What Is the Purpose of a Code of Ethics?

A code of ethics is a business document outlining professional standards expected of all company workers and representatives. Although it often addresses internal conduct, it primarily centers on what is expected of employees when engaged in customer-centric activities. It establishes standards by which business representatives are held accountable.

A code of ethics and code of conduct are two separate documents, the first of which addresses the company's broad moral standards and the second of which instructs employees how to use those standards in their day-to-day workplace actions.

TL;DR (Too Long; Didn't Read)

A code of ethics is a voluntary document that helps people at all levels of an organization act with honesty and integrity.

Ethics Code Maintains Internal Focus

A code of ethics addresses some obligations employees have to the organization. For instance, an ethical code might cover the restrictions against insider trading for corporate employees. It also may outline authority limits for particular job roles, as well as obligations to care for equipment used in carrying out work tasks.

However, most codes of ethics are values-based. This means they outline the standards of acceptable conduct when dealing with customers, clients, suppliers and the community at large. Specific items should align with the core values of the business.

For instance, the Association of College Unions International identifies caring, innovation and diversity among its core values when prefacing its code of ethics. In sales and service roles, codes might address an expectation that employees operate with confidentiality, transparency and fairness in all client interactions.

For Employees and Stakeholders

Employees are emphasized in a code of ethics, but organizations sometimes have other people who represent the business in some way. Organizations that rely on volunteers for certain roles would expect those volunteers to adhere to codes when representing the company as well. Similarly, firms might note that associates, partners, suppliers and buyers are expected to follow certain elements of the code.

Reputation Importance of Code of Ethics

In contrast to a conduct code, a primary purpose of a code of ethics is to maintain integrity in public interactions and protect the company's reputation. As an example, the CFA Institute includes the following line as part of its stated standards for investment professionals: "Place the integrity of the profession and the interests of clients above your own interests."

A code of ethics goes beyond legal standards, which employees are required to abide by whether expressed or implied in their roles. If a company chooses to enforce a code of ethics, however, then it may impose some kind of sanction if the code of ethics is broken. These sanctions can include warnings, training and improvement programs — or even termination.

Vital for International Businesses

The code enables a company to integrate ethical values into its organizational culture. The values addressed internally and in external relationships can dictate the expectations a business has of its representatives. A code of ethics is especially vital for international companies given different ethical standards around the world. American businesses are held accountable in the United States by such laws as the Foreign Corrupt Practices Act, even when doing business abroad.

The time involved in preparing a code of ethics and the resource requirements to enforce standards consistently are among its challenges. However, investing these resources will help keep your company cohesive, respectable and managed.

References

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.