Rohit Deshpande | Firms need a formal code of conduct

In April 2014, the corporate social responsibility component of the new companies law took effect, requiring large companies in India to donate a percentage of their net profit to remedy social ills such as poverty, public health disparities and educational gaps. But like the US Sarbanes-Oxley Act before it, which addresses compliance rather than ethical corporate behaviour, the new law misses an essential point.

Charitable gifts alone are not transformative. It is only when a company adopts a code of conduct that takes a stakeholder rather than a shareholder point of view that it can align itself with the needs of the society in which it operates and contribute substantively to the public good. This is particularly true for companies competing in an international arena.

A holistic approach benefits corporate performance as well. Adhering to a world-class code of conduct is a growth strategy for global companies: It differentiates them, from the competition, and engenders the trust that builds sustainable relationships with all constituencies: suppliers, partners, investors, competitors, employees, customers, regulators and the public.

Those relationships can boost not only the social, but the financial bottom line. According to the Ethisphere Institute, a New York City consultancy that ranks the world’s most ethical (WME) companies based on their standards and practices, the 88 winners in 2014 that were publicly traded in the US over the past decade showed a 21% increase in stock performance annualized over five years compared with the S&P 500’s increase of just 18%, and an 11.4% increase annualized over 10 years compared with the S&P 500’s 7.4%. Two of the total 144 2014 WME companies—Tata Power Co. Ltd and Wipro Ltd—are headquartered in India.

How do companies go about establishing an actionable code for governing corporate conduct? My colleagues and I at Harvard Business School (HBS) developed a method, the Global Business Standards Codex, published in the Harvard Business Review (HBR 2005). To craft the Codex, we analysed the five most recognized multinational codes available—which covered a range of activities, including issues (such as fraud), constituencies (customers, employees), and functions (sales)—as well as those of the world’s 14 largest companies along with legal and regulatory documents. From these we extracted some 62 widely recommended standards of conduct, grouped them under eight fundamental ethical principles (fiduciary, property, reliability, transparency, dignity, fairness, citizenship, and responsiveness), and highlighted key concepts (for example, contracts, protection) and the constituencies most affected by each.

These comprehensive Codex standards extend beyond expected provisions such as corruption, conflict of interest, discrimination, honesty in business dealings, and accurate record keeping. They also include so-called imperfect duties, those that give people some choice in how to fulfil them. For example, companies should respect employees’ dignity, create innovative products and services, protect human health and safety, communicate openly, keep promises, respect local cultures, and protect the environment.

Our Codex is not the last word, but a starting point: A reference for companies aiming to establish or refine their own set of best practices. Such a code does more than establish the company as a responsible entity, internally and externally, and protect it by helping to manage risk. It makes ethical conduct part of the company value system.

Consider the case of the Taj Mahal Palace hotel, in Mumbai, part of Indian Hotels Co. Ltd, a member of the Tata group. In November 2008, when terrorists stormed the hotel, front-line employees calmly, solicitously took control, risking their lives to save between 1,200 and 1,500 guests. This extreme customer-centric culture grew from Tata policies that prized devotion to duty above talent, used recognition as reward instead of just monetary incentives, and hired not from cities, but small towns, where traditional Indian values reign.

But the strategizing doesn’t end there. Once a multinational company adopts a code, the question becomes: How does it maintain it?

As the Tata group did: By instituting value-based leadership.

The co-founder of Infosys Ltd, N.R. Narayana Murthy, followed a similar path. The company systematically built its brand by emphasizing its commitment to transparency, integrity and principle. In the end, its value-based leadership established not just Infosys, but India Inc. as the go-to place for IT.

To understand why other companies, particularly those in emerging markets, fall short, my HBS colleagues and I surveyed over 6,200 employees at all levels in four leading global companies operating in 23 countries and regions. The results, published in HBR in 2011, showed that respondents agreed strongly about what standards their companies should meet, but they reported a striking conduct gap regarding what those companies actually do.

How can companies close that gap? By eschewing a focus on individual violators and disciplinary actions and instead taking a multifaceted look at what can be changed internally to support adherence to the code. Such changes could include improvements in infrastructure, work processes, and employee development.

Indeed, managing adherence is not so different from managing other aspects of the business. It requires taking into account how to conduct changes in response to macroeconomic and industry shifts, and positing ethical behaviour as a goal in itself, not a mere absence of slip-ups. And it requires systematic assessment: Gathering data, over time from all quarters, about the company’s ethical health, using key indicators to track performance.

Rohit Deshpandé is Sebastian S. Kresge Professor of Marketing at Harvard Business School and faculty chair of Leadership and Corporate Accountability—India.