Understanding Codes of Ethics: Types and Their Practical Uses

What Is a Code of Ethics?

A code of ethics is a set of principles intended to guide professionals in conducting business with honesty and integrity. A code of ethics document may outline the organization’s mission and values, guide on addressing problems, establish ethical principles based on the organization’s core values, and define the standards to which professionals are held.

To ethically assess a corporate code of ethics, apply universal moral standards like trust, respect, responsibility, fairness, care, and citizenship to its content, creation, implementation, and management.

Also called an “ethical code,” a code of ethics may encompass areas such as business ethics, professional practices, and employee conduct.

Understanding the Purpose of a Code of Ethics

Business ethics refers to how ethical principles guide a business’s operations. Common issues that fall under the umbrella of business ethics include employer-employee relations, discrimination, environmental issues, bribery, insider trading, and social responsibility.

While laws set basic ethical standards, business leaders are responsible for creating a comprehensive code of ethics. 

Ethical conduct has been shown to benefit an organization and society in the long term. It aligns with the triple bottom line theory of profit, people, and planet and meets the growing expectations of socially responsible customers, employees, and investors.

Most businesses and trade organizations have a code of ethics for employees or members to follow. Breaking this code can lead to termination. It's crucial because it establishes behavior rules and provides a foundation for preemptive warnings.

As climate change becomes more critical, many companies include climate policies in their codes of ethics. These guidelines show the company's commitment to sustainability or plans to adopt sustainable practices.  

This sustainability commitment may increase costs, but it can be valuable. Consumers prefer environmentally responsible businesses, boosting the company's image.

Regardless of size, businesses count on their management staff to set ethical conduct standards for other employees. When leaders follow the code of ethics, everyone is expected to comply, with no exceptions. 

Exploring Different Types of Codes of Ethics

A code of ethics may vary, but its goal is to ensure businesses and employees follow laws and act to benefit stakeholders.  Here are two types of codes of ethics commonly found in business.

Compliance-Based Code of Ethics

Laws regulate hiring and safety for all businesses. Compliance-based codes of ethics set conduct guidelines and penalties for violations.  

Specific laws govern business conduct in industries like banking, leading these sectors to adopt compliance-based codes of ethics to enforce regulations. Employees typically undergo formal training to understand these rules. Noncompliance can create legal issues for the company, and individual employees may face penalties for failing to follow guidelines.

Some companies appoint a compliance officer to ensure adherence to the code of ethics. This individual stays updated on regulatory changes and monitors employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and defined consequences rather than personal behavior monitoring. While it ensures legal compliance, it may not always promote a climate of moral responsibility within a company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company’s core value system, setting standards of responsible conduct that benefit the larger public and the environment. These ethical codes often require more self-regulation than compliance-based codes.

Some codes of conduct address both compliance and values. For instance, a grocery store might prioritize health and safety over profits in its code. It might also avoid suppliers using hormones or treating animals inhumanely. 

How Codes of Ethics Apply Across Professions

Certain professions, such as those in finance or health, have specific laws that mandate codes of ethics and conduct.

Accountants

Certified public accountants (CPAs), who are not typically considered fiduciaries to their clients, still are expected to follow similar ethical standards, such as integrity, objectivity, truthfulness, and avoidance of conflicts of interest, according to the American Institute of Certified Public Accountants (AICPA).

Financial Advisers

Financial advisers registered with the Securities and Exchange Commission (SEC) or a state regulator are bound by a code of ethics known as a fiduciary duty, a legal and ethical obligation requiring them to act in the best interest of their clients.

Distinguishing Between Code of Ethics and Code of Conduct

A code of ethics and a code of conduct both set professional standards to guide behavior of an organization’s members. However, there are some subtle differences:

• A code of ethics ensures that members exercise sound judgment. For example, legal codes prevent lawyers from handling conflict-of-interest cases or brokers from trading against clients.
• A code of conduct, meanwhile, specifies expected employee actions, including norms like punctuality and accuracy. Most companies implement an employee code of conduct to uphold professionalism and minimize workplace friction.

Having both a code of ethics and a code of conduct helps ensure that an organization operates with integrity and maintains professionalism with its employees.

Steps to Creating an Effective Code of Ethics

Organizations create codes of ethics to eliminate unacceptable or immoral behavior among their members, often focusing on existing ethical issues within their industry.

1. Identify the organization’s priorities and key ethical issues.
2. Define the principles and rules that align with these priorities.
3. Draft the code, incorporating feedback from stakeholders.
4. Ensure clarity and accessibility of the document.
5. Implement training programs for employees.
6. Regularly review and update the code to reflect changes in ethical standards or laws.

Real-World Examples of Codes of Ethics

Many firms and organizations have adopted a code of ethics. One good example comes from the CFA Institute (CFAI), the grantor of the chartered financial analyst (CFA) designation and creator of the CFA exams.

CFA charterholders are among the most respected and globally recognized financial professionals. According to the CFAI’s website, members of the CFA Institute, including CFA charterholders, and candidates for the CFA designation must adhere to the following Code of Ethics:

• Act with integrity, competence, diligence, respect, and ethics when dealing with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
• Place the integrity of the investment profession and clients’ interests above their interests.
• Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
• Practice and encourage others to practice professionally and ethically, which will reflect credit on themselves and the profession.
• Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
• Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

The Bottom Line

A code of ethics serves as a crucial framework for businesses, guiding employees to align with organizational values and uphold integrity, honesty, and professionalism. It is often tailored to specific industries, ensuring adherence to state and federal laws while promoting ethical behavior that benefits all stakeholders. This alignment with ethical principles is not just about compliance; it addresses critical areas such as climate change, social responsibility, and equality, reflecting the evolving nature of business ethics from the industrial age to the modern era. By embracing a robust code of ethics, organizations can build trust and accountability, enhance their reputation, and meet the expectations of socially responsible consumers, investors, and employees.