Code of ethics, Guidelines for developing code of ethics

Code of ethics

A code of ethics is a guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization’s core values and the standards to which the professional is held. A code of ethics, also referred to as an “ethical code,” may encompass areas such as business ethics, a code of professional practice and an employee code of conduct.

Both businesses and trade organizations typically have some sort of code of ethics that their employees or members are supposed to follow. Breaking the code of ethics can result in termination or dismissal from the organization. A code of ethics is important because it clearly lays out the rules for behavior and provides the groundwork for a preemptive warning.

Regardless of size, businesses count on their management staff to set a standard of ethical conduct for other employees to follow. When administrators adhere to the code of ethics, it sends a message that universal compliance is expected of every employee.

Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes of ethics not only set guidelines for conduct, but also determine penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries formulate compliance-based codes of ethics to enforce laws and regulations. Employees usually undergo formal training to learn the rules of conduct. Because noncompliance can create legal issues for the company as a whole, individual workers within a firm may face penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint a compliance officer. This individual is tasked with keeping up to date on changes in regulation codes and monitoring employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and well-defined consequences rather than individual monitoring of personal behavior. Therefore, despite strict adherence to the law, some compliance-based codes of conduct do not promote a climate of moral responsibility within the company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company’s core value system. It may outline standards of responsible conduct as they relate to the larger public good and the environment. Value-based ethical codes may require a greater degree of self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values. For example, a grocery store chain might create a code of conduct that espouses the company’s commitment to health and safety regulations above financial gain. That grocery chain might also include a statement about refusing to contract with suppliers that feed hormones to livestock or raise animals in inhumane living conditions.

Code of Ethics Among Professionals

Financial advisers registered with the Securities and Exchange Commission or a state regulator are bound by a code of ethics known as fiduciary duty. This is a legal requirement and also a code of loyalty that requires them to act in the best interest of their clients.

Guidelines for developing code of ethics

Development Process

The first step in developing a code of conduct is to establish the purpose of the codes and why they matter. In a KPMG survey of Fortune Global 200 companies, the three most common reasons for adopting business codes were to comply with legal requirements, create a shared company culture, and protect and improve the organization’s reputation. KPMG’s survey also found that the most commonly cited core values of Fortune Global 200 companies are integrity, teamwork, respect, innovation, and client focus. Schwartz also recommended that code provisions should be consistent with “six universal moral values” (trustworthiness, respect, responsibility, fairness, caring, and citizenship), which should prevail over financial objectives.

Once the purpose is established, the framework for developing a code requires a full understanding of the operational and reputational risks an organization faces. These issues define the organization’s objectives when developing code content, policies, communication, and training that address individual and collective responsibilities regarding risk management.

To achieve the organization’s risk management standards it is important to draft a code that clearly states expectations and guidelines for acceptable behavior, and provides options for seeking advice and for reporting concerns or suspected misconduct. In his research on the many dimensions of code development, Schwartz found that employees, managers, and ethics officers consider codes more effective when they are readable, relevant, and have a positive tone.

In addition, choosing your language carefully is important, as the authors of an article analyzing Lehman Brothers’ Code of Ethics concluded: “finding the right words to express ideas and behaviors is a key strategic action for an organization.” The authors studied Lehman Brothers’ code using the Competing Values Framework (CVF) to reveal the rhetorical elements of the message, and the Erwin method to rate the code’s tone, readability, and style. They found that Lehman Brothers’ code’s strengths were on the relational (trust) and informational (facts) side, as opposed to the transformational (change) and instructional (action) side, of the CVF. This led to their conclusion that:

The Lehman code of ethics and internal code of conduct do not offer much vision or guidance to the reader. . . . While it lays out the basic rules expected of all Lehman employees, executives missed the opportunity to create a unique code expressing strong ethical principles. A more transformational code might have identified their unique strengths and values, but this would have to be coupled with transformational leadership and a culture of strong communication. The Lehman code did a basic job of protecting the organization against illegal actions by employees, but it did little to advance an ethical culture that might have sustained them.

One of the things the authors found lacking was guidance for employees who are faced with difficult decisions. The American Management Association proposes using the code of conduct to guide employees who are conducting business and making decisions in business dealings and relationships around the globe, by simply recommending that employees ask themselves two questions:

  1. Does this comply with the law, the Code of Conduct and the company’s policies?
  2. How would customers, shareholders, general public and co-workers view it?

The best practices for drafting codes of conduct that emerge from these studies include:

  • Obtain buy-in across the organization with input from a multidisciplinary team
  • Include the organization’s mission statement, vision, and values that reflect its commitment to ethics, integrity, and quality
  • Clarify that the organization expects individuals to act with honesty and integrity in addition to compliance with legal requirements
  • Describe expected behaviors rather than stating prohibitions
  • Cover relevant risks, employment practices, protecting corporate assets, and managing third-party relationships
  • Make it user-friendly and applicable to all individuals covered by the code
  • Use simple, concise, and easily understood language (and provide translated versions as needed)
  • Describe enforcement and disciplinary procedures
  • Solicit feedback on the code from all levels of the organization
  • Update to improve content and address new issues or risk areas

But the mere existence of a code of ethics, without more, will not create a sense of shared values and commitment to ethical behavior.


Based on their analysis of the effect that Lehman Brothers’ code of ethics had on its corporate culture, the authors concluded that “silence can be deadly,” “codes fail when poorly communicated,” and “codes themselves cannot create ethical organizations.”

In fact, their research found that these two actions are key to code implementation:

  • Communicate codes through the right channels and explain why they’re important
  • Integrate codes into the organization’s practices and back it up with enforcement

Once drafted, an organization needs to embed the code into its culture. The KPMG report recommends that the code become a “living” document to guide and create ethical behavior throughout the organization through:

  • Communication and training
  • Personnel and other policy measures
  • Monitoring, auditing, and reporting

At the companies KPMG surveyed, training courses were commonly used to:

  • Explain the importance of the code
  • Reinforce ethical behavior
  • Strengthen the moral compass
  • Identify and deal with dilemmas
  • Provide guidance on how to implement the code more effectivel

At Lehman Brothers, the ethical code contained the phrase “compete aggressively in furthering the interests of the firm.” However, the authors raise the question of whether explaining to employees the level of acceptable risk in “competing aggressively” would have avoided leveraging the company “into a lethal situation.”

Effective implementation requires ethical leadership and support, training, and continuous reinforcement and updates to keep the code current. Ongoing administration and reinforcement of code standards embeds an organization’s values into its culture, which stimulates ethical reflection and action, and encourages compliance so that employees speak up when they see others engaging in unethical behavior. And for the skeptics who question whether an effective code of ethics is worth all this effort, the bottom line is that good ethics are good for business.

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