Failure to Adhere to Ethical Guidelines in Business

History shows there's a cost from ethical failures. With the modern era's increased connections between businesses, both locally and globally, and the speed by which information travels around the world via the Web and other technology, ethics problems don’t remain secret for long. Your business must be clear about ethical expectations and the consequences of the failure to adhere to them

Ethical guidelines play a critical role for businesses. Focus has shifted in recent years, transforming what was typically a list of rules for employees to follow to a values-based code asking everyone associated with the company to take a principled approach to their business dealings. The federal government, the New York Stock Exchange and the Nasdaq stock market require companies to promote ethical conduct and a commitment to comply with applicable laws, which has had the effect of turning what might have been a random ethics memo posted in the breakroom into an integral part of corporate culture. Failure to do so risks severe sanctions. The investment firm SAC Capital Advisors LP, for example, had to pay a $616 million penalty to settle two insider trading cases with the Securities and Exchange Commission in 2013 -- and while that addressed those individual instances of ethical failings, the federal investigation into company activities remained ongoing.

Failing to act ethically can have a negative effect on customers and how they perceive your business. If you’re cutting quality corners to improve profits, customers will look elsewhere. If you understate the risk of danger or liability for a specific product, customers may file suit for damages, which can result in costs far beyond your original profit margin. The cigarette industry is a prime example of this phenomenon, as the ethical shortcuts of denying or obscuring negative health effects for decades are paying major consequences at present. Moreover, if you’re putting ethics aside and exploiting the advantages of being a first mover to gouge consumers on price, the profits encourage new entries into the market, which drive prices back down and undercut those early advantages.

Employees must follow the code of ethics you set. Some principles for a code would include adherence to company values and standards relating to employee conduct. You might extend the code of ethics to social media usage, particularly for those responsible for using those resources under your company's banner. If you do business with vendors, a code of ethics should include a requirement for employees to disclose any relationships they have with a particular supplier and avoid conflicts of interest. It could also document grievance procedures and detail the process by which an employee can and should report ethical violations if witnessed. The code of ethics should also note the consequences for failing to adhere to the requirements, which could include discipline ranging from verbal warnings to written reprimands to suspension to termination, depending on the offense.

Ethical violations have proven increasingly costly for business leaders. Former Hewlett-Packard Chairwoman Patricia Dunn, for example, was so determined to find out who was leaking confidential board information to the media in 2010 that she wound up facing four felony charges as a result of HP actions under her watch that spied on board members and journalists to catch the culprit. Though she denied authorizing the specific methods used and the charges were later dismissed, she lost her job and resigned from the company board of directions. Her immediate replacement, Mark Hurd, was himself forced to resign after being charged with sexual harassment and submitting inaccurate expense reports. Some noted that the amount of disputed money on the expense reports, $20,000, was a drop in the bucket for a $115 billion company. But Hurd's actions did not reflect the HP corporate culture, which emphasizes trust, respect and dignity, as well as uncompromising integrity.

Companies that fail to adhere to ethical guidelines put their entire existence at risk. A business accused of discrimination in hiring and promotion practices, sexual harassment, misreporting time spent on chargeable projects to clients or overbilling for services rendered can find itself in legal jeopardy. In many cases, this can result in a company being banned from seeking further contracts in a particular industry. If reports of ethical shortcomings become public, like if a former employee becomes a whistleblower and goes to the press about your company’s alleged misdeeds, this failure to set an ethical example could be catastrophic.