Business code of ethics

Nowadays, many companies have a business code of ethics, a document developed for and by a company to guide the behaviour of managers and employees. In 2007, 86 per cent of Fortune Global 200 companies had a business code, an increase of 51 per cent since 2000. Among these companies, all North American firms had a business code, while 52 per cent of Asian companies and 80 per cent of European companies had a code.

Increase in business codes among Fortune Global 200 companies

What is a code?

A business code can consist of various layers of information. The structure of these layers can be depicted as a code pyramid consisting of four layers. The lower the layer, the more extensive and detailed and technical the information in the codes usually is. At the top is (1) the mission and vision of the organization, with directly underneath (2) the organization's core values, followed by (3) its responsibilities to the stakeholders. The lowest layer comprises (4) the standards and rules for managers and employees. These code elements are often integrated, together forming the company’s moral backbone.

Layers of a business code

Why do companies develop a code?

Companies have cited many reasons for developing codes of ethics, indicating their flexibility and broad utility. The most important reason among Fortune Global 200 companies is to comply with legal obligations. Other significant drivers of code development include:

  • Limiting liability in the event of accidents;
  • Limiting government initiatives to create new legislation;
  • Creating a positive, shared company culture;
  • Protecting and enhancing a company’s reputation; and
  • Improving staff behaviour and corporate social responsibility.

  • The contant of a code

    Codes range from a single page to up to eighty pages. Their content also differs. Specific company codes vary, but the bulk contain provisions addressing most of the following issues: conflicts of interest, complying with applicable laws and regulations, financial records and other internal information, confidentiality, accepting gifts and bribes, reporting violations, fair competition, insider trading and discrimination. An effective code should be:

  • Comprehensive, addressing issues stakeholders expect the company to respond to and giving guidance on dilemmas that managers and employees confront;
  • Morally justifiable, able to withstand moral scrutiny and being consistent with national laws and regulations, with generally accepted codes for businesses, industry organisations and sectors, and with stakeholders’ legitimate expectations;
  • Authentic, tailor-made and exuding the spirit of the company and expressing the company’s identity; and
  • Feasible, being manageable, realisable and practicable.

  • Embedding a code

    A code is a dead letter if it is not distributed or if after distribution it disappears into the desk drawer or shredder. In brief, ‘A code is nothing, coding is everything.’ A code’s importance lies in how it is introduced, implemented, internalised and institutionalised. This coding process can be much more important than the code itself. Coding starts with the way companies develop their code. It is important to involve internal and external stakeholders in determining the code’s content. Actual and potential dilemmas faced by managers and employers can be collected, through workshops, questionnaires, interviews and roundtables. These stories can be used as building blocks for writing a code, creating a sense of ownership among stakeholders and helping to make a code unique. Truly embedding a code means every manager and employee:

  • Knows and understands what is expected of them;
  • Feels inspired and motivated to comply with the code; and
  • Is able to comply with the code.
  • To achieve this, companies embed a living code by:
  • Communicating the code periodically;
  • Training managers and employees to implement the code;
  • Role-modeling by management in propagating the code in their words and deeds;
  • Creating a culture in which dilemmas can be raised and discussed;
  • Having monitoring systems that can detect code violations in a timely manner;
  • Punishing code violators if necessary and learning from violations; and
  • Rewarding people who go above and beyond the code.
  • Many instruments are available to embed a code, ranging from hotlines and whistleblower procedures, to compliance monitoring and ethics committees.

    Measures at the Fortune Global 200 to embed their codes of ethics

    Are codes effective?

    In view of the growing use of business codes, as well as increasing accountability pressures from governments, NGOs and other stakeholders, the question arises whether codes actually work. A recent summary of related scientific studies yields mixed results. About half of scientific studies found codes are effective or slightly effective, a third found they are not effective, and 14 per cent found they are sometimes effective and sometimes ineffective. One study found business codes could be counterproductive when employees perceive them as window-dressing. Most of these studies relate a code to one or more outcomes. What they ignore is the content of the code and how the code is embedded in the company. Given the diversity of code content and the ways they are embedded, the studies’ mixed findings are not surprising. To better understand the effectiveness of codes and to improve their effectiveness, attention should be paid to their content and how they are embedded. This can be summarised with the simple formula:

    Effectiveness of code = Content * Embedding

    See for more information on how to create a living code, my book: The Living Code.