Code of Ethics

What is a 'Code of Ethics?'

A code of ethics is a guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values and the standards to which the professional is held.

BREAKING DOWN 'Code of Ethics'

Both businesses and trade organizations typically have some sort of code of ethics that its employees or members are supposed to follow. Breaking the code of ethics can result in termination or dismissal from the organization. A code of ethics is important because it clearly lays out the rules for behavior and provides a preemptive warning.

Regardless of size, businesses count on their management staff to set a standard of ethical conduct for other employees to follow. When administrators adhere to the code of ethics, it sends a message that universal compliance is expected of every employee.

Compliance-Based Codes of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes of ethics usually not only set out guidelines for conduct, but also lay out penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries tend to formulate compliance-based codes of ethics to ensure that legalities are being followed. Employees usually undergo formal training to learn the rules of conduct. Because noncompliance can create legal issues for the company as a whole, individual workers within a firm may face penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint a compliance officer. This individual is tasked with keeping up to date on changes in regulation codes and monitoring employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and well-defined consequences rather than individual monitoring of personal behaviour. Therefore, despite strict adherence to the law, some compliance-based codes of conduct do not promote a climate of moral responsibility within the company.

Value-Based Codes of Ethics

A value-based code of ethics deals with a company's core value system. It may discuss standards of responsible conduct as they relate to the larger public good and the environment. Value-based ethical codes may require a greater degree of self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values. For example, a grocery store chain might create a code of conduct that discusses the company's commitment to strict adherence to health and safety regulations above financial gain. The chain might also include a statement about refusing to contract with suppliers that feed hormones to livestock or raise animals in inhumane living conditions.