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.