Abstract
Regulatory responses to the business failures of 1998–2001 framed them as a general failure of governance and ethics rather than as firm-specific problems. Among the regulatory responses are Section 406 of Sarbanes–Oxley Act, SEC, and exchange requirements to provide a Code of Ethics. However, institutional pressures surrounding this regulation suggest the potential for symbolic responses and decoupling of response from organizational action. In this article, we examine Codes of Ethics for a stratified sample of 75 U.S. firms across five distinct industries and find that content and language converge across organizations in ways undesired by the regulators, and that language is used to minimize the effects of the Code on constraining organizational behavior. There is, however, a noteworthy exception in the sections of the Codes dedicated the ethics of financial reporting. Although this material still contains legalistic boilerplate information, it does offer concrete guidance and emphatic language pertaining to the need to maintain the integrity of reporting practices. This suggests that the corporate understanding of the source of the failures is one of fraudulent financial reporting. Aside from the matter of financial reporting, the vague and stylized content of the Codes was a predicted response and constitutes a rational response to the regulation. The regulation, however, clearly states the belief that Codes should vary from firm to firm and that individual firms should determine the specific content of a Code. Aside from financial reporting matters, the observed result suggests that regulatory efforts may have failed to instigate corporate change in attitudes toward and enforcement of higher ethical standards by corporate actors.
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Notes
Key provisions of the Sarbanes–Oxley Act have recently been upheld by the U.S. Supreme Court (Supreme Court of the United States 2009).
An alternative explanation is that they may have anticipated the widespread box-ticking, but did not anticipate that the investing public would become aware of the empty compliance; implicit in this argument would be a supposition that investors would be unlikely to compare Codes between firms or possibly even to read the Codes, simply inferring information from the fact that a Code had been provided.
Lindsay et al. (1996) studied a broad range of mechanisms for promoting and enforcing ethical conduct within organizations, and concluded that the options for promotion and enforcement are wide-ranging and that most organizations pursue this end goal through multiple means. However, they also concluded that the use of a Code is “the dominant plank” in the firm’s effort to insure ethical conduct. Despite this, they found evidence of limited use of mechanisms to enforce the Code or to reward ethical behavior, and limited efforts to communicate the Codes and educate employees about them. In addition, half of their firms had no mechanism through which the Code was to be periodically reviewed and revised. Those authors conclude that there is reason to suspect that many companies may be engaging in empty gestures, or paying lip service, in promoting ethical conduct.
This study focuses only on an observable output that yields information about the behavior across the entire institutional field, rather than on the processes used by any given organization to develop a specific Code or the specific means by which the isomorphic content is transmitted. The examination of these factors is of practical and academic interest and is addressed in the final section of the article.
DiMaggio and Powell (1983) indicate that members of an organizational field possess characteristics of connectedness and structural equivalence. The publicly traded firms in the U.S. are collectively subject to a common set of regulations and are soliciting an identical resource (financial capital) from a collective pool of providers (equity investors); these elements tie the organizations together in common pursuits under common institutions, and demonstrate a degree of connectedness. They also possesses structural equivalence in that they have a collective obligation to adhere to government regulation (the same kind of ties to the same set of regulatory agencies).Therefore, for the purposes of this study, the population of the publicly traded firms in the U.S. is defined as an organizational field.
Isomorphic behavior refers to convergence in behavior across organizations, where one organization begins to resemble another closely. Coercive forces are those that involve the exertion of pressure to converge behaviors, which arises from forces that have some type of control over the organization. Normative forces are those that involve the societal development of desirable behaviors, upon which organizations then converge. Mimetic forces are those involving mimicry and herd behavior (imitation without planned direction).
In January 2006, the Ethics Officer Association changed its name to Ethics and Compliance Officers Association to reflect the growing emphasis on compliance with ethics and conduct standards.
Codes were provided by some, but not many, firms before the advent of the regulation discussed above. However, it was only in the wake of the decision to frame the legitimacy crisis in terms of ethical failings that a culture that promotes ethical behavior and social responsibility began to take hold and gain momentum. Developments in subsequent years yielded increased emphasis on these factors through the social responsibility reporting movement, triple-bottom-line accounting, and an increase in awareness of ethical issues via the popular media and organizational training. These developments are likely to have fostered the generation of normative isomorphic pressures that may have subsequently come into play with respect to corporate ethics; however, the key focus in the realms in which normative forces are developed for the business world (MBA programs, undergraduate business education, and corporate training) did not have a strong ethics- or responsibility-orientations in the early years of the twenty-first century. We focus, therefore, on the two isomorphic forces known to be in effect at that time: coercive pressures arising from the new government regulation, and mimetic forces that arise in situations involving a high degree of uncertainty.
Survey research indicates that before 2002, 94 out of the 100 largest transnational corporations had published codes of conduct (OECD 2001). Another study conducted before the issuance of SOX found that more than 500 companies in the U.S. adhered to some kind of codes of conduct (Kerkow et al. 2003). These studies suggest that codes were in wide but not universal use before the legal mandate to provide them. One potential reason for providing a code before SOX emerged from an earlier Congressional initiative that made having proof of an effective code of ethics a mitigating factor under the Federal Sentencing Guidelines for Organizations (HLR 2003). However, the notion of “effectiveness” was not well defined.
Before the passage of the SOX Act of 2002, firms were permitted to develop and provide codes of ethics at will. The leniency under the Federal Sentencing Guidelines for Organizations available to companies which possessed codes argues for some coercive element; however, the leniency was contingent upon proof of effectiveness, a nebulous quality that promotes the sort of uncertainty that generates mimetic pressures.
Decoupling refers to the deliberate manufacture of discontinuities or gaps between actual organizational practice and the formal policies about those practices (Meyer and Rowan 1977).
One related article to ours that we were not aware of when we designed and developed the study was conducted by Forster et al. (2009). They studied codes of conduct of S&P 500 firms during the first half of 2008 as well as a sample of small firms to compare the effect of size on convergence of codes. Their study was not motivated by a particular theory and was primarily data driven. They found a tremendous amount of convergence in the codes which post hoc they attribute to isomorphism. We complement that study by examining codes closer to the adoption of SOX (codes in 2004), and by a priori using institutional theory to motivate the research questions as well as to explain the results. Further, we make extensive use of the codes themselves to illustrate how the data support the theory. Thus, the use of a theory-driven article with examples from the codes as well as using a sample closer in temporal proximity to the enactment of SOX adds to the value that we bring to the burgeoning literature on codes of ethics in the U.S. and in the world.
These entities operate under a substantially different regulatory regime and may or may not have active operations, and therefore represent a population that may be subject to different institutional pressures others than those faced by operating entities.
This discussion is not intended to indicate that only these three industry sectors have industry- or firm-specific matters to cover within their Codes of Ethics, but to note that the sample yields the express potential for this type of unique Code content to be provided.
The identification of quintiles and position within quintiles was qualitatively unaffected by the choice of variable (total assets or sales) as proxy for firm size.
The Mydropbox technology has since been acquired by Blackboard Inc. and integrated into the SafeAssign product. It is now available as part of Blackboard Enterprise edition.
A source who spoke under conditions of anonymity shed light on the construction of the Code at her organization. When the Code became mandatory, the instruction given by the CEO was to “go and find out what others are doing, and then put something together that looks like that.” This pragmatic example yields the conclusion that, for isomorphic firms, the content and language may well be co-determined.
See Edelman et al. (2001) for a discussion of the institutional pressures generated by equal-opportunity regulation, the accompanying development of diversity rhetoric, and how these influence managerial behavior.
See Kallio (2007) for a discussion of social responsibility rhetoric and associated matters.
Based on the results of Chi-square goodness-of-fit tests, not reported separately; no test attained statistical significance at any conventional level.
No further information was provided in this Code as to what matters must be adhered to and which are open for negotiation.
Of the excerpts provided in the previous section on content convergence, the only one that represents original material is the one about Enron. All other excerpts are entirely unoriginal.
This theory is not posited as an alternative to the mimetic isomorphism argument; the two theories lead to the same conclusion (use of boilerplate). Edelman et al.’s (1999) theory spells out the details whereby mimetic behavior is also economically rational.
We thank an anonymous reviewer for the observation that in many organizations, the legal department oversees the development of the Codes; it is normal and acceptable behavior in the legal profession to take advantage of document repositories that provide uniform wording designed to standardize the discussion of various legal matters. Thus, the heavy involvement of lawyers in the construction of these Codes may explain the significant volumes of unoriginal content observed within the sample firms. However, this explanation does not materially change the conclusion that the Codes are unlikely to be intended to constrain behavior, nor does it suggest that the construction and provision of these boilerplate Codes are not functionally a mimetic response rather than an attempt to develop a distinct ethical climate for employees of a given company.
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Acknowledgments
The authors would like to thank the section editor Muel Kaptein, two anonymous reviewers, Yves Gendron, Theresa Hammond, B.K. Cohen, David Sharp and Greg Trompeter for helpful comments and suggestions.
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Holder-Webb, L., Cohen, J. The Cut and Paste Society: Isomorphism in Codes of Ethics. J Bus Ethics 107, 485–509 (2012). https://doi.org/10.1007/s10551-011-1060-1
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DOI: https://doi.org/10.1007/s10551-011-1060-1