Business Ethics as Corporate Governance

The paper analyses ethical business codes as governance mechanisms, i.e. institutions which facilitate coordination of economic behaviour. Ethical business codes are compared to other social institutions (market solutions, government intervention, the prevailing social ethic), and their efficiency is evaluated in terms of transaction costs. A normative rationale for ethical codes is found when other institutions fail to achieve socially optimal outcomes, in particular when the firm has access to unique information. Some economic incentives are identified which induce firms to commit to socially optimal ethical codes but it is argued that economic forces will not in general be sufficient for optimality.