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7 principles of highly ethical corporates
November, 23rd 2006

A recent press release on the Institute of Chartered Accountants of India (www.icai.org) site was about something important: Guidance from the International Federation of Accountants (IFAC) for companies developing codes of conduct.

The 32-page guidance developed by the Professional Accountants in Business Committee of the international body, downloadable from www.ifac.org, minces no words when emphasising the need for values in organisations. For, "Questionable business practices, and even individual incidents of improper conduct, reflect to some degree the values, attitudes, beliefs, and systems of the organisation in which they occur."

Every organisation has a standard of conduct, whether it knows it or not, says IFAC. The standard of `values, acceptable criteria for decision-making, and ground rules for behaviour' may be explicit or implicit, which every organisation communicates. Thankfully, "An increasing number of organisations realise the importance and value of explicitly communicating their values and guiding principles in a published code of conduct or ethics."

But, first, what is `code of conduct'? There is no authorised definition, frets the document. In 1999, the OECD (Organisation for Economic Co-operation and Development) had defined the phrase as "commitments voluntarily made by companies, associations or other entities, which put forth standards and principles for the conduct of business activities in the marketplace."

The guidance from IFAC, which is out as `exposure draft', attempts `a comprehensive definition' thus: "Principles, values, standards, or rules of behaviour that guide the decisions, procedures and systems of an organisation in a way that (a) contributes to the welfare of its key stakeholders, and (b) respects the rights of all constituents affected by its operations."

The code is not all, but only `one part of a comprehensive compliance and ethics programme that should be part of a values-based organisation and culture,' insists the guidance. A code may not specify all ethical and unethical actions. It can't be a list of detailed rules, so it is inevitable that employees have to use their discretion in many situations. A values-based code can help employees `do the right thing' and address ethical dilemmas that sometimes do not have clear answers, elaborates IFAC.

Values come first

Key principles in defining and developing a code of conduct are seven, according to the guidance. The first is that the organisation's overarching objective should be to develop a values-based organisation and a values-driven code. Such a code will allow all employees to make responsible decisions and avoid a `tick-box' approach that could encourage loophole-based avoidance, hopes the paper. "A code based solely on managing compliance will typically focus on prohibitions against conflicts of interest, theft of company property and revealing trade secrets, and could be titled a compliance code."

A compliance code can impact employee behaviours in only a limited way if genuine change in organisational culture is absent. Such change can come about in a values-driven organisation `that identifies values and invests considerable resources to make those values permeate all aspects of operations'. Then, you will find employees opting to make decisions consistent with those values, `even when short-term payoffs are not apparent'.

The second principle is that a code of conduct reflects organisational context. "No two codes will be the same, even in the same industry." Organisations in heavy or resource-based industries are likely to focus on issues of relatively little importance to service-based organisations or technology companies, points out IFAC.

Principle number three calls for commitment from board of directors. "Ultimately, ethical responsibility lies with the board of directors (or its equivalent), the body that has power to influence an organisation's culture and behaviour." What should boards do? They should oversee the development of the code of conduct and also the ethics and values programme.

The fourth principle highlights the need for `a multi-disciplinary and cross-functional group' to lead code development. "Groups of employees and other key stakeholders, as appropriate, should participate by undertaking risk assessments and assisting in defining and reviewing code content. International personnel should also be included." Ideally, the end product of `standards and priorities' should be on `substantial consensus'.

Fifth, there should be agreed upon stages of code development, right from `agreeing on the purpose of the code' to `connecting the code to the organisation's performance management policies and systems, and internal controls.'

Principle six, the code should apply across all jurisdictions. "More mature organisations seek to establish a single set of values and behaviour standards for its worldwide operations," one learns. "Although some minor variations are accepted to meet local conditions and conflicting local laws, these organisations believe that their interests are best served by a single, worldwide code of conduct that fosters a single, worldwide standard of acceptable behaviour."

For instance, Nike snapped links with a Pakistan-based supplier of hand-stitched soccer balls, Saga Sports, because of "significant" labour violations. "Nike, the world's largest maker of athletic apparel, says Saga Sports was having soccer balls made inside private homes in Pakistan, where Saga is based," reports www.koin.com in a story dated November 21. Nike's long-standing policy doesn't allow such practices "because of the potential for using under-aged workers and the inability to ensure safe working conditions in home-based settings".

The final principle in IFAC's paper calls for `continuous awareness and enforcement of the code and the wider compliance and ethics programme'. Bitter it may sound to some, but the exposure draft insists that the code should apply at all times "to all employees, including directors, especially during periods when challenging issues and ethical dilemmas arise." Of value are the appendices at the end of the document.

Accountants' role

Fine, where is the accountant's role in the code? Professional accountants in business should encourage an ethics-based culture that emphasises ethical behaviour, mandates IFAC. "A professional accountant's responsibility is not only to satisfy the needs of an individual client or employer, but also to act in the public interest."

Specific examples are of how an accountant working in internal audit may assess whether the code is an effective tool in minimising the risk of improper conduct, and ensure that breaches are reported to the audit committee.

A code-in-the-works that merits a close study.

D. Murali

 
 
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