The impact of codes of conduct on corporate culture:

Measuring the immeasurable

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Companies have been writing codes of business conduct for decades, but the role they play in shaping corporate culture is changing dramatically. The focus is shifting from writing a comprehensive code of rules to regulate conduct to leveraging a values-based code that inspires principled performance among employees, management and executives. This shift is propelled by both internal and external sources. Investors, customers and other stakeholders increasingly want to do business with organizations that have high ethical standards and, as a result, top management and boards of directors are becoming more attuned to the ethical climate of their corporate culture. Additionally, there is increased pressure from regulators, including the U.S. sentencing commission’s amended Federal Sentencing Guidelines for Organizations (FSGO) – generally regarded as the criterion for an effective ethics and compliance program – that now require organizations to focus on promoting an ethical culture and evaluating the effectiveness of their programs.

This paper assesses the impact of codes of conduct and code education on corporate cultures. It suggests ways that organizations can improve the effectiveness of their code programs, with specific examples drawn from successful codes implemented in a variety of companies.

The evolution of codes

Worldwide interest in business ethics and codes of conduct took off in the 1980s. Among the first large corporations to adopt codes of conduct were General Electric, General Dynamics, Martin Marietta (now Lockheed Martin) and several other defense contractors who saw business ethics programs as a way to self-regulate rather than submitting themselves to government regulation.²

In 1991, the U.S. Sentencing Commission issued the Federal Sentencing Guidelines for Organizations (FS GO), outlining the elements of an effective ethics and compliance program. As one component of this, the FS GO recognized that simply having a code was not enough. In this view, the “3P” approach – in which you “Print a code of conduct, Post it on the wall and Pray people actually read it”³ - simply did not form the basis for an effective program. As a result, the FS GO required code education for employees and other mechanisms for communicating and reinforcing organizational values.

In 2002, the Sarbanes-Oxley Act further bolstered the importance of codes of conduct by requiring public companies to have a code of conduct for top executives (and, if they didn’t have one, to explain why). Then in 2003, both the New York Stock Exchange and the Nasdaq required listed companies to adopt and disclose a “code of business conduct and ethics” that applies to all employees and directors. Together with these regulatory developments, having a code became practically a mandate for public companies.

The most recent step in the evolution of codes of conduct occurred in 2004 with the Revised Federal Sentencing Guidelines, which stipulated that companies must promote an organizational culture that encourages ethical conduct and commitment to compliance with the law. The impact of this change in the FS GO is that it effectively elevates a company’s code of conduct into becoming an integral part of its culture, not just a side note to employee education and communication.

Signs of code effectiveness and success

Many corporate leaders agree that “doing the right thing” is its own reward, but they are also finding that a strong ethical culture benefits the bottom line. Studies by LRN, and other organizations, for example, show a direct relationship between good corporate governance, ethics and compliance practices and the strength of numerous business success indicators, such as a corporation’s stock price⁶, customer purchasing patterns, and employee retention.

In several noteworthy cases, the impact of a code has been dramatic. For instance, in the late 1990s, Lockheed Martin’s ethics program prompted a virtual 180-degree turnaround in employee behavior and attitudes over a four-year period. Johnson & Johnson credits its Credo with helping it preserve its reputation and regain public trust after the Tylenol crises of the mid-1980s. During that period, “company managers and employees made countless decisions that were inspired by the philosophy embodied in the Credo.”⁷

In most organizations, the effects of having an inspiring code have been subtle but equally meaningful. Codes of conduct and code education are slowly permeating many corporate cultures, both helping employee understanding of their organization’s values as well as improving employee attitudes toward management. For example, in a recent LRN Ethics Study,⁸ eight out of ten employees say their organization has a written code of conduct or code of ethics, and of those, the vast majority (83 percent) believe that their management genuinely wants to promote ethics and integrity in the organization.

The LRN Ethics Survey also showed that roughly three out of four people who work at an organization with a written code of conduct or code of ethics affirm that their code helps them understand the conduct that the organization values. Nearly three-quarters (73 percent) say it makes the organization a better place to work and that it alters behavior and helps direct decisions. More than eight out of 10 employees apply their understanding of the code frequently on the job. In contrast, other studies have shown a direct correlation between job dissatisfaction and unethical conduct.

Such survey findings are persuasive about the impact that a compelling code of conduct can have on an organization. Indeed, The Ethics Resource Center’s (ERC ) National Business Ethics Survey shows that an organization’s ethical culture greatly influences employee conduct. Key “ethics-related actions” (ERA s) observed in organizations with strong ethical cultures include (1) management communicating ethics as a priority, (2) management setting a good example of ethical conduct, (3) coworkers considering ethics when making decisions, and (4) coworkers talking about ethics in the work they do.

Code endorsements from ethics officers

Melanie Lawrence, Adecco International’s global vice president for compliance, says that employees have become more comfortable discussing ethics and asking ethics-related questions since the company rolled out its code and online code education in late 2005 and early 2006. In one case, employees reported that a high-level executive had been making sexist and ageist “jokes” during business-related conference calls. Lawrence is convinced that they would have remained silent before the company implemented its education program. In addition, the executive, who worked outside the U.S., was unaware that his remarks were offensive and potentially discriminatory (arguably, they were acceptable in his home country), and he appreciated the feedback. This example illustrates the importance of uniform standards of conduct for global companies that operate in countries with contrasting business cultures.

For Anthony Shore, vice president and assistant general counsel of the PMI Group, one sign of his program’s success is the number of times the word “Electric” – the brand the company created for its code of business conduct and ethics – crops up in workplace conversations. This tells Shore that employees are thinking about the code when making business decisions and considering its impact on their behavior.

The success of codes and ethics and compliance programs is also apparent when analyzing hotline or helpline calls. At Temple-Inland, for example, Director of Compliance Paul Liebman tracks calls to the company’s ethics helpline. Since the company started its ethics and compliance program, Liebman has seen a sharp decline in the number of anonymous calls, an increase in the number of callers who first tried to resolve the issue locally, and a significant improvement in the percentage of calls that deal with substantive ethical and legal issues rather than HR-related complaints. To Liebman, these results reflect a positive change in the company’s ethical culture. Employees are developing a better understanding of ethical issues and are becoming more comfortable reporting misconduct and asking questions.

Employee surveys are one of the most effective tools for taking an organization’s “ethical pulse.” Most ethics officers are just beginning to conduct formal employee surveys that focus on ethics, but some have tested the waters with informal surveys. For example, Joseph Sepesy, Dow Chemical Company’s deputy director of global ethics and compliance, has been posting ethics-related questions on the company’s intranet site, receiving thousands of responses. Seventy-six percent of the respondents said that Dow’s Code of Business Conduct influenced their behavior on the job. And a similar percentage said they had consulted or used the code within the preceding year. Almost half of the respondents consulted the code within the preceding month.

Building a strong ethical culture

However, the differentiating factor in the success of a program is not just what’s in the code, but that the organization leverages it to shape its ethical culture. For this reason, many ethics and compliance officers now emphasize the importance of communication using multiple channels to raise employee awareness and disseminate organizational values. For example, in addition to courses, they utilize numerous other methods to engage employees.

Dow Chemical’s Sepesy, for example, finds online education to be a powerful tool for educating employees about a company’s values and standards, but “there comes a time,” he says, “when you just need to have a real person walking around and talking about the code.”

Temple-Inland’s Liebman agrees. The company makes its Standards of Business Conduct and Ethics available electronically and provides online education for employees. But Liebman also takes the show on the road (literally) to get people talking about the code. His well-received “Afternoon at the Movies” events at Temple-Inland’s facilities provide employees with an entertaining venue for discussing ethics. Liebman creates a movie theater atmosphere, complete with popcorn and candy, and shows clips from A Few Good Men to get the conversation rolling.

Several officers likened implementing ethics education to running a marketing campaign. They recognize that their “market” is made up of many different types of employees who respond differently to different forms of communication. Some have created a “brand” around their programs in an effort to raise awareness and send a consistent message.

The PMI Group’s Shore, for example, created the brand “Electric” for the company’s program. And Temple-Inland’s Liebman developed a brand around the company’s ethics helpline number and logo that appears on all compliance-related materials. At PPL Corporation, Chief Compliance Officer Kathleen Matthews developed the slogan “Be a L.E.A.D.E.R.” (Let Ethical Awareness Determine Every Response”) to communicate the company’s core values.

Measuring program effectiveness

Organizations actually have many tools to measure ethical performance. Before reviewing them, it’s important to state that analyzing these measurement tools must be done in context. Each organization is different, with unique organizational cultural factors and risks. Whether an ethics and compliance program is successful depends on the objectives it was designed to achieve. A manufacturing company subject to strict environmental regulation, for example, is likely to have different objectives than those of a professional services firm. And a domestic company may emphasize different things than a multinational corporation does.

Scott Mitchell, president of the Open Compliance & Ethics Group (OCE G) advises organizations to measure the impact of their programs in the context of their cultures. Some organizations, for example, have “report first” cultures, in which employees are urged to report observed misconduct to a compliance and ethics officer immediately. “Report second” organizations, on the other hand, encourage employees to discuss ethical concerns with a supervisor or peer before taking the next step. Other organizations blend the two approaches, asking employees to report first for certain issues and second for others. As a result, a meaningful analysis of survey responses, helpline data and other measures is impossible without first understanding how an organization obtains its reports and how such reports contribute to depicting its culture accurately.

Dave Heller, chief ethics and compliance officer at Qwest Communications, agrees that program success must be measured on an organization-by-organization basis. Qwest recently engaged an outside company to conduct an in-depth ethics survey of its employees. Heller was pleased with the results and found it even more useful to compare Qwest’s results to data gathered from other companies. But for Heller, the real value of this initial survey is in establishing a baseline that allows the company to measure its progress in future years.

Measurement tools

Employee surveys. Comprehensive employee surveys are one of the most powerful tools for taking an organization’s ethical pulse. Surveys measure a combination of actual behavior – such as whether respondents observed misconduct or how respondents acted under certain circumstances – as well as employees’ perceptions of the organization’s ethical climate – such as whether they feel pressure to compromise their ethical standards or fear retaliation if they report misconduct.

Surveys about compliance issues provide valuable feedback on program outcomes as well as the presence of ERA s that measure the strength of an organization’s ethical culture. But questions should not be limited to ethical issues. Research conducted for the Lockheed-Martin Corporation in the late 1990s14 revealed three statistically significant predictors of unethical conduct:

1. pressure to perform – that is, to meet productivity goals;
2. observed misconduct; and
3. job dissatisfaction.

Thus, to provide an accurate reading of an organization’s ethical climate, it is useful to expand survey questions to include information about working conditions and overall job satisfaction.

Interviews and reviews. To interpret organization-wide survey findings better, measurement should also include individual interviews, group interviews or focus groups, and reviews of relevant internal documents (such as policies, annual reports, executive speeches, new employee orientation materials and leadership education materials).

Independent audits. Many organizations engage independent third parties to audit their ethics and compliance programs. Auditors evaluate program components against world-class standards as well as the organization’s specific risk profile and assess the program’s effectiveness through document reviews, employee surveys, interviews and focus groups.

Helpline analysis. Analyzing helpline calls is an effective way to evaluate the impact of ethics and compliance programs. But the key to gleaning useful information from helpline data is to look beyond the raw data such as the number of calls to the actual content of the calls. Important indicators include:

• the number of anonymous calls,
• the number of callers who attempted to resolve the issue locally first, and
• the substantive nature of the call (in other words, whether calls were about ethical or legal issues as opposed to HR -related complaints).

It’s important to recognize that the number of helpline calls can send an unclear message about a program’s effectiveness. After an organization unveils its code of conduct and code education, for example, one might expect reports of misconduct to decline because employees have a better idea of what is expected of them. On the other hand, reported misconduct may initially rise because employees are now better equipped to recognize misconduct. For this reason, helpline call volume analysis may be most meaningful when it’s tracked over time or when combined with call content information.

In addition, “after-action” research can be extremely useful in interpreting helpline data and improving the process. Some organizations, for example, routinely conduct “customer satisfaction” surveys before closing a case file. The survey might ask the caller questions such as:

• Were you aware of the company’s code of conduct?
• Did you consult the code of conduct before you called the helpline?
• Did the code help you determine whether the conduct in question raised ethical or legal issues?
• How difficult was it for you to make the decision to call the helpline?
• Did your first conversation with us raise or lower your level of concern regarding the safety and effectiveness of the process?
• Was our explanation of the limits on confidentiality clear and understandable?
• Were you aware that you had the option to remain anonymous?
• Have you experienced any negative consequences as a result of using the helpline?
• Would you recommend the helpline to a colleague facing a similar situation as yours? If not, why not?
• How might we improve this service?

Targeted feedback. End-of-course surveys or feedback captured as the education is delivered is another important way to evaluate the effectiveness of the education itself as well as to gather additional information about the organization’s culture. Some organizations, for example, include questions at the end of a course on a particular rule asking participants whether they have observed violations of that rule.

General feedback. Job satisfaction surveys, exit surveys and other general feedback tools can also provide valuable insight into an organization’s culture. Incorporating ethics-related questions into general surveys provides yet another channel for employee feedback and may elicit more candid responses. If questions are crafted properly, employees may reveal a lot about the organization’s ethical culture without necessarily realizing they’re talking about ethics. The survey might ask, for example, whether management and supervisors provide information and keep commitments.

Also, as noted elsewhere in this paper, job dissatisfaction can be a predictor of unethical conduct. So, general feedback on the level of job satisfaction among employees has significant ethical implications.

Informal mechanisms. For many ethics and compliance officers, one of the best ways to measure the impact of a code of conduct and code education is simply to listen to what employees are saying about the code and to encourage feedback. Some CEO s have gone so far as to invite all employees to e-mail them with feedback or questions on ethics or other business issues.15 Not only can this approach generate valuable information, but it also sends a powerful message to employees about the importance of an open discussion about ethics.

Benchmarking ethics

Part of the challenge in developing quantitative benchmarks is the need to analyze results in the context of an organization’s culture. As researchers gather additional data from individual organizations and develop more sophisticated analytical techniques, it’s likely that we’ll see the development of benchmarks and metrics that account for differences in ethical culture.

Closing the gap

The most successful ethics and compliance programs are the ones that align the code of conduct and other program elements with the organization’s strategies, values and overall program objectives. As organizations refine and adapt their programs, it will become increasingly important for them to develop measurement techniques – both qualitative and quantitative – that rate their progress toward that goal.

End notes
1 For a history of Johnson & Johnson’s code, see www.jnj.com/ our_company/our_credo_history/index.htm.
2 See International Labour Organization, “Corporate Codes of Conduct,” at www.itcilo.it/english/actrav/telearn/global/ilo/code/main.htm.
3 Randy Myers, “Ensuring Ethical Effectiveness,” Journal of Accountancy, Feb. 2003.
4 Kathryn Tyler, “Do the Right Thing: Ethics Education Programs Help Employees Deal with Ethical Dilemmas,” HR Magazine50, no. 2 (Feb. 2005).
5 See “Emphasis on Strong Compliance & Ethics Reduces Enterprise and Investment Risk, Says OCE G; Cites Study Linking Strong Compliance and Ethics Programs to Stronger Stock Prices,” Business Wire, Feb. 5, 2004.
6 George Donnelly, “Beyond the Code: Benchmarking Ethics, Compliance Programs,” Compliance Week, June 14, 2005.
7 See www.jnj.com/our_company/our_credo_history/index.htm.
8 LRN Research on Code of Ethics (July 5, 2006).
9 See note 6, supra.
10 The U.S. Sentencing Commission recognized this in its 2004 amendments to the FS GO. Among other things, the amendments: (1) expand the purpose of an effective program to include promoting “an organizational culture that encourages ethical conduct and a commitment to compliance with the law,” (2) require organizations to assess ethics and compliance risk areas, and (3) require organizations to periodically measure the effectiveness of their programs.
11 According to the 2005 NBES , “where cultures are strong, it is in part because a formal program is in place. Even further, formal programs are likely to be an essential element in the maintenance of a strong culture.”
12 Lynn Paine, Rohit Deshpande, Joshua D. Margolis, Kim Eric Bettcher, “Up to Code: Does Your Company’s Conduct Meet World-Class Standards?” Harvard Business Review (Dec. 2005).
13 Ibid.
14 Need citation.
15 See Joann S. Lublin, “The Open Inbox,” The Wall Street Journal, Oct. 10, 2005, p. B1.
16 See Edward L. Pittman and Frank J. Navran, “Directors’ Guide to Assessing an Ethical Culture,” Wall Street Lawyer, July 2003, p. 12.