A business may develop a code of ethics for different reasons. In this lesson, you'll learn what a code of ethics is and the difference between a compliance-based code of ethics and an integrity-based code of ethics.
Meet Jeremy. He used to be a small business owner, but his business has grown beyond a mom and pop operation. When his operation was smaller, he was able to ensure that his business and all of its employees followed his ethical vision. Ethics are the values and principles that guide the behavior of people and organizations in relation to their responsibilities and decision-making. Now that his business has grown, Jeremy can't personally oversee all of it to ensure the business and its employees are acting in accordance with his ethical standards.
Jeremy decides that his company needs a code of ethics. A code of ethics is a written statement or code of conduct regarding the values and principles of an organization that guides the members of the organization in its responsibility to all of the organization's stakeholders. A stakeholder is any person, group or organization that has an interest or concern in the business. For example, Jeremy, employees, customers, suppliers, the government and the local community are all stakeholders in Jeremy's company because they all have some type of interest or concern in the business.
Like every other business, Jeremy's business is subject to different laws and regulations that govern its conduct. For example, there are laws that govern the employee-employer relationship, health and safety at work and to ensure consumers are protected. It is illegal for a salesperson to make a material misrepresentation of fact concerning a good or service. A compliance-based code of ethics attempts to address these legal issues.
A compliance-based code of ethics is developed to ensure that the business and its employees comply with all laws and regulations in an appropriate manner. Three key elements include the prevention, detection and punishment of non-compliant behavior. For example, Jeremy's compliance-based code may prohibit his employees from making material misrepresentations of facts when acting within the scope of their employment. Telephone sales are monitored to ensure that the sales force complies with the code and sales people are punished if they fail to do so.
Compliance-based ethical codes do have their critics. Compliance-based ethics do not foster independent thought and autonomy. They don't empower employees to be ethical actors, but rather use strict rules of fear and punishment to enforce the code. Perhaps more importantly, compliance-based ethics does not necessarily encourage a general idea of ethical behavior.
Keep in mind that what is legal and what is ethical are not necessarily the same thing. Compliance-based codes have an emphasis on not violating laws. This type of ethics code focuses on the 'thou shall not,' rather than the 'thou shall.' Businesses can be in complete legal compliance and in compliance with its compliance-based code of ethics and still engage in ethically questionable behavior, such as unnecessary, but legal, polluting to save a buck. In fact, some consider compliance-based codes of ethics to be taking the 'low-road.'
Jeremy could take the 'high-road' and develop an integrity-based code of ethics. An integrity-based code of ethics still contains rules prohibiting illegal behavior, but focuses on proper actions or effects that should be achieved rather than behavior to be avoided. In an integrity-based ethical system, Jeremy will set values to which his business and employees aspire, such as treating customers right and conducting a 'green business.'
The focus is on what the company can achieve rather than the manner in which it is achieved; it's results-orientated. The company attempts to encourage good, ethical behavior rather than focusing on monitoring and punishing errors or bad actions. For example, employees may be rewarded for finding ways to advance the aspirational goals, such as finding a more green solution in manufacturing. Of course, this type of ethical code requires a certain level of trust and employee autonomy, which may backfire.
Steps in Drafting a Code
When drafting his business' code of ethics, Jeremy will want to address several things. First, Jeremy will want to establish the ethical vision for his business. Here, he will develop the organization's values and principles.
Second, Jeremy will want to ensure that his code of ethics will comply with all legal and regulatory requirements. Just because something is ethical, doesn't necessarily make it legal. He will consult with his lawyer, CPA and HR manager to help develop a code of ethics that will comply not only with his business' values, but also with the law.
Third, Jeremy will want to work with his managers to develop a set of procedures for detection of violations and a punishment protocol for violations. For example, he may have surveillance equipment installed and conduct quarterly audits. He may also develop a progressive punishment system starting with an oral warning, then a written warning and then a final warning followed by a termination. Of course, if the violation is severe enough, the policy will provide for immediate termination. If his focus is on integrity-based ethics, he will probably restrict those procedures to the legal compliance portions of the code of ethics.
Fourth, if Jeremy wants to develop an integrity-based code of ethics, he may wish to develop a program that encourages the values, principles and ethical visions of his company. For example, he may set up a rewards program for employees demonstrating exemplary ethical behavior.
Fifth, Jeremy will want to start implementation with the distribution of the new code to all of his employees. It's a good idea for Jeremy to have employees sign a form acknowledging that they have received, read and understand the code. Jeremy will also have HR conduct a training session on the code for all employees.
Sixth, Jeremy will conduct an annual review of the code to determine if any changes need to be made. New developments may require changes to values and principles. Laws also change, which require changes to the compliance portion of the code.
Let's review what we've learned. Ethics is a system of principles and values that guide behavior and decision-making. A code of ethics is a written statement or code of conduct regarding the values and principles of an organization that guides the members of the organization in its responsibility to all the organization's stakeholders. A stakeholder is any individual, group or organization that has an interest or concern in a business.
You can break business codes of ethics into two general categories: compliance-based codes and integrity-based codes. Compliance-based codes of ethics use prevention, detention and punishment as a means to ensure compliance with the ethical code, which is generally developed to make sure that the company complies with the legal and regulatory requirements to which it is subject. While integrity-based ethical codes also prohibit violation of laws and regulations, they emphasize proper actions and effects that should be achieved. It's about encouraging proper action rather than just prohibiting wrong action.
Several steps are undertaken to develop a code of ethics for a business. The business' values and principles must be established. The code should ensure compliance with all laws and regulations to which the business is subject. A system for detection and punishment for violation of the code needs to be established.
If the code is integrity-based, then a system of rewards to encourage independent ethical behavior in accord with the code may be established. The code needs to be distributed and steps should be taken to ensure that all employees have received, read and understand the code. Formal training is advisable. Finally, a business should conduct a periodic review of the code to determine if changes need or ought to be made.
When this lesson is done, you should be able to:
- Define what a code of ethics is
- Identify compliance-based codes of ethics as fear and punishment
- Recognize integrity-based ethics are reward based
- Understand the six steps to building any code of ethics system