CODES OF ETHICS FOR MODERN CORPORATIONS

CODES OF ETHICS FOR MODERN CORPORATIONS
“When nuclear plants blow up, planes crash and firms fail, we tend to blame
human error. The world is a safer place if we can locate the source of a disaster
in an individual’s mistake, poor judgment, or even wicked human nature. While
our recent business scandals have produced the usual rogues’ gallery of
despicable individuals, our deepest fear is that our economic institutions are
flawed in some fundamental way. If so, all seems lost.”
James P. Walsh, Professor of Organizational Behavior and Corporate
Strategy (Crisis in Corporate America, 2005)
Introduction
The latest five or six years can be called a dot.com era, when traditional values tend to
rapid change and diverge from their habitual perception. At the same time, recent events have
clear-cut the vulnerability of post-modern value-system when plenty of what we have already
accustomed just rushes in collapse without any visible reason for estranged observers. At first
glance it can look almost incredible and impossible, but what we consider standards of
stability flummoxes, depriving as sometimes from our abiding faith in future.
Nowadays we are witnessing rapid demands for corporations that are now in the
vanguard of social progress. Recently we have all become the “hostages” of business whether
we like it or not. We are employed by corporations and companies and our welfare depends
on private business as we receive salaries from business, invest in business, and consume the
goods created by business. We are literally surrounded by corporate business in our everyday
life.
As far as modern corporations seem to be the pillars of modern society, people are
eligible to insist for certain accountability of business (Callahan, 1988). In this essay I will
argument the needs for strict codes of ethics for modern corporations. 
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The need for codes of ethics in modern business
Growing value of modern business increasingly requires development of clear
standards of ethic codes and responsibility principles that would be declared and shared by
corporations. These ethic codes which serve “constitutions” for businesses are probably the
most important demands of society to corporations. The ultimate function of ethic is to
produce greatest good for greatest number of people (Callahan, 1988)
The same way as society demands ethics and morality in political sphere
(constitutions and checks and balances systems are obviously the best examples of
governments’ accountability for society) it determines design of corresponding ethic codes in
business environment. Ethic codes are first of all associated with the issues of corporate
compliance, corporate governance, corporate sustainability and corporate social responsibility
(Hurst, 2004).
Corporate ethics is a complex issue and is usually defined as overall relationship of
corporation with all of its stakeholders, including customers, employees, communities,
owners/investors, government, suppliers and competitors (Hurst, 2004). In a wider extent,
business ethic involves moral obligation of CEOs and chief officers, their concern of
organizational and social problems that extend the boarders of a single company. To my
mind, ethic codes are nothing else than CEOs’ obligations to provide transparent and frank
business policy with concern of not only direct shareholders but of a society as a whole. As a
matter of fact, ethic codes are first of all moral responsibilities of companies (Cowe, 2001).
Callahan (1988) subdivides three general perspectives of ethics, i.e.: metaethics (or
the ethics as an ultimate good in philosophical meaning), theoretical normative ethics (what is
generally good or bad) and applied ethic (specific ethic norms and principles applicable to
different spheres). 
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For a long time business ethics had been considered a contestable issue (Callahan,
1988). Though it is widely recognized nowadays, we are still witnessing now the most daring
financial frauds. This thesis seems to challenge the practical need for codes of ethics. Indeed
what is the reason for ethics if it is not followed by CEOs and senior officers? This issue
needs more detailed analysis.
Until the last quarter of XX century business hardly implied excessive humanity.
Ethics and morality were the possible reasons for defeat in a war for clients and market.
However, as the role of private business increased globally, the issue of ethic codes became
one of the central in relationships between business and society.
Growing importance of business ethics is strongly associated with globalization and
forming of transnational corporations. On the one hand globalization created incredible
perspectives for corporations. On the other hand, however, it provided an ever-greatest
challenge for business. Without clear code of ethics all modern system of business may turn
to be a house of cards provoking global and national economies collapse. The 1929 financial
crisis serves a good illustration to this idea (Cowe, 2001).
Since the 1970s, multiple corporations have been gradually recognizing business
ethics in a number of ways. This included development of compliance programs for
personnel, design of board-level ethics committees, introduction of codes of conduct and
value statements, publishing annual reports, recruiting corporate social responsibility (CSR)
managers and provision of special trainings for personnel. Regardless these visible efforts the
problem of ethics in business is still disputable. Observing Callahan (1988, p.10) corporate
ethics in 1970s-1980s received wisdom, values, and pieties of conventional morality
established by tradition and directed by customary rule of the business.
In fact, ethics and morality appear to be complex questions that include philosophical,
moral, ethical, social and economic aspects. However, as conventional wisdom says that 
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excessive morality may spoil one’s business, many companies still prefer not to declare their
codes of ethics. The most common examples are probably Enron, Daewoo Motors,
WorldCom, ImClone Parmalat, Bre-X and many others. Applying the ideas of Callahan
(1988) to the issue many contemporary corporations still tend to be “directed by traditional or
customary rules or practices without stopping to examine or criticize those rules or practices
or customs” (Callahan, 1988, p. 10).
With concern of this governments and people put dramatic efforts to force
corporations follow certain codes of ethics. These efforts are usually endorsed by the
following arguments.
First of all, as mentioned above, modern society is increasingly dependent upon
business. Therewith, taxpayers have the right to know the policy and standards of the
important market players. People have the right to receive the all-round information about the
company, its potential threats, forthcoming crises, etc. In the other words, people have the
right to know if their welfare and investments are managed properly (Grayson, 2005).
The second argument implies relationships between corporations and stakeholders,
i.e. employees and their families, customers, suppliers, investors, etc. In terms of
globalization each company may have millions or even dozens of millions of stakeholders.
Let’s take the instances of McDonalds which services around ten millions people daily or
Microsoft which software is installed obviously on each of thousands’ millions of PC
elsewhere. Hence, quite often the whole civilization appears dependent on a single company.
It is a harmful tendency which must be managed by means of codes of ethics (DeJardins and
McCall, 2000).
The third problem is companies’ accountability for society as a whole. In a wider
context, all people appear to be stakeholders of corporations to a lesser or greater degree.
Hence, they require clear interrelationships between business and society. Thus, the 
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companies are responsible for struggle with long standing problems of society among which
diseases, illiteracy, poverty and underdevelopment can be mentioned.
Eventually, in terms when politics, doctors, engineers and other professionals do have
their codes of ethics it is essential for corporations to develop their own standards of ethical
conduct (Callahan, 1988). The doctors will hardly have a good practice without blameless
reputation; engineers and architects will not have projects without ensuring reliability of their
mechanisms and business; yet, politics will never be elected without a clear program also
implying ethical principles (Lewis, 2003).
Summarizing these theses, the general idea of modern business ethics lies in growing
role of corporations and their intervening into various areas of social life. This growing role
of business leads to increasing moral, social and economic obligations of corporations. This
insists of corporations’ accountability for stakeholders and society in general.
Poor codes of ethics as the reasons behind financial scandals
It is globally recognized that one of the major problems contributing to the collapse of
such giants as Enron, WorldCom, ImClone, Parmalat, Barings and many others were poor
morality and ethics. Also the causality between organizational effectiveness and ethics may
seem vague at first glance both concepts are inextricably linked. Underdeveloped ethical
principles often result in workers non-compliance, high level of employees’ turnover, poor
corporate reputations, ineffective management, poor communication within corporation and
with clients and suppliers, yet, inability to create respected and demanded products. Besides,
absence of control (the system of checks and balances) allows the companies to make
uncontrolled business behind stakeholders’ back.
A good example of ethics’ role in corporate environment is the case of Chrysler.
Being at the point of collapse Chrysler clearly declared its ethic code that inspired hope in 
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stakeholders and society. In 1987 the CEO of Chrysler Corp. Lee Iacocca managed to master
the trouble puzzling out the situation that seemed dead-end. The benefit was double: on the
one hand Chrysler coped with the problem successful and on the other hand received an
image of a trustworthy company which cares of its stakeholders.
There are of course many opposite examples. Recent corporate scandals (e.g.: Enron,
WorldCom, Tyco in the US, Bre-X in Canada, and Parmalat, Vivendi, Ahold in Europe) have
emphasized the vitality of codes of ethics (Thomas, 2005). The case of Enron is one of the
most notorious financial collapses associated with poor business ethics.
Enron that collapsed after a disclosure of massive frauds on December 2001 was one
of the leading companies on the US energy market. Within fifteen years Enron grew up from
local company to the US seventh largest corporation 21.000 personnel in more than 40
countries (Thomas, 2005).
Enron’s case is specific as it used a surrogate (I would called it staged) ethic code. For
three years before its collapse Enron was named among the 100 Best Companies to Work for
in America. In the year prior to its disclosure Enron received six environmental awards for its
politics towards climate change, human rights, and anti-corruption. However, the Enron
corporate code of ethics which appeared to be the most sold issue on eBay soon after
company close was named the never opened book (Lewis, 2003).
The overall theatrics, however, was a part of Enron’s corporate strategy. Enron’s CEO
Jeffrey Skilling used a theatric of leadership to convince stakeholders that the company is far
from financial collapse. Being aware of forthcoming crisis Enron’s chairman kept playing a
sort of a public relations game which measured with knockabout – illusion of corporate
theatre. This knockabout was clearly demonstrated in 1997 when Jeff Skilling signed a
deliberate loss making deal with twenty percent discount (as compared with Peco Company) 
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just to enter Pennsylvania’s market (Hurst, 2004). This showmanship of Enron’s leader was
accompanied with nine radio interviews, plane flights and banners within a single day.
Besides, Enron lied about its net profits and used to conceal the debts so that they did
not show up in corporate accounts. Additionally Enron’s CEO employed the practice of
shady dealings that were not appearing in company’s reports (The Chronology of Enron
Corp., 2005).
The credo of company’s administration was clearly reflected in its motto “The
Coolest Company on Earth” (Streitfeld and Romney, 2002). It is illustrative that when
Enron’s case was about to be regulated its CEO and senior executive managers appeared to
be rats leaving a sinking ship. Unfortunately this kind of ethic is still common in modern
business.
WorldCom, another notorious example of poor codes of ethics, perpetrated
accounting fraud leading to one of the largest bankruptcy in world’s economic history that
took place in July 2002. WorldCom, one of the leading telecommunication companies in the
US and overseas operating in 65 countries, employing around 85.000 people and having a
network stretching over 150.000 kilometers, was accused of fraud following its
announcement it inflated cash flows by US $ 4 billion (Hurst, 2004).
As well as Enron, WorldCom was a victim of poor business ethics that embodied in
poor accounting. On June 25, 2002 WorldCom CEO Bernard Ebbers announced the fact of
improper accounting of US $ 3.8 billion within the periods of 2001 and first quarter of 2002.
It was not a mistake, however. WorldCom deliberately concealed its profits and ignored some
senior managers’ warnings about possible threats. As reported, WorldCom “disguised its true
operating performance” and “misled investors about its reported earnings” (Accounting
scandals, 2005). 
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Again, the issue of corporate ethics was implicated in WorldCom case. Disclosed
companies debts soon led to 80% decrease of WorldCom’s share price. Eventually, in July
2002 after the audit conducted by Arthur Andersen (which in fact indicated no accounting
problems) the company collapsed as well as hundreds thousands of shareholders, including
employees and their families. Within six months that is by the end of 2003 WorldCom’s
assets were estimated to inflate by around US $ 12 billion. It is noteworthy, that quite soon
the company with almost a hundred years experience also stepped in corporate crimes.
Peculiarity and obviously an aggravation of the WorldCom case is that its CEO
Bernard John Ebbers was an active member of Easthaven Baptist Church teaching in Sunday
school. Also he admitted he was unaware of the case, for most people his personality remains
a good illustration of hypocrisy in respect to ethical principles. It is indeed s strange case of
split personality when a moralist who stands behind pulpit becomes a deceiver coming back
to his office (MCI, 2005).
Codes of ethics in a wider context: the need of morality and checks and balances
To assess the ethical issues of all above cases we also need to provide a wider context
for our analysis. With this I mean the need to examine ethical codes of Wall Street – the US
major financial center and Bay Street – Canadian financial Mecca. The point is that neither in
the US nor in Canada can a single deal occur without the implication of Wall Street or Bay
Street financiers. When a company goes a wrong way it is a responsibility of financiers and
accountants to disclosure the evil (Bachelder, 2005). So, in all of the above mentioned cases
financial tycoons were obviously conspiring with CEO and senior executive managers.
It is illustrative that many responders tend to believe that Wall Street higher-ups were
responsible for all of the above mentioned scandals (A Sore Spot…, 2005). Thus, the original
issue of business ethics extends nowadays the limits of a single company; it is rather an ethic
of a business in principle, an issue of responsibility, and moral obligations of greats for 
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common people, yet, an issue of conscience. To my mind it is the same weak moral that is
allegorized in a well-known proverb: one beats the bush while another catches the birds.
I believe that Wall Street and Bay Street need to have greater checks and balances
than national governments. A single governmental administration can not be as effective in
monitoring of corporate ethics as accountants and financial experts. Therewith, the issue of
business ethics needs to be first of all shared by NASDAQ, Toronto and Montreal Stock
Exchange involved in this process.
However, we also can not forget about the ethics of companies. Nowadays we are the
witnesses of increasing tendency to declare one principle of ethics and follow brand different
one. CEO and senior executive managers either hire their relatives and friends or warn them
about forthcoming crises (ImClone and Parmalat case). Financial experts and accountants
often have financial interests in a certain companies or serve as consultants (Enron case).
Brokers often have various interests and do not want to lose their money and upset their
clients (Vivendi case). Politicians often have their own concern in business and maintain
selected corporations, often instructing accountants and experts what to investigate and what
not to investigate (Halliburton case) (Ferrell and Ferrell, 2005).
To my mind this tendency is nothing else than spoiled system of checks and balances,
rotten objectivity and morality, centralization of control in the same offices which need to be
controlled themselves. A good illustration to this idea is Latin morality “Who will guard
(watch) the guardians”. This issue is a dilemma in fact. Actually, there are two possible
solutions. On the one hand it is development of effective system of checks and balances. On
the other hand it is the issue of morality and ethics, responsibilities and obligations, yet,
honesty and dignity of managers and owners. To my mind, the combination of both factors
may be the best way out from the problem. 
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