Formulating a Code of Ethics

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Ethics and business ethics

Ethics are the moral principles guiding our behaviour and judgments, helping us to determine what's right and wrong.

Ethics and the law, although related, are not the same thing. The law sets out the minimum compulsory standard of behaviour, while ethics goes beyond this and implies a higher standard of conduct.

Business ethics concern the application of ethical values to business activities and functions. This applies both to the conduct of individuals and that of organisations as complete entities.

Any organisation can aim or choose to carry out its business in an ethical manner. This involves making choices that are ethically the right thing to do, rather than focussing on short-term profit generation.

Whether an organisation is considered ethical will involve a combination of factors, eg:

  • the type of products or services
  • priorities, goals, and values
  • reputation
  • treatment of staff and customers
  • corporate social responsibility (CSR)

There's also a difference between doing ethical things and doing things ethically. The latter is what we mean when we talk about business ethics—ie conducting day to day business in an ethical manner.

Doing ethical things is what we know as CSR and involves activities like charitable giving and fundraising, community engagement and environmental initiatives. Ultimately, while these may do a lot of good and generate valuable social capital for businesses, they generally run alongside day-to-day business and largely do not have an impact on how an organisation is run.

The two are certainly connected, but regardless of how much an organisation donates to charity on an annual basis, it cannot truly be 'ethical' without a genuinely held culture based on values such as trust, openness, respect, and integrity.

The culture of a business is defined from the very top and trickles down to all business areas and employees. For a business to be ethical its leaders must demonstrate ethical behaviour. Leaders who are free to choose and do choose the 'right' path rather than one driven by pure financial motives will have successfully created an ethical culture in the business.

Why is ethical behaviour important for businesses?

Ethics play an increasingly important role in business. Despite how some individuals and organisations conduct themselves, companies do not operate in a vacuum and are part of a society which expects a certain standard of behaviour. Regardless of the sector or industry, the public and investors are becoming more aware and less complacent about unethical behaviour in business. 'How would I justify this to shareholders?' and 'How would this look on the front page of the Financial Times?' are questions that are asked in decision making. The immediacy and public nature of social media played a role in demanding higher standards of transparency and accountability.

In response to ethical values and social responsibility gaining significance, what were once purely ethical considerations are now being built in by law. For example, the Bribery Act 2010 is the statutory enactment of the OECD Anti-Bribery Convention—businesses now have to show they have adequate procedures against such behaviour.

Stakeholders such as current and potential employees, customers and investors want to be associated with responsible organisations. A reputation for treating stakeholders fairly, honestly and consistently is a valuable asset and builds trust.

There are significant benefits to ethical behaviour in business, in particular:

  • attracting customers, investors, and new employees
  • employee retention

Any hint of unethical behaviour or an environment in which unethical behaviour is tolerated can end up in the public domain. This can cause considerable damage to an organisation's reputation and consequentially its appeal to stakeholders. Reputation and trust have a direct and major impact on the corporate well-being of any organisation and are very hard to rebuild if lost.

In this context, the organisations that have adapted and fostered a culture able to withstand 24/7 scrutiny by media, consumers and investors will gain an advantage over their competition. Acting ethically limits the risks of non-compliance for an organisation and reduced compliance risk reduces one source of damage to that organisation.

Ethics and in-house lawyers

In-house lawyers are involved in advising on increasingly complex networks of corporate governance, compliance and regulation and are often expected to know the answers to questions of conduct but, other than the law itself, are not provided with a great deal of guidance on ethical matters.

The law imposes increasing numbers of obligations on organisations which in turn create new and even more complex ethical issues for in-house lawyers. Legislation concerning prevention of terrorism, money laundering, freedom of information and financial compliance all create new areas in which ethical judgements need to be taken alongside legal ones.

Tension can exist between an in-house lawyer or compliance team and the business people they work with. The in-house team's role is such that they might have to make judgement calls that aren't necessarily that popular commercially, potentially alienating lucrative contacts or losing sources of income, which might create a difficult working environment if the legal team is not supported in these decisions.

In this light, a code of ethics is a very useful tool. With top-level management support, a code provides a clear set of guidelines informing and supporting decision making but also providing the legal team with a clear set of parameters to point towards if their decisions prove to be unpopular.

What is a code of ethics and why is it important?

Any business decision will be influenced by the organisation's culture. Exercising ethical judgement is not a science, particularly in business—competing interests will pull decision makers in several directions. Sometimes this might require taking a less profitable route in the short term. Employers can't assume their staff understand what ethical standards are expected of them. If the organisation wants to create and sustain an ethical culture it's essential to provide guidance.

A code of ethics is an effective way of explicitly setting the tone. This is generally a free-standing expression of corporate intent, designed to give guidance on how the organisation wants to achieve its business goals in a way that is open, honest, ethical and principled.

A code is an overview of fundamental polices and directives, designed to guide relationships between employees and external stakeholders. It should direct staff to any relevant policies and procedures providing greater detail on particular substantive issues—such as an Anti-bribery and corruption policy. Some organisations might choose to have several codes of ethics, tailor-made to particular business functions such as sales or accounting.

Businesses often choose to make their code of ethics publicly available and address them to all stakeholders. Once an organisation has made public its position on ethical business and decision making, it needs to ensure its actions live up to those statements in order to maintain its reputation.

Staff should be encouraged to read the code carefully to understand it, and to use it to guide them in their work. In some organisations, employees are required to sign a statement confirming they have read and understood the code, or it might be incorporated into their employment contract.

Many organisations now also incorporate codes of ethics into their business arrangements. It is possible (even advisable) to incorporate ethics policies and conduct codes into supply contracts, requiring suppliers to take similar steps.

By establishing and supporting a code and encouraging questions and reporting of any unethical conduct, organisations can point towards high ethical standards and a clear commitment to complying with the law. If a business seeks to work within the ethical guidelines it has set for itself, it will be less vulnerable to the risk of being investigated and fined for a breach of an increasing number of laws governing business practices.

The content of a code of ethics

A code of ethics is there to explain an organisation's values, compliance and corporate responsibility commitments and provide its employees with a framework and guidance for operating in line with these values and commitments. It should explain how employees and external partners are expected to behave in the workplace, the marketplace and the communities in which the organisation operates. It should also provide guidance on how staff can raise questions and concerns about the code.

A code will usually comprise four distinct elements:

  • an introduction
  • a statement of the organisation's purposes and values
  • specific rules of conduct
  • implementation, which will define administrative processes, reporting, and sanctions

An effective code of ethics should be as clear and concise as possible.

Introduction

The introduction to a code of ethics should contain a statement from a member of senior management (eg the CEO or other board member) indicating their personal commitment to and backing of the code. Top management leading by example is very important to securing general staff engagement. Codes of ethics carry little weight with employees unless tangible signs of corporate commitment are given.

Statement of the organisation's purposes and values

The main section should consist of a mission statement followed by an explanation of the organisation's values. The values can be narrowly defined or expanded on, perhaps in more detailed attachments to the code. Most codes will include a reference to obeying all applicable laws and regulations, while specialist organisations (eg engineering or medicine) will also refer to professional standards and relevant bodies or regulators.

To deal with all the possible issues and component parts of a code, Lexis®PSL Precedent: Code of ethics is broken down into various sections: you can piece them together if you wish, or leave the substantive areas covered to sit with related policies and procedures.

In each different section, the code may address categories of problems such as taking or offering bribes, gifts, favours, sanctions and potentially endless list of more issues—see Lexis®PSL Precedents:

Some of the key issues commonly addressed in current codes of ethics are bribery and corruption, sanctions, social media, conflicts of interest, diversity, health and safety, environmental stewardship.

Final section

The final section of a code will address more administrative matters—responsibilities, implementation and sanctions for non-compliance. This might involve a simple process for reporting concerns or violations but could be more complex, particularly in larger organisations. In either case, sanctions and processes should be clearly defined. You might wish to consider:

  • a transparent process for establishing facts
  • the issuance of warnings
  • requirements for counselling or re-education
  • consequences of repeat offences, on up to discharge or even, if appropriate, litigation

A code of ethics without sanctions and a logical implementation process will be viewed by employees as an empty gesture merely for show. At the same time, ethical violations are not necessarily legal infringements; so sanctions should be proportionate.

In this final section staff should be reassured that they will be treated fairly if they do raise concerns or questions about the code.