Having a written code of ethics ensures that an organizations members will behave ethically

Stathis Gould | November 5, 2013 |

In a Compliance Week blog post, editor-in-chief Matt Kelly commented that MF Global demonstrates all the worst ways that senior management can let “tone at the top” go wrong (“MF Global: Tone Deaf at the Top, and Then Disaster,” April 8, 2013). Kelly cites three sentences taken from a post-mortem published by a trustee investigating MF Global:

“Before MF Global went public, it acquired several disparate companies it never properly integrated. As one subordinate wrote in April 2010, “There is little business or dispositional integration between the many offices and branches. There is, in short, no house culture. The unwieldy corporate structure lacked cohesion both in its culture and in its operating structure.””

Effective approaches to instilling ethics and integrity, and using codes of conduct, are key elements of ensuring sound corporate governance and management control. The Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s principle one of the control environment in the Internal Control Integrated Framework covers the need for the organization to demonstrate a commitment to integrity and ethical values. The related points of focus for achieving such commitment include the following:

• Setting the tone at the top: the board of directors and management at all levels of the organizations demonstrate through their directives, actions, and behavior the importance of integrity and ethical values to support the functioning of the system of internal control.
• Establishing standards of conduct: the expectations of the board of directors and senior management concerning integrity and ethical values are defined in the entity’s standards of conduct and understood at all levels of the organization and by outsourced service providers and business partners.
• Evaluating adherence to standards of conduct: processes are in place to evaluate the performance of individuals and teams against the entity’s expected standards of conduct.
• Addressing deviations in a timely manner: deviations of the entity’s expected standards of conduct are identified and remedied in a timely and consistent manner.

Codes of conduct help to reassure investors and other stakeholders, in particular those looking for socially responsible investment, integrity, and a commitment to ethics. Furthermore, employees generally prefer to work for organizations committed to values and ethics, and consumers tend to prefer to buy from organizations with strong records of adherence to standards of conduct and socially sensitive behavior.

As part of their leadership role and professionalism, professional accountants have a responsibility and opportunity to ensure the entire organization is attuned to high ethical standards and aligned with the values, goals, and objectives of the organization. Foremost, those in senior positions can help to set the tone at the top by displaying and encouraging professionalism and ethical behavior. An important way of influencing ethical practices and behavior in organizations is to ensure that senior management places a high premium on ethical behavior, and tone at the top. Tone at the top dictates the integrity of an organization and how employees will conduct themselves. The right tone at the top permeates throughout an organization and can be facilitated by a values-based code of conduct.

IFAC’s guidance Defining and Developing an Effective Code of Conduct for Organizations highlights the important role that accountants can play in driving and supporting organizational ethics and fostering a values-based organization. By applying a values-based approach—leading by example rather than relying on written policies and rules—accountants can promote a culture that encourages employees to internalize the principles of integrity and to “do the right thing” by allowing them to make appropriate decisions given specific circumstances.

A good example of a values-based approach is the PepsiCo Global Code of Conduct, designed to provide employees with specific guidance on how to act ethically while performing work for PepsiCo. It reinforces Pepsi’s core values and is the foundation of their strategic mission of Performance with Purpose.

All PepsiCo employees are expected to embrace the principles of the Code and:

• Show respect in the workplace;
• Act with integrity in the marketplace;
• Ensure ethics in PepsiCo’s business activities; and
• Perform work responsibly for PepsiCo’s shareholders.

Tone at the top also needs to be connected to the tone at the middle. An interesting observation by Michael G. McMillan, director of ethics and professional standards at the CFA Institute, is that most unethical behavior that we have all read about lately has not occurred in the “c-suite” but rather at the “m-level” (“Culture of Integrity Requires Financial Firms to Renew Focus on Middle Management,” Enterprising Investor blog).

Middle managers and their subordinates, not top level executives, have been at the center of most of these scandals. Therefore, if financial institutions really want to create a culture of integrity, they must also establish a “tone at the middle.” The chief financial officer and senior management will play a critical role in aligning tone at the top to behavior and actions in the middle and on the front line through effective systems of management control, performance management, training, and “walking the talk.”

Increasingly, organizations are using their codes of conduct and compliance programs as a means of engaging, educating, and raising awareness among employees. For example, Pet Supplies retailer Petco changed its code of conduct from a list of dos and don’ts to a shorter, livelier document with examples of situations employees might face on a day-to-day basis. A values or principles-based code, rather than a prescriptive approach, generally has more scope to influence employee decisions and actions.

Key questions for assessing your approach to ethical leadership

• Do organizational values, standards of behavior, and organizational support mechanisms reinforce and encourage integrity at all levels?
• Does the leadership of the organization demonstrate high standards of integrity?
• Do they practice what they preach and set a good example?
• Do directors and senior management provide a clear signal to other employees and outside stakeholders that integrity is important to the performance and reputation of the organization?
• Does adhering to the principle of integrity override short-term gain?
• Does the organization’s leadership ensure that strategy, policies, information, and culture sustain a reputation for integrity?
• Are the organization’s objectives and strategy in line with its standards of business conduct? For example, does the strategy impose unrealistic short-term performance targets that may encourage behavior that lacks integrity?
• Does the organization have a code of conduct that defines integrity and outlines the behavior it expects directors, employees, and other stakeholders to uphold?
• Does the code and compliance program adhere to regulatory and listing requirements, including for enforcement?

Connect with local resources and expertise

Find

Regardless of whether your organization is legally mandated to have a code of conduct (as public companies are), every organization should have one. A code has value as both an internal guideline and an external statement of corporate values and commitments.

A well-written code of conduct clarifies an organization’s mission, values and principles, linking them with standards of professional conduct. The code articulates the values the organization wishes to foster in leaders and employees and, in doing so, defines desired behavior. As a result, written codes of conduct or ethics can become benchmarks against which individual and organizational performance can be measured.

Additionally, a code is a central guide and reference for employees to support day-to-day decision making. A code encourages discussions of ethics and compliance, empowering employees to handle ethical dilemmas they encounter in everyday work. It can also serve as a valuable reference, helping employees locate relevant documents, services and other resources related to ethics within the organization.

Externally, a code serves several important purposes:

• Compliance: Legislation (i.e., the Sarbanes-Oxley Act of 2002) requires individuals serving on boards and organizational leaders of public companies to implement codes or clearly explain why they have not.
• Marketing: A code serves as a public statement of what the company stands for and its commitment to high standards and right conduct.
• Risk Mitigation: Organizations with codes of ethics, and who follow other defined steps in the U.S. Sentencing Commission’s Federal Sentencing Guidelines, can reduce the financial risks associated with government fines for ethical misconduct by demonstrating they have made a “good faith effort” to prevent illegal acts.

For additional information about the benefits of a code, see Creating a Workable Company Code of Ethics pp. 3-4 and 6-9.