A code of ethics issued by a business is a particular kind of policy statement. A properly framed code is, in effect, a form of legislation within the company binding on its employees, with specific sanctions for violation of the code. If such sanctions are absent, the code is just a list of pieties. The most severe sanction is usually dismissal—unless a crime has been committed.
Business ethics emerged as a specialty in the 1960s in the wake of the "social responsibility" movement embraced by some large corporations; that movement itself was stimulated by rising public interest in consumerism and the environment. An important distinction exists between law and ethics. Obeying the law is the minimum level of ethical conduct enforced in society; ethical behavior includes more than simply legal behavior. It is unethical to lie, for instance; but lying is against the law only under certain limited circumstances: lying under oath is perjury. Business ethics, and the codes that formally define it, always include elements that go beyond strict legality; they demand adherence to a higher standard. In the wake of the Enron and Worldcom corporate scandals, codes of ethics have taken on yet another dimension. Legislation passed in 2002, the Sarbanes-Oxley Act ("SOX"), requires that corporations whose stock is traded under the provisions of the Securities Exchange Act of 1934 must publish their codes of ethics, if these exist, and also publish any changes to these codes as they are made. This requirement has given corporations strong incentives to formulate codes of ethics in order to win investor confidence. Most small businesses, of course, are not regulated by the Securities and Exchange Commission (SEC) because they do not issue publicly traded stock; thus they are not affected by SOX.
Perhaps the best-known code of ethics in history is the Hippocratic Oath taken by all doctors. Contrary to common belief, that oath does not include the phrase "First, do no harm." The actual language, in the third paragraph of the classical version, states: "I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice." According to Bartlett's Familiar Quotations, the more famous phrase comes from Hippocrates' Epidemics: "As to diseases make a habit of two things—to help, or at least, to do no harm."
A code of ethics is a formal document rather than merely an "environment," an "understanding," a consensus, "unwritten rule," or just an aspect of "corporate culture." It is at minimum a published document. In many organizations employees are also required to sign a statement to the effect that they have read and understood it. Variations on this theme exist. In very large corporations or corporations reacting to recent scandals, sometimes only corporate officers or only financial officers are required to sign. In other cases multiple codes of ethics may exist tailor-made to such functions as purchasing, sales, accounting, etc.
Codes of ethics are free-standing expressions of corporate will even when they are published as chapters or sections in a document which may contain a mission statement, a listing of corporate values, and general policies relating to operations.
Codes typically divide into three distinct elements: 1) an introduction or preamble, 2) a statement of purposes and values, 3) specific rules of conduct which may be subdivided in various ways, and 4) implementation of the code, which will define administrative processes, reporting, and sanctions.
Introduction: Management Sponsorship
The introduction or preamble to a code of ethics ideally carries a statement by the top-ranked officer of the corporation indicating his or her personal commitment to and backing of the code. Experts on and scholars of business ethics never fail to underline the importance of top management leadership, including by example. Codes of ethics published pro forma, possibly in the context of some rumors of scandals, carry little weight with employees unless tangible signs of corporate commitment are given. The preamble of a code of ethics provides an opportunity for sending such a signal.
Purposes and Values
The leading section of the code typically provides an abbreviated mission statement followed by values. This section states what the company is all about, what it does, why it exists. Ideally the code will state practical financial objectives as well as less precise social and professional aspirations. The statement of values, similarly, will begin with narrowly defined statements and expand on these. Obeying all pertinent laws and regulations may be the initial value; adherence to higher ethical values will be spelled out next. Corporations engaged in some professional specialty (engineering, medicine, law, etc.) may explicitly refer to professional standards and standard-setting bodies.
Rules of Conduct
Rules of conduct are typically subdivided. The Institute of Business Ethics (IBE), a London-based organization, provides a list easily adaptable by a small business formulating its own code. IBE divides the central presentation into codes of conduct adopted by the business toward its employees, customers, shareholders and other funding agents, suppliers, and then the wider society. In the subsection dealing with employees, an effective code will be further subdivided into the corporation's conduct toward employees and, separately, conduct expected from its employees.
In the language of business, the groups named above constitute the "stakeholders," those who have a stake in the well-being (and also in the ethical behavior) of the business. These groups typically define all those with whom the corporation has an interaction. In many cases, all depending on the range and activities of the corporation, other areas will get special emphasis. Thus rules of conduct may be spelled out in relation to the physical environment; ethnic, gender, and race relations; realms such a law and justice or medical practice. Codes of ethics may also specifically address areas of difficulty such as campaign contributions or compliance with specific laws. Examples of such rules are provided by FindLaw for Small Business, of instance, relating to antitrust statutes.
Within subdivisions, the code may specify categories of problems such as conflicts of interest; taking or offering bribes, gifts, favors, etc.; rules relating to information such as disclosures, withholding data, insider trading, and so forth; preferential treatment, discrimination; interpersonal relations including sexual harassment; resolving quality versus cost conflicts; and potentially endlessly more issues. Well-executed codes of ethics will be concise, as brief as possible, yet will contain vivid examples to make each point as clear as possible.
Implementation, Reporting, and Sanctions
The final section of a code will deal with administrative implementation of the code and sanctions against code violations. The simplest code will require reporting of code infractions up the management chain, including what action to take if the next level up fails to take action. In larger organizations an office or function may be expressly charged with handling code violations. Ombudsmen may be named. Sanctions will be spelled out and their administration defined, including a transparent process for establishing facts, the issuance of warnings, requirements for counseling or reeducation, consequences of repeat offences, on up to discharge or even, if appropriate, litigation.
For obvious reasons, a code of ethics without sanctions and a rational process for its implementation will be viewed by employees as merely a gesture without "teeth." Conversely, the business owner must be alert to the fact that ethical violations are not necessarily be legal infringements; therefore sanctions such as firing an employee may be problematical unless the business has an "employment at will" hiring and firing policy and its exercise is backed by state and federal law under the circumstances.
ETHICS CODES AND SMALL BUSINESS
One of the advantages of small business is that it can avoid what are sometimes time-consuming upheavals in the business world. By any measure, traditional or modern, ethics is an important issue. Observation and studies show that ethical behavior is efficient. A. Millage recently wrote in Internal Auditor about the findings of the "2005 National Business Ethics Survey" (NBES). The NBES is conducted by the Ethics Resource Center. The survey showed that 70 percent of employees in companies with a "weak" ethical culture (as measured by NBES) observed ethical wrong-doing in their companies. Only 34 percent of employees in organizations with "strong" ethical culture did so. Employees observed morale-destroying behavior such as discrimination and sexual harassment; lying internally, to vendors, customers, and the public; misreporting of time; direct thievery; and other problems. By any measure such activities translate into higher costs, lost reputation, poor performance, etc. Ethics matters.
At the same time, the current preoccupation with codes of ethics is producing very large documents, sometimes reaching the length of books. A Google search on the phrase "code of ethics" yielded 17,900,000 hits in January 2006, a Yahoo search 12,000,000. Much of the current interest may be due to recent corporate scandals and the requirements of the Sarbanes-Oxley Act of 2002. Does the current interest mean that a small business must formulate its own code of ethics? In most cases, it will do no harm.
To publish such a code is relatively easy. Many hundreds of sample codes are available on the Internet, many of them specifically designed for the small business. The small business owner can easily write a one-page code and distribute it to employees if he or she sees the need for this. Many small businesses have found it useful in the past to publish policy statements that deal with personnel policy, including business hours, vacations, accrual of personal time, and so forth. A code of ethics along the same lines may be easy to produce and serve an important purpose: to underline the owner's commitment to ethical behavior.
Many very small businesses of 10 to 20 employees operate more like families. Ethical behavior is part of the culture—as it is in a family. In such situations the sudden appearance of a code of ethics may be rather jarring. Discussion of the matter in a staff meeting may serve the purpose better: to alert employees to this issue and what is happening "out there."
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