Why a Code of Conduct is Important for the Entrepeneur (Dingman Center of Entrepreneurship, 2005)


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Why a Code of Conduct is Important for the Entrepeneur (Dingman Center of Entrepreneurship, 2005)

  1. 1. Do Business Ethics Matter? Why a Code of Conduct Is Important for the Entrepreneur Dingman Center of Entrepreneurship University of Maryland, College Park Michael D. Pfarrer R.H. Smith School of Business University of Maryland College Park, MD 20742 Tel: (301) 653-0458 mpfarrer@rhsmith.umd.edu Business ethics has certainly been in the news lately. Beginning with the rash ofcorporate corruption cases at the beginning of this century, corporate behavior has been labeledamoral at best, illegal and immoral at worst. Indeed, the wave of corruption cases in the news hasrekindled calls for ethical training in the boardroom and workroom, as well as in the classroom.Clearly, US businesses have seen better days as far as their images and reputations go. For example, 68% of the respondents to a 2004 Harris Interactive, Inc. and ReputationInstitute Quotient study rated the reputations of US businesses as “not good” or “terrible”(Alsop, 2004). Consistent with these ratings, there has been a twenty-eight percent increase infinancial restatements over the last three years (Johnson, 2005) along with more than 900charges of corporate crime and over 500 convictions (Johnson, 2004). With unethical behavior at the center of many debates as to how to best train our currentand future business leaders, it is time for entrepreneurs to be leaders in setting future standardsfor business behavior as well as to take a proactive role in educating tomorrows industryemployees (Rousseau, 2004a, 2004b). Ironically, the recent spate of unethical behavior has givenfounders of new firms the opportunity to take an active role in shaping industry expectations. Asnew firms are established, they will take heed of successful entrepreneurial activities and pattern 1
  2. 2. themselves after such behavior. Why not have a strong code of ethics be a part of that successstory? WHY A CODE OF ETHICS? Ethics can be a messy business. Scholars and practitioners alike have often argued over adefinition of ethical behavior, as well as the necessity for a code of ethics in organizations.Indeed, there appears to be no clear moral compass to guide organizations (McNamara, 2005).But, if one operates under the assumption that business has a moral responsibility to act ethically(to which some would disagree [cf. Locke & Noel, 2004]), then a code of ethics is a logical nextstep to help codify proper behavior in organizations. If ethical behavior is somehow "doing the right thing" (McNamara, 2005), then perhapsdefining unethical behavior is less ambiguous, and more helpful in understanding the need for awritten code of ethics. Unethical behavior is manifested in organizational actions that are deemedimmoral or unacceptable according to societal norms or general standards of conduct. In otherwords, unethical acts are those that disrupt the harmony in the relationship between anorganization and its stakeholders because they violate the ideas of honesty and fairness (Sharpe,1993). A written code of ethics, then, can serve as a guide to organizational members in helpingthem determine what actions are unethical, and thus proscribed by the code. Why do entrepreneurial firms need a code of ethics? Some would argue that a code issuperfluous, that professionals are keenly aware of unethical behavior and that such a code is notneeded (Hunt & Tirpok, 1993). However, the recent wave of corporate scandals and unethicalbehavior has shown that highly educated, white-collar workers are as susceptible to immoral andunethical actions as anyone. Hence, on one level, one could argue that a code of ethics isnecessary to help expressly dictate what behavior is unacceptable. On another, as important 2
  3. 3. level, an effective code of ethics is necessary for entrepreneurs to signal that they are seriousabout combating unethical behavior in business. Similarly, designing an effective code signalsthat entrepreneurs are proactive and that it is interested in issues that affect the public (that it"matters"). As professionals, entrepreneurs should be held to a higher standard; they should beleaders in developing better ethical guidelines for the industry; they should be seen as a beaconto those they lead. In the end, ethics is good public relations (Rousseau, 2004a, McNamara,2005). By taking the lead in creating an effective, emulative code of ethics, entrepreneurs send asignal to future stakeholders that it does matter, while meanwhile expanding their profile andenhancing their image. IMPLEMENTING AN EFFECTIVE CODE OF ETHICS As an early stage entrepreneurial company it is never too early to start thinking about andimplementing a code of conduct to ensure ethical standards are ingrained into the corporateDNA. This ensures that all the process and procedures for a well-managed, investor-ownedcompany are robust and developed. Implementing a code of conduct in an important first step.An effective code of ethics... 1. Elects Board members and recognizes students and industry needsEntrepreneurial firms should elect a board of directors that includes both inside and outsiderepresentation to ensure that their bylaws, policies, and codes reflect the importance of includingthese stakeholders in their implementation. 2. Elects an ombudspersonAt the same time, entrepreneurial firms should elect an ombudsperson whose responsibilityincludes coordinating ethics policies, institutionalizing the code, and who serves as an advocate 3
  4. 4. for employees and board members who report, or who are involved in, an ethical dilemma(McNamara, 2005). 3. Is supported by the firms’ officers and leadersNo code of ethics will be heeded if officers and leaders do not support it (Fleming, 2004b;McNamara, 2005; pr reporter, 1991). To that end, executives should ensure that they place highpriority in supporting and disseminating the contents of the code. 4. Is communicated to all members and stakeholdersThe code of ethics, in order to be effective, needs to be publicly distributed to all members andstakeholders, including publishing it internally and externally (Fleming, 2004b). Failure toproactively discuss and distribute the code will lead to its ineffectiveness and eventualobsolescence. 5. Has trainingAn effective code of ethics provides training to its members (McNamara, 2005; pr reporter,1991), including on-going education. 6. Has a hotlineThe entrepreneurs’ code of ethics should have an ethics hotline (Fleming, 2004b; McNamara,2005) where individuals are encouraged to report ethical misconduct without fear of reprisal. 7. Has sanctions and enforces themAn effective code of ethics must show stakeholders that violators will be punished. If offendershave little fear of punishment, than stakeholders will see those espoused values in the code aslittle more than lip service (Bivens, 1993; McNamara, 2005; ODwyers PR Services, 1992; prreporter, 2001; Seib & Fitzpatrick, 1995). In this vein, an improved code should attempt to listthose behaviors it deems unethical, as well as provide respective punishments for said violations. 4
  5. 5. At the same time, the code should encourage cooperation by working with offenders instead ofinstantly punishing them (Ayers & Braithwaite, 1992) As Fleming noted, "elements of bothcompliance and aspiration can enrich a code" (Fleming, 2004a: 6). Regarding sanctions, aneffective code should allow for outside adjudication as well as a panel of peers to judge anyproscribed behavior (ODwyers PR Services, 1992). 8. Is regularly updated and flexibleAn effective code of ethics should be viewed as a living document (Fleming, 2004b; Hunt &Tirpok, 1993; McNamara, 2005; Seib & Fitzpatrick, 1995). That is, it should be flexible enoughto allow for changes in social norms, and it should be reviewed and updated when necessary. 9. Has a pledge that members take regularly, including a signed oath as part of membership.Finally, an effective code of ethics should include both an oral and written pledge that memberstake annually (PR Educator, 2001; Rousseau, 2004b). For example: I recognize my responsibility to the firm’s stakeholders to conduct business in a truthful and ethical manner. I believe in exhibiting trustworthy behavior to our stakeholders. I also espouse treating our stakeholders with care, justice, and fairness. Finally, I recognize that I have a responsibility to myself, other members of the firm, and society at large to exhibit civic virtue and citizenship. Absent any explicit prohibition in the Code of Ethics or that which is proscribed by law, I pledge to adhere to a "reasonable person" approach to my behavior. I recognize that I have a duty to treat others with dignity and thus conduct myself in an ethical manner at all times. 5
  6. 6. REFERENCESAcademy of Management Journal. 2002. Academy of Management code of ethical conduct. 45: 291-294.Alsop, R. 2004. In business ranking, some icons lose luster. The Wall Street Journal, November 15: B1.Ayres, I., & Braithwaite, J. 1992. Responsive regulation: Transcending the deregulation debate. New York: Oxford University Press.Bivens, T.H. 1993. Public relations, professionalism, and the public interest. Journal of Business Ethics, 12: 117-126.Carroll, A.B. 1991. The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, July-August: 39-48.Ethics Resource Center, 2003. Proposed standards and business school responsibilities. www.ethics.org, accessed March 14, 2005.Fleming, J. 2004a. Implementing a code of ethics. Academy of Management News, 35(3): 6.Fleming, J. 2004b. Implementing a code of ethics. Academy of Management News, 35(4): 10.Hambrick, D.C. 1994. What if the Academy actually mattered? Academy of Management Review, 19: 1-16.Hunt, T., & Tirpok, A. 1993. Universal ethics code: An idea whose time has come. Public Relations Review, 19: 1-11. 6
  7. 7. Johnson, C. 2004. Motivated to prosecute. Cracking down on corporate crime. The Washington Post, October 20: E1.Johnson, C. 2005. Restatements up 28 percent in 2004. Washington Post, January 20: E4.Locke, E.A., & Noel, T.W. Right problem, wrong solution: A rejoinder to Mitroff’s & Swanson’s call to action. Academy of Management News, 35(3): 4.McNamara, C. 2005. Complete guide to ethics management: An ethics toolkit for managers. www.managementhelp.org/ethics/ethxgde.htm, accessed March 15, 2005.O’Dwyer’s PR Services, 1992. PR corruption is rampant. 6(12): December.Pfeffer, J., & Salancik, G.R. 1978. The external control of organizations. New York: Harper & Row.PR Educator, 2001. New ethics include new pledge. Spring.pr reporter, 1991. Elements of a successful ethics program. 34(45): November 18: 4pr reporter, 2001. Report criticizes PR’s code of ethical standards. April 23.Rousseau, D. 2004a. Presidents message. Academy of Management News, 35(3): 1-2.Rousseau, D. 2004b. Presidents message. Academy of Management News, 35(4): 1-2.Sharpe, M.L. 1993. Public relations = ethical social behavior. PR Update, April: 3.Seib, P., & Fitzpatrick, K. Public relations ethics. Fort Worth, TX: Harcourt Brace.United States General Accounting Office. 2002. Financial statement restatements: Trends, market impacts, regulatory responses, and remaining challenges. Washington, DC: United States Printing Office. 7