The Cut and Paste Society: Isomorphism in Codes of Ethics

(Holder-Webb and Cohen)Holder-Webb, Lori; Cohen, Jeffrey. Journal of Business Ethics. Jun2012, Vol. 107 Issue 4, p485-509. 25p. 8 Charts. DOI: 10.1007/s10551-011-1060-1

This blog was very hard to write. Even though other articles were much shorter, I chose this article because I felt strongly about the topic. Those feelings make it difficult to condense this study into a blog. Here is my attempt.

This article explores whether the Sarbanes-Oxley (SOX) Act of 2002 encourages companies to write a Code of Ethics that expresses the company’s true values, or if companies feel it is another regulation that requires a rubber stamp response. Section 406 of the SOX Act of 2002 requires publicly traded companies to disclose if they have a Code of Ethics and explain why, if they do not disclose one. In 2004, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) began mandating companies that trade on their exchanges to have a published Code of Ethics.

This study was based around the year 2004. The sampling only included companies that are publicly traded; United States based; listed on Compustat; and did not provide financial services. The final sample exists of 66 companies. Of this sample, 14% use the template 1 type (checklist) of Codes of Ethics and 86% use the template 2 type (categorized). In the template 2 Code of Ethics, five of the twelve categories were used by 100% of the companies, four were used by between 95-98%, and five were used by between 44-74%. This convergence indicates that most company’s Code of Ethics are written to meet the required standards, instead of establishing company standards; form over substance. Section 406 of SOX states that a company’s Code of Ethics should be independent and greatly vary from other businesses within their industry. Only two sections of the Code of Ethics are concrete: financial reporting and record maintenance. Coercive forces are responsible for the non-decoupling language of these sections.

In this study, Holder-Webb and Cohen set out to answer three research questions.

1.      Does the content of Codes of Ethics exhibit convergence across organizations consistent with isomorphic pressures? (Holder-Webb and Cohen)

2.      Does the language of Codes of Ethics exhibit convergence across organizations consistent with isomorphic pressures? (Holder-Webb and Cohen)

3.      Do Codes of Ethics substitute decoupling language for concrete language leading to enforceable provisions? (Holder-Webb and Cohen)

Three types of pressures lead to isomorphic behavior: coercive (regulatory or cultural), normative (taught behavior), and mimetic (copycat/follower). Since Ethics was not aggressively taught in colleges at the beginning of the 21^st century, the authors focused on coercive and mimetic pressures.

The authors recognize that companies in the same industry have isomorphic Codes of Ethics. By using document-recognition/comparison software, the authors tested the Codes of Ethics published by the sample companies to determine Code originality. The authors determined that in most companies’ Codes of Ethics, coercive pressures lead to convergence in the content, and mimetic pressures lead to convergence in the language.

Nearly 40% of the sample firms’ Codes of Ethics did not contain any original language. Approximately 27% of the sample firms’ Codes of Ethics contained less than 5% original content. A mere nine of the sample firms’ Codes of Ethics contained 20% or less of original content.  

How do these companies end up with the same, or extremely similar, Codes of Ethics? It is determined that they get them by internet searches. If a company is willing to go online and copy another company’s Code of Ethics, how ethical can that company be?

This study showed that a majority of firms used decoupling language to keep the Code of Ethics ambiguous and open to firm interpretation. This kept management from being confined by concrete language and afforded the company to use the ambiguity of the document to control employees.

A 2008 Google Search determined that a minimum of 50 publicly traded companies’ Code of Ethics was identical to the one in Template 1. I do not know if this is from laziness or lack of caring, but I do know that I am going to be paying a lot more attention to the Code of Ethics for any company in which I invest or am employed.

In my opinion, what the authors proved was that the majority of companies do not give enough credence to ethics to take the time to write their own Code of Ethics to establish the company’s values.

Use Those "Binders Full of Women" to Fill the Boardroom

Green, Jeff. Bloomberg Businessweek, October 29 -November 4, 2012. “The Boardroom’s Still the Boys’ Room”. Pp. 25-26.

 While America’s workforce is so diverse in gender and culture, its corporate boards are still overwhelmingly filled with men.  Jeff Green of Business Week reports in “The Boardroom’s Still the Boys Room”, that it the problem is in the system and perhaps they can use Mitt Romney’s ‘binders full of women’ to increase board diversity  (Green, 2012, p. 25).  Rather than finding qualified talent, board members tend to recruit their friends to corporate boards using their “male-oriented traditional networks” according to Christine Allen, who sits on three boards. Yet, 45 percent of male directors blame a lack of experienced and qualified female candidates (Green, 2012, p. 25).

While other countries are forging ahead by putting quotas and terms limits in place to change the face of corporate board membership, the United States (U.S.) still lags behind, “11^th among other industrialized nations” (Green, 2012, p. 25). U.S. companies seem to be drifting in the opposite direction with only 12.6 percent of Standard and Poor’s (S&P) 1500 companies board membership being  women and only 21% of new members being female; 9 percent less than 5 years ago according to the Spencer Stuart Board Index (Green, 2012, p. 25).

Imposing term limits has enabled the United Kingdom (U.K.) to raise their female to male ratio to 17.3 percent in 2012, up from 12.5 in 2012 (Brady, 2012). Another problem in the U.S. is that once appointed to a board no one wants to leave, and why would they with an average pay of $227,250 per year for a few weeks of work? The average age of board members on S&P 500 Index companies is 62.6 years, with only 4 percent of those companies imposing mostly 10-15 years term limits (Brady, 2012).

Oddly enough, it is appears to be pension funds that are leading America’s push to increase board diversity.  The California Public Employees’ Retirement System and Global Market Insite (GMI) are collaborating to develop “their own binder of sorts”, of about 400 candidates to date in a central database called the Diverse Director Data Source (Green, 2012).

Additionally, companies with women board members perform better than similar “businesses with all-male boards by 26 percent worldwide over a period of six years, according to a report by the Credit Suisse Research Institute” (Perlberg, 2012). “Stocks of companies with women on boards tend to be a little more risk averse and (companies) have on average a little less debt” (Perlberg, 2012).

Some countries have set significantly high quotas of 40% of women-filled seats, which is resulting in less experienced boards.  A group in the U.S., 2020 Women on Boards, has set a goal to push for 20% of board sets to be filled by women (Green, 2012, p.26). U.S. companies can step up to the plate and set self-imposed term limitations and quotas themselves rather than wait to be forced to do it by entities such as, pension funds, interest groups, and government. As an added benefit, the changes may result in diverse ideas and better company performance.

References

Green, Jeff. Bloomberg Businessweek, October 29 -November 4, 2012. “The Boardroom’s Still the Boys’ Room”. Pp. 25-26.

Brady, Diane. Businessweek, September 20, 2012. “To Get Women on Company Boards, Make Men Leave”.  http://www.businessweek.com/articles/2012-09-20/to-get-women-on-company-boards-make-men-leave

Perlberg, Heather. “ Stocks Perform Better if Women Are on Company Boards”.  July 31, 2012. http://www.bloomberg.com/news/2012-07-31/women-as-directors-beat-men-only-boards-in-company-stock-return.html

 

Can Greece recover?

Can Greece recover?

Rady, Dina Abdel Moneim, Greece Debt Crisis: Causes, Implications and Policy Options, Academy of Accounting and Finance Studies Journal, Volume 16, Special Issue, 2012, PP 87-96

This article starts by describing how deep in debt Greece is (Rady, 2012). By 2010, Greece government debt was 147.3% of its GDP with maturing debt of $72.1 billion (Rady, 2012). This is compared to the EU’s restrictions of budget deficits of no more than 3% of GDP and external debt of no more than 60% of GDP (Rady, 2012). The author cites reasons for the problem in Greece as:
1) Improper economic policies of higher spending accompanied by lower revenues (Rady, 2012).
2) Poor trade policies of focusing Greece’s economy on the services sector (Rady, 2012). Services are the first thing cut when economies turn down (Rady, 2012).
3) Greece’s failure to remain internationally competitive with wage agreements raising nominal wages by 12% during a period of low inflation (Rady, 2012).
4) The 2008 global recession which cut demand for services provided by Greece which made getting more financial assistance more difficult (Rady, 2012).
5) the inability of Greece to devalue the Euro which would cheapen Greece’s debt (Rady, 2012).
The conclusion of this article is that, if Greece defaults on its debt, other southern European nations will be adversely affected (Rady, 2012). What is needed to prevent a default is tighter and stronger control by the EU, tax increases, and spending cuts (Rady, 2012). Greece also needs to promote the growth exports and more competitive wages (Rady, 2012).