2nd Issue (Sep 1995)

Editorial

Equally significant is the less known fact that Hong Kong's success story also extends to good business ethics. More than 60% of Hong Kong's listed companies, large private corporations and trade and professional bodies have implemented codes of conduct or improved their existing ones since the ICAC launched the Business Ethics Campaign with the full support of leading chambers of commerce last year.

Other companies are actively considering formulating codes of conduct. In this issue of Ethics in Practice we include a supplement listing business organisations that have adopted codes of conduct since the Directory of Hong Kong Business Code of Conduct was published in May.

We also examine how business organisations set up their codes of conduct. Some of them have come forward to share their experiences, such as overcoming awkward situations and strengthening staff morale in the pursuit of ethical excellence. We are happy to share with you the insights of an expert in this field. He is Mr Gary Edwards, the President of the Washington Ethics Resource Centre which is the forerunner in ethics development in the United States.

The Hong Kong Ethics Development Centre has received many enquiries about its services, activities and reference material since it officially opened in May this year. As a result, we have started a regular feature on the Centre'' work, services and activities. We have also highlighted our fax-on-demand number with a special design bookmark detailing its key contents. This will provide a direct and easier access to our Centre's information and reference material.

Beyond the Code - The Implementation of Corporate Ethics

It was little more than one year ago at the first Hong Kong Conference on Business Ethics that Governor Chris Patten challenged business leaders to adopt codes of conduct to ensure that employees understand and are committed to high ethical standards in their business dealings. Today more than one thousand companies, trade and professional organisations have responded to that challenge. While Hong Kong business leaders are to be commended for their swift action, they do well to consider what additional actions may be required for effective implementation of their codes and for the cultivation of a business environment that fosters proper conduct.

Although there are important differences between the cultural, legal and regulatory environments in Hong Kong and in the United States, there is also much in common. In the area of corporate self-governance, nearly twenty years of research among U.S. companies about their adoption and use of codes of conduct has yielded some insights that Hong Kong business leaders might find valuable.

In 1979, the Ethics Resource Centre (ERC) surveyed senior executives of the Fortune 500 largest industrial corporations, along with the leaders of the 150 largest non-industrial, service corporations. Nearly three quarters (73%) reported that their companies had codes of conduct, half of them having adopted a code for the first time in the previous five years. The widespread adoption of codes in the late seventies was, in large part, a reaction to corporate involvement in the Watergate political scandal (secret company "slush funds" had been maintained for illegal political contributions) and the overseas bribery scandals that led to the adoption of the Foreign Corrupt Practices Act. In the wake of rapidly eroding public confidence in the integrity of business practices, codes of conduct were meant to assure the public that business leaders would hold their employees accountable to obey the law and to conduct themselves according to higher standards than the law required.

In a follow-up (1980) ERC survey on implementation and enforcement of codes, 91% of executives professed to be satisfied with the performance of their company's code. The basis for that satisfaction is questionable, however, since barely one in four had established any means of measuring the effectiveness of the code.

By 1988 things had changed significantly as companies moved beyond mere adoption of codes of conduct to focus on methods for successful implementation, compliance monitoring and enforcement. In an ERC survey sent to 2000 companies of all sizes and across nine different industry groupings, 85% reported having adopted codes. Among the largest companies (50,000 or more employees), codes were in place in 95%.

Business ethics training, to communicate the content of the code and its application to the responsibilities of individual employees, was being provided by 28% of the responding companies and 47% of the largest companies.

Beginning in 1985 companies began to develop offices of business conduct or ethics ombudsmen to answer employee questions about proper conduct, especially in new or unusual circumstances. These offices also serve as an alternative route for employees to report serious misconduct within the organisation if it is inappropriate to make the report to the employee's immediate supervisor. By 1988, 11% of the surveyed companies reported having such an office. Among the largest companies, it was 25%.

In the most recent ERC study (1994), a survey responded to by over 4,000 employees in companies of all sizes and industries, one-third reported that their companies provide training in business ethics and conduct and one-third indicate that their companies have a business ethics office.

When the responses of employees who work for companies with comprehensive business ethics programs (i.e., a code of conduct, related training and a business ethics office) are contrasted with those employees who work for companies with none of these elements, or with only a code, but no training or business ethics office, striking differences are seen. For instance, among employees of companies with only a code, 17% find the code is "frequently

useful" in guiding decisions and conduct and 33% say it is "occasionally useful." But among employees of companies with comprehensive programs, 43% find the code "frequently useful" and 34% "occasionally."

Asked to evaluate the level of commitment to ethical business practices by others in their companies, respondents who worked in companies with comprehensive programs consistently had higher opinions of their peers, subordinates and higher management (as much as 40% higher) than employees who worked in companies with no business ethics program or with only a code.

When employees witnessed serious misconduct by others in their company, they were 16% more likely to report that misconduct and much more likely to be satisfied with the results of their reports if they worked for companies with comprehensive business ethics programs.

As corporate experience with codes of conduct increase, both our research studies and our extensive client practice confirm that the potential benefits of a code are best realized when the commitment and leadership come from top management and are manifest throughout the organisation by the provision of related training and professional assistance to clarify standards and their application to novel and sometimes very challenging situations.

Common Guidelines in Codes of Conduct:

• Do not offer advantages to clients, contractors and suppliers, or solicit or accept any from them.
• Accept only social, customary and promotional gifts with nominal value, usually less then $500.
• To avoid compromising your position in the company, declare personal liabilities like loans and debts.
• To avoid conflicts of interests, declare your outside investments or employment.
• Maintain proper accounts and company records.
• Do not divulge confidential company information for personal gain.
• Do not steal company property.

Code of Conduct

• Staff and management question why they should abide by rules that exceed legal requirements.
• Staff feel the company does not trust them.
• Staff think the company is conducting a witch-hunt or a redundancy exercise.
• Clients and business associates think the company is plagued by corruption.
• Is the company acting alone in planning a code of conduct?
• Will the standards adopted for the code be fair to everybody?

Staff Participation

The Hsin Chong Group, led by chairman Dr M.T. Yeh, spent two months consulting with every staff level a draft code of conduct prepared with the help of the ICAC. There was consensus that the Group needed a conduct code. They held in-depth discussions and made useful suggestions to clarify and improve work procedures. Such active involvement increased their commitment to the code and their confidence in explaining and implementing the guidelines.

The final draft, after endorsement by the board of directors, was incorporated in the company handbook. Staff were also briefed on the new code. In addition to the handbook, new staff have to attend a special video presentation on the subject. The company's newsletter covered prominently the development of the conduct code, from its conception to its implementation. The openness of the exercise gave the staff greater confidence in accepting the code and the company noted they worked more efficiently with a set of clear guidelines.

Chen Hsong Holdings Ltd is another leading company that has benefited from a similar exercise. The planning of the code of conduct was a morale-booster to the staff. Its Executive Director, Dr Lily Chiang, said of her experience : "The process (of developing a code of conduct) has had a positive effect and all my staff share this view. The code has actually brought everyone closer as a team. They became much more motivated because they have very clear standards to follow."

A Growing Trend

In today's highly competitive business world, a code of conduct is more than a mere company asset. It is a powerful marketing and public relations tool.

A report by the Price Waterhouse accounting firm earlier this year says Hong Kong companies could be losing out on opportunities to attract new investors because they fail to publicise their codes of conduct. Investors, particularly institutional shareholders, look into the effectiveness of management systems as part of their pre-investment studies. The Price Waterhouse Survey On Corporate Governance this year shows nearly 50% of responding listed companies did not publicise their conduct codes beyond the main boards.

The ICAC-commissioned Business Ethics Survey shows a code of conduct is a persuasive seller. Nearly 80% of respondents in the 1994 survey said the ethical conduct of a business organisation had a major bearing on their decision to buy its goods or use its services. They also had more confidence in companies with codes of conduct.

Since then, more and more companies are publicising their conduct codes, knowing they present bigger business opportunities. Some of them add slogans of ethics on stationery and publicity materials. Multinationals such as CITIC, Giordano and Schmidt apply their codes of conduct to overseas subsidiaries. Most of them volunteer their experience and conduct codes as reference material to the Hong Kong Ethics Development Centre, as well as having their names published in the Directory of Hong Kong Business Code of Conduct.

The rising importance of the conduct code is reiterated by Mr Robert Ng, Chairman of the Sino Group, who said in a video promoting corporate ethics : "I believe that ethical management is a very important part of corporate governance. And the best way to start is to have a code of conduct for everyone in the company to follow. That way, you reinforce your corporate culture for honesty and efficiency."

Business Support

The growing ethical awareness is the result of the enthusiastic support given to the Business Ethics Campaign by Hong Kong's major chambers of commerce, as well as trade and professional associations. The catalyst of this trend is the code of conduct - a trademark of reliability and long-term profitability.

One of the territory's biggest and influential commerce chamber, the Federation of Hong Kong Industries, actively encourages its 2,500-plus member companies to adopt codes of conduct. In a special message published by the Federation, Immediate Past Chairman Dr Raymond Ch'ien said : "The raising of ethical business standards and practices is inextricably related to long-term profitability and competitiveness - both locally and abroad. Companies who regulated themselves to attain the highest level of ethical conduct shall not only become pillars of the Federation itself but also beacons for the whole of Hong Kong industries."

The hotel industry's response was just as innovative : it launched a territory-wide campaign to promote ethical behaviour. The Hong Kong Hotels Association and the Hotel Controllers' Association (Hong Kong) jointly held in June this year a seminar called Leadership Through Transition - Facing The Ethical Challenge Ahead. Speaking at the seminar, Hong Kong Hotels Association Executive Director Mr Manuel Woo said : "We must not forget our industry words in a far wider environment where ethical behaviour must be observed in our relations with our clients, with the travel trade generally, with government departments and with representatives from all business circles."

The message was well received by the 120 top hotel executives attending the seminar. They pledged their commitment to a newly adopted ethics code. They also discussed ways to curb corruption and improve further the ethical environment in their industry. Follow-up action includes strengthening individual codes of conduct, control of systems and staff training programmes.

Making the Code Work

A code of conduct is only the groundwork for a better ethical environment. It has to be reinforced by other programmes, such as training and checks and balances.

Mr Herbert Liang, President of the Chinese Manufacturers' Association of Hong Kong and Chairman of the Hong Kong Ethics Development Advisory Committee said: "Merely introducing a code of conduct is no guarantee of ethical behaviour unless it is backed by a system of effective controls."

No system can be 100% corruption or fraud proof, he added. It will be useless if the people in charge exploit it for unethical personal gain. The long-term solution is to build an honest organisation culture through well-planned programmes. This is why the EDC is producing information packages, and providing training on system control and ethical decision-making.

Mr Linus Cheung, Chief Executive of Hong Kong Telecom, shares this view. He will follow up his company's drafting of a code of conduct with an extensive programme of education and orientation, to get every employee fully familiar with it.

Setting the right standards for staff is not complex task. Mr Gary Edwards, President of the Ethics Resource Centre in Washington makes a good comparison between law and ethics. He regards law as the "floor", the minimum level of acceptable business conduct. It is the standard expected of everyone, including your competitors. Ethics operates like a ceiling - in the sense of a set of standards articulated by the top management of a company for its own people. Between the two levels is a moral space where people make decisions and conduct business; in an atmosphere of corporate values. The distance between this floor and ceiling varies from industry to industry and company to company.

Hong Kong Ethics Development Centre - Opening

The guests watched a video presentation on the work of the Centre and received copies of the Directory of Hong Kong Business Code of Conduct. The ICAC Commissioner and members of the Hong Kong Ethics Development Advisory Committee made the presentation to the guests in recognition of their efforts in promoting business ethics.

The Directory contains the names and addresses of over 700 business organisations with codes of conduct in Hong Kong. Copies have also been distributed to other trade and professional bodies, foreign consulates and trade commissions in Hong Kong and Hong Kong trade offices overseas for reference. The directory will be updated yearly and business organisations seeking their inclusion can contact the EDC.

Publications

Ethics Plus provides the elements of the Programme's main components. It also features a sample code of conduct, a scheme to protect the integrity of operational systems and a management structure for ethical decision-making and resolving conflict of interests.

Consultancy

Training

In addition to producing a guidebook on System Control, the EDC will jointly organise with the Hong Kong Society of Accountants a seminar on controlling corruption and fraud. Prominent speakers from the Police, ICAC and computer experts will take part in the seminar. The Guangdong Provincial People's Procuratorate will be invited to send a representative to speak on problems relating to China trade. There will also be group discussions with case studies. This seminar for finance and accounting managers will be held in the morning of 13 October 1995 at the J W Marriott Hotel. Reservations, on a first-come first-served basis, can be made at the EDC or the Hong Kong Society of Accountants. Call 2587 9812 for more information.