The Importance of Codes of Ethics: Examination of the Need of Business Ethics and the Efficient Usage of Codes of Ethics for Good Corporate Governance

Table of Content

I. Introduction
I.1 Motivation
I.2 Issues
I.3 Structure

II. Business ethics and codes of ethics
II.1 The philosophy of ethics
II.2 The evolution of business ethics
II. 3 History of business ethics
II. 4 Business ethics and codes of ethics
II. 5 Business ethics and its forms and definitions
II.6 Business ethics and globalisation

III. Examination of the need of business ethics and the efficient usage of codes of ethics
III. 1 Hypothesis I: There is a need for business ethics
III. 1.1 Evidence in reference to philosophy
III.1.2 Evidence in reference to Adam Smith and modern capitalism
III.1.3 Evidence in reference to the industrialisation
III.1.4 Evidence in reference to the principal-agent-theory and opportunistic behaviour
III.1.5 Evidence in reference to the globalisation and increase of MNEs
III.1.6 Evidence in reference to cultural and legislative influence
III.1.7 Evidence in reference to customer power
III.1.8 Evidence by reference in to public media and NGOs
III.1.9 Critique on business ethics
III.1.10 Economical and reputational gain of business ethics
III.1.11 Measurement of impact of business ethics
III.1.12 Conclusion of hypothesis I
III.2 Hypothesis II: The efficient usage of codes of ethics can improve corporate governance
III.2.1 Definition and development of codes of ethics
III.2.2 Various types of codes of ethics
III.2.3 Motives for the implementation of codes of ethics
III.2.4 Implementation and effectiveness of codes of ethics
III.2.5 Gain Mehrwert of codes of ethics
III.2.6 Critique on codes of ethics
III.2.7 Future outlook for codes of ethics
III.2.8 Conclusion for hypothesis II

IV. Conclusion

V. References

I. Introduction

I.1 Motivation

During my time of studying business and economy, I have been fascinated by the fact that nearly everything in our world is influenced by the global economy. Every simple trade transaction or exchange of services involves a lot of people and impacts several countries nowadays. The constant rise of the globalisation produced multinational enterprises with a lot of power and control over big parts of the world’s resources. The decay of human moral understanding and the recent scandals due to unethical business practices promoted my interest of multicultural and ethical business. The change in the business ethos and the grey zones emerged due to country differences supported unethical business behaviour. Ethics and moral as defined thousands of years ago by the first philosophers need to be taken seriously again. Especially, by institutions, which have an influence on many people and our environment, as businesses have nowadays. My goal is to illustrate this importance of business ethics and their main instrument, the codes of ethics.

I.2 Issues

Is there really a need for business ethics? If everybody would act morally, why is then everybody talking about ethics in the business context?

Following the thoughts of Aristotle’s virtue ethics and Kant’s categorical imperative, there would be no need of business ethics since everybody would be trustworthy and respect the society and the nature. Recent scandals on the other hand illustrated that ethics and moral are not well-known in enterprises with its main goal of profit maximization and that managers tend to live against the categorical imperative. The debate about the connection between business and ethics started with the birth of modern capitalism and intensified with the industrialisation and globalisation. Capitalistic thoughts, increase of corporations and individualization of humans created opportunistic behaviour, which is incompatible with the moral of values according to Aristotle. The globalization and impact of growing number of stakeholders aggravate the situation of the society’s moral understanding. Through NGOs and media pressure and a change in customer’s attitudes towards corporate responsibilities the awareness of a missing moral occurred. Multinational enterprises have to face various dilemmas caused by differences in cultures and national laws. These diversities and gaps on the global level provoke grey zones, which corporations can take and some already took advantage of. To face the challenges of uncontrolled managerial misbehaviour, codes of ethics as moral guiding principles can be very useful and some manager started to realize the advantages. The voluntary codes of ethics can be a guideline for managers, employees and even suppliers. Also, it gives the company an encouragement of the corporate identity and vision, which leads to motivation and cooperation. In this paper, the importance of ethics in business and codes of ethics will be shown in the context of the changing economic world and the codes’ positive impacts on Corporate Governance, if the ethical guidelines are implemented and lived in the right manner.

I.3 Structure

The paper starts with a description of ethics and moral in a philosophical context and then passes on to the growing awareness of ethics in business. The history of business ethics gives a first overview about the significant change in the economy and the increasing need for moral in business patterns. This part of the paper also covers the corporate challenges occurring due to the globalisation and their impact on business ethics. The next section defines business ethics and its fellows, such as codes of ethics, Corporate Social Responsibility, Corporate Governance, Corporate Responsibility, Corporate Citizenship and Corporate Compliance. These fundamentals are the foundation for the two hypotheses.

The next chapter examines the two hypotheses of this thesis. The first hypothesis deals with the need for business ethics and the second hypothesis tries to evolve the importance of codes of ethics. The hypothesis about the need for business ethics is debated by several different aspects. Through falling back on the philosophy, the need is discussed with the help of Aristotle and Kant. Afterwards, the assumption, if ethics is necessary in the economy, is explored by the history of modern capitalism and Adam Smith’s theories. The debate about corporate social and ethical responsibilities exists since the birth of modern capitalism and the changes due to the industrialisation. In this time, the first problems of opportunistic behaviour occurred because of the separation of ownership and control. Companies started to grow and to enlarge their business relations and practices on a global level. This fact brought along various multicultural stakeholders and a variation of interests. The differences in cultures and national laws disclosed several moral dilemmas for business people. This point of the exploration of the first hypothesis illustrates very briefly, a need for an ethical consideration in business practices. The next aim deals with the influence of consumer power on businesses and the customers’ changing attitude towards more responsible enterprises. Several other sources of pressure to covering the moral idea of business practices exist. After exploring the critique, the economic gain of ethical behaviour will be illustrated and the way of measuring this. The first hypothesis will be ended by concluding the findings.

The second hypothesis examines the importance of codes of ethics and their influences on Corporate Governance. This part of the thesis begins with a definition of codes and evaluates the path of developing codes. The differences in codes of ethics will be explained and some examples will be named. Furthermore, the right implementation of codes will be illustrated in detail as that is the prerequisite of a code to be effective. The proper implementation and the effectiveness of codes of ethics are then assumed to assess the influence of codes and their economical gain. After naming some critics and a future outlook, the second hypothesis will be concluded.

At the end of the paper, in the fourth chapter, the findings will be completed and the importance of ethics in business and codes of ethics will be illustrated.

The thesis is based on secondary literature published between the 1970s and 2010.

II. Business ethics and codes of ethics

II.1 The philosophy of ethics

Ethics is a philosophical phenomenon, which with humans examine since several thousand years. Ethics, as a part of philosophy, deals mainly with morality. Behind the term ethics are the main issues about right and wrong behaviour in a society and a moral understanding of human beings concealed. The world of ethics includes mainly three parts, as there are applied ethics, normative ethics and metaethics. Whereas metaethics is dealing with the theoretical approach of morality, the normative ethics includes more practical issues to create moral standards in different societies. The applied ethics involves controversial situations and the moral way of acting. This part of ethics is the science of giving a moral guideline for the ‘right’ behaviour in troubling situations in the society and also in the business world. Accordingly, business ethics is a part of the applied ethics.^[1] The study of morality is the main part of ethics and gives the basis of human behaviour based in the character. The moral of a person is based on rules, which help to live and react in the society. The value system increases the ethical behaviour and leads to principles according to the specific manner people act and which guides them in controversial cases. Human beings have the ability to think objectively about situations and their role inside these moments, to choose rational between given options and commit to their behaviour. Most of these actions are based on intuitionism and impartiality, which come from the basic moral beliefs and the inclusions of other persons due to the fact that humans are social and have the tempted need to live in a group. A part of moral fundamentals is the fact to respect the life of the persons around oneself and to treat everybody in a manner as one want to be treaded oneself.^[2]

Ethics, as a science, covers the main questions about how to live the life in a good manner. The human sense for ethics is based in his moral understanding of the things happening in the world. The basis of this understanding is build due to experiences, traditions and parental teaching and forms the beliefs of people. The freedom of choice, which is given to every living creature on this planet, can lead to problematic situations, which maybe overwhelm the participants of the circumstances. This freedom of choice can be compensated due to moral understanding of humans, which gives a guideline for proper behaviour.^[3]

The ancient Greeks already argued that people who live in an amoral manner and are just self-absorbed, are mainly living against the sense of what human beings represent and are hurting themselves deep in their soul. Plato and Socrates argued in a similar manner. Although morality is subjective, it is a very important part of the existence of humans. As it is visible in the history, people debate and protest, even used and still use violent behaviour to stick to their moral beliefs. In the last thousands of years different patterns and theories of ethics have being evolved. According to the consequentiality view, the morally best action is what will bring the greatest consequences to all being influenced by this action.^[4] Immanuel Kant, one of the most popular ethical theorists, explained moral and ethics by his theory of the categorical imperative. His theory is named as the basis of rational ethics and points out that all humans should arrange their own behaviour according to the welfare of the others.^[5] Kant thought about moral behaviour as a set of maxims, which are created by every single person according to its moral rationality. The categorical imperative stresses out that everybody should act as the personal maxim can lead to a universal law. Kant’s theory is categorical because it is absolutely tied to human moral behaviour. The imperative calls out the guiding part about how one must act. Kant always stressed out the respect for all humans and the existence of humans moral dignity. In his means, people do the right decisions for the right reasons. In corporate context, this idea has sometimes been confused and managers tended to make the right thing just for profit or image reasons. This perspective is not moral, it is more prudential. A moral action has to have a good will according to the Kantian view. Another ethical fundament is the utilitarianism. This approach claims that a good human condition is one, which brings the greatest happiness to everything that can be happy and an activity can be seen as morally right, when the good is balanced over the bad. The principle of utility commits to the principle of maximization of the net good outcome. Placed in the business perspective the utilitarianism gives the principle of the maximization of productivity through efficiency because the source of maximization is the efficiency. And the good and efficient organisation of a corporation leads to higher profits, which is an economic goal.^[6]

II.2 The evolution of business ethics

One of the oldest connections between ethics and economics was invented by Aristotle, a Greek philosopher, in the fourth century BC. Aristotle pointed out that a life of a human being is good, if it is lived according to human nature. He meant that humans often make their life worse because they mainly think about short-term pleasure and are not aware about the long-term effects of their decisions. Aristotle was against the economical drive because he believed that everything what business behaviour represents is against the nature of human beings and ‘bad’ for the character. Business practices spoil the internal nature of people and show a lack of self-control.^[7] According to Aristotle the ‘moral virtue’ gives humans the habit to make the morally right decisions. The primary purpose of morality is the development of a virtuous character. People doing business tend to miss virtues and also moral instinct. Based on Aristotle, the neo-Aristotelian perspective defines ethics as a structure of guiding principles.^[8] In line with these thoughts, business ethics is an effort to create practical rules for moral business behaviour. By specifying the ethical norms and rules concrete guidelines were created. In times of Aristotle these guiding parameters were based on trust, prudence and honesty of the moral business men.^[9] Nowadays, these guidelines occur under the term ‘code of ethics’.

II. 3 History of business ethics

The influence, reach and importance of business ethics can be best shown by drawing the historical development of ethics and moral in the business context. Ethics is way longer a part of business as many business people may believe. In 1907, first moral guidelines for business behaviour were developed and even managers of big corporations started to claim: ‘The greater the corporation, the greater its responsibility.’^[10] In the 1930s, Berle and Dodd discussed the responsibilities of multinational enterprises (MNEs) and their opinion was that big corporations are very powerful and will misuse this power, if they are not managed in the interest of the public. In the 1960s, due to the environmental decline and the Vietnam War, there was a change in consumers’ position. The costumers started to realize that the superior position of corporations needs to be used for a positive change and that the MNEs needed to be more controlled. Especially due to the globalisation, the corporations started to operate all over the world and were harder to control by governmental legislation. On the flipside, claims became loud that the only responsibility of corporations is to maximize the shareholder value and that the only social act in business is to increase the profits. The most important adherent of this viewpoint was Milton Friedman. In the 1980s, a series of takeovers and acquisitions started because of the overall increase in Foreign Direct Investment (FDI) at this time. Most of these took place without any social thought or moral behaviour. The most significance change facing business ethics took place at the end of the 1990s, respectively the beginning of the twenties century and with the end of the Cold War. New technologies occurred, which led to a higher productivity worldwide, but also an improvement in communication technologies and therefore better informed consumers.^[11] Another big influencer of the increasing involvement of ethics in business topics was the signing of the General Agreement on Tariffs and Trade (GATT) after World War II and the development of other important trade zones. Capitalism started to grow and became a worldwide trend.^[12] In the second half of the nineteen’s century, the existence of multinational and global corporations increased. This delivered alteration because the activities of such big firms, which operates in different countries, exceeded the regular economically actions. Also John D. Rockefeller mentioned factors that are importantly connected to the industry and the corporations are capital, management, labour and also the community. As one of the first, he realized that social responsibility of corporations obverse the community is just as important as profit making.^[13] The ‘evolution of expectations’ showed that the social responsibility of MNEs is a moving target. The change in the expectations, what business is or should be all about, did not just make the consumers and non-governmental organisations sit up, but also the managers. In the course of the 70s, more and more manager started to take verbal confessions concerning the social impact their company has on the community and the ways to show more responsibility towards the stakeholders. During this period, the importance of ethics in business and codes of ethics got more visible than ever.^[14] Due to the changes activated by globalisation and the scandals about unethical behaviour of multinational enterprises in the United States, international business ethics became more and more important.

II. 4 Business ethics and codes of ethics

The above mentioned pressure by the public is one reason for the invention of codes of ethics, but mainly a voluntary reason. In the United States, due to the scandals in the last decade, public corporations are legislatively forced to disclose a code of ethics. This development took place in 2002 and was called the Sarbanes-Oxley-Act. In the same year, the Nasdaq stock market and the New York Stock Exchange obliged the disclosure of codes of ethics for all listed companies.^[15] Codes of corporate conduct exist nearly a century, but got the main attention in the 1960s and 1970s. At that time, corporations, international organisations and national governments started to invent and adopt codes of conduct. The most considerable codes in the 70s were invented by the OECD (Organisation of Economic Cooperation and Development) in 1976 and the ILO (International Labour Office) in 1977. The codes of these two organisations are the pioneers of ethical code development. They represent the basis for most of the individual corporate codes, which development exploited in the 1980s. The origin of codes of ethics and the first formal code ever was authored in 1937 by the International Chamber of Commerce (ICC). These standards were invented to eliminate competition between the ICC members and to avoid the damage of the environment and society in the member countries.^[16] According to the ILO, analysts acknowledged four different types of generations of issues in codes. The content of the first generation is dealing with the conflict of interest and is more focused on the interests of the corporation. The second, third and fourth generations are concerning with the public interests and are based on the commercial conduct, the rights of the employees and the rights of the human and the community. The corporate codes of ethics are respectively a part of the first generation.^[17] Modern codes are mainly based on these pioneers and are various due to different industries and the differences based in the corporation’s nature.

II. 5 Business ethics and its forms and definitions

Codes are a part of the movement of the last century towards business ethics. Based on this development, terms as Corporate Social Responsibility (CSR), Corporate Governance, Corporate Responsibility (CR), Corporate Citizenship (CC) and the compliance of the corporation were created. They all deal with ethics and morality in business patterns. This development is mainly based on a new understanding of business relationships towards the employees, the community and the environment. In the last decades, some companies started to think about the interests of their stakeholder and tried to increase the overall economical welfare. Also several managers started to promote their support of social issues and their role of good Corporate Citizens.^[18]

Business ethics, as the generic term, has itself no clear definition. It is rather the other way around. The existence of too many different definitions of business ethics can cause confusion. In business terms, business ethics is a mixture of moral principles connected to daily business behaviour and its impact on the stakeholders and the community involved.^[19] According to another author, business ethics combines values, Corporate Governance and codes of ethics. Business ethics has its focus more on morality at which Corporate Social Responsibility (CSR) spotlights the social, sustainable and environmental issues of business.^[20]

The rising tendency towards Corporate Social Responsibility is a mirror of the change in modern business. The reality of daily business shows that business and society are interwoven and that the expectations on both sides changed. Corporations realize the impact of the society and change their attitude towards it. The society on the other hand expects nowadays more from a company as to make profits. The pyramid of CSR reflects this point of view. The basis of the pyramid with its economic and legal responsibilities meets the requirements of a corporation. The top of the pyramid, which includes the ethically and philanthropy responsibilities get more in the focus at the present time. Especially the crisis, due to corporate scandals, underlines the significance of CSR all along with Corporate Governance.^[21]

The social responsibility of corporations and the Corporate Governance have some parts in common. But more interestingly is their main significant difference. CSR is voluntary and based on ethical rules, whereas Corporate Governance is mainly a binding law.^[22] In the United States of America is the Corporate Governance statue and policy based since the introduction of the Sarbanes-Oxley-Act (SOA) in 2002. In Europe, the governance of corporations is to some parts still a voluntary soft law. Corporate Governance is defined by the OECD as a system to control corporations and the accountability enterprises have towards all their stakeholders.^[23] Based on that context and the increase in complexity in the globalized world, it would make sense to ensure Corporate Governance as a binding law on a global scale. One example for the contrary of the SOA is the German Code of Corporate Governance (GCCG), which was invented in 2000 and represents a guideline for the management and control of German corporations.^[24]

As mentioned above, there are several different terms combined under the generic term business ethics. Next to CSR and Corporate Governance, there are also terms which define different issues of ethics in business. Corporate Responsibility (CR) for example is a part of Corporate Social Responsibility. This branch deals mainly with the interests of the stakeholders. The issue of profit maximization as the only corporate goal and the responsibilities towards the community and the environment are of main importance in this field. Corporate Responsibility also comprises parts of Corporate Governance and Corporate Citizenship.^[25]

Corporate Citizenship spells out the way, in which a company means to act in a community as a good citizen. Corporations commit to behave as one of the neighbourhood and not just to offer workplaces, but also to give support within the area and its environmental system.^[26]

Corporate Compliance gives a guideline of regulations and rules for employees and managers. The invention of Corporate Compliance and in some companies even a compliance manager, was mainly done to defend the enterprise against violating behaviour of managers and employees and for this reason arising expensive lawsuits. The innovation of Corporate Compliance started in the 1980s in relation to the first big corporation scandals.^[27]

II.6 Business ethics and globalisation

Business ethics on an international level faces way more challenges as bringing ethical behaviour in country-specific business transactions. Multinational enterprises have to face the differences in cultures and due to that the different traditions and also various religions, which all influence the moral understanding and per se the behaviour of the people. These differences can lead to controversial opinions of ethically ‘right’ behaviour.^[28]

The increase in advertence in business ethics was mainly dependent on the challenges the globalisation brought along. In the last century, barriers of trade were removed and the worldwide production, flow of trade and capital increased and more and more strategically alliances were adopted. Due to this development, a maceration of national borders occurred and the denationalisation started to grow. The invention of the North Atlantic Treaty Organisation (NATO) and the European Union (EU) are good examples for that shift of geographical and also political borders.^[29] That led among other things to legislative problems. It was generated a deferral of the competency and differences in the laws around the globe. That fact gave the multinational enterprises the opportunity to use the outcome of this, namely the grey zones for amoral profit maximisation. It is not everything illegal worldwide, what is seen as unethical. These facts brought up critique concerning globalisation. Reviewers argue that the principles of globalisation with its protection for free trade and an open marketplace are not appropriate for less developed countries and leaves too much room for corporations to profit from the non-industrial countries.^[30] Although these critiques, Peter Senge is talking about a revolution, which happens right now caused by the globalisation. He mentions that an interrelation exists due to the disappearance of the national boarders and that it is dependent on business and non-business organisations to realize that the whole world is interconnected. Humans tend to think in a moral manner, but also tend to act not that way as are corporations and their managers. The global businesses have nowadays the chance to change something and close the grey zones by acting ethical.^[31] Non-governmental organisations (NGOs) have an increasing awareness of this ‘greenwashing’ of corporations’ image and started to make such behaviour public. Even though, multinational enterprises invented social responsibility programs, the amoral behaviour for seeking profit did not stop eventually. Nowadays, corporations are mainly forced to behave in the right manner due to the invention and interconnection of the globalisation. New technologies in the communication area give the consumer the opportunity to inform themselves about companies and their habits before purchasing. Also non-governmental organisations invented websites, which offers facts and news about the real social behaviour of MNEs.^[32]

In conclusion of this chapter, the change in the economic and business world in the last centuries was recognizable and the impacts theses changes had on the ethical attitude towards business. The main fundamentals concerning ethics, morality, the change through globalisation and the developed subjects referred to business ethics were explained. They represent a basis for the following controversy about the need of ethics in business and their main instrument the codes of ethics.

III. Examination of the need of business ethics and the efficient usage of codes of ethics

The second chapter gave an overview of ethics and its forms and perspectives. Furthermore, it showed the history of ethics in business relation. The ethical understanding of morality and the context of ethics in business show the implications of business ethics. This fundamental impression will be the basis for the further two hypothesis. To call out the importance of codes of ethics in this paper, the first hypothesis will deal with business ethics and its need in the modern business world. It can be assumed that codes of ethics just can be important or effective in any way, when there is a basic need of ethics in nowadays business. To illustrate the significance of the codes, the importance of business ethics and its increasing awareness has to be referred. By means of the mentioned fundamentals as the change in the world economy due to globalization and the condition and goals of the present business world, the need for business ethics will be proofed. The second hypothesis will examine the importance of codes of ethics in the business context. This hypothesis will be analysed by firstly defining codes of ethics and investigate their development and various types. Subsequently, the reasons for adopting a code and its implementation will be discussed. This is essential due to the fact that codes just can be effective when they are implemented into the organisation and lived by all stakeholders. The effectiveness is an important requirement to analyse the importance and influence of codes of ethics. This impact of codes, as a part of an ethical organisation, will be illustrated.

[...]

^[1] Richard. 1989. There is ethics in business ethics; but there’s more as well, pp. 337-339.

^[2] Newton. 2005. Business ethics and the natural environment, pp. 11-19.

^[3] Machan/Chesher. 2002. A primer on Business Ethics, pp. xiii-xv.

^[4] Adams/Maine. 1998. Business ethics for the 21st century, pp. 1-13.

^[5] Albach. 2005. Unternehmensethik: ein subjektiver Überblick, pp. 1-5.

^[6] Beauchamp/Bowie. 2004. Ethical theory and business, pp. 16-27.

^[7] Adams/Maine. 1998. Business ethics for the 21st century, pp. 25-27.

^[8] Machan/Chester. 2002. A Primer on business ethics, pp. 42-43.

^[9] Beauchamp/Bowie. 2004. Ethical theory and business, pp. 28-38.

^[10] Böhm. 1979. Gesellschaftliche verantwortliche Unternehmensführung, p. 53.

^[11] Shestack. 2005. CSR in a changing corporate world, pp. 98-100.

^[12] Adams/Maine. 1998. Business ethics for the 21st century, pp. 3-4.

^[13] Böhm. 1979. Gesellschaftliche verantwortliche Unternehmensführung, p. 54.

^[14] Ibid, p. 11.

^[15] Schwartz. 2004. Effective Corporate Codes of ethics: Perceptions of Code Users, pp. 323–343.

^[16] Mamic. 2004. Implementing codes of conduct, pp. 36-37.

^[17] International Labour Office. 2001. Codes of conduct and multinational enterprises, chapter I.

^[18] Böhm. 1979. Gesellschaftliche verantwortliche Unternehmensführung, p. 10.

^[19] http://www.allbusiness.com/glossaries/business-ethics/4962856-1.html

^[20] Thomas. 2005. Business ethics, pp. 31-36.

^[21] Luo. 2007. Global dimensions of corporate governance, pp. 197-199.

^[22] Mullerat. 2005. The global responsibility of business, pp. 3-5.

^[23] Walsh/Cowry. 2005. CSR and corporate governance, pp. 38-53.

^[24] Pfitzer/Oser. 2003. Deutscher Corporate Governance Kodex, pp. VI-VII.

^[25] http://www.business-ethics.org/primer.asp

^[26] Schmeisser, et al. 2009. Shareholder Value approach versus Social Responsibility, pp. 85-88.

^[27] Geißler. 2004. Was ist compliance management?

^[28] Karmasin/Litschka. 2008. Wirtschaftsethik – Theorien, Strategien, pp. 176-182.

^[29] Beisheim, et al. 1999. Im Zeitalter der Globalisierung? pp. 16, 266-320.

^[30] Machan/Chester. 2002. A Primer on business ethics, pp. 159-169.

^[31] Senge, et al. 2010. The necessary revolution, pp. 5-22.

^[32] Spitzeck. 2008. Moralische Organisationsentwicklung.