Legal Matters | Archive

Ethics policies: It's just good business

by Dave Faulders
for Virginia Business
September 2006

Are you concerned about the business reputation of your company and its employees? What would happen to your sales if your company is drawn into a scandal? Does everyone in your organization know the company's standards of behavior? These are basic and important questions that every executive should address.

As most readers are aware, corporate ethics has been a hot topic in recent years. If you Google the term "Sarbanes Oxley Act," or SOx, which was adopted in the wake of scandals at Enron, WorldCom, Tyco and other companies, as a regulatory effort to raise the bar for corporate ethics, you will receive nearly 7 million hits. The term "conflicts of interest" yields more than 16 million hits.

Among other things, SOx requires publicly traded companies to have various ethics and conflicts-of-interest policies. It does not require the same for private companies. Nevertheless, ethics and conflicts-of -interest policies are essential for all companies - even absent regulatory requirement - for three important reasons.

First, these policies set forth expectations and requirements for company employees. Not only is employee morale improved when expectations are established and enforced, but also the company benefits from greater protection in employee disciplinary matters.

Second, having ethics and conflicts-of-interest policies helps a company avoid or successfully defend against costly lawsuits. Written policies that are consistently enforced can be a strong defense against many types of actions, such as sexual harassment and insider trading. Indeed, E. Norman Veasley, former chief justice of the Delaware Supreme Court, has indicated that courts likely will view conformance with SOx corporate governance principles as the standard for "reasonable" corporate behavior, whether or not the company is public.

Finally, having these types of policies is good business. Studies have shown that there is a strong connection between ethical behavior and marketplace dynamics. A company that is deemed to be "ethically challenged" usually faces lower sales and greater difficulty in working with business partners, while one perceived to be ethical creates dividends that go beyond legal issues and enhance sales and employee morale.

An effective ethics policy should address the following areas:
• conflicts of interest;

• protection of corporate opportunities, including prohibitions on executives taking personal advantage of opportunities created as a result of their positions with the company;

• maintaining the confidentiality of non-public corporate information;

• prohibitions on employees from taking unfair advantage of anyone through unfair dealing practice;

• compliance with laws, rules and regulations; and

• employee reporting of any illegal or unethical behavior.

Ethics and conflicts of interest policies, however, are meaningless without the support of and enforcement by the top executives in the organization. The people at the top tend to set the climate and expectations that fuel the behavior of employees. Here are several methods that companies have used to create good ethical climates:

• Many companies conduct ethics training and enforce the policies. Some companies require employees periodically to sign code-of-conduct statements. However, the policies must not be viewed as window dressing as in the case of Enron, where the board suspended the company's ethics code to allow questionable partnerships that permitted top executives to gain financially.

• Some businesses promote an ethical work atmosphere, along with salary, as a way to woo top talent.

• Some companies periodically survey employees to evaluate how well the company is adhering to its code of ethics. Their opinions are relayed to senior managers, and shortcomings are promptly addressed.

• Some executives send a clear message about their commitment to ethical conduct by making business ethics part of performance reviews.

• Some businesses use "hotlines" to report, on a confidential basis, ethical lapses. When Warren Buffett's was hired as interim CEO of Salomon Brothers after a bid-rigging scandal involving top executives, he gave his managers his home phone number and told them to call him if they saw anything unethical. Many managers called Buffett, and they collectively came up with a plan to rehabilitate Salomon's tarnished reputation.

While the vast majority of executives are ethical and diligent in watching over ethical issues, many of them are so busy it takes something like Enron to get their attention and re-evaluate their policies to ensure they're not guilty the same things. In the end, smart executives realize that periodic evaluation of their ethics policies leads to an honest, transparent and trustworthy culture that bolsters employee morale and enhances shareholder value.

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Dave Faulders is a business attorney in the Richmond offices of Executive Counsel, PLC, a business law firm that is composed primarily of former corporate general counsel. He can be reached at dfaulders@exec-counsel.com.