THE NATURE OF CODES OF BUSINESS ETHICS:
A STRATEGIC PERSPECTIVE

Fred R. David
Auburn University
Auburn, Alabama

Don Robin
Louisiana Tech University

Ruston, Louisiana

Mike Gia110urakis
Mississippi State University

Mississippi State, Mississippi

The role of business ethics in corporate strategy has been largely ignored in theory
and practice. An unfortunate result of this phenomena is that many organizations
today encounter ethics problems and pursue strategies that appear not to be based
on a foundation of ethics. Business ethics should become an integral part of strat-
egy formulation, implementation, and evaluation activities in all types and sizes of
organizations.

Ethics is sometimes defined as the clarification of what constitutes human welfare
and the conduct necessary to promote it [9]. Ethicians use the term "ethics" to refer
to the study of what is morally right or wrong [21]. Business ethics is a specialized
study of moral judgments and values that focuses on individual behavior in organi-
zations ([3],[6],[17]]). In his book Business and Society, Steiner [25] defines business
ethics as behavior "that is fair and just, over and above obedience to ... laws ...
and regulations. Loucks [23], chief executive officer of Baxter Travenol, says ethics
isn't a matter of law or public relations or religonj rather, it is a matter of trust.
Discussing business ethics with any degree of honesty means balancing the interests
of an organization's stakeholder [23]. For example, employees want high wages and
good benefits, whereas customers want low prices and high quality. Thus, division
XYZ may be divested while division ABC is strengthened. The risk of an airplane
engine failing by a tenth of one percent may be approved in order to reduce manufac-
turing costs and price by thirty percent? Difficult decisions such as these characterize
business ethics.

Newspapers and business magazines daily report legal and moral breaches of ethical
conduct in organizations. Bank fraud losses for the decade of the 1980s are expected
to exceed $20 billion, compared to losses of less than $1.5 billion for the decade of
the 1970s. Baxter Travenol Laboratories, IBM, Caterpillar Tractor, and Celanese
are example firms tha.t have formalized their own code of business ethics. The chief
executive officer of these and many other firms have spelled out the ethical standards

Journal of BU8inC88 S!ra!cgic8, Volume 6, Number 1 (Spring 1989)



2 Journal of Business Strategies Vol. 6, No.1

and values expected of all their managers and employees. Corporate strategy I'f'fieets
an understanding of the values of organizational members and constituencies of the
firm. When stakeholders of the firm benefit from certain strategies, while other
stakeholders lose. Ethical tradeoffs characterize strategic choice.

The purpose of this article is to report the findings of a recent study that examined
the codes of business ethics of major companies in the United States. The research
results could provide a basis for improving codes of business ethics. Using content
analysis and a clustering procedure, specific variables currently being included in
corporate codes of business ethics are identified and grouped into categories. Profiles
of the codes of business ethics of manufacturing and service firms are developed. An
approach for developing an effective code of business ethics is proposed.

The findings of this study could be useful to top managers, owners of small busi-
nesses, and other strategists who are responsible for developing a code of business
ethics for their organization. The results could also benefit researchers who develop
theory and test hypotheses regarding the relationship between business ethics and
organizational behavior.

Literature Review

An integral part of the responsibility of all managers is to provide ethics leadership
by constant example and demonstration [11]. However, primary responsibility for
having an effective code of business ethics rests largely with a firm's top managers or
strategists. Drucker ([12], p. 462-63) contends that no individual should ever become
a strategist unless that person is willing to have his or her character serve as the
model for subordinates:

A man (or woman) might know too little, perform poorly, lack judgment
and ability, and yet not do too much damage as a manager. But if that
person lacks in character and integrity - no matter how knowledgeable,
how brilliant, how successful - he destroys. He destroys people, the most
valuable resource of the enterprise. He destroys spirit. And he destroys
performance. This is particularly true of individuals at the head of an
enterprise. For the spirit of an organization is created from the top. If an
organization is great in spirit, it is because the spirit of its top people are
great. If it decays, it does so because the top rots; as the proverb has it,
"Trees die from the top."

Previous research indicates that a clear code of business ethics can provide guid-
ance and impetus for managerial leadership ([191,[20],[22]). Barnard ([2], p. 278)
concluded that a lack of moral responsibility on the part of a strategist will be detri-
mental to an organization. He says, "The best solution in such cases would often be
resignation, demotion, or discharge." Effectively mixing moral and business imper-
atives and making appropriate decisions in complex situations is a prerequisite for
having strategic responsibilities ([15] ,[22]' [23J ,[27]). One reason why top managers



Spring 1989 David, et ai.: Business Ethics 3

are paid 50 much more than middle managers is because they take the moral risks
of the firm [1]. Owners of businesses, chief executive officers, and top administrators
are responsible for developing, communicating, and enforcing a set of values for their
organization ([2J,[15]).

Horton [IBJ emphasizes that personal financial gain is often an underlying motive
for unethical conduct in organizations. Gellerman ([14], p. 88]) identifies three ratio-
nalizations that often explain why individuals sometimes act unethically in ways that
ultimately inflict harm to their organization:

1. Since everyone else does it, the unethical action is not really illegal or
immoral.

2. Since the corporation will benefit, the unethical action is justified.

3. Since no one will find out about the unethical action, it is worth doing.

The general value structure rooted in religion, coupled with local, state, and fed-
erallaws, can provide a baseline for appropriate ethical behavior in organizations [13J.
Laczniak and Naor [21J stress that bases for ethical conduct vary across different for-
eign countries. They assert that strategists of multinational firms are generally less
familiar with foreign markets than with domestic markets. This varying degree of
familiarity, coupled with pervasive ethnocentric orientations, makes ethical misjudg-
ments more likely for domestic companies operating in foreign countries.

There is a feeling by some practitioners and academicians today that codes of
business lack much ''impact'' [7J. For example, Cressey and Moore ([10J, p. 73)
suggest that any improvements in business ethics taking place in the last decade are
not from codes of business ethics themselves, but rather have stemmed from conditions
imposed by outsiders. These researchers ([10], p. 73) conclude that codes of business
ethics tend to imitate the criminal law and thus contain few innovative ideas about
how ethical standards of a firm can be improved. Another study by Chonko and Hunt
([8], p. 356) involving marketing managers found that the existence of corporate codes
of business ethics seems to be unrelated to the extent of ethical problems in marketing
management. Previous research thus accents the need for an improved understanding
of codes of business ethics, so that more effective codes can be developed.

Method and Analysis

Sample
A personal letter was mailed to the chief executive officer of all firms included in

the Business Week 1,000 list of manufacturing and service firms. The letter asked
for a copy of the firm's code of business ethics. Business Week uses market value,
determined by multiplying a firm's stock market price by its number of shares out-
standing, to annually determine the top 1,000 corporations in America. Market value
is a composite measure of how large and healthy a firm is at a given point in time.

A total of 178 responses were received, 83 firms providing a formal code of business
ethics (46%) and 95 chief executive officers indicating their firm had not developed a



4 Journal of Business Strategies Vol. 6, No.1

code of business ethics (54 %). Among the 83 firms providing a formal code of business
ethics, there were 32 manufacturing firms and 51 service firms. This ratio of manufac-
turing firms to service corporations is representative of the entire Business Week 1,000
population of companies. Responding firms in this study do not differ significantly
from nonrespondents on organizational size or performance measures. However, it
may be that 46 percent overestimates the actual percentage of firms with codes of
business ethics, since nonresponding finns are likely to be those without formal codes.

Content Analysis
Content anaylysis was used to evaluate the sample codes of business ethics. Con-

tent analysis entails selecting a message to be studied, developing categories for
measurement, measuring frequency of appearance of the categories using coding rules,
applying an appropriate test to the data collected, and then drawing conclusions
([4],[16]). Content analysis is a qualitative research technique often used for analyzing
message content and message handling [16]. Tn this study, two coders independently
read the sample documents and recorded the presence of particular variables in the
documents. Variables were recorded just as they appeared in the documents. A total
of 28 variables were found in the sample codes of business ethics. An overall interrater
reliability coefficient of 100 percent indicated that the two raters were able to easily
identify the ethics variables in the sample documents.

The 28 ethics variables found in the sample codes are listed in Table 1 in order of
frequency of occurrence. The most often included variable was "Conduct Business in
Compliance with All Lawsj" the least often included variable was "Firearms at Work
are Prohibited."

Cluster Analysis
The 28 variables were grouped into clusters using a two-step process. First, the two

coders independently grouped the variables under broader, more descriptive headings
where appropriate. The broader headings generated by the two coders were then
compared and titles for these groupings were agreed upon. Suggested labels for the
three clusters were as follows:

Cluster 1:
Cluster 2:

Cluster 3:

Be a Dependable Organizational Citizen
Do Not Do Anything Unlawful or Improper that will Harm the
Organization
Be good to Our Customers

As shown in Table 2, the three "named" clusters accounted for 23 of the 28 vari-
ables. Five variables did not fit into a cluster.

The second step in the cluster analysis process involved a third reviewer. This
person selected a random sample of ten codes and independently placed the ethics
variables into categories identified as clusters by the two previous coders. The ten
codes contained 218 ethics variables. This check for reliablility of the raters produced
perfect agreement with previous efforts. The third reviewer correctly classified all 218



Spring 1989 David, et al.: Business Ethics 5

items. Given the broad cluster labels and itemized character of the codes, this high
test-retest rate of reliability should not be surprising.

Table 1
Variables Included in the Sample

Codes of Business Ethics·

1. Conduct Business in Compliance with All Laws
2. Payments for Unlawful Purposes are Prohibited
3. Avoid Outside Activities that Impair Duties
4. Comply with all Antitrust and Trade Regulations
5. Comply with Accounting Rules and Controls
6. Bribes are Prohibited
7. Maintain Confidentiality of Records
8. Participate in Community and Political Activities
9. Provide Products and Services of the Political Activities

10. Exhibit Standards of Personal Integrity and Conduct
11. Do Not Propogate False or Misleading Information
12. Perform Assigned Duties to the Best of Your Ability
13. Conserve Resources and Protect the Environment
14. Comply with Safety, Health, and Security Regulations
15. Racial, Ethnic, Religious, and Sexual Harassment at Work is

Prohibited
16. Report Unethical and lllegal Activities to Your Manager
17. Convey True Claims in Product Advertisements
18. Make Decisions Without Regard for Personal Gain
19. Do Not Use Company Property for Personal Benefit
20. Demonstrate Courtesy, Respect, Honesty, and Fairness
21. lllegal Drugs and Alcohol at Work are Prohibited
22. Manage Personal Finances Well
23. Employees are Personally Accountable for Company Funds
24. Exhibit Good Attendance and Punctuality
25. Follow Directives of Supervisors
26. Do No Use Abusive Language
27. Dress in a Business-Like Attire
28. Firearms at Work are Prohibited

"The variables are presented in descending order with regard to
frequency of occurrence in the sample documents.

To further check the validity of the cluster groupings, each organization received a
oor 1 for each of the 28 ethics variables to indicate whether that variable appeared in
their code of ethics. The three coders jointly completed this analysis. A zero indicated
that the particular variable was not included in the particular code, whereas a one
indicated that the variable was included. A 28 x 28 correlation matrix between the
variables was produced. Correlations among variables in the cluster groupings were
then subjected to a test for internal consistency using coefficient alpha. The coefficient



6 Jonrnal of Business Strategies Vol. 6, No.1

alpha valu ..s for th .. thr.... nam ..d clusters w..r.. 0.84, 0.76, and 0.66 r..speetively. These
relatively high values indicate significant homog..n..ity within clust..rs.

Table 2
Clusters of Variables Found in Corporate Codes of Business Ethics

Cluster 1:
1.
2.

3.
4.
5.
6.
7.
8.
9.

Be a Dependabl.. Organizational Citizen
Comply with Safety, H.. alth, and Security Regulations
Demonstrat .. Courtesy, Respect, Honesty, and Fairness
m..gal Drugs and Alcohol at Work are Prohibit..d
Manage Personal Finances Well
Exhibit Good Att..ndance and Punctuality
Follow Dir..ctiv..s of Sup..rvisors
Do Not Use Abusive Language
Dr..ss in a Rusin ..ss·Lik.. Attir..
Firearms at Work are Prohibited

Clust"r 2: Do Not Do Anything Unlawful or Improper
that Will Harm the Organization

1. Conduct Business in Complianc" with All Laws
2. Payments for Unlawful Purposes are Prohibited
3. Bribes ar.. Prohibit..d
4. Avoid Outside Activities that Impair Duties
5. Maintain Confid..ntiality of Records
6. Comply "rith all Antitrust and Trade Regulations
7. Comply "rith Accounting Rules and Controls
8. Do Not Use Company Property for Personal Benefit
9. Employees are P..rsonally Accountabl.. for Company Funds

10. Do Not Propogate False or Misleading Information
11. Make Decisions Without Regard for Personal Gain

Cluster 3: Be Good to Our Customers
1. Conv..y True Claims in Product Adv..rtis..m..nts
2. Perform Assigned Duties to the Best of Your Ability
3. Provide Products and Services of the Highest Quality

Unclust..r..d Variabl..s
1. Exhibit Standards of Personal Integrity and Conduct
2. Racial, Ethnic, Religious, and Sexual Harassment at Work is

Prohibited
3. Report Unethical and Illegal Activities to Your Manager
4. Participate in Community and Political Activities
5. Conserve Resources and Protect the Environment



Spring 1989 David, et at.: Bv,siness Ethics 7

Comparing Manufacturing and Service Firms
Service organizations, such and banks and utilities, were heavy users of variables

in Cluster 1 titled "Be a Dependable Organizational Citizen." Example firms includ-
ing many Cluster 1 variables were Bank of Boston, City National Bank, Wachovia
Corporation, Wisconsin Electric Power, ITT, Northeast Utilities, and Texas Utilities.
On the other hand, manufacturing firms, such as Exxon, Dow Chemical, Monsanto,
Sara Lee, Dupont, and Celanese, more often included ethics variables in Cluster 2
titled "Do Not Do Anything Unlawful or Improper that will Harm the Organization,"
and Cluster 3 titled "Be Good to our Customers."

A detailed profile of the sample codes of business ethics of manufacturing firms
and service firms was developed. As indicated by significant i-values in Table 3, man-
ufacturing and service firms' codes of business ethics differ significantly on twelve
variables. Specifically, the codes of manufacturing firms more often include the fol-
lowing six variables:

1. Conduct Business in Compliance with All Laws

2. Comply with all Antitrust and Trade Regulations

3. Provide Products and Services of the Highest Quality

4. Perform Assigned Duties to the Best of Your Ability

5. Conserve Resources and Protect the Environment

6. Comply with Safety, Health, and Security Regulations

Codes of business ethics of service firms more often include the following six vari-
ables:

1. Avoid Outside Activities that Impair Duties

2. Do Not Use Company Property for Personal Benefit

3. lllegal Drugs and Alcohol at Work are Prohibited

4. Manage Personal Finances Well

5. Make Decisions Without Regard for Personal Gain

6. Dress in a Business-Like Attire

Implications

Variables included in Cluster 1 titled "Be a Dependable Organizational Citizen"
all seem to direct the employee to be "nice." These variables focus upon desirable
characteristics of people, such as to be courteous, honest, fair, and punctual; to not
use drugs or alcohol, and to manage personal finances well. These kinds of personal
characteristics are important for manufacturing as well as service employees, so per-
haps manufacturing firms should more often include Cluster 1 variables in their code
of business ethics. Being dishonest, tardy, or drug dependent can obviously disrupt



8 Journal of Business Strategies Vol. 6, No.1

manufacturing operations and reduce efficiency and productivity to an alarming ex-
tent. Although manufacturing employees typically do not interact with customers
and the general public as much as employees of service firms, Cluster 1 type variables
can still dramatically affect the competitiveness of manufacturing firms.

Table 3
Comparing Codes of Business Ethics of Manufacturing Firms

with Service Firms (n = 83)
Variables Included Mean For Mean For
In The Sample Codes Manufacturing Service
Of Business Ethics Firms (n=32) _ !,i~IIls(~==~~_ t-value

1. Conduct Business In .7500 .5098 2.21"
Compliance With All laws

2. Payments For Unlawful .6363 .5882 0.61"
Purposes Are Prohibited

3. Avoid Outside Activities .5938 .8039 -2.11"
That Impair Duties

4. Comply With All Antitrust .5983 .3529 2.18"
And Trade Regulations

5. Comply With Accounting .5625 .5490 0.12
Rules And Controls

6. Bribes Are Prohibited .5313 .7059 -1.62
7. Maintain Confident- .5000 .7059 -1.91

tiality of Records
8. Participate In Community .4375 .6275 -1.70

And Political Activities
9. Provide Products And Services .4375 .1765 -2.66""

Of The Highest Quality
10. Exhibit Standards Of Personal .4375 .3137 1.14

Integrity And Conduct
11. Do Not Propogate False Or .3438 .3333 0.10

Misleading Information
12. Perform Assigned Duties .3125 .0980 2.30"

To The Best Of Your Ability
13. Racial, Ethnic, Religious, .2188 .2353 --0.17

And Sexual Harassment At
Work Is Prohibited

14. Conserve Resources And .2813 .0588 2.55""
Protect The Environment

15. Comply With Safety, Health, .2500 .0588 2.26"
And Security Regulations

16. Report Unethical And lllegal .1563 .2745 -1.24
Activities To Your Manager



Spring 1989 David, et aI.: Business Ethics 9

~---- --~-

Variables Included Mean For Mean For
In The Sample Codes Manufacturing Service
Of Business Ethics Firms (n=32) Firms (n=51) t-value

17. Convey True Claims In .1563 .0980 0.79
Product Advertisements

18. Make Decisions Without .0938 .2745 -2.02'
Regard For Personal Gain

20. Do Not Use Company Property .0625 .3725 -3.83'"
For Personal Benefit

21. Demonstrate Courtesy, Respect, .0625 .1765 -1.65
Honesty, And Fairness

23. Manage Personal Finances .0000 .1373 ~2.23'
Well

24. megal Drugs And Alcohol .0000 .1176 -2.04'
At Work Are Prohibited

25. Dress In Business-Like Attire .0000 .0784 -1.63"

26. Firearms At Work Are .0000 .0588 -1.40
Prohibited

27. Do Not Use Abusive Language .0000 .0588 -1.40
28. Exhibit Good Attendance .0000 .0196 -0.79

And Punctuality

* p < .05; ** p < .01; *** p < .001

Notes to accompany Table 3

1. The mean values could range from .0000 (No firms included this variable in their code of
business ethics) to 1.0000 ( All firms included this variable in their code of business ethics).

2. The variables are listed in order of frequency of occurrence among manufacturing firms. For
example, 75 percent of all manufacturing firms included the ''Conduct Business in Compliance
With All Laws" variable.

3. Manufacturing firms have a Standard Industrial Classification (SIC) Code of less than 40;
service firms have SIC Codes ranging from 40 to 99, ie the first two digits .

• • • • • • ••
Cluster 2 titled "Do Not Do Anything Unlawful or Improper that will Harm the

Organization" contained the largest number of variables [l1J and was by far the most
subscribed to group. Over 50 companies included many of these variables in their
code of business ethics. The legalistic character of the variables in Cluster 2 seem to
give it a preventive tone designed to protect the organization, rather than a sense of
values to guide behavior. For example, two of the variables in Cluster 2 deal with
bribery. The issue seems to be that bribery is prohibited because it is against the
law, and the organization could get into trouble if bribes were given or taken. This is
certainly a desirable message, but it is substantially different from an organizational



10 Journal of Business Strategies Vol. 6, No.1

value statement such "Do Unto Others As You Would Have Them Do Unto You."
Value statements are broad based and could be proactive in shaping behavio. A more
appropriate forum for communicating rules of the firm may be in a policy manual,
rather than a code of busines ethics. Managers of both manufacturing and service
firms should perhaps consider including values to a greater extent in their code of
business ethics. Values seek ethical behavior "beyond the law for the good of all."

Cluster 3 titled "Be Good To Our Customers" contained variables that concern
ways in which the behavior of employees could satisfy customers, such as to "Convey
True Claims in Product Advertisements." Organizations including these variables in
their code exhibited no tendency toward a specific industry, but rather came from
a variety of industries. Customers are what give meaning to a business, so perhaps
both manufacturing and service organizations should include additional Cluster 3 type
variables in a code of business ethics to reflect the primary importance of obtaining
and keeping customers.

Among the unclustered variables, "Exhibit Standards of Personal Integrity and
Conduct" was included in 31 of the sample codes of business ethics. Two unclustered
variables appeared in 19 codes. These were "Racial, Ethnic, Religious, and Sexual
Harassment at Work is Prohibited" and "Report Unethical and lllegal Activities to
Your Manager." Included in 46 sample codes of business ethics, the variable "Partici-
pate in Community and Political Activities" was the most popular of the unclustered
items, being included by 46 companies. Finally, only 12 of 83 sample codes of busi-
ness ethics included the "Conserve Resources and Protect the Environment" variable.

Developing 0 Code of Business Ethics
An effective approach for developing a code of business ethics could be to identify

key ethical threats and opportunities facing the company and the industry. This
activity could be part of a firm's strategic management process. Core values a could
be specified which [1) act on those threats and opportunities, [2J incorporate the
guidance of ethical philosophies such as deontology and utilitarianism, and [3] fit or
enhance the existing organizational culture. Developed during the strategic manage-
ment process, a code of business ethics could become a part of the documentation
for an organization's culture. The code could have "impact" and be proactive. The
document could contain broad values that have been carefully devised to fit the envi-
ronment of the firm. A code of business ethics developed in this way could be more
responsive to the firm's external and internal constituencies and needs. The result
could be a document that all organizational members could understand, accept, and
support. Many individuals should have input into develoment of the document.

Laczniak and Naor [21] offer four recommendations for developing a code of busi-
ness ethics in multinational corporations. First, codes of business ethics of multi-
national corporations should be company-wide, regardless of the area of operation.
Second, the codes should serve as input information in the strategy-formulation pro-
cess. Third, when unbridgeable gaps appear between the ethical values of a host



Spring 1989 David, et al.: Business Ethics 11

country and those of a multinational corporation, the multinational corporations
should regularly develop and issue "ethical impact statements."

Conclusion

Less than 50 percent of the sample corporations in this study had developed a
formal code of business ethics. This finding was unfortunate because it may be
desirable for all firms to have a written code of business ethics. Cadbury [5J and
Litzinger and Schaefer [22] stress the need for all organizations to develop a clear
code of business ethics. A formal code of business ethics can be an effective tool for
setting ethical boundaries in a firm. When an ethical boundary or variable is violated,
swift action is needed to emphasize the importance of adhering to ethical standards
of business conduct. Drucker [12], Gellerman [14], and Velasquez [26] emphasize that
responsibility for developing and communicating a clear code of business ethics rests
primarily with top managers or strategists of the firm. As such, business ethics should
be an intergral part of the strategic management thought process.

This artide provides information that could be used to develop a more effective
code of business ethics. The results and implications of this study could provide
impetus for more research that is needed to better understand the nature and role
of codes of business ethics of America's "best" manufacturing and service firms are
provided to give direction for top managers of other organizations. A "proactive"
approach is recommended for developing and revising codes of business ethics.

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	The Nature of Codes of Business Ethics: A Strategic Perspective