How do you manage legal risk in today’s litigious world, when the actions of just one employee can result in exposure for your company?
A corporate code of conduct is the answer. Also called a code of ethics or corporate compliance, a code of conduct is in essence a company’s internal constitution. It can motivate people and give them a common framework and rules on how to do their jobs within the company’s vision.
From a strictly organizational standpoint, it’s valuable to have a document that spells out a company’s values and gets all employees on the same page, so to speak.
If your company is small, with 12 people showing up everyday and working beside each other in the same office, everyone likely understands those values. But if you have a larger company, with employees in different locations, maybe even different countries, a code of conduct can help bridge the gaps.
Legally, corporate boards and executives have a fiduciary duty to shareholders and the company itself to assess and manage risk. It’s easier to manage risk with an internal mechanism, where the company can be made aware of breaches or allegations of wrongdoing.
No company ever thinks they’re going to get in trouble or violate the law. But companies can be exposed to criminal or civil legal exposure based on the conduct of just one employee. In this regulatory environment, many companies will be subject to some legal exposure, particularly in the civil context.
Let’s say a plaintiff accuses someone at your company of sexual harassment. The plaintiff’s attorneys will ask for your code of conduct. You will look bad if you don’t have a code of conduct that talks about sexual harassment or provide employees with sexual harassment training.
Codes of conducts are not magical documents. You will not be immunized from legal exposure because you have a pre-existing code of conduct.
However, agencies such as the Department of Justice will treat you less harshly if you do. In fact, the Department of Justice looks at various factors when considering whether to charge a company with a crime. One is: Does the company have a pre-existing code of conduct? If your company does, and periodically re-evaluates that code, U.S. sentencing guidelines spell out that the fines and penalties will be less severe.
A good code of conduct usually sets out the company’s vision. An introductory comment from the highest-ranking officer can set the tone at the top: “Here’s our code of conduct. Here’s why you need to adhere your daily conduct to this code.”
The best codes are based on a risk assessment of a company and tailor the code to what the company does. If you’re simply selling widgets domestically, for example, your code of conduct will look differently than if you’re selling fighter jets to foreign governments.
Your code of conduct should address: What does our company do? Who do we interact with? Where are we doing business? The main thing is to rank and categorize the risk areas that affect your business and then manage that risk through this code of conduct.
The code also needs to spell out reporting mechanisms (anonymous or third-party methods are the best) and disciplinary procedures for breaches of the code. Companies with robust codes of conduct often reward employees who identify issues or problems.
Your code of conduct needs to be a living, breathing document, not a “paper program” that is distributed once and then never referred to again. Your code needs to be well-communicated. If you have employees all over the world, don’t forget that the overseas employees can still cause you legal exposure. If you need to translate your code of conduct into Mandarin or Hindi, do it.
If employees see your CEO committed to this code in everything he or she does, they get the message that it applies to them too. Motivating employees to share your company’s values and ethics is so much better than having a Justice Department or FBI agent show up at your office door some morning.
Chuck Williams is dean of the College of Business at Butler University. Mike Koehler, assistant professor of business law at Butler, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness or e-mail Chuck at firstname.lastname@example.org.
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