Business Ethics: The Essential Component of Corporate Governance
Business Ethics: The Essential Component of Corporate Governance
Business Ethics: The Essential Component of Corporate Governance
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private Enterpriseand to a lesser extent the capital markets in continentalEurope, there came about a separation between thosewho owned the underlying assets <strong>of</strong> the company andthe actual hired management.So the key challenge became how to ensure that theowners, or the stockholders, could control and demandaccountability from the hired management, or, in otherwords, the considerations <strong>of</strong> shareholder protectiongained importance. Following the Asian financialcrisis and other international crises, the Organisationfor Economic Co-operation and Development(OECD) came to develop the “OECD Principles <strong>of</strong><strong>Corporate</strong> <strong>Governance</strong>” that today are accepted as theinternational standard (see Box 1).<strong>The</strong> implementation <strong>of</strong> the OECD <strong>Corporate</strong><strong>Governance</strong> Principles, however, requires a whole set<strong>of</strong> supporting and enforcing market institutions. Ascan be seen from the first principle, there is a specificrecognition <strong>of</strong> the role <strong>of</strong> market institutions, theframework <strong>of</strong> law and regulations. Interestingly, thisprinciple was added in 2002 based on the review <strong>of</strong>the developing countries’ realities. <strong>The</strong> original set<strong>of</strong> principles assumed that these institutions were inplace, but the recognition <strong>of</strong> the developing countries’realities reflects the expansion <strong>of</strong> corporate governanceinto emerging markets. In these markets, greatconsideration has to be given to the overall structure<strong>of</strong> institutions, which ensure that corporate governancedoes not only exist on paper but is implemented andfairly enforced.<strong>The</strong> chart in Figure 1 illustrates corporategovernance from yet another perspective. Lookingat both sides <strong>of</strong> the chart, one can identify the depth<strong>of</strong> different agents in the framework <strong>of</strong> corporategovernance. On the one side, corporate governancedemands the participation <strong>of</strong> private actors, includingauditors, accountants, and credit rating agencies.But on the other side, it involves the functions <strong>of</strong>government, securities regulators, capital marketauthorities, and the like. <strong>The</strong> framework presentedin Figure 1 better describes the corporate governancedilemma that developing countries face, because itrecognizes the major issues in emerging markets, suchas the abuse <strong>of</strong> minority shareholders, rather thansimply dealing with the enforcement <strong>of</strong> the principleagent requirement.Source: <strong>The</strong> World Bank– 3 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Box 2. New York Stock Exchange Provision on Codes <strong>of</strong><strong>Ethics</strong>.Commentary: No code <strong>of</strong> business conducts and ethicscan replace the thoughtful behavior <strong>of</strong> an ethical director,<strong>of</strong>ficer, and employee. However, such a code can focuson the board and management on areas <strong>of</strong> ethical riskand provide guidance to personnel to help them recognizeand deal with ethical issues, provide mechanisms to reportunethical conduct, and help to foster a culture <strong>of</strong> honestyand accountability.Each code <strong>of</strong> business conduct and ethics must require thatany waiver <strong>of</strong> the code for executive <strong>of</strong>ficers or directorsmay be made only by the board or a board committee andmust be promptly disclosed to shareholders. This disclosurerequirement should inhibit casual and perhaps questionablewaivers and should help ensure that, when warranted, awaiver is accompanied by appropriate controls designed toprotect the listed company.Each code <strong>of</strong> business conduct and ethics must also containcompliance standards and procedures that will facilitate theeffective operation <strong>of</strong> the code.Each company should determine its own policies, but alllisted companies should address the most important topicsincluding the following:• Conflicts <strong>of</strong> interest. A “conflict <strong>of</strong> interest” occurs whenan individual’s private interest interferes in any way or evenappears to interfere with the interests <strong>of</strong> the corporation asa whole. A conflict situation can arise when an employee,<strong>of</strong>ficer, or director takes actions or has interests that maymake it difficult to perform his or he company workobjectively and effectively. Conflicts <strong>of</strong> interest also arisewhen an employee, <strong>of</strong>ficer, or director or a member <strong>of</strong> his orher family receives improper personal benefits as a result <strong>of</strong>his or her position in the company. Loans to or guarantees<strong>of</strong> obligations <strong>of</strong> such persons are a special concern. <strong>The</strong>listed company should have a policy prohibiting suchconflicts <strong>of</strong> interest and providing a mean for employees,<strong>of</strong>ficers, and directors to communicate potential conflictsto the listed company.• <strong>Corporate</strong> opportunities. Employees, <strong>of</strong>ficers, anddirectors should be prohibited from (a) taking for themselvespersonally opportunities that are discovered through the use<strong>of</strong> corporate property, information, or position; (b) usingcorporate property, information, or position for personalgain; and (c) competing with the company. Employees,<strong>of</strong>ficers, and directors owe a duty to the company to advanceits legitimate business interests when the opportunity to doso arises.• Confidentiality. Employees, <strong>of</strong>ficers, and directors shouldmaintain the confidentiality <strong>of</strong> information entrusted tothem by the listed company or its customers except whendisclosure is authorized or legally mandated. Confidentialinformation includes all non-public information that maybe <strong>of</strong> use to competitors or harmful to the company or itscustomers if disclosed.• Fair dealing. Each employee, <strong>of</strong>ficer, or director shouldendeavor to deal fairly with the company’s customers,suppliers, competitors, and employees. None shouldtake unfair advantage <strong>of</strong> anyone through manipulation,concealment, abuse <strong>of</strong> privileged information,misrepresentation <strong>of</strong> material facts, or any other unfairdealingpractice. Listed companies may write their codesin a manner that does not alter existing legal rights andobligations <strong>of</strong> companies and their employees, such as ‘atwill’ employment arrangements.• Protection and proper use <strong>of</strong> company assets. Allemployees, <strong>of</strong>ficers, and directors should protect thecompany’s assets and ensure their efficient use. <strong>The</strong>ft,carelessness, and waste have a direct impact on the listedcompany’s pr<strong>of</strong>itability. All company assets should be usedfor legitimate purposes.• Compliance with laws, rules, and regulations (includinginsider trading laws). <strong>The</strong> listed company should proactivelypromote compliance with laws, rules, and regulations,including insider trading laws. Insider trading is bothunethical and illegal and should be dealt with decisively.• Encouraging the reporting <strong>of</strong> any illegal or unethicalbehavior. <strong>The</strong> listed company should proactively promoteethical behavior. <strong>The</strong> company should encourage employeesto talk to supervisors, managers, or other appropriatepersonnel when in doubt about the best course <strong>of</strong> actionin a particular situation. Additionally, employees shouldreport violations <strong>of</strong> laws, rules, and regulations or the code<strong>of</strong> business conduct to appropriate personnel. To encourageemployees to report such violations, the listed companymust ensure that employees know that the company willnot allow retaliation for reports made in good faith.”Source: Securities and Exchange Commission: NYSERulemaking, April 2003. http://www.sec.gov/rules/sro/34-47672.htm– 4 –
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private EnterpriseAnother major area <strong>of</strong> concern in emergingmarkets has been the relationship between sources <strong>of</strong>debt, principally the banking system, and the corporategovernance framework. In the Asian financial crisis,for example, as well as in Brazil, Russian, and othercountries’ financial crises, the underlying quality <strong>of</strong> theassets against which bank loans were made was murky.It was not transparent to the banking system, and, as aresult, the banks ended up assuming a greater degree <strong>of</strong>risk than would have otherwise been the case. In thissense, a higher standard <strong>of</strong> transparency and disclosureis <strong>of</strong> great importance to various sources <strong>of</strong> debtaround the world in order to improve the underlyingquality and stability <strong>of</strong> the banking system.Also <strong>of</strong> concern in emerging markets is the area <strong>of</strong>privatization – the transfer <strong>of</strong> ownership <strong>of</strong> assets fromthe state sector through a corporatization process intoownership by the private sector. <strong>The</strong> Russian case isthe one that comes to mind most <strong>of</strong>ten because theprivatization was opaque and state assets in manyinstances were sold well below their market value.<strong>Corporate</strong> governance risk stemming from thesemajor areas – abuse <strong>of</strong> minority shareholders, lendingfrom the banking system, and privatization – is <strong>of</strong>tremendous importance to individual transactions,but, to a higher degree, it can be seen as a systemic riskto emerging markets.From <strong>Corporate</strong> <strong>Governance</strong> to <strong>Business</strong> <strong>Ethics</strong><strong>The</strong> relationship between ethics codes andcorporate governance has surged to the fore. Whenone looks at the World Bank chart in Figure 1, ethics,although not directly listed, is an unstated assumptionthat runs through many pieces <strong>of</strong> it. In fact, the NewYork Stock Exchange (NYSE) in the U.S. recentlyreleased new corporate governance rules, whichinclude a section with very specific requirements for acode <strong>of</strong> ethics. <strong>The</strong>se rules, therefore, place the ethicsprinciples at the heart <strong>of</strong> its corporate governanceprovisions. Specifically, Section 10 declares that“listed companies must adopt and disclose a code <strong>of</strong>business conduct and ethics for directors, <strong>of</strong>ficers, andemployees, and promptly disclose any waivers <strong>of</strong> thecode for directors or executive <strong>of</strong>ficers.”This was done in response to Enron and othermajor corporations, where the board <strong>of</strong> directorswaived a very substantially developed code <strong>of</strong> ethicsand was at the center <strong>of</strong> the financial meltdown thatoccurred in the Enron crisis. What happened inEnron illustrated what may be one <strong>of</strong> the determiningfactors in all codes, not just the ones on ethics – simplyhaving a code is not enough. It is just as importantto enforce that code in day-to-day operations. <strong>The</strong>NYSE provision (see Box 2), in that regard, focuseson both aspects <strong>of</strong> an ethics code – definition andimplementation.<strong>The</strong>se NYSE provisions have been furtherdeveloped in filings by the Securities and ExchangeCommission (SEC) and other regulatory bodies. <strong>The</strong>serequirements from the NYSE should be seen as thebeginning <strong>of</strong> a trend, and individual companies mightwant to take a look at their own standards <strong>of</strong> ethicsand their relationship to corporate governance andcompare them to the above listed NYSE requirements.One <strong>of</strong> the more contentious elements in today’senvironment that results from these standards is theadoption <strong>of</strong> a whistleblower’s policy, which requiresboards <strong>of</strong> directors to establish what is known as a“safe channel” for employees to report violations <strong>of</strong>the ethics codes, law, or other regulations directlyto a member <strong>of</strong> the audit committee <strong>of</strong> the board,bypassing management channels. Implementation<strong>of</strong> whistleblower standards can spur many debates asto the best strategy for such a policy. Nevertheless,the trend is clearly in that direction. Whetherdevelopment banks and other multinational firmsadopt the NYSE listing requirements or find someother way to satisfy the growing demand for ethics is,<strong>of</strong> course, an individual choice.<strong>Ethics</strong>From the time <strong>of</strong> the earliest civilizations, publicauthorities, philosophers, and business leaders havebeen concerned with ethics. This section will attemptto put into some historical context the concept <strong>of</strong>ethics and ethical codes. One challenge for those inthe business community, particularly those operatingin a multicultural or multinational environment,has been to find a source or standard that can anchor– 5 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Box 3. Transparency International’s “<strong>Business</strong>Principles for Countering Bribery.”<strong>The</strong> <strong>Business</strong> Principles• <strong>The</strong> enterprise shall prohibit bribery in any formwhether direct or indirect• <strong>The</strong> enterprise shall commit to implementation<strong>of</strong> a Programme to counter briberyAimsProvide a framework for good business practicesand risk management strategies for counteringbribery. Assist enterprises to:a) eliminate bribery;b) demonstrate their commitment to counteringbribery;c) make a positive contribution to improvingbusiness standards <strong>of</strong> integrity, transparency andaccountability wherever they operate.Development <strong>of</strong> a Programme for Countering Bribery• An enterprise should develop a Programmereflecting its size, business sector, potential risksand locations <strong>of</strong> operation, which should, clearlyand in reasonable detail, articulate values, policiesand procedures to be used to prevent bribery fromoccurring in all activities under its effective control.• <strong>The</strong> Programme should be consistent withall laws relevant to countering bribery in all thejurisdictions in which the enterprise operates,particularly laws that are directly relevant to specificbusiness practices.• <strong>The</strong> enterprise should develop the Programme inconsultation with employees, trade unions or otheremployee representative bodies.• <strong>The</strong> enterprise should ensure that it is informed<strong>of</strong> all matters material to the effective development<strong>of</strong> the Programme by communicating with relevantinterested parties.Scope <strong>of</strong> the Programme• Bribes• Facilitation Payments• Political Contributions• Gifts, Hospitality, and Expenses• Charitable Contributions and SponsorshipsProgramme Implementation Requirements• Organization and Responsibilities• Raising Concerns and Seeking Guidance• <strong>Business</strong> Relationships• Communication• Human Resources• Internal Control and Audit• Training• Monitoring and ReviewFor more information and the full text <strong>of</strong> the <strong>Business</strong>an ethics code, independent <strong>of</strong> national culture ornational issues.To put these kinds <strong>of</strong> considerations into context,it’s useful to take a step back and look at the historicaldevelopment <strong>of</strong> the concept. <strong>The</strong> term ethics comesfrom the Greek ethikos, which has several meanings.First, ethics can be thought <strong>of</strong> as dealing with whatis good and bad, with moral duty and obligation.Second, ethics can be seen as a particular set <strong>of</strong> moralprinciples or values. In some settings, these ethicalstandards are unique to a particular culture, while inothers, they might be part <strong>of</strong> the common culturalheritage <strong>of</strong> all nations, such as the U.N. Charter.Third, ethics can be thought <strong>of</strong> as the principles <strong>of</strong>conduct governing an individual or a group. That is,a pr<strong>of</strong>essional ethics standard such as business ethics,banking ethics, more recently accounting or advertisingethics. Fourth, ethics is also traditionally a branch <strong>of</strong>philosophy, and is related to the development <strong>of</strong> theideas <strong>of</strong> a market economy.– 6 –Many <strong>of</strong> the original philosophers <strong>of</strong> markets,such as Adam Smith and David Hume, were quiteconcerned with establishing an ethical foundation ora moral code to govern commerce. <strong>The</strong> feeling thatthese philosophers shared and the legacy that theyhave left, is that in order to guarantee the orderlytransactions within a market system, some standard,some objective utilitarian standard <strong>of</strong> behavior, needsto be established in order to ensure that markets couldperpetuate over time. In a sense, this is a reversal <strong>of</strong>the traditional Latin or Roman concept <strong>of</strong> caveatemptor, or buyer beware.When one establishes this type <strong>of</strong> ethical code, thegoal is to establish the grounds for fair dealing betweenbuyer and seller, borrower and lender, investor andcorporation 2 . Over the centuries, philosophers andleaders have attempted to set out both ethical valuesand general guides for codes <strong>of</strong> conduct. <strong>The</strong>ygenerally took great care to try to establish someindependent or objective standard from which thesecodes could be derived.
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private EnterpriseBox 4. Rules <strong>of</strong> Conduct to Combat Extortion and BriberyTransactions.• Article 1: Extortion. No one may, directly or indirectly,demand or accept a bribe.• Article 2: Bribery and “Kickbacks.” No enterprisemay, directly or indirectly, <strong>of</strong>fer or give a bribe and anydemands for such a bribe must be rejected. Enterprisesshould not (i) kick back any portion <strong>of</strong> a contract paymentto employees <strong>of</strong> the other contracting party, or (ii) utiliseother techniques, such as subcontracts, purchase orders orconsulting agreements, to channel payments to government<strong>of</strong>ficials, to employees <strong>of</strong> the other contracting party, theirrelatives or business associates.• Article 3: Agents. Enterprises should take measuresreasonably within their power to ensure: that any paymentmade to any agent represents no more than an appropriateremuneration for legitimate services rendered by such agent;that no part <strong>of</strong> any such payment is passed on by the agentas a bribe or otherwise in contravention <strong>of</strong> these Rules <strong>of</strong>Conduct; and that they maintain a record <strong>of</strong> the names andterms <strong>of</strong> employment <strong>of</strong> all agents who are retained by themin connection with transactions with public bodies or Stateenterprises. This record should be available for inspectionby auditors and, upon specific request, by appropriate,duly-authorised governmental authorities under conditions<strong>of</strong> confidentiality.• Article 4: Financial Recording and Auditing. Allfinancial transactions must be properly and fairly recordedin appropriate books <strong>of</strong> account available for inspection byboards <strong>of</strong> directors, if applicable, or a corresponding body,as well as auditors. <strong>The</strong>re must be no “<strong>of</strong>f the books” orsecret accounts, nor may any documents be issued whichdo not properly and fairly record the transactions to whichthey relate. Enterprises should take all necessary measuresto establish independent systems <strong>of</strong> auditing in order tobring to light any transactions which contravene the presentRules <strong>of</strong> Conduct. Appropriate corrective action must thenbe taken.• Article 5: Responsibilities <strong>of</strong> Enterprises. <strong>The</strong> board<strong>of</strong> directors or other body with ultimate responsibilityfor the enterprise should: take reasonable steps, includingthe establishment and maintenance <strong>of</strong> proper systems <strong>of</strong>control aimed at preventing any payments being made byor on behalf <strong>of</strong> the enterprise which contravene these Rules<strong>of</strong> Conduct; periodically review compliance with theseRules <strong>of</strong> Conduct and establish procedures for obtainingappropriate reports for the purposes <strong>of</strong> such review; andtake appropriate action against any director or employeecontravening these Rules <strong>of</strong> Conduct.• Article 6: Political Contributions. Contributions topolitical parties or committees or to individual politiciansmay only be made in accordance with the applicable law, andall requirements for public disclosure <strong>of</strong> such contributionsshall be fully complied with. All such contributions must bereported to senior corporate management.• Article 7: Company Codes. <strong>The</strong>se Rules <strong>of</strong> Conduct being<strong>of</strong> a general nature, enterprises should, where appropriate,draw up their own codes consistent with the ICC Rulesand apply them to the particular circumstances in whichtheir business is carried out. Such codes may usefullyinclude examples and should enjoin employees or agentswho find themselves subjected to any form <strong>of</strong> extortion orbribery immediately to report the same to senior corporatemanagement. Companies should develop clear policies,guidelines, and training programmes for implementing andenforcing the provisions <strong>of</strong> their codes.For more information see International Chamber <strong>of</strong> Commercehttp://www.iccwbo.org/home/extortion_bribery/rules.asp<strong>The</strong> first recorded comprehensive ethical guide wasthe Code <strong>of</strong> Hammurabi developed in 1780 B.C.E.Running to some 282 directives, the Code became thefoundation for the Kingdom <strong>of</strong> Babylon. Althoughmany <strong>of</strong> the provisions in the Code, such as thoseregulating slavery, will be seen as unethical by modernstandards, the code did establish a set <strong>of</strong> rules makingcommerce and civilization possible. As such, it is <strong>of</strong>tenreferred to throughout the Middle East.Other ancient civilizations developed codes orprinciples <strong>of</strong> their own, including the “Analects <strong>of</strong>Confucius” (500 B.C.), the “Ten Commandants” <strong>of</strong>Moses, and the Koran. Each <strong>of</strong> the civilizations wherethese principles were developed sought to establishcodes <strong>of</strong> conduct and principles to ensure that societiescould be held together. From the time <strong>of</strong> the ancientGreeks through the Enlightenment, philosophers,scholars, and others have attempted to create ethicalsystems, based on general principles, to guide behavior.– 7 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong><strong>The</strong> works <strong>of</strong> philosophers such as Aristotleand Immanuel Kant are cited in American businessschools today. Articles published in business schools 3give future business leaders grounding in the moraldilemmas that philosophers have taken on over thecenturies, by packaging it in a practical guide so thatbusiness leaders begin to think about ethics as a set <strong>of</strong>principles and guidelines for behavior rather than a set<strong>of</strong> simply rigid rules. <strong>The</strong> business world is beginningBox 5. <strong>The</strong> U.N. Global Compact.<strong>The</strong> vision <strong>of</strong> the Global Compact is outlined in its tenprinciples. Companies that sign on to the Global Compactagree to uphold these principles in their operations in anycountry around the world.Human RightsPrinciple 1: <strong>Business</strong>es should support and respect theprotection <strong>of</strong> internationally proclaimed human rights;andPrinciple 2: make sure that they are not complicit inhuman rights abuses.Labor StandardsPrinciple 3: <strong>Business</strong>es should uphold the freedom <strong>of</strong>association and the effective recognition <strong>of</strong> the right tocollective bargaining;Principle 4: the elimination <strong>of</strong> all forms <strong>of</strong> forced andcompulsory labor;Principle 5: the effective abolition <strong>of</strong> child labor; andPrinciple 6: the elimination <strong>of</strong> discrimination in respect<strong>of</strong> employment and occupation.EnvironmentPrinciple 7: <strong>Business</strong>es should support a precautionaryapproach to environmental challenges;Principle 8: undertake initiatives to promote greaterenvironmental responsibility; andPrinciple 9: encourage the development and diffusion <strong>of</strong>environmentally friendly technologiesAnti-CorruptionPrinciple 10: <strong>Business</strong>es should work against all forms <strong>of</strong>corruption, including extortion and bribery.For more information, please visitwww.unglobalcompact.orgto recognize one <strong>of</strong> the key challenges facing businessin a multicultural world – to develop ethical guidelinesthat are meaningful to employees from a wide variety<strong>of</strong> cultural and geographical backgrounds.<strong>Business</strong> <strong>Ethics</strong>Given the new mandates on business, such asthe one from the NYSE described above, firms findthemselves pressed to develop strong codes <strong>of</strong> ethics toguide the behavior <strong>of</strong> board members, managers, andemployees. As will be discussed later, multinationalcorporations are also being required to set standardsfor those in their supply chains – in some cases settinghigher standards than the laws <strong>of</strong> the countries inwhich they do business. <strong>The</strong>re are many differentfactors that companies, especially financial companies,need to take into account when developing their owncode <strong>of</strong> ethics as part <strong>of</strong> a general corporate governanceguideline.As noted earlier, in this sense, business ethics isan attempt to set out a standard by which all <strong>of</strong> theemployees <strong>of</strong> a firm can know what is expected. But itis also an attempt to encourage employees, managers,and board members to think about and make decisionsBox 6. <strong>The</strong> Caux Round Table Principles for <strong>Business</strong>.1. <strong>The</strong> Responsibilities <strong>of</strong> <strong>Business</strong>es: BeyondShareholders toward Stakeholders2. <strong>The</strong> Economic and Social Impact <strong>of</strong> <strong>Business</strong>: TowardInnovation, Justice and World Community3. <strong>Business</strong> Behavior: Beyond the Letter <strong>of</strong> Law Towarda Spirit <strong>of</strong> Trust4. Respect for Rules5. Support for Multilateral Trade6. Respect for the Environment7. Avoidance <strong>of</strong> Illicit OperationsFor more on the principles see <strong>The</strong> Caux Round Tablehttp://www.cauxroundtable.org/principles.html– 8 –
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private EnterpriseBox 7. Common <strong>Ethics</strong> Code Provisions (by the <strong>Ethics</strong>Resource Center.)Employment Practices• Workplace Harassment• Equal Opportunity• Diversity• Fair Treatment <strong>of</strong> Staff• Work-Family Balance• Discrimination• Illegal Drugs and Alcohol• Use <strong>of</strong> Organization PropertyEmployee, Client and Vendor Information• Maintaining Records and Information• Privacy and Confidentiality• Disclosure <strong>of</strong> InformationPublic Information/Communications• Advertising and Marketing• Development and Fundraising• Clarity <strong>of</strong> Information• Access to Information• Transparency <strong>of</strong> InformationConflicts <strong>of</strong> Interest• Gifts and Gratuities• Political Activity• Outside Employment• Family MembersRelationships with Vendors• Procurement• Negotiating ContractsEnvironmental Issues• Commitment to the Environment• Employee Health and SafetyEthical Management Practices• Accuracy <strong>of</strong> books and records and expense reports• Proper use <strong>of</strong> organizational assets• Protecting proprietary informationEmployment Practices• Proper Exercise <strong>of</strong> Authority• Employee Volunteer ActivitiesConflicts <strong>of</strong> Interest• Disclosure <strong>of</strong> Financial InterestsPolitical Involvement• Political ActivitiesFor more information see <strong>Ethics</strong> Resource Center athttp://www.ethics.org/common_provisions.htmlthrough the prism <strong>of</strong> some shared set <strong>of</strong> values. Whatthen are the sources from which these values can bederived?Laws and regulations <strong>of</strong> the countries in whichcompanies operate constitute one <strong>of</strong> these sources.However, it is important to recognize that companiesare no longer simply limited to national law. A set<strong>of</strong> international conventions, such as the anti-briberyconvention <strong>of</strong> the OECD, have to be taken intoaccount. National laws in many countries are seekingto harmonize with these international standards.In the area <strong>of</strong> corporate governance, there are theOECD guidelines on corporate governance, and manycountries are beginning to require corporate governancecodes as a condition <strong>of</strong> doing business. For example, inRussia, the federal securities regulator requires Russiancompanies to adopt a code <strong>of</strong> corporate governancethat is consistent with its code <strong>of</strong> corporate governanceor to explain why they have not done so. <strong>The</strong> NYSE isanother example, and other exchanges are beginning toconsider its same standard.Another area that is driving the development <strong>of</strong>corporate governance and business ethics codes is thenotion <strong>of</strong> social responsibility or corporate citizenship,which is the preferred term in the business community.<strong>Corporate</strong> citizenship involves building a decisionmakingsystem that takes into the account not onlyinternal operating procedures, but also the impact <strong>of</strong>corporate behavior on its stakeholders – employees,investors, and communities.One starting point to consider in developinginitiatives to strengthen business ethics is thedifference between bright lines and values. This isa relatively new distinction. Bright lines are thosestandards that attempt to set out specific and veryfinite rules which companies and individuals cannotbreak. <strong>The</strong> sources or guidance on these bright linerules can start with, for example, the OECD Anti-Bribery Convention, which can be translated intonational laws and rules on anti-bribery standard.Companies could take a considerable amount <strong>of</strong>time to develop these bright line standards or to try toidentify them themselves. Fortunately, TransparencyInternational (TI), working with major corporations,– 9 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>has developed its own set <strong>of</strong> bright line standards calledthe TI <strong>Business</strong> Principles (see Box 3), applicable tocompanies <strong>of</strong> various sizes, industries, and geographicallocations. Similarly, the International Chamber <strong>of</strong>Commerce (ICC) has also developed a set <strong>of</strong> rules <strong>of</strong>conduct to combat extortion and bribery (see Box 4).Although bright line rules, such as those <strong>of</strong>feredby TI or ICC, are <strong>of</strong>ten very specific, every individualcompany still needs to develop accountability practicesto ensure that employees are indeed following theserules. TI, for example, has also developed a handbookto help companies develop an entire internal practiceto enforce such initiatives. Sarbanes-Oxley, thefamous U.S. corporate governance law, also requiresdocumentation standards <strong>of</strong> accountability forhandling funds and assets in Section 404.In terms <strong>of</strong> general guidelines for behavior, thereare a number <strong>of</strong> different sources for business ethicsprograms. Historically, one <strong>of</strong> the more prominentis that developed by Reverend Leon Sullivan, whichbegan with the anti-Apartheid movement in SouthAfrica and has since evolved into a global set <strong>of</strong>principles (GlobalSullivanPrinciples.org) ReverendSullivan’s principles have been adapted and expandedby the United Nations’ Global Compact into 10principles (see Box 5). <strong>The</strong> U.N. Global compactis an unprecedented effort to coalesce the businesscommunity around common principles and contributeto global development through good business practicesand business leadership.<strong>The</strong> 10 principles in the U.N. Global Compactgo considerably beyond the bright line rules and dealwith the larger issue <strong>of</strong> values. Another similar set <strong>of</strong>principles was developed by the Caux Round Table,an organization where business leaders from differentcountries came up with a set <strong>of</strong> general principles forbusiness behavior (see Box 6). <strong>The</strong>re is another set<strong>of</strong> guidelines developed by the OECD: the OECDMultinational Corporation Guidelines. <strong>The</strong>y go evenfurther, attempting to encourage or mandate corporatebehavior in a variety <strong>of</strong> areas, ranging from theenvironment to contributions to society and providingleadership in developing a nation. <strong>The</strong> OECDGuidelines can be found at www.oecd.org.<strong>The</strong> principles cited above, whether the CauxRound Table’s or the 10 principles <strong>of</strong> the U.N. GlobalCompact, and others go considerably beyond thebright line rules. In this sense, they revert back to theconcept <strong>of</strong> ethics as a code to guide proper behavior,as a code to guide decision-making. And they havetended to bring out and to merge into corporatecitizenship concerns.Building codes <strong>of</strong> conductCodes <strong>of</strong> corporate ethics, codes <strong>of</strong> corporateconduct, and codes <strong>of</strong> corporate governance overlapin many ways. Many different organizations <strong>of</strong>ferguidance and advice on what should be containedwithin a code <strong>of</strong> corporate conduct or a code <strong>of</strong> ethics.In that regard, the most encompassing list, perhaps,comes from the <strong>Ethics</strong> Resource Center located inWashington, D.C. (www.ethics.org), which providesguidance on the issues companies should addresswithin their code <strong>of</strong> corporate ethics (see Box 7).When one looks at the various codes and sources <strong>of</strong>corporate ethics, it is easy to see that the core elementscontain a number <strong>of</strong> provisions which try to capturethree core areas. <strong>The</strong> first deals with existing laws andregulations, the second one deals with building goodbusiness relations, and the third one addresses keyconcerns <strong>of</strong> society and improves corporate citizenship.<strong>Corporate</strong> citizenship starts with a corporate code<strong>of</strong> ethics. A code <strong>of</strong> corporate ethics outlines the valuesand beliefs <strong>of</strong> an organization and ties them to anorganization’s mission and objectives. A good code notonly describes an operational process and regulates thebehavior <strong>of</strong> managers and employees, but it also setslong-term goals, communicates the company’s valuesto the outside stakeholders, and motivates employeesgiving them pride in working for the right cause.<strong>The</strong> value <strong>of</strong> a code <strong>of</strong> ethics is that it is more thansimply a statement <strong>of</strong> a company’s moral beliefs. Awell-written code is a true commitment to responsiblebusiness practices in that it outlines specific proceduresto handle ethical failures. Codes <strong>of</strong> ethics todayaddress a variety <strong>of</strong> issues including work environment,gender relations, discrimination, communicationsand reporting, gift giving, product safety, employee-– 10 –
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private Enterprisemanagement relationships, involvement in the politicalsphere, financial practices, corruption, and responsibleadvertising.As business ethics have evolved and the scope <strong>of</strong>business issues has expanded in the past several decades,so have the codes. Originally seen as a set <strong>of</strong> policiesdesigned to manage daily issues in the workplace,ethics codes have grown into extensive documentsthat address a variety <strong>of</strong> issues and serve as corporatecomplements to the extensive regulatory and societalpressures on business to behave in an ethical manner.A code <strong>of</strong> ethics needs to define the purpose <strong>of</strong>an organization. Doing that is important becauseit allows a firm to communicate its mission andobjectives as well as core values to its employees,customers, suppliers, and other stakeholders. Clearlydefining organizational values helps create a corporateimage that stakeholders can easily relate to and allowspotential employees and shareholders to have a realisticview <strong>of</strong> a corporate identity.To be effective, codes <strong>of</strong> ethics should be morethan just a document on a shelf. <strong>The</strong>y need to becreated in a way that ethical behavior is encouragedand that employees take pride in making ethicaldecisions. Codes <strong>of</strong> ethics should provide guidanceinto relationships between stakeholders and corporatedecision-making. More importantly, employees atany level <strong>of</strong> an organization must strive to uphold thestandards put forth by the code <strong>of</strong> ethics and the topmanagement should exemplify those standards, ascodes <strong>of</strong> ethics are <strong>of</strong> a little benefit if the leadershipignores them.Supply-chain codesOne <strong>of</strong> the greatest benefits <strong>of</strong> corporate citizenshipis that it can rationalize and improve a company’srelations with its supply chains overseas regardingthe quality <strong>of</strong> the products, labor practices, and theenvironmental impact <strong>of</strong> their activities. <strong>The</strong> growth<strong>of</strong> supply chain codes is most evident in supply chainsinvolving consumer goods in emerging markets withweak regulatory environments selling to consumers indeveloped markets. In countries where labor laws areless stringent than international norms, the codes havethe effect <strong>of</strong> creating higher labor standards and serveas a self-governing mechanism for the enforcement <strong>of</strong>laws governing working conditions and productionstandards.Supply Chain codes fall into several broadcategories 4 :Buyer codesMajor companies such as Wal-Mart and Targetuse these codes in their supply chain as a prerequisitefor purchasing consideration. <strong>The</strong> system is such thatthe buyer pays for internal monitors and independentauditors to review the supplier factories. Suppliersthen must pay for any infrastructure upgrades orother improvements necessary to meet the codestandards. <strong>The</strong> factories’ labor standards are also takeninto consideration. Once suppliers are selected, theyare continuously monitored to make sure they aremaintaining that standard.For buyers, the benefits <strong>of</strong> these codes are that theyprotect their brand from bad publicity and other civilattacks and higher quality goods <strong>of</strong>ten result from theupgrades to the quality <strong>of</strong> the infrastructure and thelabor force.Agent codesDoing business abroad <strong>of</strong>ten requires the use<strong>of</strong> agents to facilitate everything from customs andshipping permission to finding business partners andarranging introductions with the proper authoritiesor business leaders. Corporations, governments, andnon-governmental organizations working with orthrough intermediaries abroad know this can be anarea <strong>of</strong> risk as they are held responsible either legallyor in the court <strong>of</strong> public opinion for the activities <strong>of</strong>these agents. Shielding companies from this risk isincreasingly expensive as it involves a great amount<strong>of</strong> due diligence on the part <strong>of</strong> the organizationsresearching the background <strong>of</strong> the agent and verifyingthe soundness <strong>of</strong> their business practices. At the sametime, intermediaries seeking to do business with largeinternational companies can find the approval processto be laborious and slow, creating extra costs to doingbusiness and causing opportunities to be missed.– 11 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Transparent Agents and Contracting Entities(TRACE), an international organization that addressesthe void in working with intermediaries abroad,seeks to meet the needs <strong>of</strong> both parties in this processwhile creating a more ethical business environment.Principals are better protected and intermediariesare better served by this independent, non-partisanorganization that undertakes preliminary vetting <strong>of</strong>agents, consultants, and subcontractors.<strong>The</strong> process is simple. First, agents apply formembership with TRACE. <strong>The</strong>y are then subjected toan extensive due diligence review, including a lengthyquestionnaire, three business references, a financialreference, and a media search. Candidates are alsorequired to have or adopt a code <strong>of</strong> conduct addressingbribes, kickbacks, and conflicts <strong>of</strong> interest and agreeto annual ethics training provided by TRACE or byapproved lawyers in their country. Once their files arecompleted, they are made available to a large number<strong>of</strong> corporations – avoiding the need to replicatepackages for each company. <strong>The</strong> requirements are thesame for every requesting company or organization,resolving the “best practices” concern that others areundertaking more extensive due diligence.TRACE members’ companies benefit by avoidingthe timely documentation gathering process insupport <strong>of</strong> an intermediary. Instead <strong>of</strong> months to veta candidate, information is available upon requestand updated annually. <strong>The</strong> process can be done in aday. TRACE is funded by member fees to cover thescreening process and corporations pay an annual feeor a per-report fee to have access to the due diligencevoluntarily submitted by the members. Governmentsand non-governmental organizations pay only the cost<strong>of</strong> copying and postage for each report requested.Factory certification schemesFactories seek certification to prove that they havebeen proactive in addressing labor and infrastructurestandards. <strong>The</strong> factory pays for the certificationprocess, annual audits and any needed upgradesor actions required to remain certified. CERESPrinciples, the chemical industry’s Responsible CareISO 14001 is an example <strong>of</strong> such a process. <strong>The</strong>sestandards and certifications are typically sought out asa marketing and communication tool for factories todemonstrate their high level <strong>of</strong> standards and systems.Certification allows some factories to receive higherfees for their services as certification eliminates much<strong>of</strong> the risk for the buyer to work with them and <strong>of</strong>tensatisfies buyer codes, eliminating the buyer’s oversightcosts.Other benefits to suppliers to certificationor participation in buyers’ codes would be morecompetitive contract bidding, higher productivity,innovation and quality, and declining employeeturnover as health and quality <strong>of</strong> life issues improve forthem. Examples include SA 8000 (labor), ISO 14001(environment), and WRAP (labor). <strong>The</strong>re are manyothers.Other types <strong>of</strong> codes<strong>The</strong> Base Code <strong>of</strong> the Ethical Trading Initiative(ETI), and codes from the OECD and other groupsall serve as guidelines for companies and countrieson appropriate standards. <strong>The</strong>se codes typicallydo not have any monitoring or auditing programs,and their purpose is to provide guidance and bestpractices. Most codes cover ten points and representprinciples corresponding to the International LaborOrganization’s Core Conventions including: forcedlabor, child labor, freedom <strong>of</strong> association, and collectivebargaining, discrimination, health and safety, wagesand hours <strong>of</strong> work. Key challenges for the codes arethat they can produce inefficiencies and confusion forsuppliers as each buyer has his own code <strong>of</strong> conductand audit procedures. This confusion produces abarrier to entry for suppliers as it is unclear how todemonstrate high standards and compliance. <strong>The</strong>audit systems can vary from company to companyand be very uneven in their rigor and application.This overlap and repetition can produce unnecessaryburdens on both buyers and suppliers as buyerscover the cost <strong>of</strong> monitoring and suppliers have toallocate time and resources to ascertain and complywith a myriad <strong>of</strong> codes. A convergence <strong>of</strong> codes andprocedures is needed to truly realize the benefits <strong>of</strong> thecodes and certification programs.<strong>Business</strong> <strong>Ethics</strong> and Anti-CorruptionOver the past several decades we’ve witnessedpr<strong>of</strong>ound changes in the way business operates– 12 –
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private Enterprisein countries around the world. One <strong>of</strong> the morenotable areas is the business community’s treatment<strong>of</strong> corruption-related issues. <strong>The</strong> private sector hasbecome one <strong>of</strong> the leaders in global efforts to curbcorruption, developing landmark and far-reachingtransparency and accountability standards as well asmechanisms to enforce them. While ethical codesplay an important role in driving transparency andaccountability reforms, other initiatives that extendbeyond internal rules have also made their mark incombating corruption.As noted earlier, one <strong>of</strong> the sources from whichethical values can be derived is laws and regulations <strong>of</strong>countries in which companies operate. At the sametime, quality <strong>of</strong> laws and regulations (as well as theirenforcement) has a direct bearing on the levels <strong>of</strong>corruption in a particular country. <strong>The</strong> World Bank’sDoing <strong>Business</strong> survey <strong>of</strong> more than 100 countries,for example, clearly showed that heavy businessregulation and procedural complexities in the judiciaryare associated with higher levels <strong>of</strong> corruption. <strong>The</strong>Heritage Foundation/Wall Street Journal annual Index<strong>of</strong> Economic Freedom also illustrates well that higherdegrees <strong>of</strong> economic freedom are correlated with lowercorruption. What one can derive from looking at theDoing <strong>Business</strong> survey and the Index <strong>of</strong> EconomicFreedom is that corruption is directly related to theenabling environment issues. In that sense, effortsto establish the rule <strong>of</strong> law, strengthen the protection<strong>of</strong> private property rights, and improve the quality <strong>of</strong>regulations become crucial in anti-corruption reform.Such efforts are also crucial in improving ethicalstandards.For example, the Colombian Confederation<strong>of</strong> Chambers <strong>of</strong> Commerce (Confecámaras) inthe late 1990s recognized that on paper Colombiahad a sophisticated set <strong>of</strong> norms and instrumentsfor detecting, controlling, and punishing corruptpractices. However, these mechanisms were <strong>of</strong>ten notapplied, partly because <strong>of</strong> fear <strong>of</strong> political backlashfrom entrenched, corrupt politicians. Confecámarastherefore attempted to put forth measures that wouldensure application <strong>of</strong> anti-corruption initiatives on thesupply-side <strong>of</strong> the equation – the private sector.Confecámaras worked with local businessesto establish clear rules and codes <strong>of</strong> conduct inprocurement processes and to demonstrate the benefits<strong>of</strong> compliance. With input from business leaders,Confecámaras developed local codes <strong>of</strong> conduct,which over 1,000 businessmen voluntarily signedin the first year alone. To ensure transparency inpublic procurement, Confecámaras also proposed thedevelopment <strong>of</strong> integrity pacts. In the first year, 12integrity pacts were signed between local businessesand governments and the total value <strong>of</strong> the contractsthat were signed under integrity pact requirements withthe Manizales city mayor amounted to $1,039,200. InJanuary 2005, 16 governors and 78 mayors delivered ontheir electoral promises and signed <strong>of</strong>ficial agreementsin public, committing themselves to a transparentrelationship with the local business community.Specific Industry Standards: BankingGoing beyond the general concerns <strong>of</strong> developinga code <strong>of</strong> corporate ethics, development financeinstitutions, <strong>of</strong> course, have two related areas <strong>of</strong>concern. <strong>The</strong> first area <strong>of</strong> concern deals withdeveloping banking ethics standards to guide theirown lending practices. <strong>The</strong> second one deals withtheir role in promoting standards for individualinterests in individual industries. In the area <strong>of</strong>banking codes, there is a wealth <strong>of</strong> sources. Perhapsthe most interesting is the Swiss banking system,which has developed as one <strong>of</strong> the market leaders forbanking sources. <strong>The</strong> Swiss banking system and theFederal Banking Commission, the Swiss regulatoryauthority, require binding codes <strong>of</strong> conduct that definegood industry practices or, to put it in more modernterms, ethical management. <strong>The</strong>y have a number <strong>of</strong>guidelines on their web site (http://www.swissbanking.org/). <strong>The</strong> following are the main areas where codes <strong>of</strong>conduct, guidelines, or agreements are available:1. Agreement on due diligence2. Agreement on depositor protection3. A code <strong>of</strong> conduct for security traders4. Guidelines for management <strong>of</strong> country risk5. Guidelines for risk management6. Guidelines on portfolio managementagreements7. Guidelines for the treatment <strong>of</strong> dominantassets– 13 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>When looking at all <strong>of</strong> these codes in the bankingarea, one observer, Fouad Shaker, General Secretary<strong>of</strong> the Union <strong>of</strong> Arab Banks, presented a list <strong>of</strong> whathe felt would be the 13 principles necessary to createa good code <strong>of</strong> banking ethics 5 . Dr. Shaker’s listcontains, in one form or another, elements put forthby the Swiss banking regulators:1. Integrity and fairness2. Confidentiality3. Pr<strong>of</strong>essionalism4. Compliance with directives5. Monitoring procedures6. Sound implementation7. Transparency <strong>of</strong> transactions8. Good customer service9. Promotion <strong>of</strong> banking services (advertising)10. Transactions giving right to suspicion11. Collecting and keeping customer information12. Handling customer complaints13. Interbank regulations and rotations with otherpartiesAnother good source to compare corporategovernance and banking codes is the Canadian BankersAssociation, which also developed a wide range <strong>of</strong>separate provisions that can be found on its website,www.cba.ca. In the more narrow interests <strong>of</strong> securitiesand exchange and foreign exchange dealers, the ACI,the financial markets association has developed itsown extensive code <strong>of</strong> good conduct or code <strong>of</strong> ethics,which can be found on its website, www.aciforex.com.Developing an <strong>Ethics</strong> Program: <strong>The</strong> Role <strong>of</strong> theBoardAs noted in the NYSE listing requirements, it isvery important for corporations and banks to developtheir own ethics program. Simply adopting a code<strong>of</strong> ethics or a code <strong>of</strong> corporate governance with acompanion code <strong>of</strong> ethics is not sufficient. In fact,the Conference Board conducted a recent study <strong>of</strong>business ethics around the world and the role <strong>of</strong> boards<strong>of</strong> directors in carrying out board oversight <strong>of</strong> ethicsprograms 6 . <strong>The</strong> Conference Board identified thefollowing elements as being representative <strong>of</strong> the role<strong>of</strong> the board and <strong>of</strong> ethics programs in a cross-section<strong>of</strong> countries:• Codes <strong>of</strong> conduct• Communication <strong>of</strong> standards through training• Methods to encourage employees to reportpossible violations to management• Enforcement mechanisms throughinvestigation and discipline• Oversight and review to achieve ongoingimprovement<strong>The</strong> development <strong>of</strong> the federal sentencingguidelines by the U.S. Sentencing Commission severalyears ago is one element in encouraging such anencompassing program to be adopted by Americancorporations. <strong>The</strong>se sentencing guidelines, which canbe found at www.ussc.gov, are intended to guide acompany in dealing with employees who have engagedin bribery or broken a law. Doing so is importantespecially for the management, because the company asa whole can be punished for violations. <strong>The</strong> sentencingguidelines, in that regards, were intended to givecourts some direction in terms <strong>of</strong> when to considerthe company itself responsible for the action <strong>of</strong> itsemployees 7 . <strong>The</strong> guidelines are:1. Establishing ethics and compliance standardsand procedures2. Assessing high-level persons to oversee ethicsand compliance3. Taking due care in the delegation <strong>of</strong> substantialdiscretionary authorities to individuals4. Effectively communicating standards andprocedures to all employees and agentsthrough training and also through printed andelectronic materials5. Monitoring and auditing the operation <strong>of</strong>the ethics and compliance program andestablishing a retribution-free means, (e.g., ahelp line) for employees to obtain informationabout standards and procedures and to reportpossible wrongdoing6. Consistently enforcing discipline <strong>of</strong> employeeviolations7. Responding promptly to any wrongdoing andremedying any program deficiencies 8<strong>The</strong>se guidelines from the Federal SentencingCommission have been one <strong>of</strong> the drivers behind the– 14 –
<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>Center for International Private Enterprisedevelopment <strong>of</strong> ethics programs in the U.S. Moreover,as noted in the ethics resource list provided earlier,and in the elements identified by the ConferenceBoard, they have also spread worldwide. In fact, theConference Board carried out a survey <strong>of</strong> companiesacross the world and found that not only were theseelements quite common, but in many countries theprogram was actually established by board resolution.In the United States, 66 percent <strong>of</strong> Americancompanies established the ethics program as the result<strong>of</strong> the action <strong>of</strong> the board <strong>of</strong> directors, while in Japan,96 percent took a similar stance.Similarly, one <strong>of</strong> the key things that boards <strong>of</strong>directors must do in the wake <strong>of</strong> the U.S. FederalSentencing Guidelines and the broader trendsinternationally is to develop ways <strong>of</strong> monitoringcompliance and ensuring that these ethics codes arenot simply a standard put on the company’s web site,but not communicated and implemented throughoutthe company. One <strong>of</strong> the ways to do that is bycarrying out program audits 9 .In U.S. companies, some 45 percent have carriedout program audits (a number which can be expectedto increase given recent trends). In contrast, inJapan, 64 percent <strong>of</strong> such companies have carried outprogram audits. <strong>The</strong> number is event higher at 67percent in India, and in Western Europe, where it isover 75 percent.Complementing program audits is the concept <strong>of</strong>directors’ ethics training. <strong>The</strong> same Conference Boardsurvey found that directors’ ethics training is becomingquite common throughout the world, from a low <strong>of</strong>42 percent in Western Europe to a high <strong>of</strong> 94 percentin Japan. Many multinational companies are nowroutinely putting on ethics trainings programs for theirdirectors. <strong>The</strong> subjects covered include:• Fiduciary duties• <strong>Corporate</strong> opportunities• Principal regulations governing companybusiness• Personal liability• <strong>Corporate</strong> law• Stock exchange regulations• Insider trading• <strong>Business</strong> secrets• <strong>The</strong> employee training program 10<strong>The</strong> role <strong>of</strong> the board <strong>of</strong> directors, therefore, is seenas central to establishing and maintaining a corporateethics program, and by corollary is a central feature inthe overall subject <strong>of</strong> corporate governance guidelinesand codes. This trend can be expected to continue,driven both by national legislation, internationalconventions, and the expectations <strong>of</strong> investors. 11ConclusionDebates in coming years will center on therelative roles <strong>of</strong> business, government, and NGOsin establishing codes <strong>of</strong> conduct and in reportingrequirements as well as individual industrystandards. In each <strong>of</strong> these areas, non-governmentalorganizations, such as Transparency Internationaland Social Accountability International, are leadingthe way 12 . <strong>The</strong>se NGOs have worked cooperativelywith business and in some cases have presented theirdemands to business. In either case, the triangle <strong>of</strong>business, government, and NGOs will continue to bethe dominant forum for debates and discussion <strong>of</strong> theproper role <strong>of</strong> business in society.From the point <strong>of</strong> view <strong>of</strong> the business community,the major issue to consider is the central importance<strong>of</strong> corporate governance and business ethics inmaintaining a market economy. As noted earlier,Adam Smith, David Hume, and other philosophersand early economists were very much concerned withthe role <strong>of</strong> ethics and the role <strong>of</strong> business behavior inensuring that transactions could be conducted notonly in regional, but also in the multinational setting.In one sense, one can look at ethics as the solutionto one <strong>of</strong> the central problems <strong>of</strong> development. <strong>The</strong>problem is moving from a “cash and carry” or bartereconomy to an economy where transactions canbe conducted over time and distance. One <strong>of</strong> thefindings <strong>of</strong> the new institutional economics 13 is thatin countries and in firms with low standards <strong>of</strong> ethics,with low standards <strong>of</strong> legal regulation, and with lowenforcement, the costs <strong>of</strong> contracting become veryhigh. <strong>Business</strong> ethics, therefore, are central to ensuringthat contracts are adhered to, thereby holding down– 15 –
Center for International Private Enterprise<strong>Business</strong> <strong>Ethics</strong>: <strong>The</strong> <strong>Essential</strong> <strong>Component</strong> <strong>of</strong> <strong>Corporate</strong> <strong>Governance</strong>the costs <strong>of</strong> doing business and improving the flow <strong>of</strong>capital to emerging markets.On another note, business should be mindful,as should NGOs, that too much pressure is not putonto the multinational corporations in terms <strong>of</strong>enforcing through corporate codes or supplier-vendorrelationships laws and regulations, which are actuallythe concerns <strong>of</strong> national government. For example,the emerging trend to hold business accountable forhuman rights violations in developing countries isworrisome. In some cases, it may deter multinationalsand other sources <strong>of</strong> investment from investing inan emerging market. We have to find a way to meethigh ethical standards and, at the same time, ensurethat the reputational and collateral risks assumed bycorporations do not inhibit the further development <strong>of</strong>the emerging markets._____________________________________________Endnotes1 Berle, Adolph and Means, Gardiner. <strong>The</strong> Modern Corporation andPrivate Property, Transaction Publishers; Reprint edition (May 1, 1991).2 Edwards, Paul. <strong>The</strong> Encyclopedia <strong>of</strong> Philosophy, Volume 3. MacMillanPublishing, page 83.3 See for example Hooker, John. <strong>Ethics</strong> in Six Not-So-Easy Lessons.Carnegie Mellon, April 2001.4 “Investing in Responsible <strong>Business</strong>—<strong>The</strong> 2003 Survey <strong>of</strong> EuropeanFund Managers, Financial Analysts and Investor Relations Officers.” ADeloitte, CSR Europe and Euronext Survey, November, 2003.5 Presentation by Dr. Fouad Shaker, Secretary General, Union <strong>of</strong> ArabBanks, to the Regional <strong>Corporate</strong> <strong>Governance</strong> Forum, Amman, Jordan,January 25, 2005, sponsored by Center for International PrivateEnterprise and Global <strong>Corporate</strong> <strong>Governance</strong> Forum.6 Berenbeim, Ronald E. and Kaplan, Jeffrey M. “<strong>Ethics</strong> Programs…<strong>The</strong>Role <strong>of</strong> the Board: A Global Study.” <strong>The</strong> Conference Board, New York,2004. (page 12).7 Federal Sentencing Guidelines Manual page 476-477. http://www.ussc.gov/GUIDELIN.HTM8 Pittman, Edward L. and Navran, Frank J. “<strong>Corporate</strong> <strong>Ethics</strong> andSarbanes-Oxley,” <strong>The</strong> Wall Street Lawyer, July 2003.9 Berenbeim, Ronald E. and Kaplan, Jeffrey M. “<strong>Ethics</strong> Programs…<strong>The</strong>Role <strong>of</strong> the Board: A Global Study.” <strong>The</strong> Conference Board, New York,2004. (page 21).10 Ibid. page 31.11 International <strong>Corporate</strong> <strong>Governance</strong> Network. http://www.icgn.org12 SAI-SA8000 has become the code <strong>of</strong> conduct <strong>of</strong> labor standards forsupply chain management considerations.12 SAI-SA8000 has become the code <strong>of</strong> conduct <strong>of</strong> labor standards forsupply chain management considerations.13 A branch <strong>of</strong> economics that looks at the importance <strong>of</strong> propertyrights, legal structures, contracts, and other institutions as key elements<strong>of</strong> a market economy. For more, please see CIPE Feature Service article“Local Knowledge and Institutional Reform” by Douglass North, NobelPrize-winning economist. http://www.cipe.org/publications/fs/articles/Douglass_North.htmJohn D. Sullivan has been Executive Director <strong>of</strong> CIPEsince 1991. In 1983, he was associate director <strong>of</strong> the bipartisanDemocracy Program that created the National Endowment forDemocracy that supports CIPE. From 1977 to 1982, he workedat the U.S. Chamber <strong>of</strong> Commerce’s Public Affairs Departmentand Special Project Division. In 1976, Mr. Sullivan joined thePresident Ford Election Committee in the research departmenton campaign strategy, polling, and market research. Prior tothis he worked with the Institute for Economic Research andthe Office <strong>of</strong> Minority <strong>Business</strong> Enterprise (U.S. Department<strong>of</strong> Commerce) in Los Angeles on projects to stimulate small andminority enterprise. Mr. Sullivan has a Ph.D. in internationalrelations from the University <strong>of</strong> Pittsburgh, and is the author<strong>of</strong> a number <strong>of</strong> articles and publications on the transitionto democracy in Central and Eastern Europe, corporategovernance, and market-oriented democratic development.Aleksandr Shkolnikov is the Program Officer for GlobalPrograms at the Center for International Private Enterpriseand a doctoral student in the Department <strong>of</strong> Economics atGeorge Mason University.<strong>The</strong> Center for International Private Enterprise grantspermission to reprint, translate, and/or publish original articlesfrom its Economic Reform Feature Service provided that (1)proper attribution is given to the original author and to CIPEand (2) CIPE is notified where the article is placed and a copyis provided to CIPE’s Washington <strong>of</strong>fice via mail, e-mail, orfax.<strong>The</strong> Center for International Private Enterprise is a nonpr<strong>of</strong>itaffiliate <strong>of</strong> the U.S. Chamber <strong>of</strong> Commerce and one <strong>of</strong> thefour core institutes <strong>of</strong> the National Endowment for Democracy.CIPE has supported more than 800 local initiatives in over90 developing countries, involving the private sector in policyadvocacy and institutional reform, improving governance, andbuilding understanding <strong>of</strong> market-based democratic systems.CIPE programs are also supported through the United StatesAgency for International Development.– 16 –