BUSINESS ETHICS A code is needed for companies, regardless of size


Unflattering portraits of the business world abound.

The headlines tell of venal plunderers laying waste to the savings and loan industry and to venerable Wall Street institutions. On any given day, it seems, a major defense contractor is on the hook for falsifying product claims or passing bribes. The generic pharmaceuticals industry is weathering a drug-switching scandal that's even tainted the Food and Drug Administration. Before Eastern Airlines stopped flying, the government accused it of cutting corners on safety.

What's going on here?

In reality, the overwhelming majority of business dealings are non-controversial and totally above board. But negative perceptions have a way of being lasting ones, so it's little wonder that many companies are implementing codes of ethics.

Such documents allow firms to codify exactly what is expected of workers in their dealings inside and outside the firm. They also provide companies a good defense, says Ronald E. Berenbeim, a Manhattan expert on business ethics.

"I don't suppose an ethics code is going to make you a lot of money, but it could save you a lot of money," he says. "It could help you avoid countless lawsuits, avoid bad publicity and a tarnished reputation."

Establishing a code of ethics is simple, according to Mr. Berenbeim, whose organization surveyed 300 U.S. and international firms three years ago on the topic of corporate ethics.

"If our survey is to be believed, you probably need to involve top management and perhaps the general counsel as you formulate your code," he says. "What you do not do is involve a consultant very often. Something like 5 percent of the companies did involve them.

"It's really easy, you can do it in about a half an hour. What you need is a situation where people talk about what the company stands for and arrive at this code through a process of discussion and debate," says Mr. Berenbeim, a senior research associate with The Conference Board, an organization that aids networking among top executives.

Based on the responses from The Conference Board poll, the six most important ethical issues facing business are: environmental protection; product safety; employee health screening; security of company records; shareholder interests; and workplace safety.

Lori Tansey, with the Ethics Resource Center, said a company creating an ethics program can usually break the process into four components:

"The first thing they need to do is a brief assessment of their organization," says Ms. Tansey, whose non-profit organization is located in Washington and assists corporations with ethical matters. "They need to find out what are some of the problems or issues that their employees or organization is facing. That can be done, depending on the size of the organization, through interviews -- individually or in focus groups -- and, or, with a written survey instrument. Smaller companies probably aren't going to need a survey; midsize companies might find that more helpful."

Companies without a formal code may be affected by employees who belong to organizations that do. Such employees may have a greater sense of commitment to their careers and their professions than to the company, says Mr. Berenbeim.

"This has always been true, or potentially true of lawyers or accountants, but increasingly, groups of human resource professionals or marketing professionals or even purchasing agents are developing codes of conduct that articulate professional responsibilities," Mr. Berenbeim says. "And companies need to take those formulations into account, because I think they have to anticipate that their employees may choose to be guided by them."

ZTC "The second step [in creating an ethics code] is training," Ms. Tansey says. "Given that the business owner should have a pretty good idea of what some of the issues are, ideally the training should start at the top and cascade down."

Step three: writing the code.

As a final step, companies should create a monitoring system, she said.

"Depending on the company and depending on what the needs are, that can include anything from an ethics ombudsman to an ethics steering committee. The objective there is to have a mechanism in place that can continue to communicate on matters of ethics."

Small and midsize companies often lack ethics codes, according to Ms. Tansey. Top executives may think that they've already communicated expectations covering employee behavior, and that written standards aren't needed.

But that's a mistake, Ms. Tansey says. Small to midsize companies may actually need an ethics code more than bigger ones.

"In some ways, there's more pressure on small and midsize businesses, because winning that next contract may mean the difference between staying in business from one year to the next," she said. "The wolf is always at the door [and] they don't have a lot of the sophisticated internal controls that larger companies have, like an internal audit department, in-house counsel and security."

Whatever the size of the firm, Mr. Berenbeim says, the world of corporate ethics is a dynamic field.

Ethics codes should be reviewed periodically, he says. "The code is something like a company constitution, it's a continuing institutional vehicle for the discussion of institutional problems."

The potential benefits of a formal ethics policy outweigh the costs of creating one, Mr. Berenbeim and Ms. Tansey agree.

"The costs of not doing it can be a lot more expensive than the time involved in doing it," Ms. Tansey says. "One of the things that we've heard increasingly is that the 1990s are going to be a decade of increasing oversight and regulation. In which case, you better have your employees prepared to know what the laws and the rules are, and even more importantly, how the laws and rules apply to their day-to-day activities."

Creating an ethics code can minimize waste, fraud and abuse that could be occurring, she added.

It may also prevent government regulators from targeting an industry, says Stephen E. Loeb, a University of Maryland business professor. "I think part of it may be to avoid government regulation. In order to minimize government regulation, businesses come up with their own code of ethics to avoid government interference."

But perhaps the biggest incentive for corporate executives is an opportunity to stave off potential problems.

"Twenty years ago, if a company broke an antitrust provision, they got slapped on the wrist and fined," Ms. Tansey says. "Now, we're seeing CEOs and top corporate executives going to jail when their employees screw up or their organization screws up."

Mr. Loeb teaches the executives of tomorrow about ethical behavior and responsibilities before they reach corporate boardrooms.

He is chairman of the accounting department at the University of Maryland's College of Business and Management in College Park, where he teaches a course on accounting ethics. One of his textbooks is titled, "The Whistle Blowers: Exposing Corruption in Government and Industry."

Mr. Loeb says, "Ethics is more than just moralizing and saying, 'This is right and this is wrong.' The kids should be able to identify an ethical situation and that there is an ethical conflict. Once they've identified it, they ought to have the reasoning skill and the ability to think it through and deal with the particular situation.

"There's a big movement right now to integrate ethics into business curriculums. In general, I think, a lot of schools are moving in that direction. We live in an age of accountability, and certainly business ethics then becomes important. We live in a litigious environment."


"Corporate Ethics," by Ronald E. Berenbeim, The Conference Board Inc., New York, N.Y. 1987

"Ethical Dilemmas in the Modern Corporation," by Gerald F. Cavanagh and Arthur F. McGovern, Prentice-Hall, Englewood, N.J. 1988

"Ethical Issues in Business: A Philosophical Approach," by Thomas Donaldson and Patricia H. Werhane, Prentice-Hall, Englewood, N.J. 1988

"Ethics in Practice: Managing the Moral Corporation," by Kenneth R. Andrews, Harvard Business School Press, Boston, Mass. 1989

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