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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
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:
- Collaborate with leaders throughout the organization. Set forth clear objectives, values, and regulations that are easily agreed upon.
- 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.
- 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:
- Have the code of ethics endorsed by the Chairman and CEO.
- Circulate the code throughout the company and have employees review and sign as needed.
- Integrate the code into daily business operations.
- Implement procedures for managers and other leaders to review the code with employees regularly.
- Set forth a schedule for corporate management to review and update the code routinely.
- Detail the process of enforcing the code.
- 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.
Meet some of our Code of Ethics Lawyers
David H. Charlip, the principal of Charlip Law Group, LC, is one of only 101 Board Certified Civil Trial Lawyers in Miami-Dade, with over 38 years of litigation experience. Mr. Charlip is also one of only 136 Florida Civil Law Notaries. He has managed and litigated cases across the country. Mr. Charlip has advised businesses, drafted business formation and purchase and sale documents and litigated business disputes for over 30 years and is very familiar with all aspects of contractual relations.
With over 16 years of experience in the area of estate planning, trademarks, copyrights and contracts, I am currently licensed in Florida and NJ. My expertise includes: counseling clients on intellectual property availability, use and registration; oversee all procedural details of registration and responses with the USPTO/US Copyright Office; negotiate, draft and review corporate contracts and licensing; counsel clients on personal protection, planning and drafting comprehensive estate plans.
Melissa Taylor, the President and founding partner of Maurer Taylor Law, specializes in business contract review and drafting and is a second-generation attorney with private firm, in-house counsel, governmental, entrepreneurial, and solo practitioner experience. Melissa has a strong legal background, a dedication to customer service, is friendly, warm and communicative, and is particularly skilled at explaining complex legal matters in a way that's easy to understand. Melissa personally handles all client matters from start to finish to ensure client satisfaction.
Lawrence A. “Larry” Saichek is an AV rated attorney and a CPA focusing on business and real estate transactions, corporate law and alternative dispute resolution. With a background including five years of public accounting and six years as “in house” counsel to a national real estate investment company, Larry brings a unique perspective to his clients – as attorney, accountant and businessman. Many clients think of Larry as their outside “in house” counsel and a valued member of their team. Larry is also a Florida Supreme Court Certified Mediator and a qualified arbitrator with over 25 years of ADR experience.
Entertainment Attorney with 30+ years of experience, representing all aspects of the TV, Film, Music and Publishing Industries
Aaron focuses his practice on startups and emerging growth companies, providing general counsel services for companies from formation through exit. Aaron frequently advises clients in connection with routine and unique legal, business, and strategic decisions, including corporate, business and technology transactions, angel and venture financings, mergers and acquisitions, protection of intellectual property, and information privacy and data security.
I enjoy helping businesses of all sizes succeed, from start-ups to existing small and medium sized businesses. I regularly advise corporate clients on a variety of legal issues including formation, day to day governance, reviewing and drafting business contracts and other agreements, business acquisitions and sales, as well as commercial and residential real estate issues, including sales, purchases and leases. As an attorney licensed in both Michigan and Florida, I also advise clients on real estate issues affecting businesses and individuals owning real property in either state, whether commercial, residential or vacation/investment property. I also regularly assist nonprofit organizations in obtaining and maintaining tax exempt status, and provide general legal counsel on all matters affecting public charities, private foundations and other nonprofit organizations.