Academic journal article Southern Business Review

A New Generation of Corporate Codes of Ethics

Academic journal article Southern Business Review

A New Generation of Corporate Codes of Ethics

Article excerpt

In the early part of this decade, the business community in the United States was rocked by a series of corporate scandals. Companies such as Enron, Phar-Mor, Cendant, Tyco, Waste Management, Adelphia, Sunbeam, and Worldcom regularly made headlines as a result of accounting scams and other financial misdeeds. This wave of corporate impro- priety triggered new calls for reform, with many empha- sizing the need to protect investors through more effective promotion and regulation of business ethics in the corporate environment.

Congress was quick to respond and President G. W. Bush soon signed the Sarbanes-Oxley Act of 2002 (SOX), which set forth a number of initiatives designed to help stem the tide of corporate fraud, including the establishment of standards for a corporate code of ethics for senior financial officers. Shortly thereafter the Securities Exchange Commission (SEC) issued final rules implementing many of the provision of SOX, and amplified the scope and coverage of these standards by extending the corporate code to include the company's principal executive officer. At about the same time, in response to the perceived need for regulatory action, the major stock exchanges also proposed rules requiring their members to adopt and disclose corporate codes and take other actions to deter the occurrence of future scandals.

A common factor in each these reform initiatives is emphasis on the use of code of ethics to implement change in America's corporate culture. The purpose of this article is to briefly outline the provisions of these initiatives that pertain to adoption of corporate codes and the resulting approaches many firms have taken when drafting or revising their codes in light of these initiatives. It then offers a commentary on the positive and negative consequences of these approaches and discusses additional steps that companies might take when drafting and implementing corporate codes of ethics.

Development and Use of Corporate Codes of Ethics

Over the past two decades, many public companies have voluntarily developed and implemented codes of ethics that can be defined as specialized codes of behavior and standards for professional conduct for managers and employees. Typically, these codes state the companies' core values and provide guidelines for such matters as employee relations, relationships with customers and suppliers, conflicts of interest, confidential information, and other topics (Myers, 2003). Companies adopt such codes for many reasons, i.e., to encourage good behavior by employees, to prevent behavior that might lead to legal liability, and to foster goodwill for the company with clients, investors, the business and regulatory community, and the public. Companies may also adopt such codes as part of their efforts to establish a program to detect and prevent violations of law - such a compliance program may reduce the penalties that a company would otherwise face if found liable as a result of its employees' criminal actions (Rafalko, 1994).

For more than forty years, corporate codes have also found great favor with legislators and regulators seeking to promote ethical standards within the corporate culture. Adoption of corporate codes have been included as part of the legislative solution in the wake of a series of business scandals occurring each decade since the 1960's (Harvard Law Review, 2003). 1 Also, as noted above, Congress determined in 1991 that corporate codes would be an important part of any compliance program that companies wished to adopt to serve as a mitigating factor under the Federal Sentencing Guidelines for Organizations.

Ultimately, however, as demonstrated by the corporate scandals of 200 1 and 2002, the mere adoption of a corporate code of ethics has not usually been enough by itself to prevent corporate malfeasance. Nevertheless, it was in light of these scandals that Congress passed SOX and the SEC and the national stock exchanges adopted their rules regarding the use and disclosure of corporate codes of ethics by public companies. …

Author Advanced search


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.