POLICY
 
 
CORPORATE ETHICS WHERE ARE WE HEADING?
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By AAMIR AMIN

Feb 07 - 13, 2005
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Outrage over ethical and financial misconduct by the senior management of public companies led to the passage of historic legislation, redefining the roles and responsibilities of corporations and those who serve them. Greed and cooking of books raised many questions about the value of those on which shareholders place great reliance. It is their fiduciary duty to have a corporate sense of right and wrong and ensure that their culture is built on the same premise also.

WHAT IS A CODE OF ETHICS?

A code of ethics is a set of fundamental principles which is not only targeted as the basis of operational requirements (to do list) but also operational prohibitions (not to do list). These principles are illustrated with behavioral examples. Those who are subjected to code are required to understand, absorb and apply the examples in real life situation.

HOW IS A CODE OF ETHICS CREATED?

In order to create a code, an organization should decide upon the most important guiding values on which sense of its being right and wrong is based, formulate the expected behavioral responses, review the existing procedures for interrelating the code with procedures and establish a system that ensures the code is implemented and regularly monitored. Code of ethics is not easily developed and a lot of effort and thorough deliberations are to be made by the Board and senior management for defining the core values, roles, responsibilities and expected behavior.

Typically, a code of ethics is divided into five sections:

1. THE INTRODUCTORY SECTION

As the name suggests, it introduces the code to the rest of the world with explanation of necessity of its promulgation, scope of the code and how it is to be used. Commitment of the high-ups in the form of written statement for values and their promise of consistent adherence to the code are also included.

2. A STATEMENT OF CORE VALUES AND PRINCIPLES

It is defined in simple business language. This statement could be bifurcated into moral values and business values. Moral values include principles of trustworthiness, respect, care, justice and fairness. Business values include customer satisfaction, excellence and profitability. Statement of compliance with applicable laws, rules and regulations is also included in this section.

3. BEHAVIORAL EXAMPLES

These examples illustrate the defined values/principles. It is also made crystal clear that those examples are not all inclusive rather indicative only. Often, these examples involve the potential ambiguities and confusion faced by the employees in performing their assigned duties which is supported by the company's specific policy for resolving the matter.

4. A DISCUSSION OF THE ORGANIZATION'S SUPPORTING SYSTEMS

It involves the infrastructure on which whole system is built. It sets forth the inquiry-line for resolving any query and reporting-line for reporting any misconduct. Here, employees are taken into confidence that any whistle blower would be protected. Nonetheless, system is guarded against the mismanagement by anyone through the foolproof system of verification.

5. A STATEMENT REGARDING PERSONAL RESPONSIBILITY

It indicates that employees are supposed to understand and apply the code. It also indicates that employees should report suspicious transactions. Generally carrot and stick policy is applied.

ETHICS AND COMPLIANCE PERCEPTION DILEMMA

Some organizations perceive that ethics and compliance are two different worlds. A fine line is drawn between the two and they have different divisions with separate personnel devoted to their function. In contrast, it is very difficult to understand the need of compliance without discussing ethical principles in detail. It has also been generally established that robust ethical culture with committed leadership has a strong connection with the behavior of staffs and ultimately adds fuel to compliance-oriented culture.

ETHICS AND COMPENSATION SCHEME YARDSTICK

In today's world, instrument of performance based compensation is used for boosting revenue. However, tying up incentive scheme with tough short range targets also give rise to conflict of interest situation. This situation opens the room for unethical behavior by the executives. Due to unrealistic and unattainable targets with economic slump and competition in the market, problem is exaggerated and executives are forced to game the system.

CODE OF ETHICS CAN IT BE REGULARIZED?

Regularization of code of ethics is one of the interesting outcomes of the Enron collapse. It is felt that tragedy of Enron started after the specific waiver was granted to CFO for executing the sensitive transactions by the board of directors. Eventually, the New York Stock Exchange (NYSE) suggested that rules should be developed for regularizing the code of ethics. Sarbanes Oxley Act 2002 of USA adopted the initiative and each company registered under the Act was required to develop, disclose and implement the code. Additionally, specific waiver of any provision to any principal executive officer or senior financial officer is to be immediately disclosed under the Act.

INTERNAL CONTROL ENVIRONMENT

Control environment means the overall attitude, awareness and action of directors and management regarding the internal control system. It covers the management philosophy and operating style. Auditors are required to assess the control environment which interalia covers the ethical values adopted by the company. It is director's fiduciary duty to have a comprehensive ethical program and develop a system which communicates the program to all. It is also important to integrate the code with formal and informal processes of the organization. The Board should hold code as a standard of relevance and utility to ensure that agreed-up core principles and values are not violated. This could be evidenced through deliberations on the various issues with resolution of ambiguous matters by cross referencing to code of ethics which is ultimately evidenced in board minutes.

 

 

CORPORATE SOCIAL RESPONSIBILITY CAMOUFLAGE

One school of thought believes that ongoing initiative taken up by corporations regarding social responsible behavior is only superficial attempt to polish corporate image. It is suggested by them that whenever companies wave the banner of ethical responsible behavior, stakeholders should be on red alert. Their premise is supported by the recent scandal of Fannie Mae, one of the largest house finance company of USA.

Fannie Mae was ranked first on Business Ethics magazine's 2004 list of the '100 Best Corporate Citizens.' In response, Fannie Mae issued a press release proclaiming that it was "ranked number one among the nation's elite companies for its commitment to socially responsible behavior." But a new report on Fannie Mae by the Office of Federal Housing Enterprise Oversight raised serious concerns "regarding the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness of the Enterprise."

ETHICS IN ACTION

Merck & Co., Inc. very recently announced a voluntary worldwide withdrawal of VIOXX(r) (rofecoxib), its acute pain medication. The company's decision was based on new three-year data results. Although Merck had an option to continue to market its product with mark of caution identifying the results of these new data and availability of alternative therapies. But it took more responsible course of action which they believe will serve the interest of patients. Merck expects to lose the earnings per share by 19% after discontinuance announcement.

CONCLUSION

Having a code of ethics is not a guarantee against corporate misconduct. Recent evidence demonstrates that people do find the way of playing a game and spoil the intent of the code. It is an effective ethical program, and its continuous adherence can accomplish the mission of being a socially responsible company.