Moving to a Values-Based Approach to Corporate Codes of Conduct: Is your code practical and powerful enough to address today's issues?

• Author: Raymond, Doug
• Position: LEGAL BRIEF

Many larger companies, and virtually all public companies, have adopted a code of conduct. These codes typically are designed and written by lawyers and can be tedious to wade through. As a result, their impact on the day-to-day behavior of corporate employees is questionable. Boards should consider revisiting their approach to these prolix documents in light of the convergence of several current trends--the debate over the proper role of stakeholder versus shareholder interests; ESG matters; and criticisms of corporate inaction in the face of the many challenges faced by the nation in the past year.

Many companies first adopted detailed and comprehensive codes of conduct in response to changes in federal laws. The United States Federal Sentencing Guidelines, first adopted in the 1990s and amended many times since then, provide for reduced recommended penalties for violations of federal law where a corporation has an effective compliance and ethics program in place designed to prevent and detect criminal conduct. Similarly, the 2002 Sarbanes-Oxley Act pushed many public companies to adopt a code of ethics, at a minimum, for their principal executive officer, principal financial officer and principal accounting officer, because otherwise they would have to explain why they had not done so. In addition, well-advised boards understand that prudently crafted codes of conduct can help the company's lawyers defend against claims in employment litigation (discrimination, harassment, etc.) and other contexts, by demonstrating that the corporation, at least officially, disapproved of and was not complicit in the challenged conduct.

Generally, these codes cover a broad range of activities, such as the Foreign Corrupt Practices Act, equal employment opportunity, safety regulations, dealing with suppliers, insider trading and conflicts of interest. For the most part, these codes have been prepared by lawyers and are largely designed to demonstrate, in the event of litigation or a governmental investigation, that the corporation does not condone, and in fact prohibits, illegal activities. However, as the debate over the proper role for the corporation in our society continues to evolve, the code of conduct may be where "the rubber hits the road," as boards of directors decide to whom their obligations run.

Recent months have seen a significant increase in the debate over the proper role of the corporation. Institutional investors and the SEC are pushing...