What is a code of ethics and why do companies need it?

What is a Code of Ethics?

With a written ethical code, a company or other organization articulates its values, principles, and standards of behavior. These codes guide the decisions of management, employees, and others who act for the organization.

Honesty, professionalism, fairness, respect, and integrity form the foundational values found in most codes. Along with these values, a well-written set of ethics and code of conduct sets rules of behavior and guides business decisions.

An ethical code can address matters such as:

• Employer-employee relationships
• Dealings of employees and management with customers, investors, and vendors
• Discrimination
• Racial and sexual harassment
• Use and stewardship of organizational assets and information
• Environmental considerations
• Social responsibility

Why Do Companies Need an Ethical Code?

Encourage Compliance With the Law

The importance of promoting lawful behavior is underscored by a bank's agreement with federal authorities to a $3 billion fine for alleged violations of federal law. The illegal and unethical conduct includes opening false accounts by misappropriating customer data, forgeries, and fake records.

Establishing and enforcing ethical behavior can lessen the organization's criminal or civil liability for illegal behavior by employees or management. Under the Federal Sentencing Guidelines, federal prosecutors and courts consider the effectiveness of an organization's ethics and compliance program in reducing punishment for crimes. An effective program must include processes to identify and report criminal activity.

Organizations also face liability for negligent supervision and retention of employees who break the law. Sexual or racial harassment victims may pursue discrimination claims against employers who do not have or did not enforce policies against such behavior.

Promote Positive Public Image

Scandals such as sexual harassment, overstating profitability or value, and bribery of officials scare investors. Without sufficient capital or customers, organizations tainted by scandal face financial ruin and even bankruptcy. An ethical code projects a positive image that bolsters investors' confidence in a company.

Ethical lapses can prove very costly for nonprofits. Donations to these groups come from individuals, companies, other organizations, and governments. Such incidents erode donors' and the public's confidence in the organization's commitment to its stated mission and goals. Governmental agencies often conduct audits and may discover unethical behavior that denies future funding or legal actions to recover misused funds.

Prevent Security Breaches and Other Losses

Unethical behavior by employees results in lost revenues and profits. Acts of employee theft include:

• Overcharging by clerks at restaurants or retail stores and keeping the excess payments for themselves
• Taking money from cash registers or offices
• Keeping money paid by customers or others
• Falsely invoicing the company
• Over-reporting mileage for travel expenses
• Stealing supplies, equipment, or merchandise
• Reporting fictional sales to collect bonuses or commissions
• Receiving salaries and wages for time not worked or indicated on false time cards
• Using company credit or debit cards for personal purposes rather

Nearly three out of every four employees, by their admission, engage in employee theft. The conduct accounts for roughly a third of business bankruptcies and almost 42 percent of inventory loss. The price tag for employee theft runs around $50 billion.

What Does the Code Include?

Preamble

A typical code of ethics starts with a statement about the purpose of the code and the organization's values. It typically invites the employees to read and understand the code and explains where employees can find the code.

Often, the organization's director or chief executive will prepare or include his or her name in the introduction. Such an identification expresses the organization's commitment to ethical behavior by all involved with the organization.

Values

The core values in an ethical code usually include:

• Respect
• Honesty
• Integrity
• Fairness
• Teamwork
• Lawfulness
• Professionalism

Organizations may express additional values tailored to their specific missions, goals, or culture. These might include:

• Conservation of resources
• Environmental protection
• Diversity and inclusiveness
• Volunteerism
• Community outreach
• Education

Code of Conduct

In a code of conduct, the employer sets rules for the employee's behavior. The standards typically fall into the following categories.

Conflict of Interest

To ensure that employees protect the organization's interests, employers often prohibit self-dealing. Such a rule prevents an employee from using a separate business from overpricing sales or underpricing purchases with the organization. Conflict of interest rules may address situations where an employee competes with the business or nonprofit for contracts.

Handling the Organization's Property

An ethical code limits employees' personal use of employer-issued computers, cell phones, tablets, and tools. Such purposes consist of ordering personal merchandise or services, making nonbusiness calls or emails, playing games, or posting on personal social media accounts.

As a related matter, the ethical code of conduct should also address the use of credit cards or debit cards in the company name. Rules often require the employee to present receipts to human resources or other managers within a specific time of purchase. The employee may need advanced approval for purchase with the company card.

Harassment or Abusive Behavior

Ethics policies address words and actions that disrupt or create hostile work environments. Employees may not face reprimands, termination, or other disciplinary actions due to race, gender, national origin, religion, or sexual orientation. Codes also address unacceptable profanity, threats, assaults, insults, defamatory statements, and invasions of privacy.

Truthful Communications

Employers require salespeople, fundraisers, marketers, and others to refrain from making misleading statements in promotional material to promote truthfulness and integrity. Requirements for truthful communications also apply to statements in job applications, performance reviews, requests for expense reimbursements, and filings with courts or governmental agencies.

Enforcement

The ethics and conduct codes lack effectiveness unless the organization enforces them. A code of conduct details:

• Consequences for violating the code of conduct, such as retraining, rehabilitation, reprimand, demotion, assignment to a different department, termination, or referral to law enforcement for prosecution;
• Procedures to report violations of ethical principles or rules of conduct;
• Distribution of the codes to employees at interviews or upon hiring

A company may practice its values by refraining from particular types of business. For example, an organization devoted to environmental protection might buy only from producers of organic products. Some businesses may refuse to conduct business in places that have discriminatory laws.

Resources

The ethical policy document lists agencies that investigate and otherwise enforce applicable laws and policies. Companies provide phone numbers, email addresses, and other contact information for human resources managers, compliance officers, and others responsible for ethical rules.

Resources may also come from pamphlets, Internet links to agencies and laws, and training sessions.

What are the Benefits?

Ethical codes express an organization's mission, values, and principles that guide decisions and conduct. When properly written and implemented, these codes build trust among those in the organization, enhance the organization's reputation, and promote lawful behavior.

Codes articulate objective standards by which to judge decisions and behavior and can help the organization defend wrongful termination lawsuits, especially when an employee cannot be terminated except "for cause." Other benefits of objective standards rather than reliance upon subjective feelings include reducing claims of supervisors or managers engaging in favoritism among employees or engaging in irrational decisions.

How To Create an Effective Code?

It does not suffice to merely use honesty, integrity, and professionalism in an ethical code. The document should define those terms.

It may help to include examples of conduct or decisions that are consistent or inconsistent with the ethical code. These scenarios may draw from situations encountered in the organization. The code may use hypothetical situations tailored to the particular line of work or business of the organization.

Ethical codes should also:

• Use short sentences
• Avoid to the extent possible technical or legal terms
• Not unnecessarily emphasize words, such as through italics, bold, or all-capital letters
• Have input from people of diverse expertise, cultures, positions in the organization, and other stakeholders

A well-written and implemented code of ethics conveys the organization's values and builds trust, respect, openness, and professionalism. Having a code demonstrates the entity's commitment to moral, ethical, legal, and socially responsible behavior.

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