In Your Face

In Your Face
Thought provoking opinions on topical issues.

Tuesday, November 26, 2002

Codes of Conduct, the Ethical Principles of Companies


In my article “In Place of Strife”, I discuss the need for companies to adopt a code of conduct; which states their attitude to ethical principles, covering core values such as:

1. Honesty

2. Trust

3. Respect

4. Fairness

I would like to expand on this and explain, in more detail; what the code is, why have it and how to implement it.

What is it?

Simply put, a company's code of conduct is their commitment to society as a whole to be a good corporate citizen.

Why have it?

There may be those in boardrooms, around the corporate world, who feel that implementing such a code is an unnecessary waste of time and money. I would like to draw their attention to three key reasons, which I suggest they repeat to themselves every night before going to bed, for having the code:

1. Reputation

2. Reputation

3. Reputation

The astute readers amongst you will have noticed that I have repeated the same word three times. Precisely so, I consider a companies reputation to be so important; that I believe it is necessary to repeat it as a reason three times.

Reputation affects brand value and, at a more precise level; sales, profits and cashflow. In other words, it affects the very existence of the company itself. Something that boards, employees and shareholders should be equally concerned with.

In the modern world companies are monitored by Non Governmental Organisations (NGO’s), such as Greenpeace, for breaches in a variety of issues such as; pollution, corruption, human rights abuses etc. The NGO’s act as media savvy rapid reaction forces, rallying against perceived infringements of “good corporate citizenship”. Witness the problems that major oil companies, sportswear manufacturers, mining conglomerates and even fast food outlets have had when an NGO has mounted a publicity campaign against them.

In essence, a modern company in the 21st Century cannot ignore the realpolitik of conducting business in the international environment. It must be seen to have “clean hands”, otherwise its precious brand image will suffer.

Key components

A basic code of conduct should state the company’s commitment to:

1. Society (eg environmental issues, quality of service and products etc.)

2. Shareholders (eg providing a decent return on equity)

3. Employees (eg covering issues such as harassment, discrimination and quality of work)

The code should give clear guidelines as to the company’s attitude to, eg:

1. Integrity of records, ie the accounts should reflect economic reality; and not be the Chief Executive’s fantasy.

2. Bribes and commission payments, staff and executives should neither accept or offer these; as they pollute and corrupt the business decision making process.

3. Interests outside the company leading to potential conflicts of interest, staff and executives who, for example hold shares in competitors or suppliers, should declare their interest.

4. Respecting national and international law eg obeying tax laws; viz complex off balance sheet schemes to evade tax should be disassembled immediately.


The above list represents a basic structure which, quite properly, should be tailored to the individual organisation. In order to effectuate this, a code of conduct committee (reporting to the board or audit committee) should be formed. This should consist of senior representatives from (note committees tend not to work effectively if there are more than 6 people on them, so keep it “tight”):

1. Internal audit

2. Human resources

3. Legal

The committee should act to ensure that the code is best suited to the company and the environment, both cultural and legal, in which it operates. The committee should ensure that the code is a “living document” and develops as the company’s circumstances change.

The code should explain that compliance by all members of staff, at all levels, is expected and that appropriate disciplinary proceedings will be taken if breaches are identified.

The code must be supported, and be seen to be supported, by the board. As such the Chief Executive (CEO) should distribute (to all members of staff, shareholders and other relevant parties) a signed letter introducing the code. I cannot overstress the importance of the principle that CEO’s and senior executives are seen to practice what they preach, ethical behaviour comes from the top (ex executives of Enron and WorldCom take note!).


The code should be distributed to all employees, shareholders and be freely available to other interested parties. The prime method of dissemination should be by hard copy booklets which, in the case of employees, should be signed for to ensure their acceptance and understanding of the code.

Additionally, the code should be available for public viewing on the Internet and be reproduced within the annual report.

In order to stimulate peoples understanding a casebook, taking real life examples of potential breaches, should be prepared and distributed to managers for team briefings and discussion groups. A discussion example being:

“You are the Finance Director of business unit X, your CEO sees that the profit target for the year end may not be reached; and asks you to release a provision so that the target can be met, and bonuses paid. What do you do?”

The ensuing discussion should ensure that it is clearly understood by all that the release of a provision, in order to meet a profit target, is not acceptable. It is a shame for the investors and employees of Enron and WorldCom that such ethical practices were not driven from the top down.

Ongoing Monitoring

I am a great believer in the principle of “what gets measured gets done”. To this end the following procedures should be set up to ensure that the code is complied with:

1. Compliance officers should be appointed at local business unit level, these should be the senior legal officer.

2. The compliance officers should maintain a log of breaches of the code identifying the nature of the breach, and the disciplinary action taken.

3. A regular summary of the log should be submitted to the code of conduct committee.

4. Internal Audit should be charged with the ongoing monitoring of compliance of the code.

5. A regular summary report on material breaches should be prepared by Internal Audit, and submitted to the audit committee and the code of conduct committee.

6. Specific codes of practice with regard to environmental and safety issues can be audited and reported on within the annual report, or indeed in a separate report available to investors and outside bodies.

7. A summary report on compliance with the code should be placed within the annual report.


To those companies that still have yet to implement the above my message is simple; “wake up and smell the coffee!”. Fail to implement these and you will cease to exist.