Purpose of a Code of Conduct

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There's a reason the Sarbanes-Oxley Act requires that publicly-traded companies have a code of ethics, also known as a code of conduct. The purpose of a code of conduct is to explain exactly what conduct is expected of all employees and the consequences if they act unethically. This helps reduce the likelihood that they'll undertake unethical actions, which protects the company's shareholders. Many nonpublic companies also have a code of conduct that protects them in a variety of ways.

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

The purpose of a code of conduct is to set standards, show customers you operate with integrity and protect your company from unnecessary and potentially costly risks.

Demonstrate Company Integrity

When you choose to have a code of conduct for your company, make it required reading for all employees and refer to it often — even to customers — because you're announcing your intent to operate with integrity in all matters. It becomes part of your company culture. Clients know they'll be treated fairly and with respect, while potential customers view your company as one with which it is worthy to do business.

Customers know that when they ask for price quotes, they will be given honestly and fairly. If your products or services come with a warranty or guarantee, it will be honored according to its terms. When customers need help with your products, you will help them because it's the right way to act.

A code of conduct says you're so serious about operating ethically that you've put it in writing. It's a powerful declaration of how every single person in your employ will conduct business while representing your company.

Define Expectations to Employees

A code of conduct in business spells out to all employees what is expected of them, with no wiggle room and no excuses. You've set standards that you expect everyone in the company to follow. If they act unethically, they know there will be consequences, possibly even the loss of their job.

The Sarbanes-Oxley Act ruling became law in 2002 as a result of the unethical behavior at the time by numerous executives of large companies like Enron and others. To deter such fraud from occurring again, the act enforces ethical accounting and reporting practices by top company executives and financial personnel of public companies as well as the need to have a code of conduct.

You, of course, want to avoid having any of your employees act unethically in their jobs. Even if your company isn't public, its actions become known to its public — your customers and potential customers — and even small improprieties can ruin your reputation. Having an explicit code of conduct that applies to all employees outlines expectations for everyone, from your CEO and downward.

Reduce the Risk of Being Fined

Every business has to follow rules such as paying taxes, securing business permits and filing necessary paperwork regularly and on time. Failing to comply can cause late fees and fines to be assessed against your business. Acting unethically in other ways could cause lawsuits to be brought against your company, which are costly to defend and could result in large judgments as well as penalties.

Having a code of conduct for all employees to follow reduces the risk that any employees will act unethically and cause fines, lawsuits and penalties to be served against the company.

Know Key Features of a Code of Conduct

One of the key features of a good code of conduct is that it is written clearly and simply and is free of jargon and "legalese". A code of conduct that's written in plain English doesn't have to be translated in order to understand it.

Other key features that make a code of conduct useful instead of one that collects dust on a shelf are:

  • An opening letter from the CEO: The CEO's endorsement and explanation of the code's importance goes a long way toward its being accepted by everyone.

  • A table of contents: Make it easy for everyone to navigate the document and find points easily.

  • Additional resources: Give ideas of other places readers can go for more information.

  • Procedures: Explain how to report unethical behavior without sounding like a suggestion for employees to spy on their peers, yet make it clear that such reports will be treated with respect and confidentiality.

  • Lots of examples: Give examples to clarify points. If you want employees to know that they should not accept gifts from customers, give examples of what constitutes a gift. For example, it would be unethical to accept an expensive antique, but what about a cup of your favorite beverage from the coffee shop down the street?

  • Regular updating: Review it annually and update it as your business changes.

References

About the Author

Barbara Bean-Mellinger is a freelance writer who lives in the Washington, D.C. area. She has written on business topics for afkinsider.com, smallbusiness.chron.com, Harbor Style Magazine, the Charlotte Sun and more. Barbara holds a B.S. from the University of Pittsburgh and has won numerous awards in B2B and B2C marketing.

Photo Credits

  • business man image by peter Hires Images from Fotolia.com