Corporate codes of conduct pay scant attention to shareholders (May 20, 2008)

Shareholders get short thrift in the codes of conduct adopted by companies. A corporate code of conduct describes not only a company’s mission and core values, but also its obligations towards its stakeholders – including shareholders, workforce, consumers, and those living or working in the vicinity of the company’s site(s).

KPMG and the Rotterdam School of Management, Erasmus University have carried out research into codes of conducts drawn up by businesses that rank among the Fortune Global 200. Their conclusion is that most corporate codes of conduct give little attention to shareholders, who – as owners of the company. In reality, a meagre 48% of the codes deal with the company’s responsibility vis-à-vis its shareholders. Corporate codes of conduct focus most heavily on the company’s duty toward its employees. Of the companies surveyed, 87% have codes that deal with this issue, and almost 50% do so very extensively. The environment, too, attracts a great deal of attention. Almost 75% of the companies involved describe their roles in protecting the environment.

The research conducted by KPMG and RSM also demonstrates that, over the past ten years, the number of companies using a code of conduct has risen substantially. Of the world’s 200 largest companies, 86% now have a code. This compares with only 14% in 1990 and 51% in 2000. Companies cite compliance with legal requirements as their most important reason to introduce a code of conduct. “We can understand their attitude, in view of the demands placed on them by the Sarbanes-Oxley Act, the US Federal Sentencing Guidelines, as well as all national corporate governance codes and stock exchange regulations,” says Muel Kaptein, who is a Director for KPMG Forensic & Integrity and also a Professor of Business Ethics at RSM. “But codes of conduct are just as important in improving a company’s reputation and creating a positive corporate culture,” Kaptein goes on to say, adding “less frequently-cited reasons for adopting the code are to limit liability in the event of a mishap; to strengthen competitive strength; and to head off new external legislation.”

Most codes of conduct lay down a company’s obligation towards its employees, and vice versa, in detailed norms and values, as well as in detailed rules. Kaptein says, “Norms and values provide guidance to management and the workforce for situations where hard-and-fast rules are unworkable or undesirable. 84% of the codes provide specific norms and rules for dealing with confidential information. Moreover, 75% of the codes hold staff responsible for financial and other reporting, as well as for the protection of company property. But only 15% of the codes contain concrete norms and rules covering worktime-related issues, such as tardiness, absenteeism and overtime.”

One important development is that corporate codes of conduct are increasingly alike, says Kaptein, who adds, “For many companies it is important to develop codes specifically geared towards their own situations, strategies, identities and the dilemmas they are facing in their organisations. Especially companies that have in recent years been under great pressure to swiftly put together codes of conduct, are now expected to pay more attention to their own distinctive issues when updating these codes.”

The survey also looked at how these large companies are implementing their codes. More than 80% of them have their employees undergo code-focused training; have appointed an official to whom transgressions can be reported; and enforce compliance. Less than half of the companies vet job applicants with an eye towards the code; have incorporated elements of the code into their assessment standards for employees; and publish information on how well the code is being adhered to within the organisation.

The KPMG/RSM research will be followed up by more research into the effectiveness of corporate codes of conduct. The central research question will be “How can the effectiveness of codes be enhanced and what preconditions must be met? The research will especially look at international best practices of companies having effectively introduced their codes.

KPMG Forensics is a global practice comprising multidisciplinary professionals from KPMG member firms who can assist clients in their efforts to achieve the highest levels of business integrity through the prevention, detection, and investigation of fraud and misconduct. This practice not only helps clients discover the facts underlying concerns about fraud and misconduct but also assists clients in assessing their vulnerabilities to such activities, and in developing controls and programs to address these risks. www.kpmg.com.

For more information on KPMG or on this release, please contact Andy Bellm, Media & Public Relations Manager for KPMG, on +31 20 656 7039 or by email at bellm.andy@kpmg.nl

The Rotterdam School of Management, Erasmus University is a top-ranked international business school renowned for its ground-breaking research in sustainable business practice and for the development of leaders in global business. Offering an array of bachelor, master, doctoral, MBA and executive education programs, RSM is consistently ranked amongst the top 10 business schools in Europe. www.rsm.nl

For more information on RSM or on this release, please contact Marianne Schouten, Media & Public Relations Manager for RSM, on +31 10 408 2877 or by email at mschouten@rsm.nl.