How Have Corporate Codes of Ethics Responded To An Era of Increased Scrutiny?

How Have Corporate Codes of Ethics Responded to an Era of
Increased Scrutiny?
Tim Loughran
Mendoza College of Business
University of Notre Dame
Notre Dame, IN 46556–5646
[email protected]
Bill McDonald
[email protected]
James R. Otteson
[email protected]
January 7, 2022
Abstract: Over the past decade, corporate scandals have proliferated. These scandals, along
with the emergence of the #MeToo movement and Environmental, Social, and Corporate
Governance (ESG) mandates, have increased the scrutiny of corporations’ ethics culture. How
have companies responded in terms of the language appearing in their public ethics
documents? We compare the Code of Ethics in 2008 versus 2019 for a sample of S&P 500
firms. For the vast majority of firms, their Code of Ethics lengthened, with the average 2019
code having 29 percent more words (about 1,760 words) than the 2008 average. The language
of the codes has also changed. Words such as bribery, corruption, sustainability, speak up,
bullying, slavery, and human rights all saw significantly higher usage in the later period. We
review possible reasons for the dramatic changes, and suggest what questions remain about the
motivations behind them. Whether the changes we observe are primarily intrinsically
motivated or simply market responses to public pressures is yet to be determined. What is clear
from our findings is that society seems to be entering a new age of increasingly moral—or, at
least, moralized—corporate governance.
We thank Omrane Guedhami (Editor), Pat Murphy, and two anonymous referees for helpful
comments. Remaining errors are ours.
Key words: Code of Ethics; Textual Analysis; Corporate Scandals; ESG Rating; Sustainability.
Electronic copy available at: https://ssrn.com/abstract=3887743

How Have Corporate Codes of Ethics Responded to an Era of
Increased Scrutiny?
1. Introduction
The last decade has been a challenging one in terms of corporate scandals and in
matters of corporate responsibility. Some scandals have been environmental (BP’s massive
oil spill in 2010), some related to substantial data breaches of customer information (Target
in 2013), and some related to the overuse of financial incentives (Wells Fargo in 2016). In
addition, a number of CEOs have resigned after the revelation of alleged inappropriate
relations with employees or contractors: Intel (Brian Krzanich), CBS (Leslie Moonves),
Wynn Resorts (Steve Wynn), McDonald’s (Steve Easterbrook), and Hewlett-Packard
(Mark Hurd). Consistent with these high-profile resignations, in 2019 Strategy& found that
for the first time in the history of their annual survey more CEOs were dismissed due to
ethical issues rather than lagging firm performance or internal board struggles.1
These scandals and the evolving thinking about corporate social responsibility may
have prompted a shift away from Milton Friedman’s claim that the only social
responsibility of business is to increase its profits (Friedman 1970). This shift is reflected
in the 2019 “Statement on the Purpose of a Corporation” issued by the Business Roundtable
and signed by 181 corporate CEOs (Business Roundtable 2019). While asserting that “the
free-market system is the best means of generating good jobs, a strong and sustainable
economy, innovation, a healthy environment and economic opportunity for all,”
nevertheless the 2019 “Statement,” in its own words, “overturned a 22-year-old policy
1
For Strategy&’s write-up of their survey results, see www.strategy-business.com/article/Succeeding-the-
long-serving-legend-in-the-corner-office?gko=90171.

statement that defined a corporation’s principal purpose as maximizing shareholder return”
by “declaring that companies should serve not only their shareholders, but also deliver
value to their customers, invest in employees, deal fairly with suppliers and support the
communities in which they operate.”
The “Statement” implores companies to “create value for all of their stakeholders,”
not just their shareholders. Although doing good for all stakeholders seems an obvious
social objective for firms, whether the CEOs’ statement is altruistic or self-serving is still
subject to much debate, and some would argue that Friedman’s simple assertion is a “least
worst” solution.2 Regardless of what the optimal social contract design should be, the CEOs
in their declaration made clear that the domain of corporate ethics was expanding and that
the systematic contemplation of a firm’s ethical posture was no longer merely a check-the-
box regulatory artifact.
The question of how to incentivize firms to include social good in their operations
has evolved from the simple label of “socially responsible investing” and coalesced in the
past decade into the nonfinancial collection of factors labeled environmental, social, and
governance (ESG). In our documentation of ethics code changes over the 2008–2019
sample period, we will see evidence that managers are addressing this broader mandate.
Our paper is centered on a measurable outcome from this cultural shift: when corporate
misdeeds are more likely to become public and amidst increasing ESG concerns, how have
Standard & Poor’s 500 Index (S&P) managers responded in terms of the language
contained in public documents relating to ethics?
2
See, for example, Matt Levine’s https://www.bloomberg.com/opinion/articles/2019-08-19/maximize-
shareholder-value-top-ceos-might-be-opting-out. Levine argues that the statement could simply empower
managers by creating a more diffuse corporate objective function.

A code of ethics allows a company to highlight its standards and aspirations for
employee business conduct, as well as its commitment to environmental and other societal
issues. As noted by Stevens (1994), codes of ethics “are managerial tools for shaping
change. They often demand from employees higher standards of behavior than required by
law. A code may be part of a personnel policies manual, which many courts interpret as a
legal contract between employee and employer, or it may be a separately issued document
which stands alone” (page 64). Mathews (1987) proposes that codes of ethics allow
companies to demonstrate a commitment to social responsibility and to promote an
anticriminal and self-regulatory corporate culture.
To document changes in language, we compare codes of ethics for 347 identical S&P
500 firms in 2008 and 2019 and present a number of findings. First, there has been a
dramatic increase in average length. In 2008, the average number of words in the code of
ethics was 6,054, compared to 7,821 for the average code in 2019. Thus, the average code
has increased in length by 29 percent (almost 1,770 words). Since the ethical landscape has
become more complex, the lengthening of the code should perhaps be expected.
Interestingly, some firms bucked the trend and dramatically shortened their code (3M cut
over 97 percent of the words in their code).
Second, much of the language usage has changed over the last decade. To assist in
documenting changes in language usage, we derive from extant word lists and the codes
themselves eight categorical groupings of content words (Environmental, Human Rights,
Corruption, Inappropriate Behavior, Trust and Moral Behavior, Cyber, Social, and
Governance). Consistent with our assertion of the broadening domain of corporate ethics,
‘Environmental,’ ‘Human Rights,’ and ‘Corruption’ word categories all experienced an

increase in word count of over 90 percent between 2008 and 2019, and the ‘Cyber’ words
made their first appearances.
Terms such as social media, transparency, slavery, sustainability, anticorruption,
footprint, and trafficking appeared not at all or only infrequently in 2008 compared to
significantly higher frequencies in the later period. As an example, travel companies and
hotels did not focus attention on modern slavery or human trafficking in their 2008 codes.
However, as investors and politicians have paid increasing attention to human trafficking,
publicly-traded travel companies changed their language. The Expedia Group (an online
travel-related company) mentioned neither slavery nor trafficking in their 2008 code. In
2019, however, Expedia used the word slavery once and trafficking five times. Importantly,
the recent codes also encouraged more active employee participation in ethical behavior.
For example, the bigram (pair of consecutive words) speak up went from a count of 48 in
2008 to 766 in 2019.
Third, we document that some firms in the face of changing legal, harassment, and
environmental norms, surprisingly decided not to change their code of ethics at all. For
example, companies such as AT&T, New York Times, and Deere have effectively identical
codes of ethics across the two periods. Lastly, we find evidence that some of our code of
ethics word categories are linked to exogenous measures of firm ethical behavior.
Below we provide a brief review of the literature on corporate codes of ethics (section
2). We then provide our data and methods of analysis (section 3). Finally, we summarize
our findings, discuss some possible explanations for our findings, and indicate a limitation
on what our data show (section 4). We suggest that one possible motivation for the changes
in length and terms in codes of ethics—namely, what we call a “principles-based”

motivation—cannot necessarily be inferred from the changes in the codes as this
conclusion is observationally equivalent to firms simply engaging in window dressing.
2. Literature on codes of ethics
Although some studies have used the language contained in annual reports to gauge
ethical dimensions of the firm (Audi, Loughran, and McDonald 2016; Balvers, Gaski, and
McDonald 2016), our study focuses on the codes of ethics. Companies have been
concerned about the ethical behavior of their employees for more than 100 years. 3 One of
the first large firms to have a formal code of business conduct was the retailer J. C. Penney.
In 1913, the company’s founder believed in doing business by the standard of the Golden
Rule, “Do unto others as you would have them do unto you” and drafted a set of principles
for employees to follow.4 As mentioned by Stevens (1994), following the political scandal
of Watergate and the passage of the Foreign Corrupt Practices Act of 1977 (outlawing the
bribing of foreign officials to obtain business), US companies ramped up their usage of
codes of ethics, at least in part to improve the public’s perception of them.
Several earlier studies documented the typical focus of the codes. For example,
Cressey and Moore (1983) find that many of the early business ethics documents gave
more attention to “unethical conduct likely to decrease a firm’s profits than to similar
conduct that might increase profits” (page 53). Using a sample of 281 US firms, Chatov
(1980) documents that the five most commonly prohibited employee activities are
extortion/kickbacks, conflict of interest, illegal political contributions, violation of laws,
3
For much more detailed reviews of the code of ethics literature, see survey papers by Stevens (2008) and
Babri, Davidson, and Helin (2019).
4
For a description of J. C. Penney’s Statement of Business Ethics, see:
https://www.sec.gov/Archives/edgar/data/1166126/000116612607000022/exhibit14businessethics.htm.

and the use of insider information. Sanderson and Varner (1984) reports that the codes for
39 of the top Fortune 100 companies were typically poorly written (i.e., long sentences and
numerous relative clauses), reflecting the influences of the firm’s legal department.
Later publications typically analyzed outcomes of the codes. For example, using
survey results for a sample of office equipment salespeople, Weeks and Nantel (1992) find
that a well-communicated code of ethics might be beneficial for ensuring ethical behavior
of the sales personnel. Similarly, McKinney and Moore (2008) document that employees
with a written code of ethics are much less likely to find international bribery an acceptable
practice. For a sample of four Chinese toy suppliers, Egels-Zandén (2014) finds that codes
actually do improve workers’ rights. Just the presence of a code, according to Adams,
Tashchian, and Shore (2001), seems to improve the perception of ethical behavior within
an organization. Schwartz (2001), however, interviewed 57 managers, employees, and
ethics officers at four major Canadian companies and finds evidence that corporate codes
of ethics often do not, after all, affect employee and executive behavior.
Helin and Sandstrom (2007) argue that one factor accounting for ineffectiveness of
corporate codes of ethics results simply from employee’s lack of awareness of the content
of the code. Davidson and Stevens (2013), in an experimental setting, use Bicchieri’s
(2006) model of social norm activation to predict that a code of ethics will improve both
manager behavior and investor confidence to the extent that it activates social norms that
control opportunistic behavior. They also predict that a certification requirement will
increase that activation.5 Consistent with their predictions, they find that a code of ethics
5
Similarly, Blay, Gooden, Mellon, and Stevens (2019), in an experimental setting, find that auditor
misreporting effectively disappears when there is an auditor signoff and the investor is another participant in
the experiment.

improves manager behavior and investor confidence only when the code incorporates a
public certification choice by the manager. The certification choice, therefore, made both
the manager and the investor more aware of the code.
Forster, Loughran, and McDonald (2009) examine how similar the codes of ethics
are between companies by using a regular expression method to parse the documents into
individual sentences. Over 2.5 billion sentence comparisons between the codes were
conducted. The authors report that the average number of exact sentence matches in S&P
500 companies’ codes of ethics is 36.8. They also document examples of boilerplate
language across the sample and find several cases where the code of ethics for different
firms are effectively identical. That is, some companies merely copy verbatim another
firm’s code. Using a sample of 66 firms across five different industries, Holder-Webb and
Cohen (2012) also find excessive overlap in code language. In terms of trends,
Sharbatoghlie, Mosleh, and Shokatian (2013) document the increased convergence of US
and global codes of ethics between 2006–2009.
Finally, we note also that the effects of informal moral norms versus explicit moral
codes has long been a subject of philosophical investigation. As Blay, Gooden, Mellon,
and Stevens (2018) show, Adam Smith’s Theory of Moral Sentiments (1982 [1759])
claimed that society acted as a “mirror” that reflected others’ perceptions of one’s own
conduct. Smith argued that our desire for “mutual sympathy of sentiments” led us to adapt
our behavior and judgment to the expectations of others, even in the absence of an explicit
moral code (Otteson 2002). Immanuel Kant (1981 [1785]), who read and was influenced
by Smith, argued that it was solely one’s own internal commitment to a universalizable
moral rule—a “categorical imperative”—that could give one’s actions moral worth. This

raises the question of not just behavior but also motivation and intent when evaluating
conduct, and presents a difficulty in assessing the purpose and effectiveness of corporate
codes of ethics, a difficulty to which we return in the final section.
3. Data and methods
S&P 500 Code of Ethics Data
In response to prior ethical lapses by a number of major corporations, the US
Government passed the Sarbanes-Oxley Act of 2002 (SOX). Although Section 406 of SOX
requires only that public firms disclose whether they have adopted a code of ethics for
management, the major US exchanges have strengthened that mandate by requiring codes
of business conduct and ethics for all listed companies. Thus, publicly-traded US
companies have a Code of Business Conduct and Ethics that applies to all their employees.6
This exchange requirement for the code simplifies the task of obtaining the codes compared
to the mail surveys used in earlier studies to build their sample (Murphy 2005). Throughout
our study, we use the terms “code of ethics,” “code of business conduct and ethics,” and
“code” interchangeably.
We start with the sample of S&P 500 firms, an index of large, successful,
publicly-traded companies, included in the analysis of Forster, Loughran, and McDonald
(2009) obtained from https://sraf.nd.edu/data/ethics. Of their sample of S&P 500 firms
from December 2007, 347 firms continued to exist as of December of 2019. Firms not
existing in 2019 were typically purchased by other publicly-traded firms or went bankrupt.
6
There is variation in the exact terminology used to describe an S&P firm’s code. For example, PepsiCo
calls it “The Global Code of Conduct,” while FedEx labels it as “Code of Conduct: Our Guide to Delivering
the Purple Promise.” We do not include the CEO’s letter as part of our code study.

In December of 2019, we obtained codes of business conduct and ethics for the remaining
sample of 347 S&P 500 firms. Typically, the codes are posted on the Corporate
Governance section of the firm’s Investor Relations website.
Generally, a corporate ethics officer writes codes of ethics, often with the assistance
or oversight of the legal or human resources department, or both. Although a firm’s board
would bear ultimate responsibility for both the code’s content and enforcement, typically
a board does not get directly involved with implementation unless there is a major scandal
or one that involves a high-ranking executive. Nevertheless, the codes themselves claim
authority over all of the firms’ operations, and the significant increases in length we found
suggest growing and changing concerns regarding the ethical culture of firms and the
ethical behavior of employees.
MSCI’s ESG and Ethisphere Institute’s “Most Ethical Firm” Data
To link codes of ethics language to an outcome, we incorporate Environmental,
Social, and Corporate Governance (ESG) ratings and Most Ethical Firm data into our
analysis. ESG ratings measure how the firm treats its workers, the natural environment,
and society. We obtain the ESG rating from MSCI’s website (https://www.msci.com/esg-
ratings). MSCI’s ESG ratings are generated by analyzing 37 key issues (e.g., carbon
emissions, labor management, tax transparency, chemical safety, and business ethics).7
MSCI grades companies on a AAA to CCC scale. For example, in 2020, 3M, Microsoft,
and Kellogg received AAA ratings while General Motors and Wells Fargo had CCC
ratings. We convert MSCI’s letter scale into a numeric scale (e.g., AAA is 7; AA is 6; …
7
MSCI’s ESG methodology is available on their website (see https://www.msci.com/esg-ratings).

and CCC is 1). Because MSCI tends to focus their rating on larger firms, our S&P sample
has 271 firms with available ratings. Smaller S&P firms such as Macy’s, Mattel, Harley
Davidson, and Nordstrom lack ESG ratings.
The Ethisphere Institute (EI) creates an annual list of the world’s most ethical
firms.8 EI’s rating system contains “more than 200 multiple-choice and text questions that
capture a company’s performance in an objective, consistent, and standardized way.” EI
places the largest weight on the nominee’s Ethics & Compliance program. In 2020, EI
selected 131 global firms for their honoree list. A number of S&P 500 firms in our sample
made the 2020 list, including 3M, AT&T, Eli Lilly, IBM, PepsiCo, and GM.
Summary Statistics
The sample summary statistics for our 347 S&P 500 firms are reported in Table 1.
The average number of words in the code of ethics was 6,054 in 2008, compared to a mean
of 7,821 in 2019. This increase of over 1,760 words represents a 29 percent jump in the
average word count. Within each period, there is wide variation in code length. For
example, the 5th percentile in 2019 contained 1,554 words while the 95th percentile had
14,036 (almost than 10 times higher). In 2019, the bottom three S&P 500 companies in
code of ethics word count are Starbucks (320), Boeing (344), and 3M (444). The three S&P
companies with the most words are two financial companies and one health insurance firm:
T. Rowe Price (37,100), Moody’s (22,342), and Humana (19,212).
In contrast to the general trend of increasing length in the sample, 3M, Pitney
Bowes, Starbucks, and Eli Lilly all reduced their word counts by more than 90 percent.
8
See their website for the 2020 most ethical firm list as well as a description of their selection process for
the honorees (https://www.worldsmostethicalcompanies.com/honorees/).
10

The reasons for these extraordinary reductions in this subsample appear to fall into two
categories, neither of which suggests a reduced emphasis on ethical conduct by the firms.
For example, 3M’s recent code claims that it is impossible for the company to list every
possible ethical situation that their employees could face. Instead, 3M has their employees
answer three questions when faced with an ethical circumstance. Similarly, Pitney Bowes
introduces their shortened 2019 code by stating that “No code or policy can anticipate every
situation that may arise,” and then focusing on six guiding principles. Thus, some
companies acknowledge the increasing complexity of the ethical landscape and address
this by building the code on fundamental principles that are expected to cover both the
anticipated and unanticipated ethical issues that might arise. Alternatively, both Starbucks
and Eli Lilly shortened their primary ethics code as it has become a core statement of values
that references either a more comprehensive discussion of the topic (e.g., Eli Lilly’s Red
Book) or an expansive collection of resources (e.g., Starbucks’
“livingourvalues.starbucks.com” website).
Conversely, State Street, Biogen, Snap-on, and Marsh & McLennan all increased
their code length by more than 2,000 percent. State Street, a large financial services and
bank holding company, went from a code with 299 words in 2008 to one with 14,128 words
in 2019 (55 pages in length). Their latest code has separate sections on “When to Speak
Up,” “How to Speak Up,” “Gambling at Work,” “Anti-Tying Policy,” and “The Media.”
Also summarized in Table 1 are our exogenous measures of firms’ ethical behavior.
For the 271 S&P firms with an ESG rating, Table 1 reports that the average and median
firm has an ESG rating of approximately 4 (i.e., a grade of “BBB”). The ESG ratings are
available only for years 2016 and 2020. Lastly, we create a Most Ethical Firm Dummy
11

variable. Firms on the 2020 most ethical firm list are assigned a value of one for the
variable; otherwise, zero. Ten percent of our sample made the Ethisphere Institute’s list of
most ethical firms in 2020.
Spearman Correlations of the Codes of Ethics
As reported in Table 1, the average Spearman correlations between ethics codes in
2008 and 2019—based on comparative word counts—are relatively low. The mean
Spearman correlation is 35.4 percent while the median firm correlation is 29.7 percent.
This suggests that the majority of firms have changed their code of ethics over time.
Table 2 reports the 10 lowest (Panel A) and highest (Panel B) Spearman
correlations between each firm’s 2008 code of ethics and their code in 2019. The table also
notes the number of words in each code of ethics. Generally, firms with vastly different
code of ethics word counts report lower correlations while firms with effectively identical
word counts have high code correlations. For example, Tyson Foods has the lowest code
correlation (–21 percent) due in part to its significant change in word counts; 1,204 in 2008
compared to 2,218 in 2019, which was attributable to a total rewrite of their 2008
document. The firm with the second highest inter-period correlation (0.99) is PACCAR
Inc., a manufacturer of commercial trucks. Of the few changes occurring in PACCAR's
code (most are simply a matter of adding headings), the 2019 version adds, in the section
on harassment, “gender identity or expression” to the list of protected groups.
AT&T, one of the twenty largest firms by market capitalization in 2008, changed
its code of ethics by only 10 words (correlation of 98 percent) between 2008 and 2019. In
2019, some of the changes include AT&T adding the phrase “or other corporate codes or
12

policies” and “through AT&T’s Hotline found on AT&T’s website,” and dropping the
phrase “that are made in good faith” when describing retaliation against employees who
report potential violations. One potential explanation of this is that AT&T also has a Code
of Business Conduct, which is not part of their Investor Relations web page and appears to
be more of an internally facing document.
Code of Ethics Word Subcategories
As noted in Loughran and McDonald (2016), the natural language processing
literature “has long emphasized the importance of developing categorization procedures in
the context of the problem being studied (e.g., Berelson (1952))” (page 1208). Similarly,
Loughran and McDonald (2011) show that generic word categories work poorly when
applied to the specific content of corporate filings and develop word lists based on their
prior information about business terminology.9 Simply put, word meanings vary
substantially with context. At the same time, self-generated lists seem subjective and
susceptible to selection bias.
To our knowledge, there is no comprehensive lexicon of business ethics terms. We
attempt to create a balanced solution by using, where possible, existing lists supplemented
by our assessment of the 23,421 unique words used in all of the sample codes. From the
23,421 words in our sample documents and the words/categories previously identified in
other research, we create eight groups of words totaling 570 content words. The eight
categories are: Environmental, Human Rights, Corruption, Inappropriate Behavior, Trust
and Moral Behavior, Cyber, Social, and Governance. Because the primary focus of our
9
Gentzkow, Kelly, and Taddy (2019) note that the use of endogenous dictionaries is most appropriate in
cases where prior information is “strong and reliable” (page 554).
13

study is descriptive and not inferential, we believe the benefits of the corpus-specific
lexicons outweigh the potential pitfalls of self-generated lists.
Baier, Berninger, and Kiesel (2020) (BBK) created an ESG list (containing no
bigrams) of 482 words from usage in annual reports and proxy statements of the 25 largest
market capitalization companies in the S&P 100 Index. BBK break their list of 482 ESG
words into three main categories—Environmental, Social, and Governance. For our
Environmental words, we used the Environmental category of BBK with nine
words/phrases (climate change, conservation, environmentally, footprint, global warming,
pollutant, recycled, sustainable, and sustainably) added to their core list.
Working from BBK’s Social word list, we created our Human Rights word list.
More than half of our Human Rights words overlap with the BBK Social list. To the
original BBK social list, we added seven words (discriminatory, diverse, human rights,
slave, slavery, tolerance, and trafficking). For completeness, we also created a separate
BBK Social word list containing BBK Social words not included in one of our other
subcategories. Examples of BBK Social words that are not on our Human Rights list
include charity, childbirth, drug, warranty, and teacher.
We create our Corruption list by extending a subset of words from the BBK
Governance list. From the BBK Governance list, we include seven words (bribery, corrupt,
corruption, crimes, embezzlement, misconduct, and whistleblower) on our Corruption word
list. We extend this to a total of 31 words, although notably some of those are simply
inflections of the BBK words. In addition, we created a separate list labeled BBK
Governance, which includes words on the BBK Governance list not contained in any of
14

our other subcategories. Examples of BBK Governance words include IRS, tenure, salary,
ballot, pension, and grandchildren.
A November 9, 2017 CNN article (“The words we use to describe sexual
harassment”) assisted us in creating the Inappropriate Behavior list.10 The Trust and Moral
Behavior word list contains the 21 trust words of Audi, Loughran, and McDonald (2016)
with the five additions of speak up, transparent, transparently, truthful, and truthfully.
Words relating to computers and the internet have more recently entered daily
language. Our last category is Cyber words (cyber, cybersecurity, malware, and social
media), which captures the changing language contained in codes relating to the internet.
None of the Cyber words appeared in our sample’s code of ethics in 2008.
Our analysis also counts nine bigrams (pairs of consecutive words) and one trigram
(three consecutive words) in the tabulation of our word subcategories. Specifically, we
include “climate change” and “global warming” in the Environmental category; “human
rights” in the Human Rights category; “gender harassment,” “quid pro quo,” “sexual
assault,” “sexual harassment,” and “unwanted advances” in the Inappropriate Behavior
category; “speak up” in the Trust and Moral Behavior category; and “social media” in the
Cyber category.
Language Changes in the Code
Table 3 reports language changes in the codes of ethics between the two time
periods for a select subset of our ethics subcategories.11 Panel A reports that the aggregate
10
https://money.cnn.com/2017/11/09/pf/words-sexual-harassment/index.html. Some of the sexual
harassment language from the CNN article (e.g., sexual penetration, sexual coercion, and sexist jokes) never
appeared in any of the S&P code of ethics and thus were excluded from our analysis.
11
The BBK lists were developed in the context of corporate disclosures and thus the remaining words in the
social and governance categories do not always signal information about business ethics (e.g., in the social
category: employ, foundation, headcount, people, scholarships; and in the governance category: auditor,
15

count of Environmental words increased 93 percent (going from a count of 2,264 in 2008
to 4,360 words in 2019). A number of Environmental words saw dramatic increases in
usage between the two periods. For example, carbon, climate change, footprint, and
sustainability all experienced word count increases of at least 1,400 percent from 2008 to
2019. However, not all Environmental words saw spikes in usage. Surprisingly, the bigram
global warming had an aggregate count of only one in all the codes in 2019 while the word
pollutant never appeared in 2019 compared to three times in 2008. The word environment
was not included on our Environmental word list because it is typically used in the context
of the “work environment” and not the “natural” environment.
The Human Rights word list, as reported in Panel B, had a 92 percent increase in
usage between the time periods. The three highest words in percentage increases are
slavery, human rights, and trafficking. This suggests that the topic of modern slavery and
trafficking has gained importance in US codes of business conduct. Also of note, the word
transgender occurred zero times in 2008 compared to 16 times in the later period.
Some countries have a historical culture of bribery and corruption when dealing
with local government officials. Two main US trading partners, Mexico and China,
historically score poorly on worldwide corruption rankings. As an example, in 2019,
Transparency International in their Corruption Perception Index (CPI) ranked Mexico #130
and China #80 out of 198 countries.12 Increasingly, US companies are educating their
employees about what constitutes bribery in the code of conduct. Consistent with this
assertion, Panel C of Table 3 reports that the count of our Corruption word list increased
leadership, nomination, parachute, plane, grandchildren.). For this reason, although we include these two
categories in the results for completeness, we do not disaggregate the word counts for them in Table 3.
12
See the 2019 CPI ranking on Transparency International’s website (https://www.transparency.org/en/cpi).
In 2019, Mexico ranked only barely better than the nations of Lebanon, Dominican Republic, and Kenya.
16

95 percent. Words such as corruption, anticorruption, bribery, extortion, and
whistleblower all saw significantly higher occurrences in the later period.
As noted earlier, inappropriate behavior led to the recent dismissals of a number of
prominent CEOs. We would thus expect that the language of US codes of ethics would see
a dramatic increase of Inappropriate Behavior words. Yet surprisingly, the count of
Inappropriate Behavior words saw only a modest increase of 23 percent in word usage, less
than the 29 percent increase in average word counts. In fact, words such as groping,
pornographic, quid pro quo, and sexual all experienced declines in usage. The count of
sexual harassment usage actually fell 30 percent (326 to 228) between 2008 and 2019.
The count of Trust and Moral Behavior words between 2008 and 2019 increased
by 56 percent. Of all our lists, the Trust and Moral Behavior words had the highest raw
word counts in both 2008 and 2019. The words transparently, transparent, trusted, and
transparency all experienced large count increases. Although businesses may not have a
moral obligation to be transparent or fair, these terms also seem to reflect changing moral
concerns. Relatedly, the bigram speak up, referring to an employee’s obligation to stand
up for what is right, jumped from 48 occurrences in 2008 to a count of 766 in 2019. Of all
the words on the Trust and Moral Behavior list, only virtue experienced a decline in counts
between 2008 and 2019. Since the typical firm code focuses on the moral behavior of its
employees, words dealing with trust and integrity should and do frequently appear.
The last panel of Table 3 reports the pattern for Cyber words. This list contains four
internet-related terms (cyber, cybersecurity, malware, and social media). The aggregate
count of Cyber words went from zero in 2008 to 1,504 in 2019, serving as a clear example
of the changing domain of ethics codes. Like all languages, English evolves and
17

continuously adds new words or phrases. For example, the bigram “social media” never
appeared in any S&P 500 code of ethics in 2008, versus appearing 1,331 times during 2019.
PepsiCo uses “social media” four separate times in their 2019 code, even having a section
on “What are some examples of social media use that violates our policies?”
Table 4 reports the summary statistics for each of the subcategory word lists. The
average S&P firm in our sample had 6.52 Environmental words in 2008, compared to 12.56
in the same firm’s code in 2019. As noted in the table, the change in Environmental words
is –6 at the 5th percentile, while the 95th percentile is 24. Some firms added significantly to
their discussion of the environment following BP’s oil spill in 2010. For example, Noble
Corporation, an offshore oil drilling company, went from one Environmental word in 2008
to one of the top counts in 2019 (57). In 2019, Noble Corporation even had a section in
their code on environmental stewardship.
Human Rights words also saw an increase in usage between 2008 and 2019. The
average change in Human Rights words was slightly more than nine. As an outlier, Cisco
Systems had a relatively low human rights count of nine in 2008, while in 2019 their human
rights count was 69 (the highest count). CH Robinson Worldwide, an international shipping
and transportation company, saw the largest increase in Corruption words, growing from
two in 2008 to 88 in 2019 (ranking #1).
The smallest average percentage increase of the subcategory word lists was for
Inappropriate Behavior words. The average count increased only from 15.32 to 18.79.
However, a number of firms significantly increased their text devoted to inappropriate
behavior by managers. One of the top movers was CBS; the firm had only two
Inappropriate Behavior words in their 2008 code compared to 93 in 2019. As noted in the
18

introduction, Leslie Moonves, the long-time chairman and CBS CEO, was dismissed in
December of 2018 following numerous allegations of abuse and sexual harassment.
In the category of Trust and Moral Behavior word counts, Cisco Systems had the
largest raw increase. The firm went from a count of 67 Trust and Moral Behavior words in
2008 to 267 in 2019. Conversely, Pitney Bowes had the biggest drop in Trust and Moral
Behavior word count (decreasing from 116 words in 2008 to only seven in 2019). The
changes for both companies relate, in part, to corresponding large changes in their overall
word count.
Both the BBK Governance and BBK Social categories experienced increased
average word counts between 2008 and 2019. CVS Health Corp, for example, added 374
additional BBK Social words from 2008 to 2019. At the other extreme, an outlier is alcohol
company Brown Forman, which dropped 650 BBK Governance words as its code of ethics
overall word count declined from 21,164 words in 2008 to 4,559 words in 2019.
Change in ESG Rating
We have ESG ratings at two points in time, 2016 and 2020, for a sample of 271
S&P firms. Is there any association between changes in our word category counts and
changes to the firm’s ESG rating? Target Corp. had the biggest positive change in ESG
rating (a rating of CCC in 2016 compared to a rating of A in 2020). Thus, Target Corp. had
a change in ESG of +4 (going from an ESG score of 1 to 5). Conversely, Boeing, Chubb,
Cardinal Health, Marriott International, and Southwest Airlines all had an ESG rating
change of –2. The variation in time series of ESG ratings allows an analysis on what
language in the code of ethics is linked with changes in the externally obtained rating.
19

Table 5 reports the regression results with the Change in ESG Rating as the
dependent variable. Since the variable of interest is the change in rating, the majority of
the independent variables also focus on changes over time. Our independent variables are
Change in Environmental Words, Change in Human Rights Words, Change in Corruption
Words, Change in Inappropriate Behavior Words, Change in Trust and Moral Behavior,
Change in Cyber Words, Change in BBK Governance Words, Change in BBK Social
Words, Change in Market Value of Equity, Spearman Code Correlation, and the natural
logarithm of the number of code of ethics words in 2019. For the sample, the firm with
largest increase in market value of equity (stock price multiplied by number of shares
outstanding) during our sample period is Amazon. In the table, the t-statistics are in
parenthesis.
In the regression, one of our variables is statistically significant at conventional
levels in explaining the change in the ESG rating. We find that the Change in Inappropriate
Behavior words is significantly associated with fluctuations in the ESG rating (at the 5
percent level). The positive coefficient on the Changes in Inappropriate Behavior variable
means that higher counts of inappropriate behavior words are associated with significant
improvements in the firm’s ESG rating. It appears that MSCI views firms more positively
that lay out exactly what constitutes inappropriate behavior by managers/employees. Given
that CEO inappropriate behavior is a leading cause of employment termination, this seems
a reasonable focus for the rating agency.
20

Most Ethical Firm Dummy
As our last empirical test, we examine the relation between being classified as one
of the world’s most ethical firms and levels of our selected word categories. In the Table 6
logit regression, the dependent variable is the Most Ethical Firm Dummy (set to one if the
firm is on the 2020 Ethisphere Institute annual list of the world’s most ethical firms,
otherwise zero). The percentage of Environmental, Human Rights, Corruption,
Inappropriate Behavior, Trust and Moral Behavior, Cyber, BBK Governance, and BBK
Social words in the 2019 code of ethics are independent variables. Also included as
independent variables are the natural logarithm of market value of equity in 2019 and the
Spearman correlation between the 2008 and 2019 codes.
In the logit regression, the coefficient on Trust and Moral Behavior has a value of
60.92 and is statistically significant at the 5 percent level (z-statistic of 2.28). Of the ten
independent variables, it is the only variable with a significant coefficient. The positive
coefficient implies that higher frequencies of Trust and Moral Behavior words in the firm’s
2019 code of ethics are associated with a higher probability of being identified as a most
ethical firm according to the Ethisphere Institute. As noted earlier, EI places the highest
weight in their rating on the nominee’s Ethics & Compliance program. Of all the language
contained in the code of ethics, it appears that the EI rating is most affected by trust words
such as ethics, ethical, integrity, trust, and transparency.
Because successful ethical firms have assumed integrity and trust values into their
organizations through their codes of ethics, the linkage between higher relative counts of
Trust and Moral Behavior words in their code and being externally classified as a most
ethical firm is expected. This relation is consistent with the firm’s code of ethics playing
21

an important role in building corporate culture and not merely being cheap talk. As PepsiCo
(a 2020 EI most ethical firm) notes, “Our Code is at the center of everything we do. It
reinforces our core values, and is the foundation of our strategic vision.”
4. Discussion and Conclusions
Our analysis demonstrates that corporate codes of ethics have seen dramatic changes
in the period from 2008 to 2019. The average length of ethics codes increased from 6,054
words in 2008 to 7,821 words in 2019, an average increase of 29 percent. Although a
handful of firms defied the trend and shortened their codes, most increased by a relatively
large amount. Terms such as social media, slavery, sustainability, footprint, and trafficking
appeared not at all or only infrequently in 2008 but appeared with significantly higher
frequencies in 2019. Consistent with codes of ethics playing an important part in building
and maintaining corporate culture, we document a positive linkage between Trust and
Moral Behavior words (e.g., ethics, respect, and trust) and being selected as a most ethical
firm by the Ethisphere Institute. We also find that changes in Inappropriate Behavior words
are positively linked with changes in ESG ratings.
There are several possible explanations for the growing length of corporate codes
of ethics. They could be responses to: increasing immorality or corruption among corporate
executives or other employees; a growing sense that consumers, customers, or investors
care about moral values; growing worries about legal liability or negative reputational
effects from bad public relations stories; or a combination of these concerns. However, all
of these possibilities might also ultimately reflect a standard corporate motivation to
22

increase profits. If any of these matters could jeopardize corporate profitability, then it
would be simply good business practice to attend to them.
A different explanation would be a growing realization of proper moral principles,
or an increasing concern among board members and executives of implementing proper
moral principles. A test of this latter possibility—what we might call a “principles-based”
motivation—would be whether firms adopt and implement them even if they lead to net
losses.
A longstanding moral tradition holds that genuine moral principles involve
sacrifice; if one gets rewarded for, or benefits from, one’s moral principles, or if they come
at no cost to one, then one accordingly gets little moral credit for them. As Immanuel Kant
(1981 [1785]) argued, true moral virtue is displayed when we follow a moral rule simply
because it is the moral rule, regardless of the consequences. The Kantian argument raises
this question: Would firms increase their commitment to ethical principles, and to their
codes of ethics, if doing so led to negative financial consequences—to, for example,
demonstrable net loss of profitability?
Many defenses of corporate social responsibility (CSR) include the claim that
engaging in CSR will ultimate pay off in greater profitability, due to positive public
relations, positive reputational effects, or increased likelihood of new and returning
customers, all leading to increased sales (see El Ghoul, Guedhami, Kwok, and Mishra
2011; Attig, El Ghoul, Guedhami, and Suh 2013; Malik 2015, and Stoian and Gilman
2017). Their arguments tend to be: adopting CSR policies is the right thing to do, and doing
so will benefit the firm in the long run.
23

Yet, the addition of the latter claim raises the possibility that it is the motivation
driving the change, while the former is a welcome coincidence along for the ride. If so,
then the increased attention to corporate codes of ethics we have observed is susceptible to
being described as virtue signaling, moral grandstanding (Tosi and Warmke 2020), or
following and responding to changes in cultural mores, rather than a reflection of sincere
or principled commitment. The wide variation we found in the length of codes might also
suggest that companies are experimenting with ways to match or reflect rapidly changing
cultural mores.
It is perhaps not an accident that corporate codes of ethics have expanded during a
time when moral values have enjoyed increased emphasis among the public, and have
expanded as the public has increased its express concern for moral values. This suspicion
is reinforced by the fact that the particular directions the expanded codes of ethics have
taken—for example, sustainability, which saw a 2,275 percent increase in usage—coincide
with increasing concerns among the public about the same issues.
Corporations have dedicated considerable time and resources to revising and
expanding their codes of ethics. These expansions must, then, be responding to and
reflecting a significant concern, and this concern has strengthened substantially during the
period we review. Whether this concern is a result of companies attempting to compete and
succeed in markets increasingly characterized by newly changing consumer sentiment or a
result of sincere, and new, commitment to moral principle is not obvious from our findings.
Of course, either way we may welcome the change.
Yet before we could applaud companies for newfound moral commitments, we
would need to know what companies’ true motivations are for revising and expanding their
24

codes of ethics. We would also need to know what actual changes in corporate behavior
the new codes entail: Are they mere window dressing designed to appease consumer
perception? Are they ‘box-checking’ to satisfy potentially changing legal liability or
regulatory expectations? Or, are they indicative of actual behavioral change in the
companies?
The test suggested above—whether companies would adhere to their new codes if
doing so led to net losses—might constitute one way to discern their motivating concerns
and intentions. Addressing those questions is the subject of future research, though looking
at written corporate codes of ethics will not by itself be dispositive. In the meantime, what
is clear from our findings is that we seem to be entering a new age of increasingly moral—
or, at least, moralized—corporate governance.
25

References
Adams, J.S., Tashchian, A. and Shore, T.H. (2001). Codes of ethics as signals for ethical
behavior. Journal of Business Ethics, 29(3), 199–211.
Attig, N., El Ghoul, S., Guedhami, O. and Suh, J., 2013. Corporate social responsibility
and credit ratings. Journal of Business Ethics, 117(4), 679–694.
Audi, R., Loughran, T. and McDonald, B. (2016). Trust, but verify: MD&A language and
the role of trust in corporate culture. Journal of Business Ethics, 139(3), 551–561.
Babri, M., Davidson, B. and Helin, S. (2019). An updated inquiry into the study of
corporate codes of ethics: 2005–2016. Journal of Business Ethics, 1–38.
Baier, P., Berninger, M. and Kiesel, F. (2020). Environmental, social and governance
reporting in annual reports: A textual analysis. Financial Markets, Institutions &
Instruments, 29(3), 93–118.
Balvers, R.J., Gaski, J.F. and McDonald, B. (2016). Financial disclosure and customer
satisfaction: do companies talking the talk actually walk the walk? Journal of Business
Ethics, 139(1), 29–45.
Berelson, B. (1952). Content Analysis in Communication Research. Glencoe, IL: The Free
Press.
Bicchieri, C. (2006). The Grammar of Society: The Nature and Dynamics of Social Norms.
New York, NY: Cambridge University Press.
Blay, A.D., Gooden, E.S., Mellon, M.J. and Stevens, D.E. (2018). The usefulness of social
norm theory in empirical business ethics research: A review and suggestions for future
research. Journal of Business Ethics, 152(1), 191–206.
Blay, A.D., Gooden, E.S., Mellon, M.J. and Stevens, D.E. (2019). Can social norm
activation improve audit quality? Evidence from an experimental audit market. Journal of
Business Ethics, 156(2), 513–530.
Business Roundtable. (2019). Statement on the purpose of a corporation. Retrieved here:

https://purpose.businessroundtable.org/.
Chatov, R. (1980). What corporate ethics statements say. California Management Review,
22(4), 20–29.
Cressey, D.R. and Moore, C.A. (1983). Managerial values and corporate codes of ethics.
California Management Review, 25(4), 53–77.
26

Davidson, B.I. and Stevens, D.E. (2013). Can a code of ethics improve manager behavior
and investor confidence? An experimental study. The Accounting Review, 88(1), 51–74.
Egels-Zandén, N. (2014). Revisiting supplier compliance with MNC codes of conduct:

Recoupling policy and practice at Chinese toy suppliers. Journal of Business Ethics,
119(1), 59–75.
El Ghoul, S., Guedhami, O., Kwok, C.C. and Mishra, D.R., 2011. Does corporate social
responsibility affect the cost of capital? Journal of Banking & Finance, 35(9), 2388–
2406.
Forster, M., Loughran, T. and McDonald, B. (2009). Commonality in codes of ethics.

Journal of Business Ethics, 90(2), 129–139.
Friedman, M. (1970). The social responsibility of business is to increase its profits. New
York Times Magazine.
Gentzkow, M., Kelly, B., and Taddy M. (2019). Text as data. Journal of Economic
Literature, 57(3), 535–574.
Helin, S. and Sandström, J. (2007). An inquiry into the study of corporate codes of ethics.
Journal of Business Ethics, 75(3), 253–271.
Holder-Webb, L. and Cohen, J. (2012). The cut and paste society: Isomorphism in codes
of ethics. Journal of Business Ethics, 107(4), 485–509.
Kant, I., 1981 (1785). Grounding for the Metaphysics of Morals, trans. J. W. Ellington.
Indianapolis: Hackett.
Loughran, T. and McDonald, B. (2011). When is a liability not a liability? Textual analysis,
dictionaries, and 10‐Ks. Journal of Finance, 66(1), 35–65.
Loughran, T. and McDonald, B. (2016). Textual analysis in accounting and finance: A

survey. Journal of Accounting Research, 54(4), 1187–1230.
Malik, M. (2015). Value-enhancing capabilities of CSR: A brief review of contemporary

literature. Journal of Business Ethics, 127(2), 419–438.
Mathews C. (1987). Codes of Ethics: Organizational Behavior and Misbehavior. Research

in Corporate Social Performance and Policy, 9, 107–30.
McKinney, J.A. and Moore, C.W. (2008). International bribery: Does a written code of
ethics make a difference in perceptions of business professionals. Journal of Business
Ethics, 79(1), 103–111.
27

Murphy, P.E. (2005). Developing, communicating and promoting corporate ethics
statements: A longitudinal analysis. Journal of Business Ethics, 62(2), 183–189.
Otteson, J. R. (2002). Adam Smith’s Marketplace of Life. New York: Cambridge University
Press.
Sanderson, G.R. and Varner, I.I. (1984). What’s Wrong with Corporate Codes of Conduct?
Management Accounting, 66(1), 28–31.
Schwartz, M. (2001). The nature of the relationship between corporate codes of ethics and
behaviour. Journal of Business Ethics, 32(3), 247–262.
Sharbatoghlie, A., Mosleh, M. and Shokatian, T. (2013). Exploring trends in the codes of
ethics of the fortune 100 and global 100 corporations. Journal of Management
Development, 32(7), 675–689.
Smith, A. (1982 [1759]). The Theory of Moral Sentiments, D.D. Raphael and A.L. Macfie,
eds. Indianapolis: Liberty Press.
Stevens, B. (1994). An analysis of corporate ethical code studies: “Where do we go from

here?” Journal of Business Ethics, 13(1), 63–69.
Stevens, B. (2008). Corporate ethical codes: Effective instruments for influencing

behavior. Journal of Business Ethics, 78(4), 601–609.
Stoian, C. and Gilman, M. (2017). Corporate social responsibility that “pays”: A strategic
approach to CSR for SMEs. Journal of Small Business Management, 55(1), 5–31.
Tosi, J. and Warmke, B. (2020). Grandstanding: The Use and Abuse of Moral Talk. New
York: Oxford University Press.
Weeks, W.A. and Nantel, J. (1992). Corporate codes of ethics and sales force behavior: A
case study. Journal of Business Ethics, 11(10), 753–760.
28

Table 1 Code of Ethics Summary Statistics for S&P 500 Firms with Codes in Both 2008 and 2019
N Mean Median SD 5th 95th

Code of Ethics word count in 2008 347 6,054 5,335 4,184 1,194 12,678
Code of Ethics word count in 2019 347 7,821 7,641 4,015 1,554 14,036
Change in word counts between 2008–2019 347 1,767 1,508 4,322 –5,237 8,251
Code correlation between 2008 and 2019 347 35.4% 29.7% 24.3% 4.4% 85.3%
ESG rating in 2016 271 3.89 4 1.46 2 6
ESG rating in 2020 271 4.40 4 1.29 2 6
Most Ethical Firm Dummy in 2020 347 0.10 0 0.30 0 1
The sample includes 347 S&P 500 Index firms that have codes of ethics in both 2008 and 2019. SD
stands for standard deviation. The correlation is a Spearman rank correlation. The sample size is 271
for the Environmental, Social, and Corporate Governance (ESG) rating taken from MSCI’s website
(https://www.msci.com/esg-ratings). The Most Ethical Firm Dummy is equal to one if the company is
on the 2020 Ethisphere Institute’s listing of the world’s most ethical firms, else zero.
29

Table 2 Lowest and Highest 10 Code of Ethics Spearman Correlations between 2008–2019
for a Sample of 347 S&P 500 Firms
Panel A: Lowest 10 Spearman Correlations

Code of Code of
Ethics Word Ethics Word
Count in Count in
Rank Firm Name Correlation 2008 2019
1. Tyson Foods –21% 1,204 2,218
2. Newmont Corp. –10% 5,205 2,285
3. Texas Instruments –5% 574 1,660
4. Kimberly Clark –3% 4,022 5,392
5. Stanley Black & Decker –3% 6,814 6,702
6. Avon Products –2% 8,380 5,421
7. Darden Restaurants 0% 2,724 4,973
8. Lincoln National 0% 6,550 6,097
9. Baker Hughes 0% 6,891 5,204
10. Hershey 1% 5,612 7,878
Panel B: Highest 10 Spearman Correlations

Code of Code of
Ethics Word Ethics Word
Count in Count in
Rank Firm Name Correlation 2008 2019
338. Dillards 92% 3,567 3,707
339. New York Times 92% 4,716 4,794
340. Big Lots 92% 2,171 2,223
341. Loews 92% 2,771 2,664
342. Deere 94% 1,362 1,306
343. Manitowoc Co. 95% 5,950 5,611
344. Thermos Fischer Scientific 95% 5,960 5,979
345. AT&T 98% 1,813 1,823
346. PACCAR 99% 6,484 6,494
347. Vornado Realty Trust 99% 2,603 2,600
30

Table 3 Selected Word Changes Between 2008 and 2019
Panel A: Environmental Words
Count in Count in Percentage

Word 2008 2019 Change
Agriculture 3 5 67%
Air 149 260 74%
Atmosphere 53 55 4%
Biodiversity 1 3 200%
Carbon 1 39 3,800%
Clean 42 89 112%
Cleaner 4 17 325%
Cleanup 3 1 –67%
Climate 32 42 31%
Climate change 1 15 1,400%
Coal 7 5 –29%
Conservation 16 34 113%
Contamination 4 2 –50%
Emission 4 6 50%
Emissions 21 69 229%
Emit 0 1 NA
Environmental 968 1,353 40%
Environmentally 45 105 133%
EPA 2 3 50%
Footprint 4 74 1,750%
Fossil 0 1 NA
Freshwater 0 1 NA
GHG 0 1 NA
Global warming 0 1 NA
Green 8 31 288%
Greenhouse 0 18 NA
Groundwater 2 2 0%
Hazardous 94 104 11%
Pollutant 3 0 –100%
Pollutants 10 12 20%
Pollution 25 31 24%
Printing 28 22 –21%
Recycle 6 29 383%
Recycled 7 11 57%
Recycling 20 67 235%
Renewable 2 12 500%
Resource 239 492 106%
Solar 0 2 NA
Species 0 1 NA
Stewardship 27 126 367%
31

Superfund 1 0 –100%
Sustainability 16 380 2,275%
Sustainable 26 225 765%
Sustainably 0 10 NA
Toxic 15 7 –53%
Warming 0 1 NA
Waste 312 464 49%
Wastes 11 10 –9%
Water 45 111 147%
Wetlands 0 1 NA
Wildlife 0 1 NA
Wind 2 4 100%
Zoning 5 4 –20%
Total 2,264 4,360 93%
32

Panel B: Human Rights Words

Dignity 228 319 40%
Discriminate 100 118 18%
Discriminated 30 37 23%
Discriminating 22 35 59%
Discrimination 821 1,077 31%
Discriminatory 117 144 23%
Diverse 130 371 185%
Diversity 350 765 119%
Equality 7 27 286%
Expression 57 224 293%
Freedom 56 100 79%
Human rights 47 682 1,351%
Humanity 1 3 200%
Marriage 35 29 –17%
Nondiscrimination 34 23 –32%
Peace 3 5 67%
Privacy 939 1,815 93%
Religion 409 426 4%
Religious 96 131 36%
Slave 2 11 450%
Slavery 1 77 7,600%
Tolerance 56 184 229%
Trafficking 15 205 1,267%
Transgender 0 16 NA
Total 3,556 6,824 92%
33

Panel C: Corruption Words

Antibribery 6 28 367%
Anticorruption 9 91 911%
Bribe 239 464 94%
Bribery 357 1,671 368%
Bribes 268 425 59%
Bribing 13 30 131%
Coercion 24 40 67%
Corrupt 492 429 –13%
Corruption 123 1,488 1,110%
Crime 97 113 16%
Crimes 24 90 275%
Criminal 883 908 3%
Criminally 9 24 167%
Criminals 8 19 138%
Deceive 12 17 42%
Deception 27 42 56%
Deceptive 74 84 14%
Dishonest 42 84 100%
Dishonesty 39 45 15%
Embezzlement 40 35 –13%
Extortion 2 15 650%
Forgery 18 20 11%
Fraud 457 692 51%
Fraudulent 145 159 10%
Fraudulently 34 25 –26%
Kickback 149 187 26%
Kickbacks 225 263 17%
Misconduct 328 677 106%
Nepotism 14 27 93%
Whistleblower 38 80 111%
Wrongdoing 106 122 15%
Total 4,302 8,394 95%
34

Panel D: Inappropriate behavior words

Abusing 21 26 24%
Abusive 55 152 176%
Bully 0 5 NA
Bullying 11 183 1,564%
Gender harassment 0 1 NA
Groping 2 1 –50%
Harassing 121 181 50%
Harassment 1,809 2,133 18%
Hostile 185 224 21%
Inappropriate 525 763 45%
Inappropriately 49 122 149%
Intimidate 10 18 80%
Intimidating 148 230 55%
Intimidation 130 197 52%
Offensive 377 530 41%
Pornographic 42 38 –10%
Pornography 19 26 37%
Quid pro quo 17 16 –6%
Rape 1 1 0%
Sex 263 288 10%
Sexual 1,199 1,134 –5%
Sexual assault 1 2 100%
Sexual harassment 326 228 –30%
Stereotypes 2 10 400%
Unwanted advances 2 10 400%
Total 5,315 6,519 23%
35

Panel E: Trust and Moral Behavior words

Accountability 217 301 39%
Character 32 66 106%
Ethical 2,248 3,046 35%
Ethics 4,466 6,214 39%
Fairness 218 270 24%
Honest 467 777 66%
Honesty 388 504 30%
Integrity 2,297 3,976 73%
Respect 1,602 2,487 55%
Respected 61 83 36%
Respectful 90 282 213%
Responsibilities 1,103 1,588 44%
Responsibility 1,829 2,460 34%
Responsible 1,558 2,169 39%
Speak up 48 766 1,496%
Transparency 21 195 829%
Transparent 10 195 1,850%
Transparently 1 42 4,100%
Trust 744 1,690 127%
Trusted 30 131 337%
Truth 38 78 105%
Truthful 195 317 63%
Truthfully 64 99 55%
Virtue 36 30 –17%
Virtues 0 1 NA
Total 17,763 27,767 56%
Panel F: Cyber words

Cyber 0 55 NA
Cybersecurity 0 95 NA
Malware 0 23 NA
Social media 0 1,331 NA
Total 0 1,504 NA
The sample includes 347 S&P 500 Index firms that have code of ethics in both 2008 and
2019.
36

Table 4 Summary Statistics for Various Sub-category Words in Both 2008 and 2019
Mean Median SD 5th 95th

Environmental word count in 2008 6.52 3 9.94 0 22
Environmental word count in 2019 12.56 9 14.64 0 33
Change in Environmental words 6.04 3 11.95 –6 24
Human Rights word count in 2008 10.25 8 9.76 0 28

Human Rights word count in 2019 19.67 18 13.41 1 45
Change in Human Rights words 9.42 7 13.37 –7 34
Corruption word count in 2008 12.40 10 10.54 1 34

Corruption word count in 2019 24.19 22 15.89 3 51
Change in Corruption words 11.79 9 16.65 –12 43
Inappropriate Behavior word count in 2008 15.32 10 17.38 0 52

Inappropriate Behavior word count in 2019 18.79 16 15.24 1 45
Change in Inappropriate Behavior words 3.47 2 19.01 –25 31
Trust and Moral Behavior word count in 2008 51.19 41 36.93 9 125
Trust and Moral Behavior word count in 2019 80.02 77 46.57 16 172
Change in Trust and Moral Behavior words 28.83 24 44.63 –37 111
Cyber word count in 2008 0 0 0 0 0

Cyber word count in 2019 4.33 3 4.78 0 13
Change in Cyber words 4.33 3 4.78 0 13
BBK Governance word count in 2008 142.33 124 98.81 32 299

BBK Governance word count in 2019 175.81 166 93.36 43 326
Change in BBK Governance words 33.48 32 102.98 –141 187
BBK Social word count in 2008 68.10 56 52.59 4 180

BBK Social word count in 2019 109.74 108 64.50 13 223
Change in BBK Social words 41.64 33 65.87 –52 141
The sample includes 347 S&P 500 Index firms that have code of ethics in both 2008 and
2019. SD stands for standard deviation.
37

Table 5 Regression with Change in ESG ratings as the Dependent Variable
Change in ESG Rating

Variable (1)
Change in Environmental Words –0.850
(–1.41)
Change in Human Rights Words –0.091
(–0.14)
Change in Corruption Words –0.192
(–0.39)
Change in Inappropriate Behavior Words 0.946**
(2.18)
Change in Trust and Moral Behavior Words 0.109
(0.56)
Change in Cyber Words 0.458
(0.32)
Change in BBK Governance Words –0.135
(–1.27)
Change in BBK Social Words 0.222
(1.23)
Change in Market Value 0.061
(1.56)
Code Correlation –28.363
(–0.97)
Log(2019 Words) 9.672
(1.06)
Intercept –33.257
(–0.43)
Adjusted R-Squared Value 2.05%

Sample Size 271
The sample size is 271 S&P 500 firms with available codes of ethics and ESG data. The dependent
variable is the change in the ESG rating between 2016 and 2020. For independent variables, we include
the change in word counts for the various subcategories (i.e., Environmental, Human Rights, Corruption,
Inappropriate Behavior, Trust and Moral Behavior, Cyber, BBK Governance, and BBK Social). For
example, Change in Environmental Words is the difference in the environmental word counts between
the 2008 and 2019 code of ethics. Change in market capitalization is the percentage change in market
value of equity between 2008 and 2019. Code correlation is the correlation between the 2008 and 2019
code of ethics. Log(2019 words) is the natural logarithm of the number of words in the 2019 code of
ethics. Because of scaling issues with the change in the ESG rating, the coefficients are all multiplied
by 100. The t-statistics are in parenthesis. Coefficients marked with ∗, ∗∗, and ∗∗∗ are significant at
10%, 5%, and 1%, respectively.
38

Table 6 Logit Regression with Most Ethical Firm Dummy as the Dependent Variable
Most Ethical Firm Dummy

Variable (1)
Percentage of Environmental Words 2.577
(0.02)
Percentage of Human Rights Words 240.160
(1.59)
Percentage of Corruption Words –185.719
(–1.34)
Percentage of Inappropriate Behavior Words –153.157
(–0.99)
Percentage of Trust and Moral Behavior Words 60.920**
(2.28)
Percentage of Cyber Words 284.133
(0.89)
Percentage of BBK Governance Words –55.179
(–1.17)
Percentage of BBK Social Words 18.812
(0.42)
Log(Market Value) 0.180
(1.16)
Code Correlation –0.142
(–0.14)
Intercept –6.121
(–1.56)
Pseudo R-Squared Value 9.67%

Sample Size 347
The sample size is 347 S&P 500 firms with codes of ethics in both 2008 and 2019. The dependent
variable is the Most Ethical Firm Dummy variable (set to one if the firm is on the 2020 Ethisphere
Institute annual list of the world’s most ethical firms, else zero). The percentage of
Environmental, Human Rights, Corruption, Inappropriate Behavior, Trust and Moral Behavior,
Cyber, BBK Governance, and BBK Social words in the 2019 code of ethics scaled by the number
of words in the 2019 code are independent variables. Also included as independent variables are
the Spearman correlation between the 2008 and 2019 codes and the natural logarithm of market
value of equity in 2019. The z-statistics are in parenthesis. Coefficients marked with ∗, ∗∗, and
∗∗∗ are significant at 10%, 5%, and 1%, respectively.
39

How Have Corporate Codes of Ethics Responded To An Era of Increased Scrutiny?

Uploaded by

Copyright:

Available Formats

How Have Corporate Codes of Ethics Responded To An Era of Increased Scrutiny?

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

How Have Corporate Codes of Ethics Responded To An Era of Increased Scrutiny?

Uploaded by

Copyright:

Available Formats

How Have Corporate Codes of Ethics Responded to an Era of

Electronic copy available at: https://ssrn.com/abstract=3887743

Wynn Resorts (Steve Wynn), McDonald’s (Steve Easterbrook), and Hewlett-Packard

economy, innovation, a healthy environment and economic opportunity for all,”

Electronic copy available at: https://ssrn.com/abstract=3887743

communities in which they operate.”

box regulatory artifact.

contained in public documents relating to ethics?

Electronic copy available at: https://ssrn.com/abstract=3887743

companies to demonstrate a commitment to social responsibility and to promote an

anticriminal and self-regulatory corporate culture.

over 97 percent of the words in their code).

themselves eight categorical groupings of content words (Environmental, Human Rights,

‘Environmental,’ ‘Human Rights,’ and ‘Corruption’ word categories all experienced an

Electronic copy available at: https://ssrn.com/abstract=3887743

made their first appearances.

Terms such as social media, transparency, slavery, sustainability, anticorruption,

2008 to 766 in 2019.

in length and terms in codes of ethics—namely, what we call a “principles-based”

Electronic copy available at: https://ssrn.com/abstract=3887743

conclusion is observationally equivalent to firms simply engaging in window dressing.

2. Literature on codes of ethics

bribing of foreign officials to obtain business), US companies ramped up their usage of

codes of ethics, at least in part to improve the public’s perception of them.

extortion/kickbacks, conflict of interest, illegal political contributions, violation of laws,

Electronic copy available at: https://ssrn.com/abstract=3887743

an organization. Schwartz (2001), however, interviewed 57 managers, employees, and

Electronic copy available at: https://ssrn.com/abstract=3887743

the manager and the investor more aware of the code.

Sharbatoghlie, Mosleh, and Shokatian (2013) document the increased convergence of US

and global codes of ethics between 2006–2009.

Electronic copy available at: https://ssrn.com/abstract=3887743

codes of ethics, a difficulty to which we return in the final section.

3. Data and methods

S&P 500 Code of Ethics Data

In response to prior ethical lapses by a number of major corporations, the US

publicly-traded companies, included in the analysis of Forster, Loughran, and McDonald

(2009) obtained from https://sraf.nd.edu/data/ethics. Of their sample of S&P 500 firms

Electronic copy available at: https://ssrn.com/abstract=3887743

Governance section of the firm’s Investor Relations website.

ethical behavior of employees.

MSCI’s ESG and Ethisphere Institute’s “Most Ethical Firm” Data

To link codes of ethics language to an outcome, we incorporate Environmental,

Electronic copy available at: https://ssrn.com/abstract=3887743

Davidson, and Nordstrom lack ESG ratings.

capture a company’s performance in an objective, consistent, and standardized way.” EI

T. Rowe Price (37,100), Moody’s (22,342), and Humana (19,212).

Electronic copy available at: https://ssrn.com/abstract=3887743

Book) or an expansive collection of resources (e.g., Starbucks’

Electronic copy available at: https://ssrn.com/abstract=3887743

most ethical firms in 2020.

Spearman Correlations of the Codes of Ethics

As reported in Table 1, the average Spearman correlations between ethics codes in

Table 2 reports the 10 lowest (Panel A) and highest (Panel B) Spearman

Inc., a manufacturer of commercial trucks. Of the few changes occurring in PACCAR's

on harassment, “gender identity or expression” to the list of protected groups.

Electronic copy available at: https://ssrn.com/abstract=3887743

be more of an internally facing document.

Code of Ethics Word Subcategories