Unit 3

Code of Ethics
Source: theintactone.com/2019/03/13/cgve-u4-topic-5-code-of-ethics-guidelines-for-developing-code-of-ethics/

A code of ethics is a guide of principles designed to help professionals conduct business honestly and
with integrity. A code of ethics document may outline the mission and values of the business or
organization, how professionals are supposed to approach problems, the ethical principles based on
the organizations core values and the standards to which the professional is held. A code of ethics,
also referred to as an ethical code may encompass areas such as business ethics, a code of
professional practice and an employee code of conduct.

Both businesses and trade organizations typically have some sort of code of ethics that their
employees or members are supposed to follow. Breaking the code of ethics can result in termination
or dismissal from the organization. A code of ethics is important because it clearly lays out the rules
for behavior and provides the groundwork for a preemptive warning.

Regardless of size, businesses count on their management staff to set a standard of ethical conduct for
other employees to follow. When administrators adhere to the code of ethics, it sends a message that
universal compliance is expected of every employee.

Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes
of ethics not only set guidelines for conduct, but also determine penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries
formulate compliance-based codes of ethics to enforce laws and regulations. Employees usually
undergo formal training to learn the rules of conduct. Because noncompliance can create legal issues
for the company as a whole, individual workers within a firm may face penalties for failing to follow
guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint a
compliance officer. This individual is tasked with keeping up to date on changes in regulation codes
and monitoring employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and well-defined consequences rather than
individual monitoring of personal behavior. Therefore, despite strict adherence to the law, some
compliance-based codes of conduct do not promote a climate of moral responsibility within the
company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company’s core value system. It may outline standards of
responsible conduct as they relate to the larger public good and the environment. Value-based ethical
codes may require a greater degree of self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values. For example, a
grocery store chain might create a code of conduct that espouses the company’s commitment to
health and safety regulations above financial gain. That grocery chain might also include a statement
about refusing to contract with suppliers that feed hormones to livestock or raise animals in inhumane
living conditions.

Code of Ethics among Professionals

Financial advisers registered with the Securities and Exchange Commission or a state regulator is
bound by a code of ethics known as fiduciary duty. This is a legal requirement and also a code of
loyalty that requires them to act in the best interest of their clients.

Guidelines for developing code of ethics

Development Process

 Establish Purpose: The first step in developing a code of conduct is to establish the purpose
of the codes and why they matter.

In a KPMG survey of Fortune Global 200 companies, the three most common reasons for
adopting business codes were to

a. Comply with legal requirements,

b. Create a shared company culture, and
c. Protect and improve the organization’s reputation.

KPMG’s survey also found that the most commonly cited core values of Fortune Global 200
companies are integrity, teamwork, respect, innovation, and client focus.

Schwartz also recommended that code provisions should be consistent with “six universal
moral values” (trustworthiness, respect, responsibility, fairness, caring, and citizenship),
which should prevail over financial objectives.

 Risk Analysis: Once the purpose is established, the framework for developing a code
requires a full understanding of the operational and reputational risks an organization faces.
These issues define the organization’s objectives when developing code content, policies,
communication, and training that address individual and collective responsibilities regarding
risk management.

 Drafting the Code: To achieve the organization’s risk management standards it is important
to draft a code that clearly states expectations and guidelines for acceptable behavior, and
provides options for seeking advice and for reporting concerns or suspected misconduct.

In his research on the many dimensions of code development, Schwartz found that
employees, managers, and ethics officers consider codes more effective when they are
readable, relevant, and have a positive tone.

 Choosing a language: In addition, choosing your language carefully is important. Finding

the right words to express ideas and behaviors is a key strategic action for an organization
code’s tone, readability, and style.

 Guidance for employees: The American Management Association proposes using the code
of conduct to guide employees who are conducting business and making decisions in business
 dealings and relationships around the globe, by simply recommending that employees ask
themselves two questions:
i. Does this comply with the law, the Code of Conduct and the company’s policies?
ii. How would customers, shareholders, general public and co-workers view it?

The best practices for drafting codes of conduct that emerge from these studies include:

 Obtain buy-in across the organization with input from multidisciplinary teams.
 Include the organization’s mission statement, vision, and values that reflect its commitment to
ethics, integrity, and quality.
 Clarify that the organization expects individuals to act with honesty and integrity in addition
to compliance with legal requirements.
 Describe expected behaviors rather than stating prohibitions.
 Cover relevant risks, employment practices, protecting corporate assets, and managing third-
party relationships.
 Make it user-friendly and applicable to all individuals covered by the code.
 Use simple, concise, and easily understood language (and provide translated versions as
needed).
 Describe enforcement and disciplinary procedures.
 Solicit feedback on the code from all levels of the organization.
 Update to improve content and address new issues or risk areas.

Implementation

Based on their analysis of the effect that Lehman Brothers’ code of ethics had on its corporate
culture, the authors concluded that “silence can be deadly,” “codes fail when poorly communicated,”
and “codes themselves cannot create ethical organizations.”

In fact, their research found that these two actions are keys to code implementation:

 Communicate codes through the right channels and explain why they’re important
 Integrate codes into the organization’s practices and back it up with enforcement

Once drafted, an organization needs to embed the code into its culture. The KPMG report
recommends that the code become a “living” document to guide and create ethical behavior
throughout the organization through:

 Communication and training

 Personnel and other policy measures
 Monitoring, auditing, and reporting

At the companies KPMG surveyed, training courses were commonly used to:

 Explain the importance of the code

 Reinforce ethical behavior
 Strengthen the moral compass
 Identify and deal with dilemmas
 Provide guidance on how to implement the code more effectivel
Effective implementation requires ethical leadership and support, training, and continuous
reinforcement and updates to keep the code current. Ongoing administration and reinforcement of
code standards embeds an organization’s values into its culture, which stimulates ethical reflection
and action, and encourages compliance so that employees speak up when they see others engaging in
unethical behavior. And for the skeptics who question whether an effective code of ethics is worth all
this effort, the bottom line is that good ethics are good for business.