Government-Mandated Ethics Codes Do Little To Influence Executive Behavior

Newswise — Regulatory or governmental mandates that call for the implementation of corporate ethics codes do less to influence the strategic decisions of financial executives than pressure from key market-related stakeholders with economic ties to the firm according to research co-authored by John (Jack) Stevens and David Harrison of Penn State's Smeal College of Business.

"Almost every large firm has adopted an ethics code, yet certain unethical and illegal behaviors have persisted," Harrison said. "In attempting to understand and explain this phenomenon, we tried to distinguish between those firms that treat their codes as symbols or window dressing from those who make it an integral part of their strategic decisions."

"Symbolic or Substantive Document? The Influence of Ethics Codes on Financial Executives' Decisions," which appears in the February issue of Strategic Management Journal, is based on extensive telephone interviews with more than 300 senior financial officers at companies with formal ethics codes. The executives were asked a range of questions to determine what factors motivate firms to actually use the codes they choose to adopt.

"The distinction between ethics code adoption and ethics code use is non trivial," the authors write. "Enron's ethics code was extremely detailed, numbering over 60 pages. However, there is little evidence that this code was internalized into the strategic decision-making processes of their executives."

Stevens, Harrison, and their co-authors H. Kevin Steensma of the University of Washington and Philip Cochran of Indiana University conclude that pressure to use ethics codes is far more effective when it comes from "market" stakeholders-those who interact with firms through economic transactions (suppliers, customers, shareholders, etc.). Pressure from "non-market" stakeholders such as regulatory agencies, the court system, government bodies, and other special interest groups is less important to executives, and often results in the adoption of policies without the requisite follow-up implementation.

"Because of recent corporate malfeasance affecting millions of stakeholders, we may begin to see a pendulum shift toward the government's attempting to increase its countervailing power over corporations," the authors write. "However, our results suggest that regulatory mandates such as those recently issued to influence ethics may not be an effective means to constrain executive indiscretion."

The researchers also found that executives are more likely to make the ethics code part of their strategic decision-making processes if they believe in its power to create an internal ethical culture, helps employees deal with "gray areas" in business decisions, if they think adherence to the code will enhance the firm's external reputation and lead to business productivity, and if ethics codes training programs occur regularly.

About the Smeal Co-AuthorsJack Stevens is a professor of management and organization, associate dean for undergraduate programs, and director of outreach at the Smeal College. His research emphasizes managerial strategy, managerial commitment, policy implementation, business-government relations, and the use of information systems in decision making.

David Harrison is a professor of management. He is currently researching the trajectory of work and cultural adjustment for those posted to (expatriates) and returning from (repatriates) international assignments. He is also working on theories about the nature and effects of different forms of diversity in work teams over time.