The Role of Codes of Ethics in Shaping Corporate Culture. The Importance of Ethical Principles in Labour Relations

Understanding the ethical framework and then embedding it into the corporate culture of a business or institution is essential to ensure that it is maintained in the current environment. In general, companies that implement effective ethical practices in their operations will generally get more out of their employees through their loyalty and respect for the rules. This also has a positive impact on public attitudes towards business transparency, which is the key to increasing profits (ComplyLog 2024). It can be argued that companies that allocate significant resources to invest in their people get many times more for their business. The practices of preventing corruption among employees of a company in terms of establishing ethical principles and creating codes of ethics are no exception.

The requirements for ethical behaviour of individuals are contained in the Law of Ukraine ‘On Prevention of Corruption’ (Articles 37, 38, 63) (Verkhovna Rada of Ukraine 2014). The Law of Ukraine ‘On Insurance’ defines the procedure for approving and controlling the code of conduct (ethics), policy for identifying, preventing and managing conflicts of interest in the insurer (Article 25, part 7, clause 13) (Verkhovna Rada of Ukraine 2021). Article 5 of the Law of Ukraine ‘On Financial Services and Financial Companies’ contains norms and requirements for managers and employees of financial and/or support services providers, including standards of business conduct and professional ethics (Verkhovna Rada of Ukraine 2023). A code of ethics is not mandatory. The law does not provide for sanctions for its absence, such an internal document enhances the company’s reputation and builds trust (Think Brave 2024).

As a general rule, a code of ethics is the basis for how a company defines the behaviour of its employees in accordance with its business goals. A code of ethics includes the principles of an institution or organization, its standards and expectations for ethical and moral behaviour of all those associated with the company (ComplyLog 2024). It is important to note that if all employees understand the company’s values and mission, they work effectively for results. Thus, it is imperative to communicate the main aspects of the code of ethics, including all obligations.

In general, a code of ethics has a range of advantages. The first one is creating and maintaining a company’s reputation because a business is obliged to establish and adhere to the ethical principles set out in its code of ethics (Aayisha Reference Aayisha2023). The existence of the risk of being involved in unethical behaviour, such as corruption, encourages many business owners to actively promote standards and rules of conduct in the workplace and to establish sanctions for those who violate them. That is why the adoption of codes of ethics is the basis for creating an ethical environment for business and increasing trust on the part of counterparties and the public.

Investors perceive such a business as a profitable investment because they understand the principles on which the business is built (Meyer-Sahling and Mikkelsen Reference Meyer-Sahling and Mikkelsen2022). When there is a clearly defined policy of equity and sustainable development in the code of ethics, the likelihood of investing in a business increases rapidly. Otherwise, the company faces the risk of internal violations and reputational damage (Borry Reference Borry2017).

Attracting professionals to the team is another important aspect. Thus, recent employment trends show that young people choose to work in companies that actively promote high goals and moral principles. In general, more employees are now guided by the desire for ethics and fairness in the workplace. That is why the code of ethics is an ideal way to show potential employees the principles and methods of work, company values and to make such a company attractive to the candidate (Hassan et al. Reference Hassan, Wright and Yukl2014). A business with a strong ethical stance will have an advantage in the labour market by offering better working conditions than those companies who do not adhere to these principles. This also applies to aspects such as inclusiveness. If the code encourages inclusivity at all levels of the organization, it has a better chance of attracting the best candidates, regardless of their race, age, gender identity, sexual orientation or cultural background (ComplyLog 2022c).

It is also important to note that social, environmental and governance aspects are key terms related to sustainable investing in today’s market. This refers to issues that directly relate to the company’s attitude towards its employees, ensuring their well-being and a comfortable atmosphere in the workplace (ComplyLog 2022b). The code of ethics creates equal, fair and holistic workplaces. Moreover, companies should adapt their codes to the changes taking place in society in order to prevent certain inequalities or a deteriorated working environment.

The code of ethics facilitates the resolution of conflicts of interest by including provisions on how to handle these situations. That is why it is necessary to encourage timely disclosure of conflicts of interest and to make sure that this requirement is enshrined in the code of ethics. In the worst case, this can negatively affect the company’s reputation and further cooperation with contractors (ComplyLog 2022a).

A code of ethics helps create better practices for internal behaviour within the team, as clearly established ethical norms and principles eliminate the possibility of ambiguity, and therefore all employees understand their obligations clearly. Moreover, this affects the internal standardization of existing processes and principles that are essential for the functioning of the business internally (Hassan et al. Reference Hassan, Wright and Yukl2014). This includes onboarding processes, grievance procedures, whistleblowing investigations, chain of command, job responsibilities and other aspects of internal processes.

A code of ethics helps create better practices for external behaviour in terms of confidentiality, protection of trade secrets and intellectual property of the company. It also has an important impact on the framework and protocols for communication with customers. Ultimately, employees will act consistently, with integrity and in a manner that is beneficial to the company. Furthermore, the code of ethics should address the prevention of leakage of sensitive data or use of protected materials for personal gain, as well as risk mitigation issues, including the risk of any activity that could damage the relationship between the business and its customers, including issues directly related to corruption. (ComplyLog 2022b).

In general, codes of ethics should be consistent with applicable laws, including those on the prevention of corruption. When the code of ethics is approved for the first time or when it is updated in accordance with the changes and realities of today, the stated positions, rules, principles and policies should be communicated to employees. The code of ethics should be made available to all employees (Meyer-Sahling and Mikkelsen Reference Meyer-Sahling and Mikkelsen2022). This ensures that they are aware of their responsibilities in relation to the code and their behaviour within the organization. It is also important to explain the protocol for reporting certain questionable ethical standards in a particular employee. For this reason, it is necessary to create a strong whistleblowing process in the code of ethics. Employees should be informed about the existence of reporting channels, the confidentiality of their reports, and how their reports will be handled (ComplyLog 2022c). It is also important to establish procedures for investigating reports and imposing sanctions, i.e., the organization should have a policy on how it will act upon a report of a violation of the ethical principles covered by the code. In addition, there should be penalties for those found guilty of unethical behaviour.

Codes of Ethics and Corporate Culture

By their nature, codes of ethics define the key values and standards of a company and its employees. They are formally agreed upon and are mandatory for everyone to follow. The code of ethics provides guidance on certain appropriate behaviour and establishes obligations to which employees must strictly adhere. Unlike disciplinary codes, codes of ethics do not have an enforcement mechanism. On the contrary, by adopting a code of ethics and establishing the value of moral principles and standards, employees are expected to strive to comply with it themselves and follow ethically correct behaviour through various seminars, trainings and workshops (Meyer-Sahling Reference Meyer-Sahling2020).

Moreover, codes of ethics are an excellent tool to help deter and prevent corruption and promote integrity. Indeed, the adoption of codes of ethics is an important indicator for businesses, their status and attractiveness to investors. However, sometimes the reality differs significantly from the desired expectations. For some organizations, on the one hand, codes of ethics serve as a real official document that must be followed. The code of ethics is considered a guide for ethical behaviour and helps to recognize ethical issues in the course of work (Six and Lawton Reference Six and Lawton2013). However, on the other hand, in a significant number of enterprises, codes of ethics may be ignored, and their implementation may become an unsystematic phenomenon. It depends on the position of the management, as there are many cases when ethical codes are purely formal and non-compliance with them does not entail any kind of responsibility. The main function of codes of ethics is only to demonstrate their status to counterparties, to ‘maintain’ reputation, etc.

If we compare codes of ethics and disciplinary codes, the latter are certainly a tougher alternative to prevent corruption. Thus, disciplinary codes are highly formalized documents that define procedures and, in particular, sanctions for employees found guilty of misconduct. They are intended to focus on the deterrent effect of punishment rather than on setting guidelines or standards of appropriate behaviour for employees or civil servants themselves (Garcia-Sanchez et al. Reference Garcia-Sanchez, Rodriguez-Dominguez and Gallego-Alvarez2011).

It is important to note that the effectiveness of codes of ethics will be much higher if disciplinary codes are implemented in parallel. Their combined enforcement is generally associated with a reduction in corruption. In practice, the more disciplinary codes are applied, the more ethical codes deter corruption in both the public service and the private sector. In other words, one tool for preventing corruption interacts with the other, reinforcing each other.

In our opinion, this is a good indicator that codes of ethics can work effectively and bring the desired results. However, this is only possible if additional mechanisms are introduced, such as the disciplinary code. An important point for further research and an improvement of anti-corruption policy is the search for other additional anti-corruption mechanisms that will prevent corruption (Garcia-Sanchez et al. Reference Garcia-Sanchez, Rodriguez-Dominguez and Gallego-Alvarez2011). Nevertheless, a modern anti-corruption strategy should combine instruments to achieve maximum effect. Regarding the effectiveness of purely ethical codes in preventing corruption, it is important to note the following factors. Codes of ethics clearly define ethical standards and norms of behaviour. Clear wording is the basis for compliance by employees with ethically correct behaviour and the absence of a tendency to commit corrupt acts (Stevulak and Brown Reference Stevulak and Brown2011).

Incorporating the code of ethics into corporate culture is done to ensure its effectiveness. When employees clearly observe that ethical behaviour is consistently modelled and supported, it becomes a norm of labour relations. In this regard, management plays a significant role, as the attitude of management to moral principles and compliance with ethical standards is an indicator of its involvement in the corporate culture and adherence to the prescribed rules. A lack of commitment to the code of ethics by managers can undermine the effectiveness of codes of ethics (Six and Lawton Reference Six and Lawton2013). As a result, the effectiveness of ethical codes is reduced, while corruption flourishes.

The implementation of training programmes on ethical behaviour is extremely important. Training helps employees to understand the importance of ethical behaviour and provides them with the skills to deal with ethical issues (Andrews Reference Andrews2013). However, it is necessary to reinforce such training with the norms of the current legislation on the prevention of corruption, the liability for corrupt acts, and the importance of adherence to the principles of the code of ethics. It is also important to introduce a disciplinary code that would reinforce the ethical norms.

The mechanisms for reporting ethical violations and an effective response to such reports should also be created in the form of confidential channels for reporting corruption and other manifestations of unethical behaviour in the company. Effective mechanisms, combined with whistle-blower protection, encourage employees to report concerns while preventing corruption (Six and Lawton Reference Six and Lawton2013). Communicating the consequences of not adhering to ethical codes to employees is another key component of introducing the code of ethics. All codes of ethics are adopted with due regard to the current legislation, anti-corruption policies, etc. Understanding the responsibility for one’s actions reduces the risk of corruption (UtilitiesOne 2023).

The effectiveness of codes of ethics is determined by how relevant they are to current situations and their ability to adapt to the evolving nature of labour relations. The norms of the code of ethics should be reviewed and updated from time to time, regulating new ethical issues (Wright et al. Reference Wright, Hassan and Park2016). Open and transparent communication of ethical standards helps build trust between employees and stakeholders. Such transparency helps prevent corruption in labour relations (Andrews Reference Andrews2013).

As can be seen, the effectiveness of codes of ethics in preventing corruption is influenced by many factors. However, it is important to understand that it should be applied alongside other enforcement mechanisms, for example, in conjunction with a disciplinary code.

Problematic Aspects of Implementing Codes of Ethics

The effectiveness of codes of ethics is manifested in different aspects and often depends on other anti-corruption instruments. Although the code of ethics has an impact on the prevention of corruption and on the internal work of the enterprise, it is initially essential to consider certain difficulties and problems related to its implementation.

The lack of understanding of the importance of implementing and adhering to a code of ethics by the company’s management is the key problem in this context. When management promotes ethical behaviour, there is a higher probability that this will be adopted by the staff. However, if the top management does not fully support and demonstrate commitment to ethical values, employees may perceive the code as a mere formality (Prabowo et al. Reference Prabowo, Sriyana and Syamsudin2018).

Moreover, the lack of communication and training leads to the fact that employees do not understand the meaning and role of the ethical code in their work. This may cause ignorance or even misunderstanding of the norms and principles established by the code. In this regard, we recommend implementing specific communication strategies and holding regular webinars on the practical application of the code of ethics in the workplace. Vague wording of the code of ethics also creates a double perception of ethical standards, norms, and principles. That is why the clarity of the wording and justifications in the code is critical. Moreover, these formulations should be practically applicable (Prabowo et al. Reference Prabowo, Sriyana and Syamsudin2018).

The absence of an established confidential channel for reporting unethical behaviour, such as corruption, may result in employees being afraid of having their message exposed and worsening the working atmosphere. To solve this problem, it is important to create reliable channels for anonymous reporting of violations. Therefore, the establishment of such channels is a priority for the effective prevention of corruption. Furthermore, the lack of consistency of legal norms with the ethical norms covered in the code of ethics is another problem. Consequently, constant adaptation and improvement are required in order to adapt to new and emerging issues (Boateng and Cox Reference Boateng and Cox2016).

Apart from that, the awareness of employees of the liability for unethical behaviour, such as corruption, strengthens the responsible attitude to their work duties (Quah Reference Quah2020). At the same time, cultural and regional differences cause challenges in creating a universal code of ethics that takes into account local features. Therefore, we recommend adapting the code of ethics to cultural differences, involving employees with different backgrounds in the development process, and providing additional guidance on its application in different contexts.

Employees can often resist the introduction of an ethical code as this is accompanied by additional changes in the existing processes and culture of the organization. They may feel uncertain or even threatened by the changes in the established practices. This can cause distrust of innovations and unwillingness to adopt new rules. To overcome this resistance, it is recommended to develop gradual change strategies that will take into account the needs and interests of employees. The key aspect of such strategies is effective communication that clearly demonstrates the benefits of implementing an ethical code (Treisman Reference Treisman2007). For example, educational programmes or training can help employees understand the importance of ethical standards and their benefits for the organization and for each employee. Encouraging ethical behaviour through various forms of recognition and awards can motivate employees to adhere to new norms.

Many companies may also lack the resources to properly monitor and oversee ethical compliance. This creates a risk that ethical violations go unnoticed or unpunished, which in turn undermines the credibility of the code of ethics. For effective control, it is recommended to conduct regular audits based on available reports of unethical behaviour that may detect and prevent potential violations. The introduction of mechanisms for anonymous reporting of violations can help identify cases of unethical behaviour that might otherwise go unnoticed.

If ethical behaviour is not taken into account when assessing the effectiveness of employees, this can lead to the fact that employees will give priority to the fulfilment of tasks and the achievement of results at the expense of ethical standards. In this regard, the introduction of indicators of compliance with ethical standards for assessing the performance of employees can improve performance indicators. Thus, recognition and remuneration of employees who demonstrate a high level of ethical behaviour can motivate them to adhere to these standards. However, it is worth considering the personal authority of managers between colleagues (Palidauskaite Reference Palidauskaite2006).

Accordingly, the implementation of the code of ethics should be a systematic and comprehensive process, involving communication, education, control, and integration with key performance indicators. This will reduce resistance and increase the level of ethical behaviour in the company.