Business Horizons (2010) 53, 31—37
www.elsevier.com/locate/bushor
The bottom-line benefits of ethics code commitment K. Matthew Gilley a,*, Christopher J. Robertson b, Tim C. Mazur c a
Bill Greehey School of Business, St. Mary’s University, One Camino Santa Maria, San Antonio, TX 78228, U.S.A. b College of Business Administration, Northeastern University, Boston, MA 02115, U.S.A. c Chief Operating Officer, Ethics and Compliance Officer Association, 411 Waverly Oaks Road, Suite 324, Waltham, MA 02452, U.S.A.
KEYWORDS Codes of ethics; Company performance; Leadership; Stakeholders
Abstract Recent corporate scandals highlight that an exclusive focus on financial performance, to the exclusion of broader stakeholder-related performance criteria, can be detrimental to overall firm value creation. Among the ways to enhance leaders’ focus on stakeholder value creation is the development and executive championing of an effective code of ethics. Such ‘‘Ethics Code Commitment’’ (ECC)–—which incorporates characteristics of the code and behaviors by top management–—affects a broad number of organizational stakeholders, yielding value for them, thus increasing their psychological and/or financial commitment to the organization while strengthening the firm’s corporate culture. This article develops a model highlighting the various benefits of ECC to key stakeholders and the subsequent effects on an organization’s culture and competitiveness. In particular, we focus on the need to include community leaders and key employees in the ethics code development process; the importance of moving away from a purely legalistic document to one that inspires stakeholders; the importance of linking ethics to strategy; and managerial approaches that can enhance the effectiveness of the code of ethics through ethics-related dialog. When developed and implemented correctly, ECC can prove to be an important source of competitive advantage via the effects it has on relationships between the firm and key stakeholders. # 2009 Kelley School of Business, Indiana University. All rights reserved.
1. Ethics code commitment Top executives face constant pressure to improve the financial performance of the companies they * Corresponding author. E-mail addresses: mgilley@stmarytx.edu (K.M. Gilley), c.robertson@neu.edu (C.J. Robertson), tmazur@theecoa.org (T.C. Mazur).
lead. This is especially true for public company executives, who must cope with intense scrutiny of their quarterly and annual financial results. This near-term financial performance pressure has led many top executives to ignore, to a large degree, strategies that maximize the firm’s longer-term value for key non-investor stakeholders. These key stakeholders primarily include employees, customers, and
0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.08.005
32 suppliers (Hillman & Keim, 2001). A degree of neglect of non-investor stakeholders is not surprising, given that recent empirical research on the Fortune 500 suggests CEOs are actually given dis-incentives to pursue stakeholder management initiatives (see Coombs & Gilley, 2005). More specifically, it appears that CEOs’ compensation packages are at risk when they pursue stakeholder management initiatives that blur the focus on financial performance. If recent high profile scandals have taught us anything, it is that unethical decisions designed to boost short-run profits can be seriously detrimental to long-run financial success and stakeholder value creation. For instance, Merck & Co.’s management continued to aggressively market Vioxx–—its arthritis drug that was facing intense competition from Pfizer’s Celebrex–—despite having information suggesting there were heart attack and stroke risks associated with Vioxx. Ultimately, over 27,000 patients (read: stakeholders) may have died as a result of Vioxx-related complications. Merck & Co.’s financials suffered, as well; in November of 2007, the company agreed to a nearly $5 billion Vioxx settlement. And while many significant ethical lapses have occurred in the United States, such failures are not exclusively an American phenomenon; one need only consider Parmalat, Royal Ahold, and the recent Chinese milk scandal (among others) to recognize this fact. The treatment of workers in foreign facilities and environmental contamination by global businesses are two additional reminders that ethical lapses span the globe. To ensure long-term corporate success, it is incumbent upon senior executives to continually search for unique methods of creating value for shareholders and non-investor stakeholders alike such that the long-term financial health of the firm is maximized and the greatest possible value is created for society as a result of the business’ activities. This line of reasoning is very much in sync with that of Falck and Heblich (2007) and Werther and Chandler (2005), who suggest that managing companies for shared/societal benefit can lead to enhanced competitiveness. Given that the modern corporation is essentially a nexus of economic activity amongst voluntary participants (i.e., stakeholders), a key to long-run competitiveness is maximizing the strength of the firm’s relationships with its stakeholders. Ethically-treated employees, for instance, will be more committed to the organization. Customers finding significance beyond a simple market transaction with an organization will be more loyal. Suppliers which are being treated ethically will be more likely to consider a client company’s interests when making key decisions. The list of stakeholder-
K.M. Gilley et al. related benefits to the firm from ethical treatment of, and value creation for, all stakeholders is significant. One key mechanism through which top executives can foster value creation for all stakeholders is an effective code of ethics and the championing/ communication of that code. However, it is not surprising to find that corporate codes of ethics are mostly lackluster, compliance-oriented, narrowly focused documents that center on the avoidance of malfeasance. After all, why should top managers extend their corporate codes of ethics to include proactive measures related to stakeholder value creation when stakeholder management initiatives may put their compensation at risk (Coombs & Gilley, 2005)? We argue that an effective code of ethics, appropriately championed, strengthens the moral culture of a firm, yielding benefits to a broad variety of stakeholders. This stakeholder value creation ultimately leads to enhanced stakeholder relations, which thus provides a source of competitive advantage to the firm. To truly add value, ethics codes must extend beyond a compliance focus and strive to cultivate and maintain a collective spirit and culture throughout the organization that focuses on promoting positive moral behavior while simultaneously striving to prevent ethical lapses. Moreover, implementing a viable and valuable ethics code becomes increasingly challenging and important as organizations grow (Robertson & Crittenden, 2003). As organizations become more complex, it is critical that senior management shepherd the development of a robust code of ethics (Sims & Brinkmann, 2003). In and of itself, however, the development of an ethics code is insufficient to yield superior stakeholder value creation; management must also vigorously and consistently champion the code, and strive for constant and consistent dialog on issues of ethics. Comprehensive development and championing of an effective code of ethics is what we call Ethics Code Commitment (ECC). Herein, we explore this issue by delineating the ways in which organizations and management teams exemplify ECC, as well as by discussing the ways in which ECC relates to corporate culture and creates stakeholder value. In addition, we address how ECC can lead to competitive advantage through its deterrence, operational, and strategic advantages. This article is organized around a conceptual model (Figure 1) which captures the interrelated factors that each affect, albeit to varying degrees, the extent to which ECC can lead to the enhancement of a firm’s competitive advantage.
The bottom-line benefits of ethics code commitment Figure 1.
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Links between ethics code commitment (ECC), corporate culture, and competitive advantage
2. ECC, stakeholders, and competitive advantage ECC is a multifaceted concept that clearly extends beyond the simple development of a code of ethics. Interestingly, some of the most egregious ethical lapses have occurred within organizations that had elaborate ethics codes already in place. A case in point is Enron, whose board received widespread criticism for suspending the company’s code of ethics temporarily to allow management to engage in what were ultimately found to be corrupt activities. It was, indeed, the rogue organizational culture at Enron that played a significant role in the development of a cavalier attitude toward ethics. While the firm had a well-written and comprehensive code of ethics, Enron’s corporate culture ultimately trumped any rules and policies, leading to the firm’s demise. As illustrated by this example, the existence of an ethics code is a necessary but insufficient condition for ECC. An ethics code’s existence alone does little to ensure an ethical culture, stakeholder value creation, or competitive advantage. Ethics Code Commitment, however, combines characteristics of the ethics code with changes in managerial behaviors to yield the maximum possible culture-related benefits and, subsequently, stakeholder value and organizational competiveness. Three primary benefits of ECC–—deterrence, operational advantages, and strategic advantages–— may yield an overall competitive advantage to the firm. Deterrence of unethical or illegal behavior is the primary purpose of most codes of ethics, which is clear from their legalistic/compliance orientation. This is primarily an issue of ‘‘prevention.’’ A clear policy related to unethical behavior in the workplace is an ingredient essential to the prevention of malfeasance. Moreover, explicit consequences for particular actions should be articulated at all levels. A code without an implementation/enforcement component is virtually useless, and every attempt should be made to disseminate the details of each step in the [code
of ethics] [firm policy] [behavior] [punishment/ reward] moral value chain. Managers can then incorporate feedback and seek to achieve a more effective moral compass within their organizations. In addition to potential deterrence of unethical or illegal behavior, effective codes of ethics also yield valuable ‘‘promotion-related’’ benefits that can be both operational and strategic in nature. Regarding operational advantages, the inclusion of key stakeholders in the ethics code development process can foster relationships that have perhaps been tenuous in the past. For example, we suggest that company executives consult community leaders when developing or significantly revising a code of ethics such that relationships with these key stakeholders may be further developed. From an operational perspective, reaching out to workers while developing an ethics code can help gain their commitment, which in turn should result in higher levels of motivation, lower turnover, greater productivity, and so forth. To maximize this initiative, it is important that organizational leaders involve employees from across the organization–—especially at mid- and lower-levels–—who exemplify organizational values, have established themselves as ethical leaders (though ‘‘leadership’’ in this context should not be construed to include those exclusively in managerial positions), and will be effective champions of ethics in the organization. A number of strategic advantages are also likely because of ECC. Chief amongst these is the benefit to the firm’s reputation that results from ECC’s enhancement of the company’s culture. As will be discussed later, ECC stands to significantly alter the dialog toward openness and sound ethical principles, which can provide a number of beneficial strategic outcomes. For instance, ECC-focused firms will see enhanced customer and investor commitment as a result of the openness and transparency required by ECC. Indeed, all else being equal, customers would rather buy a product from a company that they trust (Kenning, 2008). Finally, by bringing buyers and suppliers into the discussion,
34 relationships will be strengthened that may yield future strategic advantages.
3. Codes of ethics that yield competitive advantage As noted, most corporate codes of ethics are basic compliance documents which fall well short of fostering ethical decision-making, much less the active pursuit of policies and strategies that create value for all of an organization’s key stakeholders. In having met with employees and top executives to discuss the topic of ethics codes, both groups articulated to us that codes of ethics strike them as a basic means of ensuring that the company is indemnified against employee behaviors which are likely to cause the company harm. In many cases, such codes of ethics are combined with documents that must be signed by employees, stating they have not witnessed any violations of the company’s code of ethics over a given time period (usually the preceding year). This sort of procedure runs the risk of leaving employees with the feeling that management developed the code simply to cover the company’s interests, often resulting in an adversarial ‘‘us-versus-them’’ relationship between staff and the firm. This is especially the case in organizations which do not invite employee input regarding the construction of a code of ethics, and ethics is not frequently discussed by top management. In this scenario, not only are employees discouraged, but management also misses a tremendous opportunity for mutual value creation for the company and key stakeholders, while simultaneously engaging in an activity that strengthens the firm’s core cultural values. To maximize an ethics code’s probability of creating a moral culture that yields value for all stakeholders, thus helping the firm achieve competitive advantage, management must be careful to ensure that the code itself is developed in a systematic, comprehensive, inclusive, and strategic manner. There are a number of key attributes of the code itself, the method of developing the code, and the means of communicating the code and ethics in general, that comprise ECC and produce maximum stakeholder and company value. For example, most organizations fail to include relevant stakeholders in the ethics code development process. Not only does this ultimately lead to potential alienation of stakeholders in ethical decision-making by company management, but also a lost opportunity to uncover ways in which mutual value may be created via the ethics code. In short, by including multiple stakeholders in the ethics code development pro-
K.M. Gilley et al. cess, new ways of operating and of organizing relationships among stakeholders may be discovered that yield profits for the firm and value for stakeholders. Thus, stakeholder involvement in the code development process is a critical component of ECC. In the same vein, stakeholder participation increases the comprehensiveness of the issues considered for incorporation into the code. As a result, a greater variety of stakeholder needs and wants are addressed, thereby creating value for both the company and the stakeholders themselves. The internal-external stakeholder interface can also be positively influenced by creating and sustaining a strong moral culture. External stakeholders–—such as buyers, suppliers, and the local government–—are more likely to support a firm’s top management team during scandals and crises if the firm has proactively, and somewhat publicly, engaged in activities that help to minimize potential wrongdoing in the workplace. This trust can serve as a bridge between management and external players who may play a significant role in the determination of a firm’s competitive position. Given the compliance-related aspects of ethics codes, it is clearly important to include legal and regulatory counsel in the ethics code development process. Most large organizations do this already, and this is why the bulk of ethics codes in America’s largest corporations are legalistic/ compliance-oriented. Such documents are inherently uninspirational for employees and other key stakeholders. Thus, while we recommend the inclusion of legal and regulatory counsel in the ethics code development process, we caution against letting such participants lead the process. Rather, their role should be of a consultative nature. It is vital that the code extend beyond simple and lackluster compliance issues to include matters that motivate stakeholders to strengthen their ties with the organization. Codes of ethics which read as ‘‘Thou Shalt Not’’ lists cannot motivate stakeholders to maximize the mutual value created as a result of their relationship with the organization. Those closely linked to a company’s core values stand to move the code beyond a legalistic/negatively-oriented document, toward one that inspires ethical decision-making that yields value for a multitude of stakeholders. Codes of ethics must also be carefully linked to both company strategy and executive compensation. Regarding strategy, there is often a very clear lack of connection between a company’s code of ethics and its overall strategy. Indeed, a sound code of ethics can aid the implementation and ultimate success of corporate strategy by focusing organizational actors on key stakeholder value issues when
The bottom-line benefits of ethics code commitment making strategic decisions. When codes of ethics are strategic in nature, meaning that stakeholder value creation and company performance issues are explicitly addressed in the code, managers are more likely to allocate resources in ways that yield both ethical and profitable outcomes for all involved. In addition, by linking executive compensation to the achievement of ethics code goals–—or, at the very least, to lapses in ethics within the organization–— companies will stand a much greater chance of creating both positive stakeholder and financial results. Thus, boards of directors should carefully evaluate management on their achievement of ethics-related initiatives contained in the company’s code of ethics. This is critical to ECC, because it communicates to all organizational members that ethical behavior is taken very seriously by upper management and the board. To have the greatest effect on both the company and its stakeholders, a code of ethics should be motivational in nature. It ought not only capture the minds of those who must live by it, but also capture their hearts. To do this, the code of ethics must clearly communicate the importance of the organization to the world around it, the value that the company yields for society, and the ways in which the company’s various stakeholders get value from their interactions with the corporation. This stands in stark contrast to the typical code of ethics, which, as noted earlier, is a legalistic compliance document. Johnson & Johnson’s credo is a noteworthy example. While not specifically a part of J&J’s code of ethics, the credo addresses the company’s responsibility to–—and the value derived by–—its customers (doctors, nurses, patients, etc.), employees, the employees’ families, communities, and shareholders. Not only does this provide key stakeholders with insight regarding management’s philosophies behind decision-making, but it also yields an ethical corporate culture that produces decision-making designed to create stakeholder value. Indeed, management states that the credo specifically challenges them to put stakeholder needs above profits. As mentioned earlier, most management teams develop a code of ethics that simply focuses on the deterrence of unethical behavior, which we call prevention. This is clearly critical, but in focusing on this aspect exclusively, management overlooks the tremendous strategic and operational benefits that sound ethics codes may yield beyond just the deterrence of malfeasance. To have the maximum possible influence on organizational success, a code of ethics must strive for both prevention and promotion. Promotion deals with the fostering of a culture where doing the right things for the right reasons happens reflexively throughout the organi-
35 zation. The Johnson & Johnson example is a perfect illustration of this. It is critical that a firm views its code of ethics as a key organizational resource, to be developed and nurtured just as any other key resource would be. When this occurs, the code has the potential to yield competitive advantage, but only if it is combined with managerial behaviors designed to maximize its value to the organization’s key stakeholders. What is lacking in many organizations is ethical leadership from top executives whereby they actively manage the development, implementation, and continued dialog about the company’s code of ethics. Combined with an ethics code that follows the suggestions discussed above, the management team’s commitment to the code and its use in decisionmaking at all levels may yield sustainable competitive advantage because of the value inherent in such comprehensiveness and commitment for the firm’s key stakeholders.
4. ECC at Accenture and BP Our overarching thesis in this article can be clearly observed through the actions of a number of reputable firms in recent years; Accenture and BP are two particularly noteworthy examples. Accenture–— a U.S.-based management consulting, technology services, and outsourcing company–—employs 140,000 individuals in 48 countries. A few years ago, the firm’s ethics and compliance program manager realized that Accenture’s 4-year-old code was in need of an update, and envisioned evolving the document from simply outlining compliance criteria to something that could serve as a useful, practical tool for employees. Before undertaking the process of renewal, the manager met with Accenture Chair and CEO William D. Green, a leader who appreciates the value of personally demonstrating the CEO’s involvement in and support of the code of ethics. After hearing the manager’s description of the proposed 8-month project, Mr. Green asserted that he wanted something he could teach. This excited the ethics manager and the entire team, knowing that the chairman and CEO wanted a document that so specifically reflected the executive team’s values that they could easily and naturally communicate the code’s standards to key stakeholders. While some companies assign the ethics staff, one lawyer, and maybe a copyrighter to update their code, Accenture built a more comprehensive strategic team, ensuring that the code appropriately reflected Accenture’s brand and the same level of superior-quality design, graphics, and writing that Accenture’s many external communication pieces
36 reflect. In this way, Accenture chose to design and present the code not as a mandatory legal document, but rather as a critical component of the company’s overall business strategy; one that would create stakeholder value and yield deterrence, operational, and strategic benefits to the firm. A key component of the company’s ethics communications plan entails ‘‘touching’’ Accenture employees throughout the 48 countries in which the firm operates. Not only do legal and regulatory standards vary from country to country, but the language of ethics and values is received differently, as well. In response, Accenture’s ethics team worked with liaisons in each country–—‘‘Geographic Ethics Leads,’’ who were not simply expatriates, but were native to the country–—to allow them a voice in how their version of the code was written and formatted, so that it accurately reflected the specific ethical situations faced by local employees. To achieve this goal, the Leads held focus-group sessions in which employees were asked common questions (e.g., Which sections of the code do you find the most useful? The most difficult? The most surprising or unexpected?) that helped the team customize the code for each country. A key strategy for creating a positive, useful communications tool–—that is, a ‘‘living document’’–—as opposed to the previous legalistic, negative code, was to connect the code’s standards to the company’s values, using action statements to illuminate the concepts. Accenture’s code of ethics has been translated into 16 languages, to distribute to both employees and outside stakeholders around the globe. Accenture’s code is unusual in that it includes a thoughtful opening letter from CEO Green. In that letter, Mr. Green stresses Accenture’s core values of stewardship, stakeholder value creation, respect, and integrity. In fact, Mr. Green notes that Accenture’s core values are the centerpiece of Accenture’s code of ethics; this was central to moving the document away from purely a deterrence orientation, to one which also focuses on the promotion of stakeholder value creation. Furthermore, Accenture’s code of ethics also addresses issues related to communities, the environment, and even the importance of thoroughly understanding clients’ codes of ethics such that Accenture may better create additional value for them. As a result, Accenture’s code of ethics addresses a broad variety of stakeholders in a unique way that sets it apart from other organizations. Accenture’s method of developing its new code of ethics, the comprehensiveness of the code, the inclusiveness of the teams charged with developing the code, the commitment to the incorporation of the firm’s core values, the links to
K.M. Gilley et al. Accenture’s strategy and competitive orientation, and the championing of the code by top management, are all indicative of a high level of ECC that will yield significant improvements in corporate culture, and thus, benefits to all stakeholders–— owners included. BP is another company that is noteworthy for its ECC. Although BP is somewhat smaller (97,000 employees) than Accenture, BP’s ethics program is notably larger and older than Accenture’s. One reason for this is the extent to which BP has, over time, effectively integrated its compliance and ethics program into the company’s overall business strategy, which in BP’s corporate culture requires a higher number of ethics representatives stationed at operations around the world. Like Accenture, BP realized that, to ensure the BP Code of Conduct accomplishes its goals and is an effective communications tool, employees in various countries and job levels must be tapped during the design and development process. When BP last updated its code in 2005, the firm conducted 20 focus group sessions in 15 countries, learning from over 450 employees along the way. Other components of the ethics program that helped secure employees’ commitment to the new code include:
125 Compliance and Ethics Leaders (CELs); 100 Global Virtual Teams and Best Practice Networks;
Over 2,000 Health, Safety, Security, and Environment Subject-Matter Experts;
40 Senior Leadership Champions; 15 members of a Code Advisory Team; and 30 Regional Ombudspersons (who accept and respond to calls from employees about alleged violations of the code). BP’s most current code of ethics has been translated into 11 languages and highlights the company’s commitment to its employees, business partners, the environment, communities, and so forth. Each section of the document corresponds to a different stakeholder group, and begins with a positive affirmation stating the company’s desires for positive outcomes regarding that particular faction; this yields a code which suggests that top management recognizes and understands the crucial links between stakeholder value creation and long-run competitive advantage. Mirroring the practice of Accenture, the BP ethics code begins with a letter
The bottom-line benefits of ethics code commitment written by CEO Tony Hayward, stressing trust, integrity, and values. Tellingly–—and reflective of the value BP management believes is inherent in the code–—this document is located centrally on the company website, under the prominent ‘‘How We Run The Business’’ tab. Rather than being relegated to a dark corner, or perhaps even housed on the firm’s intranet (and therefore unavailable to the public), the BP code of ethics is showcased in such a way that it is clear BP recognizes it is central to the effective management of the business and is highly related to brand reputation and core values. Because of the way BP put together its code, the comprehensiveness of the stakeholders addressed by the code, and the apparent importance assigned to the code by upper management, it is evident that BP has a high level of ECC that should yield a competitive advantage. Although ECC can be costly and time-consuming, its benefits are real. Progressive top executives, such as those at Accenture and BP, understand that investments in ECC produce significant long-term advantages. Accenture and BP have employed extensive mechanisms to enhance their ECC, suggesting that large multinational firms are beginning to appreciate the significance of a transparent and inclusive ethics code development process, as well as the importance of correctly communicating those
37 policies. The deterrence, operational, and strategic advantages inherent in ECC yield significant benefits to firms willing to make the investment. In the future, the most successful and highly praised executives will be those who embrace ECC as a cornerstone of their leadership.
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