Code of Ethics: Understanding Its Types, Uses Through Examples

What Is a Code of Ethics?

A code of ethics is a guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values, and the standards to which the professional is held.

A code of ethics, also referred to as an "ethical code," may encompass areas such as business ethics, a code of professional practice, and an employee code of conduct.

What is the Purpose of a Code of Ethics?

Business ethics refers to how ethical principles guide a business's operations. Common issues that fall under the umbrella of business ethics include employer-employee relations, discrimination, environmental issues, bribery, insider trading, and social responsibility.

While many laws exist to set basic ethical standards within the business community, it is largely dependent upon a business's leadership to develop a code of ethics.

Both businesses and trade organizations typically have some sort of code of ethics that their employees or members are supposed to follow. Breaking the code of ethics can result in termination or dismissal from the organization. A code of ethics is important because it clearly lays out the rules for behavior and provides the groundwork for a preemptive warning.

Given the importance of climate change and how human behavior has severely impacted the climate, many companies have begun to include climate factors in their code of ethics. These principles include the ways in which the company is dedicated to operating sustainably or how they will shift to doing so.

In many cases, this commitment to sustainability adds to the costs of a company, but because consumers are becoming more focused on the types of businesses they choose to engage with, it is often worth the cost to maintain a good public image.

Regardless of size, businesses count on their management staff to set a standard of ethical conduct for other employees to follow. When administrators adhere to the code of ethics, it sends a message that universal compliance is expected—no employee is exempted.

Types of Codes of Ethics

A code of ethics can take a variety of forms, but the general goal is to ensure that a business and its employees are following state and federal laws, conducting themselves according to an ideal that can be exemplary, and ensuring that the business being conducted is beneficial for all stakeholders. The following are two types of codes of ethics found in business.

Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes of ethics not only set guidelines for conduct but also determine penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries formulate compliance-based codes of ethics to enforce laws and regulations. Employees usually undergo formal training to learn the rules of conduct. Because noncompliance can create legal issues for the company as a whole, individual workers within a firm may face penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint a compliance officer. This individual is tasked with keeping up to date on changes in regulation codes and monitoring employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and well-defined consequences rather than individual monitoring of personal behavior. Despite strict adherence to the law, some compliance-based codes of conduct do not thereby promote a climate of moral responsibility within the company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company's core value system. It may outline standards of responsible conduct as they relate to the larger public good and the environment. Value-based ethical codes may require a greater degree of self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values. For example, a grocery store chain might create a code of conduct that espouses the company's commitment to health and safety regulations above financial gain. That grocery chain might also include a statement about refusing to contract with suppliers that feed hormones to livestock or raise animals in inhumane living conditions.

Code of Ethics in Different Professions

Certain professions, such as those in the finance or health fields, have specific laws that mandate codes of ethics and conduct. 

Accountants

Certified public accountants (CPAs), who are not typically considered fiduciaries to their clients, still are expected to follow similar ethical standards, such as integrity, objectivity, truthfulness, and avoidance of conflicts of interest, according to the American Institute of Certified Public Accountants (AICPA).

Financial Advisers

Financial advisers registered with the Securities and Exchange Commission (SEC) or a state regulator are bound by a code of ethics known as a fiduciary duty. This is a legal requirement and also a code of loyalty that requires them to act in the best interest of their clients.

Code of Ethics vs. Code of Conduct

A code of ethics is similar to a code of conduct. Both are sets of professional standards to guide the behavior of an organization's members.

However, there are some subtle differences: a code of ethics is used to ensure that members have sound and unclouded judgment. Examples include the legal codes that prohibit lawyers from accepting cases where they have a conflict of interest or those that prevent brokers from trading against their clients.

A code of conduct, on the other hand, guides the specific actions of a company's employees. It may contain certain norms of professional responsibility, such as punctuality and accuracy. Most companies have an employee code of conduct, both to maintain professionalism and to prevent friction among their employees.

How to Create a Code of Ethics

Organizations create codes of ethics in order to eliminate unacceptable or immoral behavior from their members. These are typically structured around existing ethical issues within their industry.

The first step is for the organization to identify its priorities, as well as any ethical issues that it wishes to avoid. For example, an organization may want to avoid having conflicts of interest because of previous scandals in which employees acted against the interests of the company or clients. As a result, their code of ethics might prohibit certain inappropriate relationships, or prohibit employees from any appearance of a conflict of interest.

What Is an Example of a Code of Ethics?

Many firms and organizations have adopted a code of ethics. One good example comes from the CFA Institute (CFAI), the grantor of the chartered financial analyst (CFA) designation and creator of the CFA exams. CFA Charterholders are among the most respected and globally recognized financial professionals. According to the CFAI's website, members of the CFA Institute, including CFA Charterholders, and candidates for the CFA designation must adhere to the following Code of Ethics:

• Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
• Place the integrity of the investment profession and the interests of clients above their own personal interests.
• Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
• Practice and encourage others to practice professionally and ethically that will reflect credit on themselves and the profession.
• Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
• Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

The Bottom Line

A code of ethics is a guiding set of principles intended to instruct professionals to act in a manner that aligns with the organization's values, and is beneficial to all stakeholders involved. A code of ethics is drafted by a business and tailored to the specific industry at hand, requiring all employees of that business to adhere to the code.

The moral choices of businesses have evolved, from the industrial age to the modern era. In the world we live in today, working conditions, how a business impacts the environment, and how it deals with inequality, are all areas that are garnering a greater degree of attention. A code of ethics helps ensure that businesses will act with greater integrity at various levels of the organization.