Should Legally Enforceable Codes of Business Ethics Be Mandatory for Every Business - Example

Name of Student: Name of Supervisor: Course: Date: Should Legally Enforceable Codes of Business Ethics be Mandatory for Every Business? According to the encyclopaedia, a code of ethics can be defined as a document that is formal as opposed to just an environment, or an understanding or else an unwritten rule, consensus or feature of corporate culture. At the very least, it is a published document while in many firms, personnel are required to confirm by signature that they have read and understood the document outlining the code of ethics (Werhane and Freeman, 1997). These exist in various forms; very large companies or those that have experienced some sort of scandal ensure that only corporate or financial officers are supposed to sign the document. In others, there may be more than one code of ethics custom made for each department such as sales, accounting and purchases. Codes of ethics constitute independent expressions of the will of the corporates whether they are published as chapters or section within a document that may include the mission statement, values and policies that the company holds. Therefore a code of ethics can be defined as a particular kind of policy statement issued by a business. One that is framed properly takes a legal form; binding company employees with the prospect of particular repercussions should there be a violation of the code. Without these stated sanctions, the code is impotent. The most exacting punishment is dismissal in the event that no crime has been committed. The concept of ethics and behaving ethically has proved to be of critical importance to contemporary corporations (Weber, 2006). All through its remarkable growth in the last twenty years, the area of business ethics has been plagued by a lack of direction and has been tripped up by its own logic. This has resulted from the conflicting research methods that have been used to study ethics. On one hand, research on business ethics can be based on experimental concepts which are those that illustrate and explain factual situations for example what motivates managers, accountability structures in organisations as well as the connection between ethical behaviour and financial performance. On the other hand, research on business ethics can be based on normative ideas which even if they are not as a rule grounded in current business practices and frameworks, are known as prescriptive by ethicists. They provide guidelines as to what action should be taken although philosophers do state that there is no amount of experimental rigor that can on its own equate to an 'ought' (Sorley, 1904/1969). One such empirical study was carried out by Singh (2011) who reported that the rise in codes of ethics in business as reported by KPMG (2008) are accurate and codes of ethics form the fabric of any given corporation operating in the current business environment. Discussion With the global growth of an ethical culture in corporate governance, the role of ethical values takes centre stage (Duggar, 2007). The definition of corporate governance is the processes that guide institutions in a structure that encompasses legal, institutional, social and cultural factors. Ethical leadership is a principle element of corporate governance. Organizations usually designate someone to act as Ethics Officer around whom the central control offices concerned with ethical issues coalesce. The role of this office is to promote corporate culture in a way that encourages work performance related values to thrive. This begins with the Chief Executive Officer within the organization who is the nexus in terms of being an example for embracing these ethical guidelines. The executive makes available an area of confluence between ethics of governance and the code of ethics of the organization as pertains to employees. In service industry organisations, customer care is a central ideal which involves the necessity of comprehending customer needs. This gives the organisation the capacity to cater to customer needs by providing quality services (Green, Chakrabarty and Whitten, 2007). A key ingredient for the design and implementation of corporate culture is integrity (Duggar, 2007). People of integrity build relationships that are based on trust within the organisational environment. Integrity is important in employees that confer in order to reach an agreement on shared values. Only once this agreement is reached can an ethical corporate culture be developed. Integrity is the foundation for a very conducive corporate environment which in turn gives rise to good corporate governance. Organisations are categorised in various ways according to who controls the shareholding. There are state-owned organisations where the ownership is defined and the main voting shares are held by the government, family businesses or multiple family businesses, non-family businesses are controlled by individuals or groups, foreign owned businesses are controlled by a foreign shareholder. Institutional ownership is defined as that in which control is in the hands of institutional investors such as investment or pension funds (IBCG, 2010). Corporate Governance is the process by which organisations are operated, supervised and motivated. It encompasses the relationships governing shareholders, officers, and Board of Directors and oversight committees. When an organisation has good governance practises, it means that principles are converted into objective recommendations through practise. These recommendations streamline the company interests with the aims of conserving and augmenting its value, paving the way for access to capital and ensuring its longevity (IBCG, 2010). Corporate Governance has certain basic principles. The first principle is transparency which denotes more than a desire to keep informed. It is more derived from the requirement to provide stakeholders with a complete map of the available information, and not just that required by law. When there is sufficient transparency, it results in the existence of both internal and external trust, in third party relationships. This information is not limited to economic and financial performance as well as other factors, both tangible and intangible which dictate managerial action which results in value creation (Stanwick and Stanwick, 2009). Fairness is the second principle in that the shareholders and other stakeholders are treated with fairness and it is unacceptable to discriminate in terms of policies and attitudes. Accountability involves the agents of governance who need to take responsibility for their actions and accept the full consequences of their actions and omissions. Corporate Responsibility is the purview of agents of governance who ensure the sustainability of the organisation through observance of environmental and social concepts when choosing which business deals and operations to indulge in (Desjardins, 2011). There are several codes that follow one another in the United Kingdom, the current one being the Combined Code on Corporate Governance, 2003 (2006). The code outlines good practise standards and it is mandatory for listed companies to report on how they apply the standards or else explain why they have not. According to the listing conditions, the code applies to all companies which have incorporation in the UK as well as being listed on the London Stock Exchange Main Market. A Corporate Governance Committee monitors functioning within the Financial Reporting Council. Article 161 of the German Stock Corporation Law (Transparency and Disclosure Act, 2002) stipulates that executive and supervisory boards of exchange-listed companies need to annually declare that the recommendations of the Government Commission on the German Corporate Governance Code as contained in the official section of the Federal Gazette of the Federal Ministry of Justice is being complied with. They must also state which are not being complied with, said declaration being permanently available to shareholders. Reputation is one of a company's chief assets (Alzola, 2011). Those companies which are known to promote ethical behaviour and social responsibility generally tend to record better financial performance (Pava and Krausz, 1996). Ethical behaviour assists the success of a business as it is a big influencer of the type of relationship enjoyed with various stakeholders such as personnel, consumers, suppliers and investors. Although a reputation for good ethics does not necessarily result in new business, the converse is true should the firm have a reputation for unethical practises. Svensson et al (2010) carried out a study in which they came up with a model or system of what ethical behaviour should be about. There are several sub-components to this system, namely the code of ethics, ethical audits, appraisal of ethical performance and repercussions stemming from breach of code. The other main elements of this model include the communication to stakeholders of the endeavours to utilise ethically sustainable practises as well as management, monitoring and evaluation of these practises. For corporations and non-profits, codes of ethics are supposed to help employees determine the appropriateness of certain actions when dealing with clients and other agencies. Governed behaviour in these settings includes rules on acceptance and giving of gifts and services in the employee-client relationship. It also includes rules on promises made on company performance and responsibilities. It also covers the possibility of making profit from insider information or enabling others to do the same. It is a requirement in many employment settings for personnel to attend annual trainings on ethics and responsibilities as well as signing statements agreeing to subscribe to ethical guidelines (Your Dictionary, 1996). According to the Lawton (2011) Facebook for the first time agreed to work with the German government in order to come up with a voluntary code of conduct that is meant to protect users' privacy while online on the social network. The code is meant to deal with issues of bolstering media literacy and transmitting data in a way that complies with the law in Germany. The most well known codes of ethics in the public domain are those that have failed such as the cases of Boeing, WorldCom and Enron in the United States, Global Crossing and Parmilat in Europe and others from other parts of the world. This is because of the sheer amount of money lost by investors and the hundreds of thousands of jobs lost. Many of these organisations had codes of ethics and it might help to understand why they did not work. In the case of Enron, their focus was on 'rules' and 'values' in the organisation (Donaldson, 1990) and even though they possessed a code of conduct, it went largely ignored. The board of directors at Enron took the code so lightly that they voted to waive them for Jeffrey Fastow, which culminated in the company’s bankruptcy. The whistleblower hotline at Enron went directly to the CEO, Ken Lay. It was only used by a small group of people however. This was the problem with many of these organisations, they were very narrow-minded as pertains to their code of conduct, and senior officials were exempt. They also had no legitimate method of enforcing the code and had a general culture of unethical practises being tolerated (Schwartz, 2005). The ethical behaviour of companies is to do with how they relate to users of information, the environment and society as a whole. Schwartz (2012) analyses business ethics as perceived by managers in Israel. He links the term to such elements as being able to tell the difference between good and evil, acting in an appropriate and satisfactory way, good behaviour, lack of deviance, professional manner, conducting oneself in a manner which would not cause scandal, social responsibility, proper treatment of people, taking other people's interests into account, playing by the rules, being honest, transparent and dignified. In order to understand ethical behaviour, it is necessary to know what non-ethical behaviour is. The latter includes disregarding laws, showing favouritism, theft, discrimination, not maintaining confidentiality, bribery, lack of transparency, and other instances of disorderly conduct. Ethical behaviour would therefore constitute the opposite of these behaviours which include adhering to the law, being transparent, being non-discriminatory and other social and environmental factors. An analysis conducted by Rao et al (2012) of the annual reports of 100 Australian listed companies on the Australian Stock Exchange and concluded that there was a significant positive relationship between ethical environmental reporting and how efficient the board is. Sanchez et al (2011) analysed how Spanish firms practise disclosure and it showed that in firms where the CEO and the Chairperson of the Board are one and the same and in addition, the meetings are less frequent, which shows the efficiency of the board, tend to disclose more information on strategy on their websites for the benefit of stakeholders. Buniamin et al (2008) analysed the content of 243 Malaysian listed firms and found that the size of the board affected the degree of environmental reporting. Akhtaruddin et al (2009) also alludes to a positive relationship between the board size and the reporting of voluntary information. This means that how efficient the board is, is a factor of its size and structure and this influences its tendency to disclose voluntary information. This tendency defines the behaviour of the firm. Conclusion This report has attempted to explore the question of whether legally enforceable codes of business ethics should be mandatory for every business. From the literature examined, it can be concluded that a company having a code of ethics makes a difference to how they conduct business. When these codes of ethics are not taken seriously as in the case of Enron and others, the result is business failure. Other studies have shown that firms which have more voluntary compliance with the codes perform better financially. The crux of the issue however, is that it is voluntary. It would therefore be counterproductive to force these codes on companies. Rather, it must be shown to them that it is to their advantage to adhere to these codes. This is because applying legal repercussions and making it mandatory may not be practical because behaviour is a subjective issue and it depends on other people reporting abuse. Unless the company is willing to comply, ensuring adherence is almost impossible. Therefore, codes of business ethics should not be mandatory. References Alzola, M. “The Ethics of Business in Wartime”, Journal of Business Ethics, 2011: 99: 61–71. Print. Akhtaruddin M., Hossain M.A., Hossain M. and Yao L. “Corporate Governance and Voluntary Disclosure in Corporate Annual Reports of Malaysian Listed Firms”, JAMAR, 2009: 7(1): 1-19. Print. Buniamin S., Alrazi B., Johari N. and Rahman N. “An Investigation of the Association between Corporate Governance and Environmental Reporting in Malaysia”, Asian Journal of Business and Accounting, 1(2) 2008: 639-647. Desjardins Group. “Code Of Ethics And Professional Conduct.” 2011. 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Callaghan. “Implementation, Communication and Benefits of Corporate Codes of Ethics: An International and Longitudinal Approach for Australia, Canada and Sweden”, Business Ethics: A European Review 18, 389–407: 2009. Print. Svensson, G., Wood, G. and Callaghan, M. “A corporate model of sustainable business practices: An ethical perspective”, Journal of World Business 45 2010: 336–345. Schwartz, M. S. “Universal Moral Values for Corporate Codes of Ethics,” Journal of Business Ethics 59 2005: 27–44. The Combined Code on Corporate Governance, Web. 2006 Weber, J. “The new ethics enforcers.” Business Week (February 13) 2006: 76-77 Werhane, Patricia, H. and Freeman Edward, R. “Blackwell Encyclopaedic Dictionary of Business Ethics.” Cambridge, Mass., Blackwell Business. 1997. Print. Your Dictionary. “Code of Ethics Examples.” 1996. Online: http://examples.yourdictionary.com/code-of-ethics-examples.html Read More