Organisational Codes of Ethics: Guiding Light or Oxymoron?

 

A large American company revised and committed to its Code of Ethics in 2000. This rousing and lengthy Code states that the company’s employees, subsidiaries and affiliates:

 

“are charged with conducting their business affairs in accordance with the highest ethical standards. An employee shall not conduct himself or herself in a manner which directly or indirectly would be detrimental to the best interests of the company or in a manner which would bring to the employee financial gain separately derived as a direct consequence of his or her employment with the Company. Moral as well as legal obligations will be fulfilled openly, promptly, and in a manner which will reflect pride in the Company’s name. […]

Relations with the Company’s many publics – customers, stockholders, governments, employees, suppliers, press, and bankers – will be conducted in honesty, candour, and fairness.”

 

Impressive stuff. The Code’s 64 pages cover government affairs, anti-trust laws, conflict of interest, “human rights” and many other aspects on responsible and ethical business practice.

So who was this upstanding member of the American business community? Enron Corporation, the giant energy-trader whose nosedive crash in 2002 left thousands of employees out of work, and some of its managers in prison.

 

Saying One Thing And Doing Another

 

Despite Enron’s stated commitment to the core values of integrity, respect, communication and excellence, Enron officials acknowledged that the company overstated its profits by more than US$580 million for at least 5 years before it crashed. As the stock price plunged in 2002, Enron’s 20,000 employees were barred from selling Enron shares from their retirement accounts, while top Enron executives cashed out more than US$1 billion in company stock and received more than US$100 million in bonuses.

In their book “The Smartest Guys in the Room” (2004), Bethany McLean and Peter Elkind detail almost unfathomable breaches of ethical standards by Enron’s executives, driven by greed and an unwavering focus on boosting the share price. In one example, Enron’s West Coast Trading Desk manipulated California’s energy market deregulation at a cost to Californian consumers of US$7 million, and organised fake power outages, to force up artificially the price of electricity. Meanwhile, Enron’s Board of Directors exempted CFO Andy Fastow from the company’s Code of Ethics, so that his private equity fund could raise money for and do deals with Enron. Enron later used Fastow’s funds and dodgey accounting to “manage” its balance sheet and write off losses as profit, deceiving investors with a false picture of the company’s performance.

 

What Use is a Code of Ethics?

 

Enron’s case is a spectacular example of a Code of Ethics that was not worth the paper it was written on. Its executives made countless business decisions that squarely contradicted the organisation’s stated values. Their behaviour was the antithesis of integrity, respect, communication and excellence that the Code promoted.

Employees at all levels are subject to pressures, opportunities and incentives that challenge their judgment, and have the potential to sway them towards unethical behaviour. This is, in part, what a Code of Ethics tries to address.

A Code of Ethics is only useful if it:

 

A Code of Ethics must be a genuine statement of how the business behaves towards its internal and external stakeholders. There is no point having a Code of Ethics which reads really well, but which the organisation has no intention of following. Does the company really champion human rights (as Enron claimed), or in reality is it focused on profit for shareholders within the bounds of the law?

Most organisations have a Code of Conduct which gives employees explicit directions about how to act in certain situations. For example, a Code of Conduct may direct employees to disclose and actively manage any conflict of interest, or to refuse kickbacks from suppliers. These directions are specific, practical and simple. They do not require much judgement by the employee.

In comparison, a Code of Ethics is a statement of the values or principles that underpin everything the organisation does. Where the Code of Conduct and associated policies are silent or their application is uncertain, a Code of Ethics gives guidance for solving the problem. The Code of Ethics should be general, advisory rather than directive, and shorter than a Code of Conduct. In Australia, we are more likely to see 1-page Codes of Ethics, than 64-pages of Enron-style puffery.

Increasingly, the organisations we work with are keen to define their guiding ethical principles as part of a new focus on corporate social responsibility. They are actively committing to behave ethically and contribute to economic development, while improving the quality of life of the workforce, their families and the communities in which they operate.[2] To be effective, corporate responsibility must be integrated into the day-to-day business. All stakeholders must be engaged, and individual managers must be supported to apply the company’s values, make socially responsible decisions, and obey the law. Having a coherent and genuine Code of Ethics is a good place to start.

 

What Do We Believe In?

 

Ethics is about right versus right. In business as in life, there are often situations in which two or more values (such as justice and forgiveness) are relevant but they demand different approaches to the same problem. For example, when our employees are dealing with customer complaints, do we want them to privilege honesty or politeness? Do we need our employees to be courageous, or would we rather have conformity?

Every organisation preferences some values over others, subtly or noticeably. A university might value intellectual rigour, independence and the pursuit of knowledge. By comparison, a telecommunications company would prefer customer service, consistency in network availability, and profit. For this reason, there is no such thing as a one-size-fits-all Code of Ethics.

As part of formulating a Code of Ethics, it is important to scrutinise what the organisation means by the values it proposes to include. When we assist our clients to create Codes of Ethics, we often ask “what do you mean by that?”. For example, most Codes of Ethics include “integrity” as a core value. The Macquarie Dictionary (4th ed.) defines integrity as:

For each person or organisation, “integrity” will have a slightly different meaning, depending on the context, industry, and other values at play. To an engineer, having “integrity” could mean the bridge won’t fall down. To a psychopath, having “integrity” could mean consistently acting in abnormal and dangerous ways.

This simple example shows that when discussing the values and principles that underpin an organisation, we can’t assume that everyone has the same understanding of the organisation’s stated values. Drafting a Code of Ethics requires a thorough discussion about what those values will actually mean in practice, in the context of your specific organisation.

 

We Already Act Ethically – Why Codify It?

 

Codes of Ethics serve many purposes. They are at the same time aspirational and grounding, abstract and practical. They give employees, customers and shareholders an understanding of how the company conducts itself, and therefore have the potential to increase loyalty, focus, trust and cooperation.

Recent research undertaken by recruitment firm Hays found that 32% of Australian employees and 44% of New Zealand employees rated the company’s “vision, culture and values” as the most important factor in determining their ongoing perception of their employer. Meanwhile, 23% of Australian employees and 18% of New Zealand employees reported that they would resign if the company did not adhere to its stated company culture or branding. [3]

Research also indicates that companies which demonstrate a coherent set of ethical principles, as well as business goals, are more likely to be profitable and stand the test of time. In “Built to Last: Successful Habits of Visionary Companies”, Jim Collins and Jerry Porras found that:

“Visionary companies pursue a cluster of objectives, of which making money is only one – and not necessarily the primary one. Yes, they seek profits, but they’re equally guided by a core ideology – core values and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies.” [4]

By openly committing to ethical principles and standing by them, the company demonstrates its openness, reliability and soundness of character. No matter what the content of your Code of Ethics, this is a good message to send to your stakeholders.

 

[1] Professional Standards Council, “Model Code of Ethics Principles”, June 2002.
[2] See e.g., Philip Kotler and Nancy Lee, Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause (2005), page 3.
[3] Hays Recruitment, Workplace Series, Issue 5, “Creating an Employment Brand”.
[4] Jim Collins and Jerry Porras, 1994, page 8.

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