Code of Ethics: Compliance-based and Integrity-based

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  • 0:06 Ethics
  • 1:08 Compliance-Based Code
  • 2:53 Integrity-Based Code
  • 3:42 Steps in Drafting a Code
  • 5:35 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

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.

Ethics Defined

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.

Compliance-Based Code

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.'

Integrity-Based Code

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.

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