The Dimensions of Ethical Leadership Delineated by Codes of Ethics for Executives and Financial Officers

Abstract

The financial scandals of the late 1990s and early 2000s led Congress to pass the Sarbanes-Oxley Act of 2002 (SOX). SOX Section 406 requires publicly-traded corporations to disclose whether they have a separate code of ethics that applies to their senior financial officers (financial code of ethics). Our study examines the content of the financial code of ethics of 29 publicly-traded firms and find that, in accordance with SOX 406, full, fair, accurate, timely and understandable disclosures and compliance with applicable laws and regulation are strongly encouraged by these codes of ethics as are and honest and ethical conduct and communication of issues by the senior financial officers. Most of the codes we examine also expect their senior financial officers to be positive role models for other employees and to actively promote ethical behavior. Most of the financial codes of ethics we examine also prohibit certain activities, primarily conflicts of interest and insider trading. The majority of the codes also specify penalties for violations of the codes with most of the codes listing termination of employment and other disciplinary actions in response to code violations. Most of the codes also contain provisions that require senior financial officers to report any violations of the code of ethics of which they are aware. We are surprised to find that many of the codes do not discuss important issues. For example, the issues of waivers of the code of ethics or prohibition of retaliation for reporting code violations are discussed only by a minority of the codes in our study. Similarly, less than half of the codes in our study require officer signatures or certification and less than a third discuss the process for amending the code of ethics. Finally, very few codes provide guidance for officers who seek clarification of the code, discuss who within the company is considered the “owner” of the code, or disclose where interested parties can locate the code.