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
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
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
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
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
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
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.