MLR

Do you have a company ethics policy?

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A company ethics policy is an important tool for protecting your business. It protects you both from financial losses brought by employee fraud, as well as from adverse publicity created by the unethical behavior.

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To be effective, the policy must address important topics, as well as be communicated to employees by management so the substance of the policy, the expectation that it will be adhered to and the realization that it will be enforced are understood.

One of the cornerstones of any ethics policy is the affirmation that the employee owes the company a duty of loyalty. This requires, among other things, that company property be used only for company purposes (other than on an incidental basis) and that the company’s confidences be protected from disclosure.

The policy should make clear that not only are theft and misappropriation of trade secrets and customer lists forbidden, but employment by the company should not be used as an opportunity for personal gain.

For example, the policy should specify the extent to which employees may accept gifts from vendors, if at all. In general, gifts from vendors should be limited to those without significant economic value. The policy should make it clear that this is to be judged in the entirety, not on the basis of a number of individual gifts provided over a course of time.

It should be made clear that gifts can encompass not only tangible goods, but expensive dinners and tickets to events. The policy should also prohibit employee solicitation of gifts and the acceptance by an employee of any amount of cash, no matter how small, from a vendor. Ideally, the policy will address each of these areas with concrete examples that will aid in employee understanding and minimize ambiguity.

On the other side, attention should be given to the question of whether gifts or other gratuities may ever be provided to vendors, other business partners or government officials. The best practice is to avoid any gratuities except those that are nominal in amount. The gratuities might, on the surface, appear to be offered in the company’s interest. But they may in fact violate the ethics policy of the recipient and in some cases be contrary to law.

Such provisions illustrate another important reason for an ethics policy: to assure that the company itself acts ethically in the marketplace and with respect to regulatory agencies. This is not merely good corporate citizenship.

Many companies have suffered severe damage to their reputations and substantial financial penalties because of overzealous conduct by employees or management, particularly with respect to financial issues. An effective ethics policy must contain provisions aimed at assuring that employees act ethically in dealing with business partners and competitors.

Recent scandals have resulted in many ethics policies containing specific provisions pertaining to the importance of adhering to accounting standards in financial reporting. Such policies emphasize the importance of truthful financial reporting and of portraying transactions in a way that maximizes openness and reflects the company’s established system of internal controls.

Some policies even go so far as to specify certain types of financial reporting that are deemed improper, such as misclassification of expenses, acceleration (or deceleration) of revenues and expenses without justification, and improperly describing obsolete inventory.

A comprehensive ethics policy requires the support of company management to achieve its goals. The policy should not just be distributed. It should be explained in training sessions with employees. Management must communicate its expectation that the policy will be adhered to and that employees will conduct the company’s business with integrity.

Recent events have shown that the “success” brought by unethical conduct is fleeting and the adverse consequences are far more long-lasting. A corporate ethical culture grounded in a comprehensive policy is essential to a competitive and successful business. It helps to ensure and preserve business success.