July 25, 2024

Advancing Corporate Yields

Pioneering Business Success

Understanding Its Types and Uses

Table of Contents

What Is a Code of Ethics?

A code of ethics is a set of principles intended to guide professionals in conducting business with honesty and integrity. A code of ethics document may outline the organization’s mission and values, guide on addressing problems, establish ethical principles based on the organization’s core values, and define the standards to which professionals are held.

To evaluate corporate codes of ethics ethically, you must apply universal moral standards like trustworthiness, respect, responsibility, fairness, caring, and citizenship to the stages of content, creation, implementation, and administration.

Also called an “ethical code,” a code of ethics may encompass areas such as business ethics, professional practices, and employee conduct.

Key Takeaways

  • A code of ethics outlines an organization’s guidelines and best practices for maintaining honesty, integrity, and professionalism.
  • Violating the code of ethics can lead to sanctions, including termination, for organization employees or members.
  • Specific laws regulate business conduct in some industries, including banking and finance, while in others, a code of ethics is voluntarily adopted.
  • The main types of codes of ethics include compliance-based, value-based, and professional codes of ethics.
  • Addressing climate change has become a key component of companies’ codes of ethics, highlighting their commitment to sustainability.

Joules Garcia / Investopedia


What Is the Purpose of a Code of Ethics?

Business ethics refers to how ethical principles guide a business’s operations. Common issues that fall under the umbrella of business ethics include employer-employee relations, discrimination, environmental issues, bribery, insider trading, and social responsibility.

Although many laws establish basic ethical standards for businesses, it’s primarily up to business leaders to develop a comprehensive code of ethics.

Ethical conduct has been shown to benefit an organization and society in the long term. It aligns with the triple bottom line theory of profit, people, and planet and meets the growing expectations of socially responsible customers, employees, and investors.

Businesses and trade organizations usually have a code of ethics that employees or members must follow. Violating this code can lead to termination or dismissal. A code of ethics is crucial because it clearly defines the rules for behavior and offers a basis for preemptive warnings.

While a code of ethics is often not required, many firms and organizations adopt one to identify and characterize their business to stakeholders. This can build trust, ensure accountability, and demonstrate a commitment to ethical behavior, all of which can improve a company’s reputation and contribute to its success.

Given the importance of climate change and the significant impact of human behavior, many companies now include climate factors in their code of ethics. These principles outline the company’s dedication to operating sustainably or their plans to shift toward sustainable practices.

Although this commitment to sustainability can increase costs, it often proves worthwhile as consumers increasingly prefer to engage with environmentally responsible businesses, enhancing the company’s public image.

Regardless of size, businesses count on their management staff to set ethical conduct standards for other employees. When leaders adhere to the code of ethics, universal compliance is expected, with no exceptions.

Types of Codes of Ethics

A code of ethics can take various forms. Still, its general goal is to ensure that a business and its employees follow state and federal laws, conduct themselves according to exemplary standards, and benefit all stakeholders. Here are two types of codes of ethics commonly found in business.

Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes of ethics set guidelines for conduct and determine penalties for violations.

Specific laws govern business conduct in industries like banking, leading these sectors to adopt compliance-based codes of ethics to enforce regulations. Employees typically undergo formal training to understand these rules. Noncompliance can create legal issues for the company, and individual employees may face penalties for failing to follow guidelines.

Some companies appoint a compliance officer to ensure adherence to the code of ethics. This individual stays updated on regulatory changes and monitors employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and defined consequences rather than personal behavior monitoring. While it ensures legal compliance, it may not always promote a climate of moral responsibility within a company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company’s core value system, setting standards of responsible conduct that benefit the larger public and the environment. These ethical codes often require more self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values.  For example, a grocery store chain might create a code prioritizing health and safety regulations over financial gain. Additionally, the code might include a commitment to avoiding suppliers that use hormones in livestock or raise animals in inhumane conditions.

Code of Ethics in Different Professions

Certain professions, such as those in finance or health, have specific laws that mandate codes of ethics and conduct.

Accountants

Certified public accountants (CPAs), who are not typically considered fiduciaries to their clients, still are expected to follow similar ethical standards, such as integrity, objectivity, truthfulness, and avoidance of conflicts of interest, according to the American Institute of Certified Public Accountants (AICPA).

Financial Advisers

Financial advisers registered with the Securities and Exchange Commission (SEC) or a state regulator are bound by a code of ethics known as a fiduciary duty, a legal and ethical obligation requiring them to act in the best interest of their clients.

Code of Ethics vs. Code of Conduct

A code of ethics and a code of conduct both set professional standards to guide behavior of an organization’s members. However, there are some subtle differences:

  • A code of ethics ensures that members exercise sound judgment. For example, legal codes prevent lawyers from handling conflict-of-interest cases or brokers from trading against clients.
  • A code of conduct, meanwhile, specifies expected employee actions, including norms like punctuality and accuracy. Most companies implement an employee code of conduct to uphold professionalism and minimize workplace friction.

Having both a code of ethics and a code of conduct helps ensure that an organization operates with integrity and maintains professionalism with its employees.

How to Create a Code of Ethics

Organizations create codes of ethics to eliminate unacceptable or immoral behavior among their members, often focusing on existing ethical issues within their industry.

The first step is for an organization to identify its priorities and any ethical issues it wishes to avoid. For example, a company might want to prevent conflicts of interest due to past scandals. In that case, its code of ethics might prohibit inappropriate relationships or actions that could lead to a conflict of interest.

What Is an Example of a Code of Ethics?

Many firms and organizations have adopted a code of ethics. One good example comes from the CFA Institute (CFAI), the grantor of the chartered financial analyst (CFA) designation and creator of the CFA exams.

CFA charterholders are among the most respected and globally recognized financial professionals. According to the CFAI’s website, members of the CFA Institute, including CFA charterholders, and candidates for the CFA designation must adhere to the following Code of Ethics:

  • Act with integrity, competence, diligence, respect, and ethics when dealing with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
  • Place the integrity of the investment profession and clients’ interests above their interests.
  • Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
  • Practice and encourage others to practice professionally and ethically, which will reflect credit on themselves and the profession.
  • Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
  • Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

What Is a Code of Ethics in Business?

A code of ethics in business is a set of guiding principles to inform how decisions are made across an organization. In this way, it tells employees, customers, business partners, suppliers, or investors about how the company conducts business. Companies will use a code of ethics to state the values they consider important and how these guide their operations.

What Are the Five Ethical Principles?

In the accounting profession, five ethical principles guide the industry’s code of ethics: integrity, objectivity, professional competence, confidentiality, and professional behavior.

What Is a Code of Ethics for Teachers?

A code of ethics for teachers defines the primary responsibilities of a teacher to their students and the role of the teacher in a student’s life. The National Education Association outlines the following two principles for education professionals. First, commitment to the student involves guiding students to reach their potential fairly and inclusively. Second, commitment to the profession includes raising professional standards and exercising professional judgment.

What Is an Example of a Code of Ethics?

An example of a code of ethics would be a business that drafts a code outlining all the ways that the business should act with honesty and integrity in its day-to-day operations, from how its employees behave and interact with clients, to the types of individuals it does business with, including suppliers and advertising agencies.

What Is the Difference Between a Code of Ethics and a Code of Conduct?

A code of ethics is broader in its nature, outlining what is acceptable for the company in terms of integrity and how it operates. A code of conduct is more focused in nature and instructs how a business’s employees should act daily and in specific situations, which links these to the values and principles of the organization.

The Bottom Line

A code of ethics is a guiding set of principles intended to instruct professionals to act in a way that aligns with the organization’s values and benefits all stakeholders. A business’s code of ethics is drafted and tailored to the specific industry at hand, and it requires all business employees to adhere to it.

The moral choices of businesses have evolved, from the industrial age to the modern era. In the world we live in today, working conditions, how a business impacts the environment, and how it deals with inequality are all areas that are garnering a greater degree of attention. A code of ethics helps ensure that businesses will act with greater integrity at various levels of the organization.

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