How to Develop a Company Code of Conduct
Simply having a company code of conduct is not enough. Research has found that the process an organization follows to develop a code of conduct can impact its effectiveness (Schwartz, 2008). Researchers have also suggested that the implementation process is an important factor in creating an ethical culture.
“Code of conduct” and”code of ethics” are terms that are used interchangeably and, in fact, they are called many different things, which Schwartz collectively defines as follows:
A business code is a distinct and formal document containing a set of prescriptions developed by and for a company to guide present and future behavior on multiple issues of at least its managers and employees toward one another, the company, external stakeholders and/or society in general.
In a previous post, we described the”hallmarks of an effective compliance and ethics program“ as outlined by the US Department of Justice and Securities and Exchange Commission. In this post, we’ll look at how to develop code content that reflects your organization’s values and risk tolerance, and ways to implement its provisions to increase their effectiveness.
Code of Conduct Development Process
Establish the Purpose
The first step in developing a company code of conduct is to establish the purpose of the codes and why they matter. In a KPMG survey of Fortune Global 200 companies, the three most common reasons for adopting business codes were to comply with legal requirements, create a shared company culture, and protect and improve the organization’s reputation. KPMG’s survey also found that the most commonly cited core values of Fortune Global 200 companies are integrity, teamwork, respect, innovation, and client focus. Schwartz also recommended that code provisions should be consistent with”six universal moral values“ (trustworthiness, respect, responsibility, fairness, caring, and citizenship), which should prevail over financial objectives.
Understand Your Risks
Once the purpose is established, the framework for developing a code requires a full understanding of the operational and reputational risks an organization faces. These issues define the organization’s objectives when developing code content, policies, communication, and training that address individual and collective responsibilities regarding risk management.
To achieve the organization’s risk management standards it is important to draft a code that clearly states expectations and guidelines for acceptable behavior, and provides options for seeking advice and for reporting concerns or suspected misconduct. In his research on the many dimensions of code development, Schwartz found that employees, managers, and ethics officers consider codes more effective when they are readable, relevant, and have a positive tone.
Chose Your Language
In addition, choosing your language carefully is important, as the authors of an article analyzing Lehman Brothers’ Code of Ethics concluded:”finding the right words to express ideas and behaviors is a key strategic action for an organization.” The authors studied Lehman Brothers’ code using the Competing Values Framework (CVF) to reveal the rhetorical elements of the message, and the Erwin method to rate the code’s tone, readability, and style. They found that Lehman Brothers’ code’s strengths were on the relational (trust) and informational (facts) side, as opposed to the transformational (change) and instructional (action) side, of the CVF. This led to their conclusion that:
The Lehman code of ethics and internal code of conduct do not offer much vision or guidance to the reader. . . . While it lays out the basic rules expected of all Lehman employees, executives missed the opportunity to create a unique code expressing strong ethical principles. A more transformational code might have identified their unique strengths and values, but this would have to be coupled with transformational leadership and a culture of strong communication. The Lehman code did a basic job of protecting the organization against illegal actions by employees, but it did little to advance an ethical culture that might have sustained them.
Additional Guidance for Employees
One of the things the authors found lacking was guidance for employees who are faced with difficult decisions. The American Management Association proposes using the code of conduct to guide employees who are conducting business and making decisions in business dealings and relationships around the globe, by simply recommending that employees ask themselves two questions:
- Does this comply with the law, the Code of Conduct and the company’s policies?
- How would customers, shareholders, general public and co-workers view it?
Best Practices for Drafting Codes of Conduct
The best practices for drafting codes of conduct that emerge from these studies include:
- Obtain buy-in across the organization with input from a multidisciplinary team
- Include the organization’s mission statement, vision, and values that reflect its commitment to ethics, integrity, and quality
- Clarify that the organization expects individuals to act with honesty and integrity in addition to compliance with legal requirements
- Describe expected behaviors rather than stating prohibitions
- Cover relevant risks, employment practices, protecting corporate assets, and managing third-party relationships
- Make it user friendly and applicable to all individuals covered by the code
- Use simple, concise, and easily understood language (and provide translated versions as needed)
- Describe enforcement and disciplinary procedures
- Solicit feedback on the code from all levels of the organization
- Update to improve content and address new issues or risk areas
But the mere existence of a code of ethics, without more, will not create a sense of shared values and commitment to ethical behavior.
Implementing Your Company Code of Conduct
Based on their analysis of the effect that Lehman Brothers’ code of ethics had on its corporate culture, the authors concluded that”silence can be deadly,””codes fail when poorly communicated,” and”codes themselves cannot create ethical organizations.”
In fact, their research found that these two actions are key to code implementation:
- Communicate codes through the right channels and explain why they’re important
- Integrate codes into the organization’s practices and back it up with enforcement
Once drafted, an organization needs to embed the code into its culture. The KPMG report recommends that the code become a”living” document to guide and create ethical behavior throughout the organization through:
- Communication and training
- Personnel and other policy measures
- Monitoring, auditing, and reporting
At the companies KPMG surveyed, training courses were commonly used to:
- Explain the importance of the code
- Reinforce ethical behavior
- Strengthen the moral compass
- Identify and deal with dilemmas
- Provide guidance on how to implement the code more effectively
At Lehman Brothers, the ethical code contained the phrase”compete aggressively in furthering the interests of the firm.” However, the authors raise the question of whether explaining to employees the level of acceptable risk in”competing aggressively” would have avoided leveraging the company”into a lethal situation.”
Effective implementation requires ethical leadership and support, training, and continuous reinforcement and updates to keep the code current. Ongoing administration and reinforcement of code standards embeds an organization’s values into its culture, which stimulates ethical reflection and action, and encourages compliance so that employees speak up when they see others engaging in unethical behavior. And for the skeptics who question whether an effective company code of conduct is worth all this effort, the bottom line is that good ethics are good for business.