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Developing a corporate code of conduct for private firms

Matthew Purcell

Corporate codes of conduct are a relatively new invention. Although first suggested by business and government leaders following ITT’s (a U.S.-based multinational corporation) involvement in the 1973 Chilean military coup that resulted in the assassination of then-president Salvador Allende and the rise of General Augusto Pinochet’s military regime, it was not until the 1980s that multinational corporations began implementing codes of conduct as the primary vehicle for articulating their ethical philosophy and expectations.

Such optional codes became a requirement following the corporate scandals of the early 2000s. First, Sarbanes-Oxley required public companies to disclose in their SEC filings the existence of a code of conduct and any changes made to such code. Further, in 2003, the major U.S. stock exchanges required all listed companies to implement codes of conduct. Therefore, as of 2003, all U.S. public companies, whether or not operating internationally, are required to have, and maintain, a code of conduct.

Notwithstanding such requirements for public companies, many private companies in the United States continue to operate both domestically and internationally without the benefit of a code of conduct to govern their behavior.

What are codes of conduct?

Codes of conduct vary greatly in both purpose and content. Many are highly detailed and explicit, while others, like Johnson & Johnson’s famous “Credo,” are short and direct.

Most codes of conduct address ethical issues such as bribery, corruption, conflicts of interest, proprietary information, receiving gifts, environmental concerns, sexual harassment, intellectual property, antitrust issues, workplace safety, political activities, nepotism, child labor, human rights and a host of other topics. Regardless of the content, these codes provide organizations with a frame of reference that defines areas of ethical concerns and core values to guide actions.

Codes of conduct play a key role in creating an environment of predictability and consistency for the behavior of employees and are one of the ways directors and officers motivate ethical corporate behavior. At their best, codes of conduct can induce pride in employees and admiration from outsiders.

Why have one?

There are both legal and business incentives for maintaining a robust code of conduct, the most paramount being (1) maintaining consumer and investor goodwill, (2) avoiding outside regulation and oversight, (3) avoiding unwanted litigation, and (4) assuming social corporate responsibility.

First, corporate leaders are quick to recognize that a successful business must maintain consumer and investor goodwill. This goodwill comes not only from the quality of a company’s products and services, but from the moral value of the company itself. In connecting with consumers and investors, a code of conduct can become a company’s greatest public relations tool.

For example, in 2004, pharmaceutical-giant Merck faced a public relations nightmare when negative reports regarding arthritis drug Vioxx came to Merck’s attention. Merck reacted quickly in voluntarily pulling Vioxx from the market. Merck stated that its decision was merely an ethical decision based on the company’s code of conduct. Merck’s handling of the situation, while not universally blessed, won the admiration of many consumers and investors and helped the company weather the storm.

Numerous other companies have successfully promoted their codes of conduct with great efficacy in appealing to the moral sensibilities of consumers and investors as part of their overall marketing strategies.

Second, codes of conduct can assist companies in preventing additional outside regulation and oversight by demonstrating appropriate self-regulation in their respective industry. Outside regulation and oversight are both burdensome and expensive. Codes of conduct are one relatively inexpensive way of demonstrating self-regulation to minimize additional governmental interference.

This is exactly what PricewaterhouseCoopers (“PwC”) did in 2002. In the midst of national debate regarding Sarbanes-Oxley, PwC drafted its code of conduct and paid for full-page advertisements in national newspapers describing the code as the “accounting industry’s first global code of conduct” in an apparent attempt to minimize governmental interference.

Third, a healthy code of conduct can prevent, or mitigate the effects of, unwanted litigation. In focusing on employee compliance with internal regulations, the company can inspire employee faith and obedience in the code, and thereby reduce the risk of employee misbehavior. If employee misbehavior occurs and litigation ensues, the company’s demonstrated adherence to a code of conduct may mitigate the effects or damages in litigation.

Fourth, corporations are expected to act in a socially responsible way in order to maximize shareholder profits. Former Executive Vice President, General Counsel and Corporate Secretary of The Coca-Cola Company (and now Massachusetts governor) Deval Patrick observed, “The new globalized world market is making good business the only way to succeed in business today.”

Other than simply being “the right thing to do,” maintaining a code of conduct makes good business sense.

Making a code of conduct effective

A code of conduct is another arrow in the corporate quiver of a successfully run business. However, the credibility and value of such codes depend not only on adopting a code, but on the additional steps directors and officers take to enforce the code, such as companywide training and an engaged compliance department.

A well-developed code of conduct supports a company’s public image, increases employee judgment, strengthens individuals’ moral courage, and helps formulate a company’s sense of identity. In other words, it’s good business.

This column was written by Matthew D. Purcell, an associate in the Boise office of Perkins Coie LLP.

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