Business Codes of Ethics Research Paper

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Business codes are formal or informal standards of behavior that give structure and direction to economic action and behavior. They codify the values of a corporation, an industry, or a whole sector, and thereby create accountability and certainty of expectation. Conceived of as self-binding acts, business codes provide constraints both to collective organizations (e.g., firms) and individual actors (e.g., management) within the economy. In Western economies, as well as in the emergence of a global economy, they play an important role as governance structures because of, and insofar as they make possible, the expansion of economical and societal cooperation.

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1. History And Actuality

Voluntary standards of behavior in the economy as a means of self-binding and constraint can be found in early history. Their emergence is connected to the guilds of craftsmen and merchants in the Middle Ages, where they regulated behavior towards the other members of the guilds, customers, co-workers, and employees. In the beginning they were informal and derived from tradition, common rites, and the customs belonging to a trade. With the expansion of long-distance trading these standards were laid down and were adopted by traveling merchants. Thus they became increasingly formal which meant that they became enforceable by third parties. These early business codes served to ensure contracts concerning future delivery and payment of goods and were enforceable by guild courts and the threat of ostracism (Mitchell 1969).

To the extent that national and international business laws were established and enforceable by government bodies during the nineteenth century, private standards of behavior based on the threat of ostracism and loss of reputation gradually started to lose their importance. But in the 1970s a renaissance of private standards of behavior emerged from two main sources. The first was the internationalization and globalization of markets and production networks, which were and still are unaccompanied by developments of political, juridical, and cultural institutions and their enforceability. Such business codes include maintaining human rights in cooperative relationships, for example with suppliers and partners, and they define common perspectives in areas where different values standards as well as cross-cultural values conflicts hinder the establishment of transcultural teams.




The second source was the organizational decentralization of corporations, which led to an increase in ‘gray areas’ and decreasing possibilities of utilizing direct monitoring and control mechanisms. Here business codes have to define a common set of values in order to give the company identity and a behavioral orientation. To reach this aim it needs to form vision, mission, and value statements, compliance standards, and rules for dealing with the company’s stakeholders (customers, employees, suppliers, environment) (Weaver 1993). Such standards of behavior can be enforced by sanctions and incentives within the company. With regard to customers and suppliers the companies’ reputation and brand names are important enforcing mechanisms.

2. Minimum Standards, Problem Standards, And Corporate Standards

Business codes are characterized by self-binding, possibilities of private enforcement, and the identity of the actors. Self-binding by voluntary constraints of action, certainty of expectation in contracts by forceability (sanctions, incentives, reputation), and the creation of corporate identity by means of codified and realized values in business routine make standards of behavior a functional equivalent to national regulations and laws. Whenever national or supernational regulations and their enforcement do not exist or are not feasible, regardless of the identity of an actor, private standards of behavior become a dominating issue of economic and societal governance. They are therefore known as ‘soft laws’ (Fatouros 1994). By creating certainty of expectation for economic action in societies which are characterized by division of labor, business codes directly influence the state of welfare in any given society. With these reliable and trustworthy rules more cooperation and more transactions are made possible than without them.

The distinction between minimum standards, problem standards, and corporate standards enables us to group modern business codes along with the kinds of cooperations and transactions that are steered by them.

2.1 Minimum Standards

Minimum standards are instruments serving the governance of global business transactions. There are, for example, ‘Guidelines for Multinational Enterprises’ and ‘Corporate Governance Guidelines’ (OECD 1991/1998), a ‘Code of Conduct on Transnational Corporations’ (UN 1994), and ‘Guidelines on the Treatment of Foreign Direct Investment’ (World Bank 1992), to name just a few. They define minimum requirements for such areas as working conditions, involvement of unions, safety at work, consumer protection, competition, technology transfer, investment in developing countries, corruption, and human rights.

Minimum standards emerge from bargaining processes between national governments, national and international organizations of employers and unions, and any nongovernmental organizations (NGOs) involved, directed by a recognized international organization (Fatouros 1994). Their status is precarious. These agreements are obligatory for the signing parties although they cannot be enforced by law. Whether it is possible to implement them therefore depends on the voluntary efforts of the contractors as well as on whether or not it is possible to take action against rule breakers or to damage their reputation in a cost generating way. Their strength lies in the fact that they provide standards which possess some chance of realization while there is no suitable international law available or accessable. Their weak points are the difficulty of implementing and controlling them. Nevertheless, they are a significant component of economic globalization because they are a functional equivalent to the still underdeveloped international business law. Hence, they create a certain formal and political certainty within the world economy which is a crucial demand for worldwide prosperity.

2.2 Problem Standards

Problem standards define proposals of behavior that help to solve certain problems, and go far beyond the rules of the game asserted through the minimum standards. One example from the area of ecological sustainability is the ‘responsible care’ process of the chemical industry’s international associations and companies. From the area of social responsibility the efforts to abolish child labor and forced labor according to the Council on Economic Priorities’ standard ‘Social Accountability 8000’ may be cited. Problem standards are highly ambitious compared to the potentialities and mentality of many companies. Hence they are accepted by only a few companies, mostly by those which have elaborated them, usually in cooperation with NGOs. This may happen in associations or chambers of commerce or in loose assemblies of those companies for whose business actions the problem in question is instantly relevant. Their strength lies in their model character and in the fact that they make practical experiences concerning these standards possible. Their weakness lies in mostly very difficult controlling and in possible competitive disadvantages for those companies that do not succeed in overcoming the costs of implementing and keeping the standards through prices.

2.3 Corporate Standards

Corporate standards codify the constitutive and action-directing values of a corporation. As codes of conduct or codes of ethics they are components of corporate governance, that is, of the leading, steering, and controlling mechanisms of an economic organization. They are also expressions of the distinct philosophy and policy of the corporation. The values of a corporation can be classified as performance values (e.g., profit, quality), cooperative values (e.g., loyalty, team spirit), communication values (e.g., respect, transparency), and moral values (e.g., integrity, fairness) (Wieland 2000). A firm gains identity and distinctiveness as soon as a specific values mix drawn from these four classes of values endows it with a particular profile. Particularity here means that it fits best with the promises of the company, with its tradition and history, and the aspired direction of future developments. As a rule, these business codes provide regulations for coping with suppliers and customers, shareholders and employees, as well as rules of law and of environment protection. They are part of an overall ethics management system by which the business codes are operated and pursued in corporate practice. Normally this is executed by means of internal and external communication, by training, by ethics officers, and by being incorporated in labor contracts, and the system is controlled by monitoring audits (Weaver et al. 1999).

The systems themselves can be divided into law driven and value-driven ones (Paine 1994). While the first are compliance programs which focus on the observation of the rules of law and are organized by the legal department of a corporation, the latter as value management systems aim at a comprehensive development of the corporate culture specifically concerning relations with the totality of stakeholders. Codes of ethics therefore never make any statements about existing matters of fact, and they never stand in for the moral consensus of all parties that are interested in the company. It is just the other way around. They define the values of an organization against all stakeholders and declare them conditional for further interaction. As conditions of cooperation with and within an organization these values are shaped like commitments of performance. The company commits itself to these values and promises to continually work on the fulfillment of its commitment. This makes it obligatory for all stakeholders also to bind themselves to the values. In the last decade of the twentieth century, about 80 percent of the big US companies had such codes (Center for Business Ethics 1992). In Europe this must be estimated considerably lower, although there are no exact figures available.

Apart from those reasons for the renaissance of business ethics mentioned in the outset another important factor is legal developments. Because of the introduction in the USA of organizational liability in case of deviant behavior of employees, incentive systems have been installed which make it financially worthwhile to document before the court the implementation and communication of a code of ethics, so that in case of an individual breach of law, the organization cannot be held responsible for it (United States Sentencing Commission 1995). Legal developments similar to this can also be observed in Europe. In this context business codes aim to achieve a higher level of transparency and thereby enhance the means of control in the corporation. The strength of standards of behavior in corporations is that they are highly specific and integrate the involved actors in maintaining them by the implementation of incentives. However, they cause problems for any form of control and by the fact that they have to be introduced into the operative actions of the corporation in a relevant way.

3. Functions And Effect

Although all three kinds of business codes refer to different types of cooperation and transactions they are identical in respect of their functions and effectiveness. These can be differentiated as follows:

(a) Business codes are a functional equivalent to national deficits of regulation by way of directing companies to self-binding and self-control.

(b) Business codes determine and define the identity of those corporations that bind themselves to standards of behavior. These corporations are distinguished from other organizations in the public arena of realization and communication.

(c) Business codes are the basis, as well as a criterion of selection, for corporate decisions. Hence, they define the range of liability a company claims beyond existing law.

(d) Business codes internally and externally indicate the behavioral preferences of an organization and at the same time communicate a challenge to all its stakeholders to bind themselves to them.

(e) Business codes provide certainty of expectation in business relations and make possible the building up of mutual trust by creating a check against informational uncertainty and opportunistic behavior.

(f) Their prevalence on the one hand relies on economic benefits which arise from the acceptance of standards of behavior. On the other hand one runs the risk of losing economic and social reputation in any case of violation of the legal and moral obligations committed to.

(g) The aspects mentioned—self-binding, identity, responsibility, certainty of expectation, building up trust, reputation—constitute a system of mutual effects which lead to an expansion of economic and societal cooperation and to accompanying gains from trade.

(h) These effects can only be reached by actually maintaining the standards of behavior within the business routine of the company. For that purpose they have to be implemented and integrated into the operative processes of the organization and its management. One of the most important instruments in this respect are ethics management systems.

Bibliography:

  1. Center for Business Ethics at Bentley College 1992 Installing ethical values in large corporations. Journal of Business Ethics 11: 863–7
  2. Fatouros A (ed.) 1994 Transnational Corporations: The International Legal Framework. Routledge, London
  3. Mitchell W 1969 An Essay on the Early History of Law Merchant. Burt Franklin Press, New York
  4. Paine L S 1994 Managing for organizational integrity. Harvard Business Review 72: 106–17
  5. United States Sentencing Commission (ed.) 1995 Corporate Crime in America: Strengthening the ‘Good Citizen’ Corporation. United States Sentencing Commission, Washington, DC
  6. Weaver G R 1993 Corporate codes of ethics: purpose, process, and content issues. Business and Society 32(1): 44–58
  7. Weaver G R, Trevino L K, Cochran Ph L 1999 Corporate ethics programs as control systems: influences of executive commitment and environmental factors. Academy of Management Journal 42(1): 41–57
  8. Wieland J 2000 The ethics of governance. Business Ethics Quarterly 11(1): 73–87
  9. Zadek S, Pruzan P, Evans R (eds.) 1997 Building Corporate Accountability. Earthscan, London
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