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Ethics and business conduct

In the past—and still today—it was often asserted that a company’s sole responsibility was to generate profit for its owners, and that ethics had no place in the boardroom. That view has changed. The late Jerry R. Junkins, former president of Texas Instruments, which has a reputation for very high ethical standards, said:

If I do something unethical for some short-term gain, somebody else is going to get hurt and they’re not going to forget it. You’re clearly trading a short-term gain for something that’s inevitably going to be worse down the road—you’ll lose business.

He was right. In recent years, we have seen a number of very impressive companies go out of business as a result of unethical conduct.

In addition, the concept of “shared value” has been gaining ground. Most famously in their 2011 Harvard Business Review article, “ Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society,” Michael Porter and Mark Kramer assert that the competitiveness of a company and the health of the communities around it are mutually dependent. Many corporations have long expressed values and missions in terms of serving their various stakeholders, rather than just their shareholders. And in fact, it has become well-established that a goal of maximizing shareholder value is not generally successful in so doing.

The ethical standards of a company are driven from the top. The ethics policy should be recommended by the president, ratified by the board and rolled out to the company with appropriate explanations and training. Implementing and consistently following a top-down ethics policy—with input from all levels—will help employees, customers, stakeholders and others who interact with the company to understand and relate to the company’s intentions.

The values of the company—whether or not they are explicitly stated—determine which fundamental principles are most important. For example, if a company’s vision is “to be the best widget-servicing company in the universe,” its key values might be excellence, integrity and supporting customers. Focusing on these values, rather than simply profit, is a good starting point for creating shared value.

Ethics policies and procedures deal with two types of improper activities: those that are illegal and those that are legal but not ethical. Defining an illegal practice is relatively straightforward: it is forbidden by the laws of Canada, a province, a municipality or another country or jurisdiction in which the company does business. Illegal practices include fraud, violating securities laws, and so on. Unethical practices are broader, and include conflicts of interest, seeking to influence someone’s judgement so that they do not discharge their responsibilities, using buying power to coerce a supplier, giving or receiving lavish gifts, and other actions. In these cases, guidance is often required to distinguish acceptable from unacceptable practice.

Often, companies use the terms “code of ethics” and “code of conduct” interchangeably, but this is not strictly correct. A code of ethics establishes the principles that are expected to underlie all employee and corporate behaviour. A code of conduct explicitly addresses certain types of behaviour that the company believes are inappropriate. They can be generally worded or very definitive.

Publicly traded companies should also have policies restricting insider trading in its securities as well as “tipping” and similar conduct related to share values. If you are drafting a code of conduct for a publicly traded company, you may wish to consult with a lawyer on these provisions.

Whistleblower policies

A whistleblower is an individual, usually someone inside the company, who witnesses or becomes aware of illegal or unethical behaviour that for one reason or another is not being addressed by the normal management chain of command. When that person reports their observations to a higher authority, they are said to be blowing the whistle on the group or person who is behaving inappropriately.

Typically, such a person would report the problem to their own management.  Sometimes, however, it is their own management that is caught up in the inappropriate behaviour. Other times, the manager who hears the problem does not take action. A company serious about ethical conduct needs a mechanism for whistleblowers to come forward with their information in a manner that is respectful of their vulnerability.

Publicly traded securities issuers in Canada are required to have whistleblower policies and procedures in place. National Policy 52-110 (PDF) requires every issuer to have an audit committee to which the external auditors must directly report. The audit committee is responsible for, among other things, establishing procedures for:

  • The receipt and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters, and
  • The confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters

The law might not compel other companies to implement explicit whistleblowing policies, but all companies are subject to the whistleblowing provisions of the Criminal Code of Canada. Yosie Saint-Cyr outlines “The State of Whistleblowing in Canada” on Slaw.ca:

Section 425.1 of the Criminal Code makes it a criminal offence for employers, anyone acting on behalf of an employer, or a person in a position of authority over an employee, to take disciplinary action, demote, terminate, otherwise adversely affect the employee’s employment, or threaten any of these things, in order to force the employee to refrain from providing information to law enforcement officials about the commission of an offence by his or her employer or by an officer, employee or director of the employer.

Section 425.1 also makes it an offence to threaten or retaliate against an employee who has already provided information. However, employees are only protected if they approach a person whose duties include law enforcement. They are not given protection if they contact a media source or an outside agency or advocacy group

It is always possible that a purported whistleblower, such as an employee with an axe to grind, may not be acting in good faith. Whistleblower policies should provide for appropriate confidentiality and prudent investigation of the whistleblower’s claim to protect all parties until the truth of the matter can be determined.

Depending upon the size of the company and the nature of the problem, a whistleblower policy may provide for skip-level communication (that is, going to see the boss’s boss), or communication of the problem elsewhere within the company (e.g., to an ombudsman designated for the purpose, the human resources department, the president, or even an officer or committee of the board). Most often, such a policy will provide for more than one avenue for reporting, just in case.

Jeffrey D. Sherman, BComm, MBA, CIM, FCPA, FCA
Author of Finance and Accounting PolicyPro

Finance and Accounting PolicyPro

Finance and Accounting PolicyPro

This release of Finance and Accounting PolicyPro includes a replacement for much of Chapter 1, Volume II — Governance, in Finance & Accounting PolicyPro. The following policies have been replaced: Roles, rights and responsibilities of executive officers; Board of directors meeting; Shareholder meetings; Board committees; Relationship with internal auditors; Relationship with external auditors; Ethics and business conduct; Confidentiality and privacy; Governance in not-for-profit organizations. The material has been freshened and updated, and new cross-references have been added.

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Jeffrey Sherman

Chief financial officer, author, lecturer and professor focussing on corporate finance at Atrium Mortgage Investment Corporation, Canadian Mortgage Capital Corp., Trimel Pharmaceuticals Corporation, and Anagram Services
Jeffrey D. Sherman, BComm, MBA, CIM, FCA, is a director or CFO of several public companies and has had over 20 years of executive management experience. He is the author of Finance and Accounting PolicyPro, Not-for-Profit PolicyPro and Information Technology PolicyPro (guides to governance, procedures and internal control, all published by First Reference and the CPA). Read more
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