Guidance for the Development of a Code of Corporate Conduct
Comments from ACCA
April 2006
ACCA is pleased to comment on the above consultation. The confidence of stakeholders is of key importance for financial systems and economies to operate effectively and efficiently. The interests of stakeholders must, therefore, be protected. We concur with the view of both the International Federation of Accountants (IFAC) and its Professional Accountants in Business (PAIB) Committee that the values of integrity, transparency and expertise articulated in the Code of Ethics for Professional Accountants should be adhered to by all those in the financial reporting supply chain. This is fundamental to building credibility in financial systems and to the development of sound economies. We also agree that these values should be promoted in a relevant and meaningful way. We welcome, therefore, this opportunity to respond to the exposure draft Guidance for the Development of a Code of Corporate Conduct.
As noted in the IFAC Code of Ethics for Professional Accountant – at paragraph 300.5 – it is expected that professional accountants in business will encourage an ethics-based culture that emphasises the importance of ethical behaviour. We, therefore, congratulate the PAIB Committee in its endeavours to raise the profile of business ethics.
General comment
In general, people are expected to act ethically. That is, to act in ways which accord with principles of generally accepted ‘correct’ conduct. ‘Business ethics’ adds additional layers of ethical issues to the acceptable level of behaviour because of the significance of the economic and financial impact of organisations, which means that they are very often in the public eye. Accordingly, a code of corporate conduct should provide a framework for ‘doing the right thing’.
Values-based codes
Codes of corporate conduct articulate the application of ethical values to business practices. Accordingly, we believe that such codes should be values-based as this approach is best suited to a rapidly changing business environment; a legalistic, rules-based code encourages creative, loophole-based avoidance.
We believe values-based approach provides the necessary framework for analysing the threats and safeguards which users can use to determine appropriate courses of action. It is best suited to the rapidly changing business environment as it allows for the multitude of circumstances which may arise in practice. As such, it best serves the requirements and interests of both the user and stakeholders.
We also believe that the robustness of the values-based approach should not be undermined by the proliferation of detailed underlying rules. The danger is that by including such rules, which literally interpreted, could be circumvented thus undermining the underlying principles.
We have noted above, our support for a values-based code. In our view the guidance note does not adequately set-out the benefits of a values-based approach. A values-based code provides a framework for analysing threats and safeguards to determine appropriate courses of action. It allows users to make responsible decisions, having first taken into consideration all relevant facts.
In many cases there is not a simple choice between right from wrong. Often, it is a ‘right versus right’ dilemma that an individual has to choose between. This provides the greatest challenge when developing codes of corporate conduct, which in turn provides the strongest case for a values-based code to encourage ethical behaviour.
We would, therefore, prefer that the guidance focus on how organisations can achieve a values-based organisation rather than give the, arguably false, impression that this is the third of three stages. Again arguably, going through stages 1 (managing for compliance) and 2 (managing stakeholder relations) will not bring about the best culture for creating a values-based organisation. We, therefore, suggest that organisations be encouraged to aim for a values-based code and creating the culture for such a code to be effective.
Introduction
We are concerned that in the ‘Introduction’, there appears to be an emphasis on the need to ‘enforce standards of conduct’. We believe the approach should be to ‘encourage’ people to ‘do the right thing’. Codes which ‘enforce’ are rules and may encourage loophole-based avoidance. Codes should not simply be about ‘chastisement’; they should be much more about an attitude of mind than simply blind compliance. We would, therefore, suggest that the guidance better promotes the values-based approach.
Benefits of developing a code of conduct
We question whether the second and third bullet points are of general application or whether they are specific to North America. In the UK for example, it is not the case that directors and officers have increased responsibility for the acts of the organisation. The main benefit of a code should be to help users to live up to the values of the organisation. A code of corporate conduct should, therefore, provide a framework for measuring behaviour which is supported by organisation’s employment processes designed to ensure that all employees work in line with this framework.
The role of the professional accountant
Similarly, we believe a code of corporate conduct plays a vital role in strengthening the control environment which is the foundation of, and fundamental to, all other internal controls. We do not see a code of corporate conduct as merely supplementing traditional forms of control.
The IFAC Code of Ethics provides guidance for professional accountants in business. The guidance could usefully make more reference to how the IFAC Code of Ethics can be applied when developing a corporate code of conduct.
Typical content for a code of conduct
We believe this is far too long and will, therefore, not be remembered by employees. A code of corporate conduct should be based on values rather than a list of ‘dos and don’ts’. A values-based code will have a more positive impact on the culture. If an organisation feels it needs to provide examples of ‘dos and don’ts’, this is better set out in an appendix to the code.
Approaches to developing a code of conduct
At the third bullet (page 7), we do not believe the aim should be to ‘follow prescribed standards of conduct and social values’. The aim should be to create a culture where employees ‘do the right thing’ meeting the moral expectations of the board and of society.
Stage 1 – managing for compliance
We do not believe that simply having a code of conduct will ensure compliance with laws and standards. We agree that a code will be an aid to ensuring compliance but on its own, it is of little use. Again, creating a culture where ethical behaviour is promoted is key.
Stage 2 – managing stakeholder relations
We are of the view that establishing codes of conduct to manage stakeholder relations on the basis of ‘self-interest’ could unintentionally result in unethical behaviour.
Stage 3 – creating a values-based organisation
We have stated above our support for codes based on values and believe such codes best support an ethics-based culture. Indeed, such a culture allows for instinctive responses ‘to do the right thing’. The aim should be to have a culture such that there is an instinctive response which ensures ethical behavior. In our view, there is nothing wrong with an instinctive, rather than a compliance-based, response in an ethics-based culture.
We believe people as individuals have values and beliefs. These values should in turn underpin the organisation’s core business values, its mission and goals and how it conduct its business. To make the organisation’s ‘values’ relevant and to influence the collective values of its employees, they have to be values that work and make sense for the individual.
The typical actions - stage 1
We believe stage 1 actions should include ‘assessing or monitoring compliance’.
The typical actions - stage 3
We believe creating a values-based organisation is key to encouraging ethical behaviour. We, therefore, do not regard this, as implied in the text, as a ‘last resort’.
In our view, the implementation of stage 3 should include an assessment or monitoring programme.
Defining the organisation’s values
We agree that in defining the values of an organisation, it is vital there is ‘buy-in’ through consultation and collective commitment as opposed to imposition from the top. As part of this, the process should be transparent and ‘results’ of the consultation should be communicated to employees to enable them to determine how their views have been taken into consideration.
Similarly, we agree that the code’s values should apply to all employees. If it is seen to apply only to non-management employees, the initiative will fail.
International application of codes of conduct
For international organisations, the code of corporate conduct needs to be globally portable. To that end, we believe it must be values-based. It is unrealistic to expect a code of corporate conduct to cover all possible situations that employees may face. Behaving ethically is much more than simply a blind compliance with the code; it is about an attitude of mind.
Precision and clarity
While we agree that clarity is important, we would warn against a proliferation of detailed rules undermining the underlying principles.
The law and the organisation’s code of conduct
While we agree with the sentiment under this section, it should be made clear that compliance with the law is mandatory. By way of example if disclosure of information is required by law, this will override any duty of confidentiality.
Organisational and management challenges
We agree, in endeavouring to create an ethics-based culture, there will be many challenges. Having a code is not in itself sufficient for ethics to be taken seriously. To affect a cultural change needs a ‘champion’. To that end it is essential that that the CEO and the senior management team are fully committed to creating an ethics-based culture. They should ensure that they take all necessary steps to make the code a ‘living and breathing’ document. This will require the organisation to monitor, review, educate, keep up the awareness and report on performance.