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.
- A code of ethics sets out an organization’s ethical guidelines and best practices to follow for honesty, integrity, and professionalism.
- For members of an organization, violating the code of ethics can result in sanctions including termination.
- In some industries, including banking and finance, specific laws govern business conduct. In others, a code of ethics may be voluntarily adopted.
- The main types of codes of ethics include a compliance-based code of ethics, a value-based code of ethics, and a code of ethics among professionals.
- A focus on climate change has become an integral part of companies’ codes of ethics, detailing their commitment to sustainability.
Code of Ethics
Understanding 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.
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 led to negatively impacting the climate in a severe manner, many companies have taken to include climate factors in their code of ethics. These principles include manners 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 of every employee.
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 with an ideal that can be exemplary, and ensuring that the business being conducted is beneficial for all stakeholders. The following are three 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 thus 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 Among Professionals
Financial advisers registered with the Securities and Exchange Commission (SEC) or a state regulator are bound by a code of ethics known as 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.
Certified public accountants, who are not typically considered to be a fiduciary 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).
Example of Code of Ethics
Many firms and organizations have adopted a code of ethics. One good example comes from the CFA Institue (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 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 in a professional and ethical manner 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.
Code of Ethics FAQs
What are the five codes of ethics?
All companies will have a different code of ethics with different areas of interest based on the industry they are involved in, but the five areas that companies typically focus on include integrity, objectivity, professional competence, confidentiality, and professional behavior.1
What is a code of ethics in business?
A code of ethics in business is a set of guiding principles intended to ensure a business and its employees act with honesty and integrity in all facets of its day-to-day operations and to only engage in acts that promote a benefit to society.
What is a code of ethics for teachers?
A code of ethics for teachers defines the primary responsibilities of a teacher to their students and the role of the teacher in the student’s life. Teachers are required to show impartiality, integrity, and ethical behavior in the classroom.2
What is an example of a code of ethics?
An example of a code of ethics would be a business that drafts a code outlining all the ways the business should act with honesty and integrity in its day-to-day operations, from how its employees behave and interact with clients, to the types of individuals it does business with, including suppliers and advertising agencies.
What is the difference between a code of ethics and a code of conduct?
A code of ethics is broader in its nature, outlining what is acceptable for the company in terms of integrity and how it operates. A code of conduct is more focused in nature and instructs how a business’s employs should act on a daily basis and in specific situations.1
The Bottom Line
A code of ethics is a guiding set of principles intended to instruct professionals to act in a manner that is honest and that is beneficial to all stakeholders involved. A code of ethics is drafted by a business and tailored made to the specific industry at hand, requiring all employees of that business to adhere to the code.
The moral choices of businesses have evolved over time, 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 society deems important that perhaps two centuries ago it did not as much. A code of ethics helps ensure that businesses will always act with integrity.
Compete Risk Free with $100,000 in Virtual Cash
Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you’re ready to enter the real market, you’ve had the practice you need. Try our Stock Simulator today >>« Back to Glossary Index