Points for Good Conduct

Every company has a corporate culture which establishes how the business is run on a day-to-day basis. In some companies, a specific corporate culture will have been created by management, whilst in others it may simply have evolved over time, without much attention being paid to whether or not it is right for the business.

PUBLIC AWARENESS

Investors, customers and employees are now better informed and more ethically aware than ever before and the adoption of ethical business practices is consequently receiving significant attention.

Accounting scandals have raised numerous questions about the adoption of aggressive accounting techniques, the manipulation of profits and the use of financial engineering to create a more favourable impression of the business. There is also much greater awareness of the impact of business activities on the environment and of social concerns, particularly where activities are undertaken in countries where standards and regulations are less stringent than in Europe.

INTERNAL ISSUES

Corporate ethics and social responsibility are primarily about internal issues that are within the company's control, over which it can exercise real influence. People are becoming increasingly sceptical about corporate codes and mission statements which do not appear to have any noticeable impact on the company's day to day activities and which perhaps represent good intentions rather than real commitment.

The specific matters needing consideration in any business will vary depending on the nature and scale of its operations, but they might include the sourcing of goods and services from low-wage countries, the use of child labour in developing countries, equity in pay and conditions, and the acceptability of making 'commission' and similar payments.

Questions for directors to consider might include:

• What kind of organisation do we want to be?
• Which values really matter to us?
• Does the business have values that should never be sacrificed in pursuit of profit, and are these communicated effectively across the organisation?
• Is there a well-understood framework for making decisions on ethical issues – and does this apply to all levels within the business?
• Does every director and employee understand what is expected of him/her?
• Is it evident that the company expects and rewards ethical behaviour?
• Are employees encouraged to discuss any ethical dilemmas that they encounter – and is it clear who they should approach in these circumstances?
• How does the company respond in such a situation?

BENEFITS OF ETHICAL AWARENESS

The benefits of ethical conduct can be difficult to measure, especially in the short term. The disadvantages, in terms of lost business and additional costs, are likely to be more readily apparent, especially in the early stages.

However, commercial success is usually interpreted as more than financial results, and corporate reputation is now regarded as a valuable asset, albeit one which takes time to build.

High ethical standards are increasingly recognised as an asset and unethical behaviour seen as a liability. A strong corporate image can also bring competitive advantage and help to attract investors, customers and high-calibre employees.

AVOIDING ADDITIONAL REGULATION

Businesses frequently complain about the extent and complexity of laws and regulations and the administrative overload that this can create. However, commercial freedom goes hand in hand with responsibility.

The increased public awareness of, and demand for, ethical and socially responsible behaviour is likely to lead to increased bureaucracy and controls if companies are not prepared to act voluntarily. Company directors therefore need to accept the rapidly changing environment and be pro-active in championing ethical standards rather than trying to defend positions that may have been acceptable in the past but are no longer considered to be so.

DRAFT IFAC GUIDANCE

The International Federation of Accountants (IFAC) has recently published an exposure draft of proposed guidance to help companies develop a code of business conduct. Having an effective code is generally regarded as a key element of corporate governance and internal control and the draft guidance has been developed by the IFAC Professional Accountants in Business Committee.

An initial draft was published for comment in January 2006 but has since undergone fairly substantial revision and so is being issued for a further exposure period. Once finalised, Defining and Developing a Code of Conduct is intended to form the first in a series of principles-based good-practice pronouncements.

The introduction to the exposure draft emphasises that ethical conduct lies at the core of all business – people do business with those they trust and get business from those who trust them.

Ethics is consequently a driver of business growth and an issue to which all boards and investors should give due attention. The draft guidance highlights the need for each business to have an effective code of conduct and provides practical guidance on the development of such a code. It is intended to be equally relevant to those who are developing a code for the first time as it is to those who wish to review and improve an existing code. The following definition is offered for a code of conduct:

"Principles, values, standards or rules of behaviour that guide the decisions, procedures and systems of an organisation in a way that (a) contributes to the welfare of its key stakeholders, and (b) respects the rights of all constituents affected by its operations."

The document sets out the business case for developing a code of conduct and explains the role of the professional accountant in business in this context. It emphasises that employees generally prefer to work for an organisation with a commitment to values and ethics and that consumers are increasingly seeking to buy from entities with high standards and social sensitivity. It also notes that a code of conduct can be particularly helpful to decision making in widely spread operational units where formal supervision may be more difficult.

GOOD PRACTICE PRINCIPLES

The main part of the document looks at the nature of a code of conduct, sets out the key principles for the development of a code and provides detailed guidance on applying those principles in practice. An illustrative example of a corporate code of conduct is provided in the appendices, together with additional guidance on the development of codes of conduct within the public sector.

The good practice principles for the development of a code of conduct include:

1. The promotion of a culture that encourages employees to 'do the right thing' and allows them to make appropriate decisions. Some of the most difficult issues arise from dilemmas caused by new technologies or business arrangements, or where two or more obligations conflict. An effective code of conduct should provide a framework to enable employees to analyse threats and safeguards and determine an appropriate course of action.

2. The development of a code that reflects, and is appropriate to, the size, nature and complexity of the organisation. The draft guidance emphasises that no two codes of conduct will be the same, even within the same industry, and that smaller organisations can generally take a simpler approach, resulting in a shorter document covering a narrower range of issues.

3. Commitment from the board of directors. A code of conduct will only be effective if it is led from the top and if ethics and transparency are incorporated into all elements of corporate strategy.

4. The establishment of a clear process for the development of the code and a multi-disciplinary, cross-functional group to lead that process, in order to encourage ownership across all areas of the business.

5. Application of the code across all jurisdictions. Managing compliance with the code may be particularly challenging where it needs to operate across a number of geographical and cultural boundaries, but many global organisations believe that they are best served by a single worldwide standard of behaviour.

6. Continuous awareness and enforcement of the code, including incorporation into communication and training programmes and a clear and consistent disciplinary process across all levels for breaches of the code.

Complying with these principles will result in a corporate code of conduct that allows a more effective and ethically aware day-to-day running of your company.