Code of Ethics for a Board of Directors: Why It Is Necessary and How to Create an Effective Code

The following is an article reprinted with permission from the upcoming Winter 2009 edition of The WWR Letter:

Code of Ethics for a Board of Directors: Why It Is Necessary and How to Create an Effective Code

By: Matthew G. Burg, Associate

As this new year brings various challenges to each and every organization, it also brings a heightened scrutiny of what organizations are doing and, more importantly, what their leaders are doing. Leaders are typically held to a higher standard, not just with business decisions but with business values; and not just with professional life, but in their personal life too. Just as a board guides, it must also be guided and held to standards in advancing the integrity of its organization.  A critical tool for guiding a board of directors, as well as fostering a culture of honesty and accountability within the organization, is a code of ethics for the board of directors.

Generally, a code of ethics serves to provide guidance to directors to help them recognize and deal with ethical issues, provide mechanisms for reporting possible unethical conduct, and promote the values of the organization. Although a code of ethics ideally addresses issues that regularly arise, no code of ethics can anticipate every situation that may occur. Thus, as a matter of practice, any potential ethical issues not specifically addressed in the code of ethics should be addressed with your organization’s legal counsel.

The following steps provide a general framework for developing an effective code of ethics for your board of directors:

1.  Development Team. Prior to drafting a code of ethics for your board of directors, assemble a development team. The team should not only include members of the board but also other members from all levels of your organization who can contribute different and valuable perspectives.

2.  Statement of Values. With your newly formed development team, brainstorm and develop a statement of values. The values may be unique to your organization but should also reflect generally accepted values of every organization as well as your greater community. The values should communicate the standard for all aspects of your organization’s programs and operations.  Before moving on to drafting the code of ethics, present the statement of values to your board of directors for approval.

3. Elements of a Code of Ethics. Once your statement of values is established, you are ready to draft a code of ethics, which should clearly set forth how the board will put the organization’s values into practice. In drafting the code, write simply and clearly, avoiding legal jargon and making the document as user-friendly as possible.

While the particular elements of your code of ethics may differ, the following standard elements should be included:

• Personal and professional integrity 
• Exercise of loyalty, good faith, and fair dealing in all conduct
• Dedication to confidentiality of personal and/or financial information
• Avoidance of real or perceived conflicts of interest
• Adherence to governmental and industry rules and regulations, along with continued education and training to ensure knowledge of new topics
• Equal treatment of organization members, customers, and others to ensure respect, confidentiality, and fairness to all persons
• Full and fair disclosure of financial information in financial statements and public communications
• Confidence that noncompliance or violations of the code will not be tolerated and provide a process for handling such occurrences

Completing the code is only the beginning. The code of ethics will become the board’s guide going forward. It will be a living document that can be dispersed to customers, the media, and others, and may be displayed in your organization to promote the organization’s overall commitment to loyalty, obedience, due care and excellence.

Matthew G. Burg is an Associate in the Litigation & Defense department of the Cleveland office. He can be reached at (216) 685-1111 or mburg@weltman.com.

Resources consulted:

Current Issues in Credit Unions Podcast #29, August 26, 2008, http://ciicu.libsyn.com

CUNA

The Independent Sector

The Ethics Resource Center

Management Quarterly, Developing a code of ethics, by Boudreaux, Greg and Steiner, Tracey; March 22, 2005

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