Code of Ethics for Business

What is a Code of Ethics?

A code of ethics is a collection of principles and practices that a business believes in and aims to live by. A code of business ethics usually doesn't stand alone, it works in conjunction with a company's mission statement and provides more specific policies about conduct to give employees, partners, vendors and outsiders an idea of what the company stands for and how it's members should conduct themselves.

The key in distinguishing a code of ethics from other business documents is to hit the right level of specificity. It should address both the particular nuances of the company's industry as well as its broader goals for social responsibility and should be concrete enough to serve as a guide for employees in a quandary without laying out rules for every situation that could arise.

Policies can include issues such as a companies commitment to not working with vendors who use child labor or are environmentally harmful, not discriminating in their hiring and not taking bribes. For example, recently when Ikea was opening their first location in Russia, they were approached by local bigwigs requesting a kickback to turn their utilities on just before the store's grand opening. It would have been easy to cave to the pressure of their responsibility to stakeholders, creditors, and employees but Ikea has a firm no bribes policy. To get around the problem, they leased power generators to get their store lit up in time for its kickoff.

"A code of ethics is about corporate culture," says Michael Connor, the editor and publisher of the online magazine Business Ethics. "Many small- to medium-sized businesses have a code of ethics; it's probably not written down in many cases but it wouldn't hurt if it was."

Connor believes that there's no such thing as a business being too small to benefit from a code of ethics. Having a code is "often viewed as a luxury or something that is an added cost," he says. The reality these days is that the business that does not have a code of ethics subjects itself to a much greater risk from regulatory and lawsuit action when, not if, there is an unfortunate incident.

Setting Priorities

The first step a company has to take in laying out a code of ethics is deciding what values are important to it and what lines it won't cross. When Marianne Jennings is consulting with companies implementing a code of ethics, she probes a company's leadership to discover their boundaries. The professor at Arizona State University's business school and author of The Seven Signs of Ethical Collapse, asks her clients, "What are the things you would never do at this company to get a client, to keep a client, to make sure you met your numbers for the quarter? Just thinking through that sets the framework for the code."

Clarifying these details can be especially helpful as the company grows. "As they grow, they're going to be hiring more people that are probably dissimilar to their value structure and putting those rules and procedures in place will help your company grow in the way you want it to grow," says John Fraedrich, a professor of business ethics at Southern Illinois University.

Having HR educate incoming employees about the code of ethics and the company's culture is especially important in the age of increasingly rapid job turnover. Connor says that sometimes employees "are hired and fired at such a pace that people don't know what the corporate culture is."

Getting Input

A common mistake that companies make when drafting a code of ethics is not to consult employees. "Often the code of ethics comes from the top and the company is really not aware of the kinds of things the employees are facing," Jennings says. In these cases "the code of ethics comes out and it's instantly dismissed as a sham because the employees really know what's happening and it's not covered in the code or it's addressed in a different way."

Even if you think you're in tune with the daily trials and tribulations of your staff, you should solicit broader participation in the crafting of the code. Employees need to have a say in it but they also need to know why the code is important and why it ultimately contains the tenets that it does. Jennings suggests soliciting anonymous input from your staff on a situation they were in during the past year that made them uncomfortable as a good starting point.

Don't Sweat the Small Stuff

Making sure your code of ethics is neither too vague, nor too specific can be a challenge and a slip up can make employees resentful of the endeavor. Jennings says that it's a mistake for companies to kick off their code of ethics with crackdowns on small details.

"At almost every company, people who want to do business with you bring plates of cookies at the holidays," she says. Companies often begin by pouncing on these sorts of transgressions "and that immediately creates a hostile atmosphere because people don't want to let go. You have to work with them to understand the big perspective until they self-realize what they need to do" regarding the more specific scenarios.

Particular Pitfalls

Some ethical dilemmas can reverberate much more powerfully through a small business than through a larger corporation. Take the example of "officecest", i.e., a romantic workplace relationship.

"If you have a small company you really need to have a policy of no dating within the company," Fraedrich says. "Let's say there is some sort of harassment issue or sexual misconduct; it doesn't matter if they were great friends in the beginning, at the end it's going to be a nightmare."

Another ethical pitfall that can stir up particular trouble for a small business is nepotism. "In start-up companies, it's all about "who do I trust" and sometimes nepotism will start," Fraedrich says, and family-run businesses have to be especially vigilant against an ethical lapse that could lead at best to employee dissatisfaction and at worst to a discrimination suit.

Who to Turn to for Help

While it can be valuable to consult a lawyer when drafting a code of ethics, "a lawyer is not really an ethics individual," explains Fraedrich. "He or she is there to determine what can be construed as legal or illegal and what can be argued in court." Connor says that smaller companies could draft a code themselves, especially if they are in a low-risk, low-liability field, and Fraedrich similarly advises that if you have more than 20 employees, it's time to consult an ethics or human resources specialist.

According to the International Business Ethics Institute, a Washington-based non-profit advocacy group, once again, making employees feel secure enough to raise concerns is a key factor in creating an ethical workplace. To do this, businesses need to offer an open and non-retaliatory environment with strong two-way communications. That means fostering a workplace where dialogue and feedback are part of the ingrained corporate culture, through regular employee surveys and assessments, the group says.

Other strategies include developing standards and procedures for raising concerns, implementing training at all levels and having a process in place to investigate and address reports of misconduct.

Beyond that, business leaders need to start rewarding ethical behavior among employees, rather than just noting productivity and performance.

Putting Someone in Charge

Even if senior management and employees embrace a code of ethics, someone needs to be put in charge of applying and updating it. This person is typically known as an ethical officer or, in more intimidating terminology, a compliance officer. They need to be reliable, have a strong commitment to the company's success and good people skills. They also need to have access to senior management or the board of directors for periodic updates or in case a problem arises.

The role of ethical officer typically falls to somebody on the HR or sales team. This person is also in charge of the system for monitoring and reporting misconduct. Like the process for creating the code, this should be done anonymously as any whistleblower would likely be concerned about what rocking the boat would do to their career.

Some companies kick the tires of their adherence to the code of ethics by checking in with both managers and employees about it during performance reviews. It's also crucial to make your code of ethics a dynamic thing that changes as your business changes. Connor says, "Like taxes, it doesn't hurt, once a year, to look at it yourself and ask, Does this truly represent our business and where we want to be?"


Business Ethics
Definition of a Code of Ethics
Is Ethics a Contradiction to Business?
Ethics Case Studies
What's Your Price?
Sample Ethic Principles
Illinois Institute of Technology's Center for the Study of Ethics in the Professions
The Ethics Resource Center
Business for Social Responsibility

Source: Josh Spiro via

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