An entrepreneur should implement an effective code of ethics for their business for several reasons. A code of ethics signals that the business takes ethics seriously and wants to combat unethical behavior, which is important for the business's reputation. It also clearly defines acceptable and unacceptable behavior for employees. An effective code of ethics should be supported by leadership, communicated to all stakeholders, include training and enforcement of sanctions for violations, and be updated regularly.

1. Do Business Ethics Matter?
Why a Code of Conduct Is Important for the Entrepreneur
Dingman Center of Entrepreneurship
University of Maryland, College Park
Michael D. Pfarrer
R.H. Smith School of Business
University of Maryland
College Park, MD 20742
Tel: (301) 653-0458
mpfarrer@rhsmith.umd.edu
Business ethics has certainly been in the news lately. Beginning with the rash of
corporate corruption cases at the beginning of this century, corporate behavior has been labeled
amoral at best, illegal and immoral at worst. Indeed, the wave of corruption cases in the news has
rekindled calls for ethical training in the boardroom and workroom, as well as in the classroom.
Clearly, US businesses have seen better days as far as their images and reputations go.
For example, 68% of the respondents to a 2004 Harris Interactive, Inc. and Reputation
Institute Quotient study rated the reputations of US businesses as “not good” or “terrible”
(Alsop, 2004). Consistent with these ratings, there has been a twenty-eight percent increase in
financial restatements over the last three years (Johnson, 2005) along with more than 900
charges of corporate crime and over 500 convictions (Johnson, 2004).
With unethical behavior at the center of many debates as to how to best train our current
and future business leaders, it is time for entrepreneurs to be leaders in setting future standards
for business behavior as well as to take a proactive role in educating tomorrow's industry
employees (Rousseau, 2004a, 2004b). Ironically, the recent spate of unethical behavior has given
founders of new firms the opportunity to take an active role in shaping industry expectations. As
new firms are established, they will take heed of successful entrepreneurial activities and pattern
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2. themselves after such behavior. Why not have a strong code of ethics be a part of that success
story?
WHY A CODE OF ETHICS?
Ethics can be a messy business. Scholars and practitioners alike have often argued over a
definition of ethical behavior, as well as the necessity for a code of ethics in organizations.
Indeed, there appears to be no clear moral compass to guide organizations (McNamara, 2005).
But, if one operates under the assumption that business has a moral responsibility to act ethically
(to which some would disagree [cf. Locke & Noel, 2004]), then a code of ethics is a logical next
step to help codify proper behavior in organizations.
If ethical behavior is somehow "doing the right thing" (McNamara, 2005), then perhaps
defining unethical behavior is less ambiguous, and more helpful in understanding the need for a
written code of ethics. Unethical behavior is manifested in organizational actions that are deemed
immoral or unacceptable according to societal norms or general standards of conduct. In other
words, unethical acts are those that disrupt the harmony in the relationship between an
organization and its stakeholders because they violate the ideas of honesty and fairness (Sharpe,
1993). A written code of ethics, then, can serve as a guide to organizational members in helping
them determine what actions are unethical, and thus proscribed by the code.
Why do entrepreneurial firms need a code of ethics? Some would argue that a code is
superfluous, that professionals are keenly aware of unethical behavior and that such a code is not
needed (Hunt & Tirpok, 1993). However, the recent wave of corporate scandals and unethical
behavior has shown that highly educated, white-collar workers are as susceptible to immoral and
unethical actions as anyone. Hence, on one level, one could argue that a code of ethics is
necessary to help expressly dictate what behavior is unacceptable. On another, as important
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3. level, an effective code of ethics is necessary for entrepreneurs to signal that they are serious
about combating unethical behavior in business. Similarly, designing an effective code signals
that entrepreneurs are proactive and that it is interested in issues that affect the public (that it
"matters"). As professionals, entrepreneurs should be held to a higher standard; they should be
leaders in developing better ethical guidelines for the industry; they should be seen as a beacon
to those they lead. In the end, ethics is good public relations (Rousseau, 2004a, McNamara,
2005). By taking the lead in creating an effective, emulative code of ethics, entrepreneurs send a
signal to future stakeholders that it does matter, while meanwhile expanding their profile and
enhancing their image.
IMPLEMENTING AN EFFECTIVE CODE OF ETHICS
As an early stage entrepreneurial company it is never too early to start thinking about and
implementing a code of conduct to ensure ethical standards are ingrained into the corporate
DNA. This ensures that all the process and procedures for a well-managed, investor-owned
company are robust and developed. Implementing a code of conduct in an important first step.
An effective code of ethics...
1. Elects Board members and recognizes students' and industry needs
Entrepreneurial firms should elect a board of directors that includes both inside and outside
representation to ensure that their bylaws, policies, and codes reflect the importance of including
these stakeholders in their implementation.
2. Elects an ombudsperson
At the same time, entrepreneurial firms should elect an ombudsperson whose responsibility
includes coordinating ethics policies, institutionalizing the code, and who serves as an advocate
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4. for employees and board members who report, or who are involved in, an ethical dilemma
(McNamara, 2005).
3. Is supported by the firms’ officers and leaders
No code of ethics will be heeded if officers and leaders do not support it (Fleming, 2004b;
McNamara, 2005; pr reporter, 1991). To that end, executives should ensure that they place high
priority in supporting and disseminating the contents of the code.
4. Is communicated to all members and stakeholders
The code of ethics, in order to be effective, needs to be publicly distributed to all members and
stakeholders, including publishing it internally and externally (Fleming, 2004b). Failure to
proactively discuss and distribute the code will lead to its ineffectiveness and eventual
obsolescence.
5. Has training
An effective code of ethics provides training to its members (McNamara, 2005; pr reporter,
1991), including on-going education.
6. Has a hotline
The entrepreneurs’ code of ethics should have an ethics hotline (Fleming, 2004b; McNamara,
2005) where individuals are encouraged to report ethical misconduct without fear of reprisal.
7. Has sanctions and enforces them
An effective code of ethics must show stakeholders that violators will be punished. If offenders
have little fear of punishment, than stakeholders will see those espoused values in the code as
little more than lip service (Bivens, 1993; McNamara, 2005; O'Dwyer's PR Services, 1992; pr
reporter, 2001; Seib & Fitzpatrick, 1995). In this vein, an improved code should attempt to list
those behaviors it deems unethical, as well as provide respective punishments for said violations.
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5. At the same time, the code should encourage cooperation by working with offenders instead of
instantly punishing them (Ayers & Braithwaite, 1992) As Fleming noted, "elements of both
compliance and aspiration can enrich a code" (Fleming, 2004a: 6). Regarding sanctions, an
effective code should allow for outside adjudication as well as a panel of peers to judge any
proscribed behavior (O'Dwyer's PR Services, 1992).
8. Is regularly updated and flexible
An effective code of ethics should be viewed as a living document (Fleming, 2004b; Hunt &
Tirpok, 1993; McNamara, 2005; Seib & Fitzpatrick, 1995). That is, it should be flexible enough
to allow for changes in social norms, and it should be reviewed and updated when necessary.
9. Has a pledge that members take regularly, including a signed oath as part of
membership.
Finally, an effective code of ethics should include both an oral and written pledge that members
take annually (PR Educator, 2001; Rousseau, 2004b). For example:
I recognize my responsibility to the firm’s stakeholders to conduct business in a
truthful and ethical manner. I believe in exhibiting trustworthy behavior to our
stakeholders. I also espouse treating our stakeholders with care, justice, and
fairness. Finally, I recognize that I have a responsibility to myself, other members
of the firm, and society at large to exhibit civic virtue and citizenship.
Absent any explicit prohibition in the Code of Ethics or that which is proscribed
by law, I pledge to adhere to a "reasonable person" approach to my behavior. I
recognize that I have a duty to treat others with dignity and thus conduct myself in
an ethical manner at all times.
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6. REFERENCES
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Hunt, T., & Tirpok, A. 1993. Universal ethics code: An idea whose time has come. Public
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7. Johnson, C. 2004. Motivated to prosecute. Cracking down on corporate crime. The Washington
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