Bus 637 Week 5 DQ
RANBABY
UptoCode.pdf
BEST PRACTICE
Up to Code Does Your Company's Conduct Meet World-Class Standards? by Lynn Paine, Rohit Deshpande, Joshua D. Margolis, and Kim Eric Bettcher
New research reveals
an emerging global
consensus on basic
standards of corporate
behavior.
/ ' " " O D E S OF CONDUCT have long been v ^ - a feature of corporate life. Today, they are arguably a legal necessity - at least for public companies with a pres- ence in the United States. As of 2004, both the New York Stock Exchange and the Nasdaq require listed companies to adopt and disclose a code of conduct. And under the Sarbanes-Oxley Act, pub- lic issuers of securities must disclose whether they have adopted a code for their senior executives (and if not, why not). Similarly, federal guidelines direct judges to take into account the adoption of a code when determining whether a company convicted of a crime had an effective ethics and compliance pro- gram in place-and thus when setting a fine. The legal case for a code is further bolstered by various requirements and enforcement policies in specific areas of the law. The EPA, for example, considers a company's compliance efforts when it
assesses penalties for environmental in- fractions. Moreover, the courts of Dela- ware, legal home to more than half of ail U.S. publicly traded companies and 58% of the Fortune 500, have held that boards are responsible for ensuring that management implements a compliance and reporting system informed by the federal sentencing guidelines.
The matter goes beyond U.S. legal and regulatory requirements, however. Calls for defined standards of corporate conduct have issued from many comers of the globe. Sparked by corruption and excess of various types - from garden- variety deception and bribery to labor abuses and elaborate schemes of mar- ket manipulation - dozens of industry, government, investor, and multisector groups worldwide have proposed codes and guidelines to govern corporate be- havior. Examples include the United Nations Global Compact and the Con-
122 HARVARD BUSINESS REVIEW
sumer Charter for Global Business. Meanwhile, the European Commission has endorsed conduct codes as a tool for promoting corporate responsibility and urged companies to embrace, at a minimum, the Fundamental ILO Con- ventions and the OECD Guidelines for Multinational Enterprises. And in other regions, bodies as varied as Hong Kong's Independent Commission Against Cor- ruption, South Africa's King Committee on Corporate Governance,the Brazilian Institute of Corporate Governance, and the Japanese prime minister's 2002 ad- visory panel on the quality of life have advised companies to develop codes.
While they do not have the force of law-at least, not yet-these initiatives reflect an increasingly global debate on the nature of corporate legitimacy. They are slowly defining the terms and condi- tions of companies' license to operate- or what is sometimes called the corpo-
rate social contract - around the world. By adopting its own code, a company can clarify for all parties, internal and external, the standards that govern its conduct and can thereby convey its com- mitment to responsible practice wher- ever it operates.
Company codes serve myriad other practical purposes. A code can help em- ployees from diverse backgrounds work more effectively across geographic and cultural boundaries. It can also serve as a reference point for decision making, enabling companies to operate with fewer layers of supervision and to re- spond quickly and cohesively in times of crisis. It can even aid in recruitment, helping attract individuals who want to work for a business that embraces world-class standards. Of course, a code can also help a company manage risk by reducing the likelihood of damaging misconduct. And as part of managing
their own brands, some companies ex- amine the codes of their potential sup- pliers and partners. India's Tata Group, for example, requires any company that wants to use the Tata name to adhere to the group's code of ethics.
Given all the legal, organizational, reputational, and strategic considera- tions, few companies will want to be without a code. But what should it say? Apart from a handful of essentials spelled out in Sarbanes-Oxley regula- tions and NYSE rules, authoritative guidance is sorely lacking. The codes and guidelines promulgated by busi- ness, government, and civic groups in recent years contain a lengthy and con- fusing menu of possibilities.
In search of some reference points for managers, we undertook a systematic analysis of a select group of codes. After distilling and comparing their content, we sought to identify the motivating
DECEMBER 2005 123
BEST PRACTICE • Does Your Company's Conduct Meet World-Ciass Standards?
principles behind them. We were sur- prised to find that, despite the codes' seeming variety, they share many simi- larities in the standards of conduct they put forth and the ethical principles to which they give expression. We aiso found that differences among the codes are in many cases complementary rather than conflicting, although the codes do differ on some crucial points that are not easily reconciled.
In this article, we present our findings in the form of a "codex," a reference source on code content. It contains a set of overarching principles and a set of conduct standards for putting those principles into practice. Standards and principles are the hricks and mortar for formulating a code. Standards capture how companies and their personnel should treat their major constituencies, while principles give the standards their legitimacy. Although rarely expressed explicitly, principles answer the ques- tion,"Why do we accept these standards as guidelines for our conduct?"
The provisions of the codex must be cus- tomized to a company's specific busi- ness and situation, and individual com- panies' codes will include their own distinctive elements as well. What the codex provides is a starting point grounded in ethical fundamentals and aligned with an emerging global con- sensus on basic standards of corporate behavior.
Of course, a world-class code is no guarantee of world-class conduct. A code of ethics can no more ensure ethi- cal conduct than a code of laws can en- sure legal conduct. A code is only a tool, and like any tool, it can be used well or poorly - or left on the shelf to be ad- mired or to rust. But the better it is made, the greater the chance it will ful- fill its intended purpose.
Collecting the Data We began by reviewing five widely rec- ognized sets of conduct guidelines for multinational companies: The Caux Round Table Principles for Business
Like any tool, a code of conduct can be used well or poorly-or left on the shelf to be admired or to rust. But the better it is made, the greater the chance it will fulfill its intended purpose.
Our Global Business Standards Codex is intended not as a "model code" that companies should adopt as is, but as a benchmark for those wishing to create their own world-class code. It repre- sents our attempt to gain a comprehen- sive, but simplified, picture of the con- duct expected of today's corporations.
Lynn Paine is the John G. McLean Profes- sor of Business Administration, Rohit Deshpande is the Sebastian S. Kresge Pro- fessor of Marketing, and Joshua D. Margo- lis is an associate professor of business ad- ministration at Harvard Business School in Boston. Kim Eric Bettcher is a former HBS research associate. The authors can be reached at gbscodex(§hbs.edu.
(CRT Principles), the OECD Guidelines for Multinational Enterprises (OECD Guidelines), the UN Global Compact, the Interfaith Center on Corporate Re- sponsibility's Principles for Global Cor- porate Responsibility (ICCR Principles), and the Global Reporting Initiative (GRI). We focused on guidelines for first- order conduct, largely ignoring those for implementation and oversight. We refer to these five sources as "codes" even though only the first four appear in a traditional code format. We tried to infer the governing precepts for con- duct behind the GRl's proposed perfor- mance indicators.
We chose these codes for several rea- sons. First, they are meant for compa-
nies in general, not for a single company or a specific sector, such as apparel or ex- tractive industries, for which specialized codes have recently been developed. Second, they relate to a broad spectrum of corporate activity rather than a single issue (such as corruption), function (pro- curement), or constituency (employees). Third, they speak to companies world- wide. Fourth, they are multinational in origin. Finally, each was developed through a multiparty process involv- ing many individual and organizational participants. To date, more than 2,200 companies, including 98 of Fortune's Global 500, have joined the UN Global Compact, and 39 governments have en- dorsed the OECD Guidelines. Taken to- gether, the multiparty codes refiect a range of views from different sectors of society: business, government, and non- profit (which includes civic, religious, and environmental organizations).
We also examined the codes of 14 of the world's largest companies, includ- ing the top ten in the BusinessWeek Global 1000 for 2003 (all from the United States or the United Kingdom) and the top two companies from conti- nental Europe and Asia as shown on the Financial Times 2003 list of the World's Most Respected Companies. Since we looked only at companies' codes, how- ever, and not at other documents these companies have issued on specific topics such as confiicts of interest, we do not claim to have a complete picture of the companies' policies.
For U.S. legal and regulatory require- ments on code content, we reviewed the Sarbanes-Oxley Act, along with the SEC's implementing regulations and the NYSE and Nasdaq corporate gover- nance rules. We distilled the precepts for corporate conduct found in the 23 sources (the five multiparty codes, the 14 individual company codes, and the four legal and regulatory sources) and categorized them by the constituen- cies whose interests were principally at stake. (Go to gbscodexresearch.hbr.org to see our background analysis of the combined codes.) As a check on our re- search, we reviewed numerous other code-of-conduct studies by academics as
124 HARVARD BUSINESS REVIEW
Does Your Company's Conduct Meet World-Class Standards? • BEST P R A C T I C E
well as organizations such as the Confer- ence Board and the OECD. And to pro- tect against cultural blind spots, we com- pared the codes of nine companies from five emerging markets: Brazil, China, India, Nigeria, and Russia.
The Common Ground Viewed together, the source codes con- tain provisions relating to the six tradi- tional corporate stakeholders: custom- ers, employees, investors, competitors, suppliers/partners, and the public. Al- though the stances toward these con- stituencies vary-companies are urged to "create value for," "deal fairly with," or "fulfill obligations to" their constituen- cies-the codes uniformly recognize that companies have responsibilities to sev- eral groups.
A number of general provisions, ap- plying to al! activities and all parties, ap- peared in many documents. Nearly all the codes enjoin companies to observe the law, protect the environment, avoid bribery, and conduct business in a truth- ful manner. Other recurring provisions include disclosing relevant infonnation in a timely fashion, keeping accurate records, honoring agreements, respect- ing human dignity and human rights, protecting health and safety, and con- tributing to society through innovation.
Among the guidelines that apply to specific constituencies, we found those concerning customers to be the most similar. Companies are consistently called upon to meet the quality require- ments of customers, protect their health and safety, and treat them fairly. Envi- ronmentally safe products and services are also frequently called for, and pro- visions relating to truthfulness and transparency in customer dealings are among the most common. Privacy and the protection of confidential customer data also receive a moderate level of attention.
Regarding employees, the codes con- sistently mandate that companies pro- tect workers from injury and illness in the workplace, avoid discrimination, pro- vide equal employment opportunity, and respect their dignity and human rights. Provisions forbidding retaliation against
» The GBS Codex For companies that want to assess their code of conduct or craft a new one,
we offer the Global Business Standards Codex, a roundup of widely endorsed
conduct guidelines for companies around the world. We arranged the stan-
dards according to eight underlying ethical principles:
I. FIDUCIARY PRINCIPLE page 125
II. PROPERTY PRINCIPLE page 127
III. RELIABILITY PRINCIPLE page 127
IV. TRANSPARENCY PRINCIPLE page 127
V DIGNITY PRINCIPLE page 128
VI. FAIRNESS PRINCIPLE page 129
VII. CITIZENSHIP PRINCIPLE page 130
VIM. RESPONSIVENESS PRINCIPLE page 131
Although many standards are informed by more than one principle, we
have listed each standard onlyonce,We also incfuded several supplementary
provisions {shown in italics) that are worthy of managers' consideration even
though they did not meet our criteria for inclusion in the core group. For clar-
ity, we have indicated which constituency (customers, employees, investors,
suppliers/partners, competitors, the public, or even the company itself) is most
affected by each. Grounded in ethical fundamentals, this codex can betaken
as a first approximation of global best practices for companies and their direc-
tors, officers, and employees,
I.FIDUCIARYPRINCIPLE: Act as a fiduciary for the company and its investors. Carry out the company's business in a diligent and loyal manner, with the degree of candor expected of a trustee.
Key Concept Constituency Standard
Diligence
Loyalty
Company Promote the company's legitimate interests in a diligent and professional manner.
Maintain the company's economic health.
Safeguard the company's resources and ensure their prudent and effective use.
Refrain from giving excessive gifts and entertainment.
Investors Provide a fair and competitive (or better) return on investment.
Company Use position and company resources only for company purposes (not for personal gain).
Disclose potential conflicts between personal and company interests.
Refrain from activities involving actual conflicts of interest, such asseif-dealing and competing with the company,
GBS Codax continued on pagi 127
DECEMBER 2005 125
BEST PRACTICE • Does Your Company's Conduct Meet World-Ctass Standards?
employees who report misconduct are also widespread. Various codes mention open communication, responsiveness to suggestions and complaints, fair and rea- sonable compensation, and assistance in developing skills.
Similarities in provisions relating to investors, suppliers/partners, competi- tors, and the public are less numerous and less pronounced. Those that do occur are often specific applications of tbe general provisions. The standards covering suppliers, for example, pick up tbe fair-dealing, environmental protec- tion, antibribery, and human rights themes introduced earlier.
The Differences We unearthed a fault line between codes written by people who represent busi- ness and those written by groups that represent multiple sectors of society. The business sector codes-those created by the Caux Round Table and by individual companies for their own use - are much more attentive to the economic health of the enterprise and to employees' re- sponsibilities to the corporate entity. By contrast, the four multisector codes {OECD Guidelines, UN Global Compact, ICCR Principles, and GRI) are largely silent on such matters as diligence in car- rying out the company's business, pru- dence in using company resources, and care in protecting company assets. In- frequently mentioned in the multiparty codes are provisions concerning con- flicts of interest and self-dealing, issues that were central to the corporate scan- dals of 2001 and 2002 and that appear prominently in the company codes and the regulators* guidelines. Indeed, con- flict of interest has historically been among the most frequently covered top- ics in company codes.
Not surprisingly, the business sector codes place more emphasis on respon- sibilities to investors. Only one of the multisector codes (GRI) addresses finan- cial returns to investors, and none men- tions insider trading, whose prohibition is required by regulatory guidelines and which is in fact prohibited by the major- ity of company codes. Investor and fi- nancial concerns are not wholly neg-
lected in the multisector codes. Two codes call on companies to provide in- vestors with accurate and timely infor- mation, and one requires them not to obstruct share owners' legal rights. More- over, the multisector codes include gen- eral precepts on financial disclosure, accounting, audits, and financial report- ing. But the specific requirements of economic trusteeship - insofar as it in- volves the creation of economic value- receive little attention.
The multisector codes also have com- paratively little to say about business- to-business conduct, especially between competitors. While the multisector codes issue broad guidelines such as "adhere to competition laws" and "cooperate with competition authorities," the busi- ness sector codes call explicitly for free and fair competition, respect for rivals' property rights, and appropriate gather- ing of competitive information. In the supplier/partner domain, the multisec-
tor codes focus on labor and environ- mental standards, while the business codes address a wider set of issues.
Compared with the business sector codes, the multisector codes are more oriented toward employees and the gen- eral public. For example, all the multi- sector codes call on companies to recog- nize employees' right to free association and collective bargaining, whereas only four of the business sector codes do (and three of those are from non-U.S. compa- nies). Similarly, all the multisector codes include restrictions on using forced and child labor; only five company codes do. While topics such as employment safe- guards and reasonable notice of major employment changes receive attention from multisector groups, the NYSE governance rules explicitly state that codes may preserve at-will employment arrangements. That is, under the NYSE's rules, companies may follow the long- standing and unique-to-the-U.S. legal
126 HARVARD BUSINESS REVIEW
Does Your Company's Conduct Meet World-C!ass Standards? • BEST P R A C T I C E
principle that, in the absence of an em- ployment contract of specific duration, an employee may be dismissed at any time-with or without notice.
The themes of stakeholder responsive- ness and engagement are much more prominent in the multisector codes. For example, the GRI and the ICCR Princi- ples call for worker participation in cer- tain decisions and activities, and the OECD Guidelines call for cooperation with government authorities and com- munity officials. The ICCR document even proposes that companies go be- yond dialogue and actually abide by the recommendations put forth by some stakeholders, though it is the only code that makes such a recommendation.
The two groups of codes also reflect different postures toward public policy concerns. The multisector codes ask companies to actively address such issues as corruption, labor practices, human rights, and environmental protection. Apart from the CRT Principles, few of the business codes take an activist stance on these issues. The business codes typ* ically condemn bribery, labor abuses, and environmental degradation in com- panies' own operations; but the multi- sector codes go further, advocating that companies reach out to persuade oth- ers-in their value chain, in their com- munity, in the society at large - to ad- dress these issues as well.
The appropriate scope of corporate activism is up for debate. Many of the codes-especially the multiparty codes- ask companies to collaborate on, con- tribute to, or otherwise support causes that are of broad public significance. Under the UN Global Compact, compa- nies are even charged with providing health, education, and housing for em- ployees in certain circumstances. The CRT Principles say that companies should promote free trade, open mar- kets, and democratic institutions. But such activity is arguably an incursion into the powers of the state. By the dictatesofciassical liberalism, such mat- ters should be handled by public offi- cials following democratic ideals of par- ticipation and due process. To be sure, the multiparty codes enjoin companies
GBS Codex: FIDUCIARY PRINCIPLE, continued
Loyalty Company Refrain from receiving excessive gifts and entertainment.
Refrain from pursuing for personal benefit opportunities discovered through position or company resources.
investors Refrain from trading in the company's securities on the basis of confidential company information.
I I . PROPERTY PRINCIPLE: Respect property and the rights of those who own it. Refrain from theft and misappropriation, avoid waste, and safeguard the property entrusted to you.
Protection
Theft
Company
Company
Competitors
Protect company assets, including con- fidential and proprietary information, funds, and equipment.
Do not misappropriate company resources through theft^ embezzlement, or other means.
Respect rivals' property rights, including those regarding intellectual property.
m . RELrABILITY PRrNCiPLE: Honor commitments. Be faithful to your word and follow through on promises, agreements, and other voluntary undertakings, whether or not embodied in legally enforceable contracts.
Key Concept Constituency Stai
Contracts
Promises
Commitments
Suppliers/ Partners
All
All
Pay suppliers and partners on time and in accordance with ag reed-on terms.
Honor promises and agreements.
Fulfill implicit and explicit obligations to all constituencies.
IV. TRANSPARENCY PRINCIPLE: Conduct business in a truthful and open manner. Refrain from deceptive acts and practices, keep accurate records, and maketimely disclosures of material information while respecting obligations of confidentiality and privacy.
Key Concept Constituency Standard
Truthfulness All
Deception
Suppliers/ Partners
Customers
Competitors
Be honest and respect truth in all activities.
Record transactions in a fair and accurate manner.
Deal with suppliers and partners honestly.
Avoid deceptive and misleading state- ments and omissions in customer-re lated activities, such as marketing, sales, and research.
Do not acquire commercial information by dishonest or unethical means.
GBS Codex continued on page 128
DECEMBER 2005 127
BEST P R A C T I C E - Does Your Company's Conduct Meet World-Class Standards?
GBS Codex: TRANSPARENCY PRINCIPLE, continued
Disclosure All Make timely disclosures of relevant financial and nonfinanciai information.
Engage in transparent accounting and financial reporting.
Investors Provide investors with relevant, accurate, and timely information.
Customers Give customers adequate health and safety information, warnings, and labels.
Provide accurate information about thecontent, use, and maintenance of products.
Employees Give reasonable notice ofoperationai changes likely to iiave a major effect on employees' livelihood.
Candor Employees Communicate in an open and honest manner, subject to legal and competitive constraints.
Public Communicate and consult with commun- ities affected by environmental, health, and safety impacts ofthe enterprise.
Objectivity All Adhere to independent auditing and financial-reporting standards.
V. DIGNITY PRINCIPLE: Respect the dignity of all people. Protect the health, safety, privacy, and human rights of others; refrain from coercion; and adopt practices that enhance human development in the workplace, the marketplace, and the community.^ .
Key Concept Constituency
Respect for All the Individual
Employees
Suppliers/ Partners
Public
Health & Safety All
Customers
Employees
Suppliers/ Partners
Respect the dignity and human rights of others.
Adopt work practices that respect employees'dignity and human rights.
Prevent harassment in the workplace.
Prefer suppliers and partners whose employment practices respect dignity and human rights.
Support and protect human rights within the company's sphere of infiuence.
Protect human health and safety.
Ensurethat products and services sustain or enhance customer health and safety.
Protect employees from avoidable injury and illness in the workplace.
Provide a work environment that is free from substance abuse.
Prefer suppliers and partners whose work practices respect international labor standards on health and safety.
GBS Codex continued on page 129
to recognize the government's jurisdic- tion over society at large, to avoid im- proper involvement in politics, and to pay their taxes in a timely manner. And the individual companies' codes seem to concur - at least with the first two provisions. (Company codes rarely dis- cuss tax obligations.)
Yet the proper division of labor among companies, governments, and civic ac- tors is far from settled. Differences may well reflect disparate underlying as- sumptions about democracy and due process. In democratic societies that have accountable governments, corpo- rate activism may seem unnecessary or unjustified, whereas the absence of a legitimate and well-functioning gov- ernment may make corporate activism seem essential.
To the extent that individual compa- nies do adopt an activist position, it is likely to be issue specific - focused, for example, on the environment, bribery, or human rights. Companies also seem less reluctant to use their influence to shape the practices of their suppliers and partners than to embrace general public advocacy. Indeed, more than half the company codes require suppliers and partners to refrain from bribery, and a similar number say preference should be given to those who observe applicable environmental standards. Overall, though, while the multisector codes are more activist than the husi- ness codes, individual companies can be found on all points of the activism spectrum.
Not all differences among the codes track the divide between business and nonbusiness perspectives, and some follow no obvious pattern. One example is the treatment of compensation, a topic addressed explicitly by the CRT Principles, two multisector codes, and four company codes. While the CRT Principles call for "compensation that improve[sl workers' living conditions," the company codes favor pay that is "fair" or "competitive." Depending on market conditions and how these terms are interpreted, the required pay levels could be quite similar-or they could be radically different
128 HARVARD BUSINESS REVIEW
Does Your Company's Conduct Meet World-Class Standards? • BEST PRACTICE
Governing Principles Despite such differences in emphasis and content, we found that most ofthe roughly 130 precepts we identified in the 23 source documents could be seen as practical applications of Just eight basic principles, most of which echo long- standing themes in ethical and legal thought. Without insisting on a rigid sys- tem of classification, we found that the standards cluster loosely around the fol- lowing principles:
The Fiduciary Principle. By law, the officers and directors of a corporation are fiduciaries for the company and its shareholders. However, all employees stand in a fiduciary relationship to the corporate entity in that they are en- trusted to protect its resources and act on its behalf in carrying out their job- related responsibilities. Traditionally, trusteeship has included duties of dili- gence, candor, and loyalty to the benefi- ciary over the self. Thus, disclosing con- flicts of interest and prohibitions on unauthorized self-dealing have been traditional guidelines for trustees. The same logic dictates that fiduciaries may not benefit themselves at the expense of the entity they serve - by, for example, pursuing for their own personal benefit business opportunities that belong to the corporation. At the core ofthe fidu- ciary principle, however, is the notion of diligence, prudence, and energetic effort applied in the service of another. Negli- gence, carelessness, and halfhearted ef- fort are clear, if less frequently discussed, violations of this principle. Although fiduciary concepts are not covered in the multisector codes, they are central to the functioning ofthe economy and should, under recent regulations on code content, be included in any com- pany's code.
The Property Principle. Whether jus- tified by arguments from the standpoint of human dignity and liberty or from that of wealth maximization and eco- nomic development, the property prin- ciple is today regarded as central to in- dividual and societal well-being, the ultimate test of any ethical system. Theft and embezzlement of tangible property are the classic violations of this
GBS Codex: DIGNITV PRINCIPLE, continued
Privacy & Customers Confidentiality
Employees
Use of Force Employees
Public
Respect customers' privacy.
Protect confidential customer information.
Respect employee privacy.
Protect confidential employee information.
Abstain from directly or indirectly using forced or child labor.
Ensure that security personnel respect international standards on the use of force.
Contribute to the elimination of forced labor and abusive labor practices.
Association & Expression
Learning & Development
Employment Security
Employees
Suppliers/ Partners
Customers
Public
Employees
Employees
Recognize employees' right to free association and collective bargaining.
Prefer suppliers and partners whose work practices respect international labor standards on free association and collective bargaining.
Respect customers'cultures.
Respect local cultures.
Assist employees in developing skilis and knowledge.
Create employment opportunities that enhance human development.
Safeguard employment and emplovabilitv-
VI. FAIRNESS PRINCIPLE: Engage in free and fair competition, deal with all parties fairly and equitably, and practice nondiscrimination in employment and contracting.
Key Concept Constituency Standard
Fair Dealing All
Investors
Customers
Employees
Suppliers/ Partners
Fair Treatment Employees
Suppliers/ Partners
Deal fairly with all parties.
Deal fairly with minority share owners.
Treat customers fairly in all aspects of transactions.
Set prices that are reasonable and commensurate with quality.
Offer fair and reasonable compensation.
Deal fairly in all activities, including pricing, licensing, and rights to sell.
Practice nondiscrimination and provide equal employment opportunity.
Provide equal opportunity to suppliers owned by minorities and women.
GBS Codsx continued on page 130
DECEMBER 2OO5 129
BEST PRACTICE • Does Your Company's Conduct Meet V\/orld-Class Standards?
GBSCodex:FAIRNESS PRINCIPLE, continued
Fair Treatment Suppliers/ Partners
Fair Competition
Competitors
Fair Process
Suppliers/ Partners
Employees
Prefer suppliers and partners whose employment practices respect international labor standards on nondiscrimination.
Engage in free and fair competition.
Refrain from colluding with competitors on prices, bids, output, or market allocations.
Refrain from seeking or participating in questionable payments or favors to secure competitive advantage.
Require suppliers and partners to refrain from bribery and improper payments.
Do not retaliate against employees who report violations of law or company standards.
VII. CITIZENSHIP PRINCIPLE: Act as responsible citizens ofthe community. spectthe law, protect public goods, cooperate with public authorities, avoid improper involvement in politics and government, and contribute to community betterment.
Key Concept Constituency Standard
Law& Regulation
All
Investors
Competitors
Public
Public Goods All
Customers
Suppliers/ Partners
Public
Obey applicable laws and regulations.
Do not participate in money laundering or other illegal activities that support terrorism, drug traffic, or other organized crime.
Do not obstruct legal rights of share owners.
Adhere to competition laws.
Adhere to environmental laws and standards domestically and internationally
Adhere to the letter and spirit of tax laws and maketimely payments of tax liabilities.
Do not condone or participate in bribery or other forms of corruption.
Protect and, where possible, improve the natural environment.
Promote sustainable development.
Ensurethat products and services sustain or enhance the natural environment.
Prefer suppliers and partners who observe applicable environmental standards.
Do not use lack of scientific certainty as a reason to postpone cost-effective measures to address threats of serious damage to the environment.
GBS Codsx continued on pag« 131
principle, and injunctions against these behaviors are found across the ages. As intangible property has grown in im- portance, definitions of theft have ex- panded to include misappropriation of intellectual property and other types of proprietary information. Respect for property continues to mean safeguard- ing the property In one's rightful posses- sion, avoiding waste, and not infringing on the property rights of others. The codes we examined make relatively few explicit references to these mandates- perhaps because they are so ingrained as to be assumed-but a few provisions spe- cifically enjoin the protection and main- tenance of property and forbid theft and other forms of misappropriation.
The Reliability Principle. Several di- rectives invoke the principle of reliabil- ity, or fidelity to commitments. To cope with uncertainty, most societies have de- veloped ethical norms around keeping promises, fulfilling contracts, and even carrying out one's stated intentions - especially if meant to induce reliance by others. Complex schemes of cooper- ation would not be possible without these ways of forming binding commit- ments, as they allow different parties to coordinate their activities into an un- known future. They bring an element of predictability to an otherwise unpre- dictable fiow of events. The law of con- tract is an elaboration of this basic idea. As legal scholar Charles Fried has ob- served, "By promising we transform a choice that was morally neutral into one that is morally compelled."Classic viola- tions ofthe reliability principle include breach of promise, breach of contract, and other less fornial types of betrayal or going back on one's word. More gen- erally, the reliability principle implies care in making commitments - not promising more than one can deliver- and in following through on agreements and other obligations that are voluntar- ily incurred.
The Transparency Principle. A num- ber of directives are concerned with ac- curacy, truth, and disclosure of informa- tion - or what has come to be called "transparency." Although this term does not signify total openness, its core ideas
130 HARVARD BUSINESS REVIEW
Does Your Company's Conduct Meet World-Class Standards? • BEST P R A C T I C E
of honesty and respect for truth have been treated as fundamental ethical im- peratives from time immemorial. In- junctions against fraud and deceit-the characteristic violations of this pre- cept-are found in many ethical tradi- tions and virtually ail legal systems. Transparency also implies taking care to present information accurately and not to mislead. And it may mean cor- recting misinformation or offering in- formation that is material to the re- cipient in important ways - affecting personal or financial well-being, for in- stance. Justifications for such transpar- ency requirements include promoting dignity and freedom, enabling wise de- cision making, advancing knowledge, enabling cooperation, promoting soci- ety's ability to function, ensuring eco- nomic efficiency, preventing corrup- tion, and, simply, upholding the Intrinsic value of truth.
The Dignity Principle. Although cor- porate officials and employees have fi- duciary obligations to protect and pro- mote the company's interests, they are nonetheless expected to do so in a way that respects other people - whether those people are other employees, cus- tomers, supply chain workers, or mem- bers of the general public. Indeed, re- spect for the person is perhaps the starting point for all ethical thought. It leads directly to protections for health, safety, expression, and privacy, and to proscriptions on humiliation, coercion, and offenses against basic human rights. It also implies affirmative efforts to de- velop human potential, and it often means special concern for those who are incapacitated or otherwise particu- larly vulnerable. All ofthe codes include at least some provisions that ensure re- spect for the person.
The Fairness Principle. The concept of fairness has been central to ethical thought throughout the ages. Its impor- tance rests on its role in facilitating co- operation, securing legitimacy, and en- suring group survival. Four types of fairness have received particular atten- tion: reciprocal fairness, or fairness in exchange; distributive fairness, or eq- uity in allocating benefits and burdens
GBS Codex: CITIZENSHIP PRINCIPLE, continued
Cooperation Customers with Authorities
Employees
Political Public Noninvolvement
Civic All Contribution
Public
Cooperate with public authorities to address threats to public health and safety from the company's products and services.
Cooperate with employee groups, government, and others to address employment dislocations created by business decisions.
Recognize government's obligation and jurisdiction concerning society at large.
Avoid improper involvement in political activities and campaigns.
Contribute to the economic and social development of local communities and the world.
Develop innovations in technology, products, processes, and practices.
Contribute to charitable causes.
Support employee involvement in civic affairs.
Take a leading role in preserving and enhancing the physical environment.
VIII. RESPONSIVENESS PRINCIPLE: Engage with parties who may have legitimate claims and concerns relating to the company's activities, and be responsive to public needs while recognizing the government's role and jurisdiction in protecting the public interest.
Key Concept Constituency Standard
Addressing Investors Respect share owners'requests. Concerns suggestions,complaints, and formal
resolutions.
Customers Offer products and services whose quality meets or exceeds customers' requirements.
Provide timely service and remedies for customer complaints.
Employees Engage in good-faith negotiation in cases of conflict.
Respond to employees' suggestions, requests, and complaints.
Public Public Collaborate with community groups. Involvement and support public policies that
promote economic and social development.
Cooperate in efforts to eliminate bribery and corruption.
Support and protect democratic institutions.
Support diversity and social integration.
1. In corporate codes, the term "human rights" typically refers to the issues of nondiscrimination, health and safety,
and rights to free association. The term "international labor standards" generally refers to this set of issues as well.
D E C E M B E R 2 0 0 5 131
Save Your Back Issues
of Harvard Business Review
Save time and effort searching for back issues and avoid lost or damaged
copies. These custom-made library slipcases are designed to hold u issues.
They're covered in a durable, crimson, leather-like material, and their spines are labeled with the
Harvard Business Review logo in gold. Perfect for your home or office.
Slipcase Quantities and Prices: (one)$i5i (three) $40; (six) $80
Order on-line:
www.tncenterprises.net/hbr.html
by telephone: 215-674-8476
or send your orders to:
TNC Enterprises, Dept. HBR,
PO. Box 2475
Warminster, PA 18974
Please include your name, address (no PO. boxes, please), telephone number, and payment with your order. For creditcard payment, indicate name as it appears on the card, card number, and expiration date. AmEx, Visa, and MasterCard accepted.
Add $3.50 per slipcase for postage and handling. This offer is available to U.S. customers only. PA residents add 6% sales tax.
Satisfaction Guaranteed
among members of a group; fair compe- tition, which concerns conduct among rivals; and procedural fairness, which entaiis due process.
Fairness has many interpretations, but treating like cases alike is a core as- pect. Unfairness almost always involves differential treatment-favorable or un- favorable-among parties that are simi- larly situated. Although some forms of differential treatment are quite legiti- mate, the vast majority of the codes we reviewed forbid discrimination among
the codes make clear that the corpora- tion is no ordinary citizen. Rather than being full participants in the political and public policy-making processes, companies are directed to avoid "im- proper" involvement in political activi- ties and to recognize the government's obligation and jurisdiction concerning society at large.
The Responsiveness Principle. Un- like the previously discussed principles, this one may have its origins in the mod- em corporate context as a corrective to
We offer the codex not as a minimum code but as a reference that companies can use to assess their current code or to craft a new one.
employees on the basis of non-work- related characteristics, and equal pay for equal work is a recurrent idea. Many of the codes also call more generally for fair treatment, as well as fair competi- tion and fair dealing.
The Citizenship Principle. The vari- ous codes differ considerably on the de- gree to which companies should be ac- tivists on public and societal issues, but they agree on several basic issues of cit- izenship. Perhaps the most fundamental civic duty is respect for law, and all the codes call for observation of relevant laws and regulations. In addition, citi- zens are generally thought to bear some responsibility for maintaining the "com- mons" - such shared and indivisible goods as the natural environment, pub- lic spaces, or legitimate government. Just as individuals should clean up after themselves, companies, too, should re- pair any damage to the commons result- ing from their activities. Beyond this baseline, citizenship implies a willing- ness to deal with public authorities in good faith and may even imply some additional contribution by way of char- ity, civic support, or help in addressing broad societal problems.
The codes include several directives pertaining to the duties of citizenship and their classic violations, such as breaking the law, freeloading, and brib- ing public officials. At the same time,
the indifference that often characterizes bureaucratic systems. It implies a readi- ness to engage with other parties that may be affected by a company's activi- ties or may have a justifiable claim (even if not an entitlement) to attention. Al- though the multisector codes typically call for greater responsiveness than the business codes, the CRT Principles strike something of a middle ground, with precepts on engaging with suppliers and responding to complaints and sugges- tions from customers, employees, and investors.
Some of the provisions found in our source codes-avoid fraud, for instance, and ensure a safe working environ- ment-arise from only one main princi- ple. Others, like guidelines on gifts and entertainment, have links to several. For example, much of what passes for busi- ness entertainment may be more aptly described as personal entertainment at corporate expense. Such diversions of corporate property to personal use are not only breaches of fiduciary obliga- tion, but they are also a form of waste that violates the property principle. And in some cases, excessive gifts are simply a means to secure an unfair competi- tive advantage.
Although the principles have ancient roots, the precepts found in the codes are tailored to the modem business con-
HARVARD BUSINESS REVIEW
text and recognize the corporate entity as an actor in its own right. In these re- spects, the codes reveal their contempo- rary origins, for the modern corporation is a relatively recent invention, and the idea that businesses should observe a set of ethical standards is even more re- cent. In early-twentieth-century legal circles, the corporation's capacity for moral judgment and responsibility was hotly contested. The idea continues to be debated by a few theorists, though by now it is widely accepted-as evidenced by the sheer number of corporate codes of ethics.
By emphasizing the common threads running through these codes and con- necting them to enduring themes in ethical and legal thought, we do not mean to deny important differences in how the precepts are understood and applied around the world. Nor do we suggest that they are consistently ob- served. But we do see an emerging core of global standards of conduct.
The core precepts articulated in these codes reflect ethical principles that have arisen to address problems and concerns in virtually all societies - problems of trust, cooperation, fairness, safety, secu- rity, and so on. Given the central role of business in society today, it is not surprising that these same principles should be applied to corporate behav- ior. We urge business leaders to heed the rising chorus and to take steps now to ensure that their companies' practices are, in fact, up to code.
Creating the Codex The Global Business Standards Codex reflects our findings on standards of con- duct as well as our conclusions about tbe ethical principles informing them. At its core is the body of standards around which we found wide agree- ment. Tbis group includes not only reg- ulatory requirements and items that appeared with some consistency across the various codes but also ones that oc- curred with high frequency in either business sector or multisector codes. For example, we included provisions on con- flicts of interest, the use of company re- sources, and employee privacy - topics
that appear in half or more of the com- pany codes but in few of the multisector codes. By the same reasoning, we in- cluded provisions on forced and child labor and employees' right to free asso- ciation, both listed in all the multisector codes but in only a handful of the busi- ness sector codes.
In a few instances, we included provi- sions that we judged to be important and required by the underlying princi- ples of the codex even though they ap- peared infrequently. Fair treatment of minority share owners and responsive- ness to share owners' concerns, for ex- ample, were mentioned in only one company code and absent from most of the multisector codes.
We organized the codex by principle to reveal the ethical basis of the vari- ous standards. To facilitate implemen- tation, the codex also displays the main constituency affected by eacb provi- sion. Although further research will be required to determine the extent to which companies actually adhere to these standards, the codex may be taken as a first approximation of global best practice.
As we said at the beginning, we offer the codex not as a minimum code but as a reference that companies can use to assess their current code or to craft a new one. Some may adopt a minimalist approach, avoiding violations of the principles and standards articulated here. Others may focus on achieving excellence, enacting these principles in their most robust form. Many will want to take a position on issues outside the consensus area or include their own dis- tinctive values and commitments along- side the basics found in the codex. But all will want to consider where they stand relative to this set of widely recog- nized standards of conduct for global business.
If our hypothesis is correct, companies will ultimately be judged - and tbeir very license to operate may in some cases depend-on their responsiveness to this emerging global consensus. ^
How business
gets better. PETER G[ORDESCU«mut«iii.siT
lOtEttOtO t l IIM tUUtI
r ll r S (I )i r r r o I*
S u c c e s s F I V I [ N O I J R I N S f R I H C I P L I S
I I m U t t l l or lElL LEADEISHIP
"Pettr shares important i n s i s t s forged thniugh a remarkable career—and fasci- nating lite story," —BOB WKK;HT, Vice Chairman, GE
RAPID RESULTS!
Ho* 100-DAY PROJECTS B u i i D T H E C A P A C I T Y t o n
LARGE-SCALE C H A N C E
ROBERT H, SCHAFFER RONALD N ASHKtN,AS
"It's not only a good read, but a gmxi t(M)lkit for action," —DAVE ULRICH, professor,
University of Michigan
Reprint RO512H To order, see page 155.
"A powerful new formula for every husi- ness to become distinct and not extinct!' —RAM CiiAKAN, co-author, Execution
JJJOSSEY'BASS" An Imprint [)1 •4-'WllEY
Now you kmiw.
DECEMBER 2005 i US at ji!sseyl)ass,com
Copyright 2005 Harvard Business Publishing. All Rights Reserved. Additional restrictions may apply including the use of this content as assigned course material. Please consult your institution's librarian about any restrictions that might apply under the license with your institution. For more information and teaching resources from Harvard Business Publishing including Harvard Business School Cases, eLearning products, and business simulations please visit hbsp.harvard.edu.
