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Why Ethics Codes Are Important

What Should Be Included in Your Code of Ethics?

I have previously blogged about the importance of establishing an ethical culture in an organization to support the code of ethics. A code is meaningless unless top management models ethical behavior in every action and decision made.

Purpose of a Code of Ethics

Codes of ethics are the rules of the road for all employees to follow. They establish ethical expectations for employees and top management. To be of most value, these codes must be followed by all members of management. In other words, managers must “walk the talk” of ethics.

In today’s organizations, pressures exist to deviate from the principles of the code. For example, top managers might want to hide the fact that sexual harassment has occurred in their organizations. They may want to cover up financial fraud. Perhaps discrimination is going on in the organization. These are all gross violations of basic ethical standards and make it virtually impossible to establish an ethical culture. What’s worse, sometimes an employee who reports a wrongdoing is retaliated against for blowing the whistle. This goes against the need for truthfulness, transparency and integrity in operations.

An effective code establishes an ongoing process to meet new and challenging situations that test a company’s ability to identify and respect the rights of its stakeholders and to act not necessarily to enhance shareholder value, although that can be the by-product of making ethical decisions, but, instead, to protect the rights of customers to have a safe product whether it be an automobile or financial investment.

An effective code of ethics establishes a direction for the company and pathway to meet the organization’s ethical responsibilities to its stakeholders: customers, employees, suppliers, strategic partners; and so on.  A formal, well-communicated code of ethics can also help to protect a company's reputation and legal standing in the event of a breach of ethics by an individual employee.

A code of ethics is a vital document for any business, as breaches of ethics can land companies in serious trouble with consumers, other organizations or government authorities. Creating a code of ethics makes decision-making easier at all levels of an organization by reducing ambiguity and considerations of individual perspectives in ethical standards. However, it is essential that organizations do not treat codes as window-dressing, or documents to be filed and never looked at again.

Institute of Business Ethics (IBE) Model

The Institute of Business Ethics (IBE) outlines a 9-Step Model for developing and embedding a code of business ethics as follows:

  • Understand your context
  • Establish board level support
  • Articulate your core values
  • Find out what bothers people
  • Choose your approach
  • Draft your code
  • Test it
  • Launch it
  • Monitor it

Ethical Culture Code of ethics

Another purpose of a code of ethics is to provide guidance and set common ethical standards to promote consistency in behavior across all levels of employment and establish an ethical culture. A code governs the actions and working relationships of board members and top management with employees and in dealings with other stakeholders. Here is an outline those relationships.

  • Requires the highest standards for honest and ethical conduct, including proper procedures for dealing with conflicts of interest between personal and professional relationships.
  • Requires full, fair, accurate, timely and understandable disclosure in reports and documents filed with regulators, including financial reports, and provided to shareholders.
  • Requires compliance with applicable governmental laws, rules and regulations.
  • Establishes accountability for adherence to the code.
  • Provides for methods to communicate violations of the code.

The launch of a code of ethics is just the beginning of the journey. Ongoing monitoring, training on its use and rewarding those who demonstrate ethical leadership are also required.

LRN Study

A recent study by LRN Corporation provides many important data points to consider in establishing an ethical culture. Here are some of the findings reported by Opinion Research Corporation.

- A majority of workers – 94 percent – say it is "critical" or "important" that the company they work for is ethical.

-  Eighty-two percent said they would prefer to be paid less but work for a company with ethical business practices than receive higher pay at a company with questionable ethics.

-  Eighty percent cite disagreement with the ethics of fellow employees, a supervisor or management as the most important ethical reason for leaving a job. Twenty-one percent cite pressure to engage in illegal activity.

-  Fifty-six percent of U.S. workers define their current company as having an ethical culture. Yet one in four say that in the past six months they witnessed unethical, and even illegal, behavior where they work. Among those, only 11 percent say they were not affected by it.

Organizations must establish an ethical culture to promote good behavior and organizational values. An ethical culture encourages employee support and respect for the rules of conduct and fair treatment by management. This, in turn, promotes trust in management and internalization of the company’s values. Once this happens, ethics becomes embedded in the workplace culture.

In conclusion, let me inform readers that I conduct ethics training sessions for all kinds of organizations. If you are interested in speaking to me about doing so for your organizations, email me at: steve@ethicssage.com. Book cover

Blog posted by Dr. Steven Mintz, The Ethics Sage, on April 21, 2022. Steve is the author of an accounting ethics textbook, Ethical and Professional Obligations and Decision Making in Accounting: Text and Cases, 6th edition. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/. Follow him on Facebook at: https://www.facebook.com/StevenMintzEthics and on Twitter at: https://twitter.com/ethicssage.

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