What is a Code of Ethics?

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Definition:

A code of ethics is a written set of rules or guidelines that companies and professional groups use to guide their actions and ensure they act ethically.

🤔 Understanding code of ethics

Most people live based on a set of beliefs or ideas about how they want to treat people and how they want people to treat them. A code of ethics is a written set of ethical principles or rules that a business or members of professional groups can use to guide how to act and treat people or other companies. Usually, companies base their codes of ethics on specific core values, such as supporting environmental sustainability or social responsibility. Other times, they base the code of ethics on legal and regulatory standards.

Example

One company that publishes a code of ethics is Apple. Its code of ethics describes what it requires from the suppliers with which it works. The company includes things like fair working hours, workplace safety, and non-discrimination in its code and uses this code to show companies what Apple expects from its partners and to guide its decision making when it looks to find new suppliers for raw materials and other products.

Takeaway

A code of ethics is like a checklist of a company’s ideals…

Companies want to operate in specific ways based on the leadership’s personal beliefs or industry norms and standards. Creating a code of ethics gives people in that company a checklist they can follow when making decisions. Decisions that meet the checklist’s requirements follow the company’s code of ethics. Decisions that violate some of the principles on the checklist won’t match with the company’s ethical ideals.

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What is the purpose of a code of ethics?

A code of ethics is a set of written rules and guidelines that businesses or professional organizations use to help guide decision making. Typically, codes of ethics discuss the adopting organization’s moral values, stating what the group believes in and how it will act to stay true to those beliefs.

For example, a green energy business may have a code of ethics discussing its belief in the importance of the environment. Included in that code will be a list of commitments, such as not acting in a way that pollutes the environment.

Professional groups or associations can also have codes of ethics. The Hippocratic Oath that doctors take is similar to a code of ethics. It includes statements of professional responsibility and how the person taking the oath hopes to act in the future.

Why is a code of ethics important?

A code of ethics can help businesses operate more efficiently, retain workers, and advertise — all at the same time.

Having a published code of ethics makes difficult decisions more straightforward. For example, an electronics manufacturer that wants to expand its production capacity may have to decide between two suppliers of raw material. One supplier is known for its poor labor practices and mistreatment of workers but sells its goods for a low cost. The other supplier charges more but has better workplace standards.

If the manufacturer has a code of ethics that states its goal to partner with companies that treat workers well, it makes the choice easier. Without a code of ethics, the decision is more complicated and open to debate.

Within a company, a code of ethics helps managers manage their employees and treat them properly, which can improve employee retention. Codified ideals surrounding conflict resolution, discrimination, and filling vacancies in the company help every employee stay on the same page — and they foster a strong company culture.

Outside the company, customers who look at a business’s code of ethics may be more willing to buy from that business if its code of ethics matches with their own ethical beliefs.

Codes of ethics can also assist businesses that experience legal trouble. Showing that the company made a good faith effort to act appropriately by publishing a code of ethics for its employees to follow can look good to courts charging the business with violating ethical practices.

What should a code of ethics include?

There is no standard process or language for writing a code of ethics. Every company’s or group’s code of ethics will be different, reflecting the ideals of that organization. However, there are some strategies that can help make ethical standards more effective; and there are elements that most codes of ethics include.

Codes of ethics are generally most effective when they include a list of values and goals, rather than a list of things that the company or its employees should not do. Stating “we will work toward maintaining a clean environment” is more effective than stating “we will not pollute the environment.”

Codes of ethics should also be short, quick to read, and easy to understand. The simpler the text of the code of ethics, the more easily stakeholders can read and adopt its ideas.

The development of the code of ethics should involve people from throughout the adopting organization. This includes representatives from different departments and different levels of the company, from the CEO down to part-time workers. It should also experience frequent review and revision as the organization grows and encounters new challenges.

Many codes of ethics include an introductory letter, usually from senior leadership of the adopting group. The letter sets the tone for the code and relates the importance of the code to its readers. Most also include a mission statement and a decision-making framework that employees can use when making difficult ethical decisions.

Groups that offer resources for ethical guidance should include contact information for those resources, as well as information about related resources that readers can reference.

The specific topics discussed in the code will vary widely based on the group adopting the code. A manufacturer will have a very different code from, say, a professional group for journalists, but some commonly covered topics include:

  • Record-keeping
  • Customer service
  • Handling of confidential information
  • Conflicts of interest
  • Work/life balance
  • Discrimination
  • Social responsibility
  • Security
  • Political activity
  • Health and safety
  • Honesty and trust

Is a code of ethics required by law?

In the United States, a code of ethics isn’t required for businesses or professional organizations. However, disclosure of whether a business has adopted a code of ethics is required by the Sarbanes-Oxley Act. Companies that have not adopted a code of ethics must disclose that fact along with an explanation of why they have not adopted a code.

The code of ethics that the act requests should apply to the business’s high-level employees, including its principal executives, financial officers, and accountants. The code of ethics should aim to deter wrongdoing and promote:

  • Ethical conduct and proper handling of conflicts of interest
  • Full and timely disclosure in annual reports and other filings
  • Compliance with all relevant laws
  • Prompt reporting of violations of the code
  • A standard for accountability for adhering to the code of ethics

What is the difference between a compliance-based and value-based codes of ethics?

A compliance-based code of ethics arises due to law or other regulations that affect the organization adopting the code. A compliance-based code of ethics covers rules for how to act and penalties for violating those rules. Typically, those rules come from regulations that the organization must follow, such as not falsifying records. The code of ethics that the Sarbanes-Oxley Act encourages is a compliance-based code of ethics.

A value-based code of ethics discusses the company’s goals and relies on self-motivation rather than the threat of legal action. Value-based codes of ethics may relate things like the organization’s goals to only work with suppliers that treat employees fairly or to work to clean the environment.

Some companies adopt both a value-based and a compliance-based code of ethics, covering rules they must follow and goals to which they aspire. This mixture promotes both following the letter of the law and working to do more than the law requires.

What’s the difference between a code of ethics vs. a code of conduct?

Codes of ethics and codes of conduct are two very similar codes that help groups make decisions and relate their goals and standards to the world.

A code of ethics lists an organization’s principles and beliefs, which members of that group can use to guide their behavior. For example, a code of ethics might outline a business’s commitment to working with suppliers that treat employees equitably and operate with environmental sustainability. It will also set the expectation that employees will choose green solutions whenever possible.

A code of conduct often appears as part of a code of ethics, though it may be separate. Codes of conduct outline how members of the group must act and may relate portions of the code of ethics to real-world situations and show how employees should apply the code of ethics in their work.

Codes of conduct may explicitly disallow certain activities, like breaking the law, discrimination, or inappropriate use of company property. They set standards for professional conduct.

Most companies adopt both a code of ethics and a code of conduct. Combining the two gives even more guidance to the business’s employees and helps the act in ways that further the corporation’s goals.

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