Directors’ Fiduciary Duties to Perform in the Best Interest of the Companies: An Inter-Related Relationship Between Ethics and Governance

Abstract

This study inspires from Smith Moral Sentiment Theory which recognizes moral as the essential motive for every human action. The purpose of this study is to prove the relationship between ethical principle and corporate governance. This study employs case-study approach comprising three Malaysian cases. Each case will be analyzed parallel to the governance principle of promoting the best interest for the company. Board of directors (BOD) is emphasized throughout this study due to the important role of BOD in the structure of corporate governance. This study suggests that in order to execute corporate governance effectively, it must be based on ethical principles. As a result, ethical principles are included in the corporate governance rules as reflected by the terms of “proper purpose”, “in good faith in the best interest of the company”, “reasonable care” and “diligence”. These terms contain subjective and relative meaning. For this study, corporate governance rule cannot be separated from the confinement pillars of ethical principles. Thus, the study reiterates Smith argument that moral sentiment should underly human economic activities, including the jurisdiction of corporate management.

Key words: Ethics; Corporate governance; Agency theory; Moral sentiment; Board of directors