CORPORATE GOV (CODE OF CONDUCT) | Marc Cunningham LLC

Corporate Governance (Code of Conduct)

The apparent subconscious need of humanity for some sort of behavioral guidance framework seems to be almost as ancient as time itself.

Through the millennia, various such frameworks for behavioral guidance have appeared, either through the concerted efforts of human ingenuity or otherwise.

The Talmud identified six hundred thirteen (613) commandments in the Pentateuch – two hundred forty-eight (248) “positive” commandments (“...thou shall do....”), which number coincidentally is the same number as the bones in the human body, and three hundred sixty-five (365) “negative” commandments (“...thou shall not do....”), which number coincidentally is the same number as the days in a standard year.

King Hammurabi of Babylon was the impetus for the creation of the very-extensive and detailed Code of Hammurabi, sometime between 1792 B.C. and 1750 B.C.

In approximately 1500 B.C., the Prophet Moses fortuitously-received two stone tablets, the writing on which coincidentally condensed the 613 Pentateuch commandments into Ten.

Then, in approximately 32 A.D. the founder of Christianity emphasized the importance of 2 of those Ten Commandments, which happen to involve particular conduct.

Roman Emperor Justinian felt the necessity for providing guidance to the diverse citizens of his vast empire with concise and clear authority, so he published the Codex Justinianus sometime between 529 A.D. and 534 A.D., which eventually evolved into the model for all other behavioral guidance frameworks (a/k/a “laws”) in the “Old World” (a/k/a European) countries, and later, by extension, to many “New World” countries (such as the United States of America).

Although all the above-mentioned behavioral guidance frameworks attempted to address myriads of behaviors for many situations, many of which have since become irrelevant and obsolete, all the above-mentioned behavioral guidance frameworks have had one common theme – they all always aimed at avoiding anarchy and instability, by providing guidance focused on the types of human behaviors that would hopefully promote continuous harmony and stability for whichever types of societies such frameworks were intended to apply.

Over the recent centuries, the general references to various behavioral guidance frameworks have evolved into the generic modern term “code of conduct”.

A code of conduct is not the same as a code of ethics and must not be referenced interchangeably with a code of ethics; a code of conduct governs how employees should act from a behavioral perspective; although a code of conduct may be derived from a code of ethics, and the two codes may function together simultaneously within the enterprise, and may even be combined together into a single document, the code of conduct is more of a practical document, whereas the code of ethics is more of an aspirational document; the code of conduct is intended to address certain behaviors of enterprise employees in response to certain situations, whereas the code of ethics aims to address the decision-making processes of employees in such situations; at a minimum, every business entity should have a code of conduct, but it would be better for every business entity to have both a code of conduct and a code of ethics.

Various global deliberative bodies and institutions have either promulgated various codes of conduct, or have recommended that enterprises voluntarily promulgate codes of conduct, intended to address various behaviors in various contexts, such as the: Brazilian Institute of Corporate Governance; Caux Round Table – Principles for Business; Consumers International Consumer Charter for Global Business; Global Reporting Initiative (GRI); Hong Kong Independent Commission Against Corruption; Interfaith Center on Corporate Responsibility Principles for Global Corporate Responsibility; International Labour Organisation Fundamental Conventions; Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises; South Africa King Committee on Corporate Governance; United Nations Global Compact.

Such codes have included various recommended principles for acceptable conduct, some of which are more-prevalent than others, such as: citizenship (the enterprise must always act as a responsible citizen of both the local community as well as the global community); dignity (respect the health, privacy, safety and welfare of all stakeholders – which may currently be defined as all people affected in any way by an enterprise, including not only those with ownership interests, such as shareholders and investors, but also non-owner individuals, such as employees, consumers, end-users and those in the local and global communities – at all times and in all locations where any enterprise-related business is conducted); fairness (all business practices of the enterprise must be conducted in the most-equitable manner under the circumstances); fiduciary duty (every employee should act as a fiduciary for all the owners of the enterprise, performing their duties with the same standard of prudence and reasonable care that a similarly-situated trustee would exhibit; property (respect all intellectual and physical property of the enterprise, and all ownership rights related thereto); reliability (prosecute the business – including but not limited to not only the expressed letter of any agreements but also the implied spirit as well – of the enterprise in a manner that fosters confidence in those with whom you must interact); responsiveness (all enterprise representatives must perform all enterprise business with accuracy and alacrity, even when performing unpleasant duties, such as responding to customer complaints); transparency (always conduct enterprise business openly and truthfully, cooperate with all legitimate authorities, keep detailed records of all transactions and avoid any deceptive practices).

Today, the Board of Directors and senior management of numerous business enterprises of all sizes and types (all of which may be considered to be microcosm societies) have acknowledged the necessity for a code of conduct to promote harmony and stability in their particular microcosm society, by educating all stakeholders as to the behaviors such Directors and senior managers expect that their particular enterprise, and everyone within such enterprise, will exhibit consistently in various situations.

The cynical view of a business code of conduct may be that its function is to provide guidelines that management imposes on employees to ensure their complete obedience to management dictates, but such view may be challenged in situations where the code of conduct may be authored by the management of socially-responsible enterprises.

However, a clear, concise and unambiguous code of conduct may actually benefit both the enterprise and its employees in various ways, such as by providing: a binary decision-making structure for employees when faced with previously-unencountered situations requiring split-second reactions; a single source document for enumerating the employee behaviors the enterprise will accept and those the enterprise will not accept (thus providing actual notice to employees of what liabilities they will face if they violate the code); a roadmap for reporting violations of the code to the proper external or internal authorities, as appropriate; positive public relations for the enterprise, by publishing an enumeration of issues the enterprise has sought to address through thoughtful investment ofintellectual capital, providing evidence to like-minded members of the public and perhaps even like-minded business entities that the enterprise had the concern for such issues (which could then increase the enthusiasm of such like-minded individuals and business entities for doing business with the enterprise); a possible deterrent for potential employees who may find the code of conduct so abhorrent and antithetical to their lifestyles that they may choose not to apply for employment with the enterprise once they have read it, knowing that they could never agree to some or all of it.

Since many applicable laws covering many industries (for example, finance and pharmaceuticals) mandate that publicly-traded companies must promulgate various written codes of conduct freely-accessible to everyone, such codes of conduct may provide very tangible benefits to the enterprise in the areas of regulatory compliance, risk avoidance and risk mitigation, in that: the Sarbanes-Oxley (SOx) Act mandates that Boards of Directors and senior management of publicly-traded companies must implement codes of conduct, or in the alternative to provide detailed written justifications to the public clearly explaining why they failed to do so; enterprises that do comply with SOx and numerous other conduct-related laws may create a full or partial liability-avoidance barrier for themselves, in that if an employee may be convicted for some Federal crime, U.S. Sentencing Commission guidelines applicable to such crime may fully or partially exonerate such enterprise from any employer liability to third-parties resulting from the misconduct of the employee, based on the legal theory that by publishing a code of conduct, to which the employee agreed as of the employee’s hiring date, the enterprise was giving notice (whether actual, constructive, implied or imputed) to the employee about what conduct was acceptable or not to the enterprise, so that by the employee choosing to ignore whatever conduct prohibitions may have been in the code (and assuming that the employee violated one or more of such prohibitions), the employee then recklessly assumed sole liability for the consequences of such employee’s misconduct (of course conversely, the failure of an enterprise to promulgate a code of conduct could then expose the enterprise to catastrophic unlimited third-party liability, consequential damages, punitive damages, and the like).

There may be no law that actually prohibits private companies of any size from promulgating codes of conduct, so it may be prudent for the executives of such private companies to consider doing so.

For the sake of transparency, the code of conduct should, at a minimum: have an introduction authored by and signed by the enterprise CEO or President, explaining the intended purpose of the code, and the collective thought process that perceived the need for the code and then collaborated to formulate it; indicate who authored the code (and the signatures and titles of such authors should be clearly-displayed at the end of the document, along with a definitive statement of unanimous support from the Board and senior management); indicate the spin the authors intended to promote in the code (for example, whether the enterprise promotes the traditional bottom-line philosophy of maximizing profitability above all other considerations, or whether the enterprise promotes the more socially-responsible, modern, “3 Ps”, triple-bottom-line philosophy of considering “people, planet, profit” – in that order); have a broad breadth and scope, including detailed information to address as many aspects of employee behaviors that may be reasonably-anticipated (and to that end, the code should definitely include an extensive FAQ); not be framed in ambiguous and dense legalese, in which every definition and sentence contains numerous qualifiers, thus making no definitive statements about anything, which would only serve to diminish any non-lawyer reader’s sensitivities regarding the efficacy of the code; be published on the enterprise intranet and website, and should have every statement about employee behavior cross-referenced and hyperlinked to the URL of a particular parallel corporate policy addressing such behavior more-thoroughly; be provided for review to each potential employee at some point prior to their acceptance of employment with the enterprise, so that they may read each page of it without coercion, and then sign and date each individual page (and each such page should have a version number and date previously-printed in the footer), as a condition precedent to receiving any written offer of employment from the enterprise, directly beneath a brief, previously-printed statement that they have personally read such page without being under any coercion from any enterprise employee, and that they understand the implications of and language on such page, and that they voluntarily agree with the statements on such page; be reviewed regularly by appropriate enterprise personnel.

An enterprise may also use its code of conduct for the dual purposes of enforcement and advertising (for example, if an enterprise has the leverage of a strong brand and reputation, and an affiliate, partner or vendor of such enterprise requests permission to display the logo of the enterprise on their website, thus implying that the enterprise endorses the products or services of such affiliate, partner or vendor, the enterprise might request that such affiliate, partner or vendor must explicitly and expressly agree in the language of the logo license agreement to strictly adhere to the enterprise code of conduct, as a condition precedent for the enterprise granting such request – and the enterprise code of conduct would then be included in the logo license agreement as an exhibit, and incorporated into the logo license agreement by reference within the language of the logo license agreement.

It is important to keep in mind that although there are current laws that require enterprises of certain types and sizes to promulgate codes of conduct, such laws do not mandate the content of such codes of conduct (since to do so would be unconstitutional); thus, codes of conduct may generally contain two (2) types of entries – compliance-based (meaning that lists of certain actual laws promulgated by governments may be included, with strong statements that the employees must not violate such laws) and value-based (which pertain to the values espoused by the enterprise, rather than by a government, and which will include the many descriptions and examples of positive behaviors that the employees should do, and the many descriptions and examples of negative behaviors that the employees should not do).

The statement about complying with laws in the compliance-based entries should of course be unnecessary, since all adults should know that violations of actual laws may result in civil and criminal penalties, and so employees cannot argue that they did not know there were any consequences for violating laws (which employees have actually argued when attempting to avoid liability), because ignorance of the law is no excuse; but it is always better to reinforce the concept that all actual laws require strict compliance, rather than to merely remain silent and rely on the common sense and good judgment of employees regarding possible compliance with actual laws.

While there may be no civil or criminal penalties under any laws for violations of the value-based entries, there must be some schedule of increasing punishments specified in the code of conduct for their violation by employees; the enterprise should also apply those same punishments to violations of the compliance-based entries, but not concurrently with the application of punishments for violations of the value-based entries; in situations where an employee has violated both value-based entries and compliance-based entries, only punishments for the value-based entries may be applied first, after the employee has been given whatever measure of due process is required under the enterprise code of conduct (since business entities are given more latitude to specify their private due process protocols and are allowed to speed up their private due process protocols to a greater extent than governments can, so generally the private due process protocol of an enterprise would be completed long before the civil or criminal due process protocol of a government); punishments for the violations of the compliance-based entries would thus only be applied against an employee consecutively, only after the justice system has completed the civil or criminal legal due process protocol (since one is innocent under the law until actually-proven guilty).

As for punishments an enterprise my impose for violations of compliance-based and value-based entries, a schedule of increasing punishments may seem appropriate, such as, for example: a strongly-worded letter of reprimand placed in the employee’s personnel file for the first offense; another strongly-worded letter plus some suspension from work for some appropriate time period, and an associated loss of salary for that time period, for the second offense; another strongly-worded letter plus some suspension from work for some appropriate time period, and an associated loss of salary for that time period, plus a demotion in title and responsibilities, for the third offense; and, immediate termination plus diminishment or loss of benefits, pension and perks, for the fourth offense; of course, the previous punishment schedule assumes that the offending employee does not have a written employment contract with the enterprise, in which event that employment contract would hopefully include a schedule of punishments applicable only to that employee.

Compiling, drafting and negotiating codes of conduct and all code of conduct-related documents, and conduct training.

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