How and Why to Implement an Ethics Program

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I recently conducted ethics training for executives at a company. While operating at high ethical standards is a good business practice, most ethics programs are primarily about complying with legal standards.

For example, some firms are competing for federal contracts of a certain size and must satisfy the Federal Acquisition Regulations mandate. Others implement a program to satisfy standards under state and Federal Sentencing Guidelines or under the Public Company Accounting Reform and Investor Protection Act (the Sarbanes–Oxley Act of 2002).  Still others view such a program as in integral part of a risk management strategy or corporate governance structure.

But whether it’s for business or legal reasons, or both, an ethics program begins with a code of ethics, a communications strategy and, in many cases, organization-wide training. Depending on the size and type of the firm, an effective ethics program also includes identifying an ethics officer to investigate and resolve issues and establishing a freely accessible and anonymous hotline for employees.

Senior Management’s Ownership of the Ethics Program

Experience, case studies and research all point to the same conclusion: a successful ethics program starts with senior management’s ownership and leadership of the process. Maintaining an ethical firm culture may be impossible if senior management does not provide authentic and visible support of the program.  Management leaders not only demonstrate the ethical behaviors employees will emulate but are responsible for communicating and inspiring belief in the code of ethics through the ranks.

Forming a Cross-Functional Team

A firm’s ethical obligation to conduct its business at the highest level of integrity is enmeshed throughout the organization and extends even beyond through its supply chain and network of vendors and extended partners. It’s important that the organization’s employees feel a sense of participation and ownership in the ethics program if they are to adhere to the code of conduct. Therefore, employees from across the organization should participate in developing program.  While the task of defining a code of ethics is often delegated to an individual or smaller group, the cross-functional team will be responsible for reviewing the code of ethics and making recommendations

Defining a Code of Ethics

When defining the code of ethics for the firm, include the organizational values, the practical means of promoting those values (such as decent working conditions or equal opportunity hiring), the approach to others (such as customers and competitors) and the relationship with the larger stakeholder community. The code is “codified” – written down in a concrete form – and readied for discussion.

One of the biggest mistakes an organization makes at this stage is to simply adopt a boiler-plate code of ethics for its own use. The use of these interchangeable, publicly available codes and value statements is often disconnected from the actual experience and culture of the firm and thus lacks the authenticity that is required for an effective ethics program.
Another mistake at this stage is to delegate the formation of the code of ethics to an “expert.”  While a review by a lawyer or other expert may be appropriate at a later stage, at this point the code should arise organically from the firm’s own experiences, practices, communication structures and overall culture.

Points to Cover

A code of ethics sets the "tone from the top" of the company's culture. An effective code of ethics establishes the ethical expectations for employees and management alike and sets forth the mechanisms for enforcement and consequences of noncompliance. When the code is perceived as an integral component of the organization's culture, is understood, followed and enforced, it can provide protection for the organization from the actions of a "rogue employee" under the Federal Sentencing Guidelines and other laws.

Depending on the specifics of a statute, there may be specific provisions for the content of a code of ethics. However, in general, the code should contain policies on: conflicts of interest, insider trading, gifts and hospitality, information security and privacy, recordkeeping, cooperation with investigations and audits, and a "whistleblower" protection provision. The whistleblower provision establishes procedures whereby employees can report, without fear of reprisal, suspected illegal or unethical activities by others within the organization.

The Ethics Officer and Hotline

As noted above, depending on the size and type of the firm, an effective ethics program also includes identifying an ethics officer to investigate and resolve issues and establishing a freely accessible and anonymous hotline for employees.  The most effective way to learn about fraud is to provide employees, suppliers and other stakeholders with a variety of methods for reporting their concerns about illegal or unethical behavior. These intake methods include traditional telephone interviews, Web forms, e-mails, faxes and face-to-face meetings.

Interactive communication, such as a face-to-face conversation or a hotline interview, generates more detailed information than a one-way communication, such as an anonymous voice mail or a Web form. While some individuals may feel comfortable coming forward through an open door policy, others may not and thus the importance of having multiple reporting options available, which would include reporting to an ethics officer.

Additionally, one of the many requirements set forth by the Sarbanes-Oxley Act is providing a process for the anonymous reporting of accounting or audit irregularities.  A hotline will most likely uncover additional sensitive situations from employees than previously reported face-to-face, but it is far better to learn about these situations from a hotline than from a surprising telephone call to the CEO, or worse, from a public source. When a concern is reported internally, the organization can investigate and take corrective action, potentially avoiding the additional threat of litigation or negative publicity.

In any organization there are several departments that should be interested in the ethics hotline, including Legal, Human Resources, Internal Audit, Security, Risk Management and Loss Prevention. The purpose of the cross-functional team mentioned above is to consider the interests of each department when planning the reporting process.  Experience has shown that many of the face-to-face and hotline reports depict unfair treatment, discrimination, harassment, substance abuse or concerns about corporate policies. For this reason, some organizations choose to make Human Resources responsible for managing the ethics program and any external hotline vendor relationship. If the organization appoints an ethics officer, this person is an ideal candidate for “owner” of the hotline program.

Communication of the Code of Ethics Program

There are various ways to communicate the ethics program but regardless of how the program is communicated, one thing is certain: the ethics program must be supported from the top of the organization.  One size does not fit all. Technology provides a robust selection of media for communicating the ethics program to employees. With such media, the firm can ensure a consistent message that can be customized and updated.  Visual and audio communications can also reach employees with challenged reading comprehension skills. Computers also serve to record who receives the communication and when.

However, to be effective, the firm must weigh the speed of electronic communication to the influence of a live presentation.  To communicate the commitment of upper management, there is no substitute for the personal engagement of the senior management team.  Employees may prefer staff meetings or classroom-style communication. Ultimately, it is important for employees to know how to behave in certain business situations and to know precisely what the expectations are.

Compliance Training

It is recommended that a training program to educate the entire workforce on the code of ethics be implemented. Like the communication strategy, the firm has options on the type of training. But whether the ethics training is delivered from a website, in the classroom or some other way, the training should be a strategically structured and can be a mandatory step for all hires. Business records, auditing reports, payroll information, budgeting and other confidential information may be illegally released to the public through a disgruntled employee. To avoid such occurrences, all business communications must disclose company policy on proper ethical behavior. An effective ethics training program covers all of these situations through example, as well as a statement of the company's actual code of conduct in relation to these situations.

Company Culture

Many codes of conduct, ethics training and compliance programs are ineffective because the organization’s values are highly deterministic and material. Executive leaders use power, fear and intimidation to lead and, therefore, autonomous individuals, with high self-esteem are viewed as threats to the organization’s mission.

Authoritarian organizations are incompatible with individual dignity and respect. Bureaucratic, command-and-control organizations breed ethical dilemmas and suppress innovation.  This training synthesis the current research in employee engagement and happiness, organizational learning, leadership styles, ethical decision making, psychological autonomy and legal compliance. Specifically, the analysis reveals a troubling symbiosis between passive employees motivated by external rewards and punishments and amoral leaders.

Research conducted by the Ethics Resource Center indicates that while most large corporations have ethics infrastructures, corporate cultures - whether Enron, WorldCom or BP Petroleum - continue to perpetuate egregious short cutting and even fraud.  

In a 2012 National Business Ethics Survey, nearly one-third of respondents say that co-workers condone questionable ethical practices and another one-third report that questionable ethical practices at work are rewarded. Among the types of misconduct most observed:

•    Abusive or intimidating behavior (21%)
•    Misreporting hours worked (20%)
•    Lying (19%)
•    Withholding needed information (18%)

While employees at all levels pose significant risk of damaging a firm’s assets or reputation, an executive can pose the biggest threat by violating the law. Since executives have the most influence within the firm, they must maintain and adhere to corporate ethical procedures and the code of conduct. The ethics training procedures involved in doing so involves the presentation of case studies that showcase major corporate scandals and their fallout, bribery and the acceptance of gifts, and using the power of authority to ensure proper accounting procedures, as well as truthful and honest record availability for auditors.

Similarly, managers are responsible for their subordinates and their own actions, while maintaining the highest levels of integrity for the department they represent. Generally, their ethics training process involves settling disputes within the office, gifts and bribes, addressing illegal or harassing behaviors and incidents, reporting and record keeping practices, and other topics that not only involve their position, but that of their department, in its own daily routine.

Employees, while lacking the management authority within an organization, nevertheless pose a risk due to their behaviors and actions. For example, most employees have full access to the computer network, sensitive documents, proprietary information and other assets. Therefore, ethics training for employees generally addresses the common topics of security, negligence, malfeasance, harassment at work, workplace attire, tipping and expensing, discriminatory behavior, conflicts of interest and the proper use of company resources.


Finally, an accurate record should be kept about the administration of the ethics program. Documentation includes the number and types of complaints, how they were resolved, copies of the training curricula and the record of attendance.