EJBO Electronic Journal of Business Ethics and Organization Studies Vol. 14, No. 2 (2009) Corporate ethical codes as strategic documents: An analysis of success and failure Betsy Stevens Introduction seeks to uphold. Most importantly, they are messages through which the corpora- Ethical codes are documents which state tions attempt to shape employee behavior Abstract the major philosophical principles and and effect change through explicit state- Ethical codes state the major articulate the values embraced by an or- ments of acceptable behavior (Stevens, philosophical principles and values ganization. Effective codes are policy 1994). Codes differ from mission state- in organizations and function as documents which define the responsibili- ments by articulating the value system ties of organizations to stakeholders, the and answering the question—with what policy documents which define the conduct expected of employees (Kaptein ethical standards and values should the responsibilities of organizations & Wempe, 2002) and articulate the ethi- mission be pursued? In contrast mission to stakeholders. They spell out the cal parameters of the organization—what statements spell out the objectives of a conduct expected of employees and is acceptable and what is not (Stevens, company and articulate organizational articulate the acceptable ethical pa- 1996). A code can be used as a key strate- goals. Firms frequently attempt to man- rameters of behavior in the organi- gic document in an organization or it can age and articulate ethics through their simply be window dressing—an artifact to codes which are designed for internal and zation. Most large US and multina- make the organization appear more ethi- external audiences. tional firms today have a code. If cal to its stakeholders. Some firms draft An effective code enhances social re- utilized effectively and embraced, codes to create a positive public image or sponsibility and clarifies the norms and codes can be key strategic docu- receive a break under Federal Sentencing values the organization seeks to uphold. ments in organizations for moderat- Guidelines; others attempt to guide and It is visionary and transformational, pro- ing employee behavior and reducing focus employees on ethical behavior ap- viding guidance in difficult circumstances propriate to the organization. This pa- (Stevens, 2008). It sets the tone for the unethical actions. To be effective per analyzes corporate codes as strategic organization and can be the key corpo- they must be communicated well documents and examines why some are rate strategic document upon which all and become a part of the culture of successful while others fail. When codes decisions are based. Adherence to the the organization. An ethical code do not function as key documents, they code in ethical organizations is a com- from a major investment bank is usually have not been communicated ef- mitment an organization can undertake analyzed in terms of code effective- fectively or culturally embedded in the to ensure a strong ethical climate. When organization. As a case study, the ethical codes are embedded in an organization’s ness, transformational communica- code from a major failed investment bank climate and both leaders and employees tion, and its role as a key corporate is analyzed in terms of code effectiveness, embrace the codes with words and ac- strategic document. transformational communication, and its tions, they can help create and maintain effectiveness as a key corporate strategic successful ethical organizations. Embed- Keywords document. Some ways a different code ding the code means prioritizing strate- might have helped the company are ex- gies and policies so the code occupies a Ccorporate ethical codes, strategy, amined in light of the company’s demise. central position in the organization. ethics, Lehman Brothers Definition and scope The use and content of codes of ethical codes Most large U.S. corporations today have Codes range in length from one para- an ethical code, after increasingly adopting graph to more than fifty pages and are them in the 1980’s and 1990’s (Chonko intended to impact employee behavior et al, 2003; Trevino et al, 1999) and they (Stevens, 1994). Also called codes of con- can found in about fifty three percent of duct, business principles, codes of ethics the largest companies worldwide (Ka- and corporate ethics statements, they ptein, 2004). Code content in the 1980’s typically contain open guidelines describ- showed that most reflected concern over ing desirable behavior and restrictive lan- unethical behaviors that could hurt prof- guage prohibiting other behaviors such as its, and showed a weak commitment to bribery and conflict of interest (Nijhof, social responsibility (Cressey & Moore, Cludts, Fisscher, & Laan, 2003). Codes 1983). Complying with federal laws and enhance social responsibility and clarify avoiding conflicts of interest were com- the norms and values the organization mon themes at that time (White & 14 http://ejbo.jyu.fi/ EJBO Electronic Journal of Business Ethics and Organization Studies Vol. 14, No. 2 (2009) Montgomery, 1980). A content analysis performed by Mathews What makes codes work effectively? (1987) showed that firms primarily emphasized avoiding illegal activities, employee misconduct and placed little emphasis on Good communication the environment, product quality, or safety. Another study con- Codes can serve as core foundational documents that give or- firmed that the most frequently mentioned topics in codes were ganizational members a sense of shared values and commitment conflict of interest, gifts, and misuse of confidential information to ethical purposes (Stevens, 2008). A number of studies have (Pitt & Groskaufmanis, 1990). Steven’s study several years later yielded evidence that they work in deterring unscrupulous be- showed that codes were primarily designed to defend organiza- havior, but codes must be communicated effectively and sup- tional against egregious behavior by employees and were lack- ported by the management team. Good communication is the ing in ethical guidance and vision (1996). Snell and Herndon first requirement for effectiveness. agreed, concluding that codes were focused largely on corporate Communication plays a central role in code effectiveness; self-defense (2000). members must be aware of the code and know why it exists. Code content also differs across countries and continents. Weeks and Nantel (1992) and Adams and Rachman-Moore Langlois and Schelgelmilch’s study of codes from England, (2004) noted the relationship between codes and organizational France, Germany and the U.S. revealed that British and Euro- communication. They saw that codes were effective if they were pean codes discussed government and customer relations less communicated well through the right channels. The manner in frequently than American codes (1990). Kaptein’s study (2004) which ethical codes are communicated contributes directly to identified content differences among European, Asian and their success or failure. Schwartz‘s study of codes found that they North American codes. European codes focused far more on the are most effective when they are readable, relevant and written environment than American codes and honesty was a more sig- positively rather than negatively (2004). When communication nificant issue with Americans. Sixty four percent of American is discouraged or absent, silence can kill a company. Perlow and codes mentioned honestly as compared with forty five percent Williams cited the Enron corporation as an example of silenced of European codes and thirty eight percent of Asian codes, but organization where individuals felt they could not speak freely fairness was mentioned more frequently in European and Asian about wrongdoing (2003). codes. These content differences reflect varying cultural beliefs Conversely, the lack of communication has been attributed to and values held by managers and employees in these countries. code failure. While strong evidence exists showing that codes are effective under the right conditions, they sometimes fail to pre- The value of codes in organizations vent unethical behavior. The Enron corporation had a code, but it also had three sets of books and the board of directors twice Codes can help improve a company’s reputation and discour- suspended the code (Sims & Brinkman, 2003). Many other ex- age government intervention, allowing companies manage amples of companies with ethical codes acting unethically can themselves with less regulation. European companies have in- be found. Codes fail when communication is ineffective. creasingly used codes to regulate labor relations and discourage Communicating a code from the top often leads to the code government intervention (Sobczak, 2003). They can improve being ignored. Mandated codes in a highly centralized struc- work climate and leave employees feeling positive about the ture have been rendered ineffective because employees rejected company (Manley, 1991), shape employee behavior, and posi- attempt at control (Trevino & Weaver, 2003). Creating a code tively influence ethical decision-making (Trevino and Weaver, will not insure that ethical behavior will occur; ethics, the code, 2003, p.258). Trevino and Weaver’s research showed that open and ethical decision-making must be infused into the organiza- discussions about ethics in the organizations contributed to tion and not ordered from the top down (Neube & Wasburn, increased ethical behavior. Additionally