Code of Ethics

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What Is a Code of Ethics?

A code of ethics, also referred to as an ethical code or statement of ethical principles, is a document that sets forth the expectations, standards of practice, and principles of conduct for a business or organization. This type of policy statement can essentially form a type of legislation if it details clear penalties for employees or members who violate the code. Absent these sanctions, the code of ethics serves more like a list of expected duties.

A code of ethics goes beyond the limitations of the law and specifies many activities not prohibited by law that are nonetheless prohibited within the specified group. Ethical behavior is more complex than legal behavior. For example, it is unethical to be dishonest, but it is not illegal to lie except under certain circumstances. Business ethics demand a higher standard of behavior.

The History of the Code of Ethics

Business ethics first became a specialty in the 1960s, spurred by the social responsibility movement. The social responsibility movement states that individuals should act in a way that benefits society as a whole rather than simply protecting one's own personal interests. In the 1980s, many governments and corporations began to set forth formalized codes of behavior.

Here is an analysis of 150 of these corporate codes of ethics completed in 1989. This found five key elements that were similar among many of them. These codes of ethics addressed:

  • The proper treatment of employees
  • How to handle whistleblowers
  • Guidelines for inter-employee relationships
  • Regulations regarding employees' political contributions and actions
  • Instructions for preventing bribery and handling conflicts of interest

Codes of ethics gained greater importance in 2002, when the Sarbanes-Oxley Act ("SOX") was passed, requiring that any corporation trading stock under the provisions of the Securities Exchange Act of 1934 publish their code of ethics if one exists. This creates a strong incentive for corporations to draft a code of ethics as it helps to increase investor confidence.

How a Code of Ethics is Published

A code of ethics must be a published document, but it can take many forms. The code of ethics might exist in several forms within a single organization with each document tailored to a specific department, such as finance or sales. In some companies, employees are required to sign a document verifying that they have read the code of ethics. This requirement may apply to all employees or only to corporate officers.

The code of ethics may stand alone , or you might find it accompanied by the organization's mission statement, corporate values, and other policies. As mentioned previously, the code of ethics must be available to the public if the corporation trades its stock publicly and is regulated by the Securities and Exchange Commission (SEC).

In addition to the code of ethics produced by an individual organization, you will also find codes of ethics which apply to entire industries, such as:

  • The National Society of Professional Engineers (NSPE) Code of Ethics for Engineers
  • The Institute of Internal Auditors (IIA) Code of Ethics
  • The Code of Ethics for the Nutrition and Dietetic Registration Board
  • Association for Institutional Research (AIR) Statement of Ethical Principles
  • The Code of Ethics and Standards of Practice of the National Association of REALTORS

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What's Included in a Code of Ethics?

A code of ethics includes both internal guidelines for ethical behavior and an outward statement of commitments and values as well as guidelines that an individual's behavior can be measured against. The code of ethics should include:

  • Introduction: This preamble makes a clear statement about the company's values and commitment to supplying and enforcing an ethical code for conduct. This may appear as a message from the CEO.
  • Statement of Company Values: This details the company's mission statement, financial objectives, social aspirations, and professional goals. Here, the organization may refer to other professional standards or standard-setting bodies that it follows, such as the American Medical Association (AMA)'s Code of Medical Ethics, which applies to physicians and dental practitioners.
  • Rules of Conduct: This is the bulk of your code of ethics, outlining all of the rules that employees are expected to follow. It may discuss topics such as:
    • Compliance with industry regulations
    • Regulations for disclosure and privacy
    • Truth in advertising
    • Moral values, such as respect, responsibility, fairness, kindness, and trustworthiness
    • Involvement and interactions with the community
    • Discrimination policies
    • Handling of interpersonal relations
    • Rules regarding conflicts of interest
  • Implementation and Sanctions: This section details how the code of ethics is enforced and what consequences will occur if the code is violated. This will specify:
    • Guidelines for reporting a violation of the code of ethics
    • Consequences for code violations
    • Handling of employee termination or litigation
  • Additional Resources: The code of ethics should conclude with compliance resources that refer to laws, policies, and procedures relevant to this code. You should also provide contact information for your department of ethics or human resource department. These resources will make it easier for employees to understand the code in depth.

How to Implement a Code of Ethics

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A code of ethics is a beneficial document for nearly any type of business that will serve the company well alongside other essential contracts . When drafting a code of ethics, it's important to carefully consider the company's values, goals, and potential challenges. The code of ethics can mitigate many problems by setting forth clear rules and guidelines that employees review upon hiring.

To develop a code of ethics, you should:

  1. Collaborate with leaders throughout the organization. Set forth clear objectives, values, and regulations that are easily agreed upon.
  2. Review laws and regulations in your industry. Ensure that your code of ethics adheres to all the latest regulatory developments in your area of business.
  3. Simplify the language. Avoid legal jargon, so the code of ethics is easily understandable for employees, investors, clients, partners, and anyone else interested in your company.

Here is an article with some common provisions to consider for your code. Once a code of ethics has been reviewed, edited, and approved, it's ready for implementation. This code is only effective when it's disseminated properly throughout the organization. To do this, you must:

  1. Have the code of ethics endorsed by the Chairman and CEO.
  2. Circulate the code throughout the company and have employees review and sign as needed.
  3. Integrate the code into daily business operations.
  4. Implement procedures for managers and other leaders to review the code with employees regularly.
  5. Set forth a schedule for corporate management to review and update the code routinely.
  6. Detail the process of enforcing the code.
  7. Train all leaders involved in enforcement in the proper way to uphold the code and implement consequences.

The Value of a Code of Ethics

A well-written code of ethics will:

  • Provide legislation for the actions of individuals within the organization
  • Provide a public statement of values which serves as a form of marketing
  • Mitigate risk by outlining the consequences of ethical misconduct
  • Establish benchmarks for personal and professional evaluation
  • Promote quality standards of practice

A code of ethics is an important document for any well-established business. Drafting and implementing this code early on will help solidify the company's values and morals. Consider having a contract lawyer review your code of ethics prior to publication to ensure that it is clear and easily enforceable.

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