All healthy relationships are built on trust, including the relationships companies have with their partners, clients, and employees. If there’s something all the recent high-profile corporate scandals have shown us, it’s how fragile trust really is and how its absence can be detrimental to overall company value creation.
When implemented correctly, a code of ethics can be an important source of competitive advantage and have a huge positive effect on the company’s financial performance and all other performance criteria. Let’s take a closer look at what a code of ethics is, what it isn’t, and what its most important benefits are.
What is a code of ethics?
Investopedia defines a code of ethics as “a guide of principles designed to help professionals conduct business honestly and with integrity.” Typically, a code of ethics outlines the mission and values of the business or organization, the approach professionals are supposed to take when they encounter a problem, the organization’s core values and the ethical principles they’re based on, as well as the standards to which all professionals are held.
In the past, codes of ethics were commonly found only in non-profit organizations and other similar entities, but they have since spread into the corporate world. A code of ethics is typically employed in conjunction with a company’s specific politics and its code of conduct.
Code of ethics versus code of conduct
Because the terms “code of ethics” and “code of conduct” are often used interchangeably, there’s a lot of confusion surrounding their exact meaning. What they both have in common is that they attempt to encourage specific behavior. A code of ethics accomplishes this by providing guidance about values and choices, while a code of conducts clearly states which actions are appropriate and which are not.
Most codes of ethics have a wide scope, covering a broad range of specific and non-specific topics. Codes of conducts tend to be much narrower in their scope, dealing with a small number of particularly relevant areas, such as sexual harassment, racial discrimination, offensive language, and others.
Both codes are sometimes combined into a single document, as illustrated by the Code of Ethics and Professional Conduct created by the Linux Professional Institute.
“The LPI community is an open, safe and inclusive space fostering sharing and collaboration regardless of age, disability, ethnicity, gender identity and expression, level of experience, nationality, personal appearance, race, religion, or sexual orientation,” the document lays down some basic ethical principles before continuing with more specific examples of dishonorable and questionable conduct.
5 benefits of a code of ethics
#1. Sets the right culture
The most important benefit of a code of ethics is that it can foster an environment of trust, ethical behavior, integrity, and excellence. When everyone, from the c-suite to the people at the very bottom, plays by the same rules and behaves in a certain way toward one another, productivity tends to grow as conflicts and confusions disappear from the workplace.
In this environment, employees who might otherwise be afraid to voice their opinion feel encouraged to contribute, which is how good teams become excellent. Companies that foster an environment of trust, ethical behavior, integrity, and excellence are also better prepared to deal with unforeseen challenges because they have a very strong foundation to stand on.
#2. Builds a good reputation
Today’s customers look well beyond the price tag. With so many choices, customers gravitate toward companies they feel they can trust, and they stay far away from those companies that don’t promote ethical behavior. But it’s not just customers to whom ethics matter. Companies that pay strong attention to ethics also find it easier to establish lasting partnerships both within and outside their industry.
To see why ethical behavior is so important, we don’t need to look further than at the recent so-called Weinstein effect, which is a term that’s used to describe a worldwide wave of sexual abuse allegations against film producer Harvey Weinstein, which eventually gave rise to the #MeToo campaign. After it spent months looking for a buyer or investor, The Weinstein Company was eventually forced to file for bankruptcy because nobody wanted to touch it.
#3. Helps remain in compliance with laws and regulations
According to the landmark Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, all individuals serving on boards and organizational leaders of public companies are required to have a code of ethics to make major corporate scandals like Enron and WorldCom less likely to happen.
Any promises a company makes and fails to comply with can make it amenable to sue for breach of contract, so companies that implement a code of conduct have a strong incentive to ensure ethical treatment of its employees, clients, partners, as well as the public.
#4. Attracts outstanding employees
Outstanding employees come from all walks of life, and they all expect to be treated justly and ethically. Companies with a code of ethics reassure potential employees that they won’t be discriminated against, sexually harassed, intimidated, bullied, or subjected to any other type of workplace harassment.
Just last month, Linux Torvalds apologized for how he had been running the Linux kernel community and adopted the Contributor Covenant, which is a code of ethics and conduct for open source project, after years of driving away talented developers with his hostile behavior.
“In the interest of fostering an open and welcoming environment, we as contributors and maintainers pledge to making participation in our project and our community a harassment-free experience for everyone, regardless of age, body size, disability, ethnicity, sex characteristics, gender identity and expression, level of experience, education, socio-economic status, nationality, personal appearance, race, religion, or sexual identity and orientation,” states the Contributor Covenant.
#5. Promotes social change
One less talked-about benefit of adopting a code of ethics is that it promotes social change. We all live on the same planet and share the same finite amount of natural resources, so we’re all responsible for the happiness or misery of one another. By promoting positive social change, companies can contribute to making the world a better place for everyone, not just a select few.
In this day and age, companies cannot afford to focus solely on the bottom line anymore. The ethical aspects of doing business are becoming just as important as the financial ones, and a well-thought-out code of ethics is emerging as a necessary prerequisite for success.