Q&A: Implementing the Code of Conduct

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1 Question 1: What are the most effective ways to implement a code of conduct? Answer 1: General guidelines that an organization should follow when implementing a code of conduct include identifying and effectively using cause champions, documentation, meaningful communication, training, and commitment statements. To ensure that the desired results are realized, however, it is in an organization s best interest to customize details of its implementation plan. Organizational leaders and managers, a compliance officer, ethics committee members, and other employees are key figures in implementing a code of conduct. These individuals can appropriately speak to the cause and provide positive examples to others, thereby encouraging compliance among all employees. Documentation of a code of conduct is vital for legal and general communication reasons. The code of conduct should be distributed and readily available to all employees and any strategic partners to whom it may apply. Printed documents or company intranets are significant means for distributing and maintaining readily available copies of the policies. Other communication strategies specific to an organization should be pursued to maximize employees exposure to the established expectations. General education efforts, including training and signed commitment statements, complement other implementation efforts. Additional resources should be made available to employees regarding ethics in general as well as specific to organizational standards. Ethics training is a critical activity that must take place upon the hiring of employees and then on an annual basis to remind employees of policies and ensure that they are up to date on any modifications. Updates to the code of conduct should be promptly communicated to employees and integrated into training efforts. Having employees sign commitment statements that indicate their familiarity with and intent to abide by the code of conduct will heighten awareness of the importance of these established standards. In fact, in many organizations, it is a condition of employment to sign the statement. As an added element of annual training, it often makes sense to also have employees annually sign a commitment statement, particularly given that policies can change from time to time. Question 2: How can a culture of ethics be created? Answer 2: Cultural change is a gradual process that must occur to ensure that an organization truly has a culture of ethics. Many of the standard 1

2 implementation strategies documentation, communication, cause champions, training, other educational efforts, and commitment statements support the creation of an appropriate culture. In addition, other activities should be pursued so policies are institutionalized and a strong sense of ethics truly permeates the organization. The structure for managing the code of conduct should be integrated into the general organizational structure, and it should be made evident to employees. It is critical that code of conduct guidelines be consistent with other organizational policies and procedures. Inconsistencies between policies and procedures can lead to serious challenges or even ethical transgressions when it is not clear which policy should be the priority. Ongoing educational efforts are important for keeping all employees focused on the ethical standards and facilitating their adoption. Leaders and managers must not only champion the code of conduct cause, but they must also be positive role models for other employees by closely following the code of conduct each day in all work-related activities. How an organization handles code of conduct compliance and noncompliance issues also has an impact on the creation of a culture of ethics. Some type of recognition or reward may be appropriate for those who comply with policies. If situations of noncompliance are suspected, they should be investigated to the company's guidelines; if violations are uncovered, they should result in appropriate punitive measures. Investigations and any actions should be equally applied to all relevant individuals. Any deviations in the treatment of transgressions could send the wrong signal to employees that policies may not apply to everyone, and in turn may encourage others to test the limits of the code of conduct. Question 3: How are potential ethical situations recognized? Answer 3: Organizational leaders and managers should be proactive in using the code of conduct as a framework for determining their work-related activities and making day-to-day decisions. They should also encourage other employees to do the same. As part of these efforts, employees may discover some inconsistencies between their values or intentions and organizational ethics policies. Recognition of these issues can help highlight the preferred parameters and guide employees in pursuing appropriate activities or making the right decisions per organizational standards. An audit of organizational activities by internal or external parties may uncover potential ethical situations. These individuals may identify opportunities that 2

3 invite unethical activities or discover situations in which unethical behaviors were evident. Whistle-blowers may also increase awareness of ethical matters. A proactive approach for any organization is to become familiar with and constantly assess any operational opportunities for misconduct, and then address them to discourage activities and hopefully avoid identification of inappropriate activities on behalf of employees. Among the worst-case scenarios in recognizing ethical situations is notification by a governing, federal, or regulatory agency. Both operational scrutiny and reporting requirements may uncover opportunities for unethical behavior; the company can then build safeguards against these behaviors. As such, it is important for any organization to carefully assess the regulatory environment in which it operates and its own operations to determine and address the risks. Question 4: What are the pros and cons of being a whistle-blower? Answer 4: The act of whistle-blowing is defined as making appropriate individuals or agencies aware of suspected or confirmed wrongdoing on the part of others. This activity is often encouraged in organizational codes of conduct with a requirement that employees notify appropriate parties if they are aware of or suspect any policy violations or other inappropriate behaviors on the part of any employees. For employees in publicly traded companies, the Sarbanes-Oxley Act (SOX) provides comprehensive legal protection for whistleblowers, as noted in Section 806 (Devine, 2007), an indication that such activities are encouraged and critical in maintaining standards. Whistle-blowing can protect an organization and its stakeholders from inappropriate actions of employees by making officials aware of situations so they can be appropriately addressed. Whistle-blowing is often a required activity defined in an organizational code of conduct, so when necessary, this action is in compliance with company standards. If it is determined that an employee was aware of violations but did not report them, he or she could potentially be viewed as not complying with policy. As such, there may be negative consequences for the knowing-but-silent employee. Although whistle-blowing can be a positive action, there are some risks in doing what seems right. Whether the accusations of wrongdoing are discovered to be accurate or not, whistle-blowers can face retaliation, harassment, demotion, termination, or other treatment as exemplified by several notable cases of whistle-blowing over the years. Section 806 of SOX is a testament to the fact that negative outcomes occur. As such, SOX and other guidelines should be followed when applicable and organizations should implement other means for 3

4 providing sufficient protection for whistle-blowers. Question 5: What are conflicts of interest and how should they be handled? Answer 5: According to the article by MacDonald, McDonald, and Norman (as cited in Conflict of Interest, n.d.), conflict of interest is defined "as a situation in which a person has a private or personal interest sufficient to appear to influence the objective exercise of his or her official duties." There are legal and organization-specific guidelines to define conflict of interests that should always be used as first determinants in assessing such cases. Some potential or actual conflicts of interest may not be directly covered by established guidelines but are apparent. In some other situations, conflicts of interest are not immediately apparent. In any case, any situations that suggest conflicts of interest require further investigation to determine if any conflicts exist and if so what the necessary actions may be. Conflicts of interest can be based on monetary or other matters. For example, a situation in which an individual accepts money, significant goods, or other personal benefits to influence a business decision represents an apparent conflict of interest. Encouraging an employer to purchase supplies from a company owned by a family member or purchasing stock in a client organization when an individual has insider knowledge of a planned announcement that will soon inflate the stock price are other examples of conflicts of interest. An individual charitable contribution of significance to a nonprofit organization for which a team from a firm, including the individual donor, recently conducted a consulting project may not seem like a conflict of interest, particularly when the donor feels committed to the organization s cause. However, some may view it as a conflict of interest because it could appear that the donation was contingent upon the individual s employer receiving the consulting contract or as a means for influencing future decisions on contract awards to the company. Organizations should be proactive in recognizing potential conflict of interest situations and addressing them before they turn into more significant situations. Guidelines in the code of conduct can help organizations avoid conflicts of interest, such as the following: disclosure of familial or other personal relationships in organizational situations not accepting or giving gifts of significance to suppliers, clients, and others 4

5 reinforcing federal guidelines on insider trading If an organization is uncertain as to whether or not a particular situation may represent a conflict of interest, it should consult a knowledgeable third party, such as an attorney or its accounting or auditing firm. If participation of an employee or an organization in a specific activity may be a conflict of interest, that employee or organization should be removed from the process. Organizations should promptly address any evident actions that represent conflicts of interest by disclosure, removal of employees from situations, or other activities to correct the matter. Question 6: How should code of conduct allegations be handled? Answer 6: Allegations of code of conduct violations may become apparent as leaders and managers regularly assess their areas of responsibility, during audits by internal or external parties, through employees reports, or through notice from an external agency. Regardless of the source of allegations, it is incumbent upon an organization to thoroughly investigate each one, make a determination as to whether or not there was a violation, and then pursue the appropriate course of action. A code of conduct should clearly define the investigational activities, including who is involved in the process and exactly how it is approached. Documentation of activities is critical throughout the process. As the nature of allegations are reviewed, it may become necessary to involve others in the process, such as an attorney or an auditing firm. For investigations resulting in a determination that no code of conduct violations occurred, the appropriate individuals, including employees named in allegations, should be notified of the decisions. Furthermore, comprehensive and confidential internal records should be maintained on the investigations and outcomes for legal and other purposes. Those involved in the investigations must also maintain confidentiality on proceedings and employees involved. For investigations resulting in a determination that code of conduct violations occurred, the appropriate individuals should be notified, which includes the employees named in the allegations and final determination, supervisors, and others as appropriate. Comprehensive record keeping is critical to support the allegations and any subsequent actions (legal or disciplinary). Depending on the findings, others may need to be notified to help address the issues, including regulatory or legal agencies. As defined in the code of conduct and deemed appropriate by other appropriate standards, punitive actions must take place to reinforce the need for code of conduct compliance. 5

6 Question 7: Why is it important to address confirmed code of conduct violations appropriately? Answer 7: If there are confirmed code of conduct violations, there are several reasons why it is vital for an organization to address these matters according to guidelines set forth in the code of conduct and by relevant laws and regulations. These reasons include reinforcing the need for code of conduct compliance, setting an example for noncompliance, and protecting the organization and its stakeholders. Failure to address code of conduct violations could have serious repercussions and lead to other transgressions by the same or other employees. A code of conduct is implemented specifically to define standards of behavior and decision-making guidelines in an organization. As such, it is important to follow the code of conduct at all times, including when violations occur. Adherence to the standards sends a strong message to all employees that the guidelines are a critical part of the organization s culture and operations. Pursuing punitive actions for violations further signals adherence to the policies and can be a vivid and realistic indicator to others of the repercussions of noncompliance. Code of conduct violations must also be appropriately addressed to protect the stakeholders of an organization. Some ethical transgressions, as exemplified by well publicized cases in recent years, can have profound effects on stakeholders. An organization must ensure that all is being done to protect the long-term viability of the organization and the livelihood of its employees, investors, and others. Furthermore, actions will provide some legal protection for an organization should any lawsuits or other activities be pursued related to the situations. Question 8: What should be done if confirmed code of conduct violations also involve illegal activities? Answer 8: As with any confirmed code of conduct violation, actions are essential for supporting legal, regulatory, and code of conduct standards and for protecting the organization and its stakeholders. For violations that involve illegal activities, the organization must be positioned to also deal with the investigations by outside parties or organizations, as well as any negative publicity and related factors that may be linked to the situation. Upon learning of any illegal activities within the organization, individuals should report them through the proper internal channels and, in turn, the appropriate 6

7 executives should report the situations to the proper authorities. If any legal activity on part of the organization seems appropriate, such as filing charges against specific employees, those options should be explored. Prompt consultation with legal and other counsel, such as auditors, can help an organization determine the best course of action. Immediate and full disclosure can often reflect positively on the organization, even during trying times. With illegal activities, investigations are often conducted by external agencies. Full cooperation with officials during such investigations is important to facilitate the process and minimize the long-term negative impact on the organization. Disclosure of illegal activities and investigations by regulatory or other agencies can often become public knowledge, resulting in unwanted or negative publicity about the organization. Plans should be determined and implemented for immediate and positive public relations campaigns to offset any negative publicity and to reassure stakeholders that the organization is stable and ready to deal with the current challenges. Upon reporting illegal activities, some organizations have found it beneficial to immediately issue press releases defining the situations, actions taken by the organization, intentions to cooperate with any investigations, and plans to pursue all necessary actions against those who violated organizational standards. Such efforts can have positive results, portraying organizations as being committed to legal and ethical requirements, as well as being proactive about any issues. Question 9: How does an organization ensure that it is in compliance with its own policies as well as external standards? Answer 9: Much effort is devoted to compiling a code of conduct as well as monitoring and enforcing compliance. Significant investigation has been conducted to determine potential areas of risk and to address those matters in the code of conduct; however, policies can be subject to interpretation, and they may not necessarily cover all likely situations in an organization. Furthermore, the legal and regulatory environments can change, not to mention that those guidelines can also be subject to interpretation, so it is important for an organization to monitor its own compliance with the code of conduct and external guidelines. This can be done through the following three major efforts: monitoring the organization s activities is done regularly by leaders, managers, and others conducting periodic and formal self-audits engaging an outside firm to conduct periodic audits 7

8 Leaders and managers should be monitoring activities to ensure that the behaviors of employees and any decisions reflect the organization s standards and known external guidelines. In addition, other employees should feel compelled to do the same as they abide by the established standards. Any potential or likely compromises in standards must be promptly addressed. In addition, an organization should periodically conduct comprehensive self-audits, using a compliance officer, the ethics committee, or others for these efforts. Formal reports should be generated from the audits for review by the executive team and others as necessary. An organization s accounting or auditing firm is a meaningful resource for ensuring compliance. During preparation or auditing of an organization s financial statements, some code of conduct matters may be reviewed. An organization should also request a more comprehensive assessment of its practices to confirm compliance with internal and external standards, particularly given that external standards may change. Recommendations for improvements can help the organization to be better prepared for any challenges. Question 10: Are there other considerations related to code of conduct implementation and application? Answer 10: As an organization considers code of conduct implementation and application, there are other factors to keep in mind. These include the values and actions of employees as well as the internal and external environments. Although a comprehensive code of conduct can provide meaningful guidelines for employees, it is a work in progress that requires change. As has been previously stated, each employee is likely to have different ethical standards, and a code of conduct establishes a consistent set of values to be followed for work-related activities; however, organizations must recognize that a written policy or some training will not necessarily lead to immediate adoption of the guidelines. Employees must be given time to understand, accept, and embrace policies. Cultural change that is inclusive of ethical standards is related to this process and also requires time. This requires patience and continuous reinforcement of standards. As the internal and external environments of an organization evolve, the existing code of conduct may not be appropriate or fully address potential challenges. For example, as an organization engages in new activities or as it becomes more experienced with managing the code of conduct and addressing organizational concerns, this document can be refined to take into account 8

9 these situations. Industry, legal, and regulatory environments can also change, so a careful assessment of the code of conduct implications and implementation of modifications is necessary. A code of conduct provides a solid foundation for organizational activities, but it must have some inherent flexibility to change over time. References Conflict of interest. (n.d.). Retrieved July 13, 2007, from Business Ethics Web site: Devine, T. (2007). Sarbanes-Oxley Act summary of law. Retrieved July 13, 2007, from Government Accountability Web site: 9