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Journal of Business Ethics (2008) 82:527-537 ? Springer 2007
DOI 10.1007/sl0551-007-9579-x
leadership or employee
ABSTRACT. In this we present two influence decision making?
empirical study,
new models that are corporate ethics based. The first Do have an influence on consumer behavior?
they
model the value index
numerically quantifies corporate Do they provide prescriptive normative language
(CV-Index) based on a set of predefined parameters and that sets a moral standard independent of economic
the second model estimates the market-to-book values of
considerations?
in relation to the CV-Index as well as other
equity
In this article we
draw upon the literature that is
parameters. These models were to Canadian
applied
particularly germane to our current study, namely,
companies listed on the Toronto Stock Exchange (TSX).
our analysis, we found statistically significant those articles which look at the business case for the
Through
evidence that values inclusion of ethical values in codes of ethics and the
corporate (CV-Index) positively
correlated with firm The results are even impact that the inclusion of those values has on firm
performance.
more for firms with low market-to-book val As well, we discuss some related and
significant performance.
ues. Our
empirical findings suggest that corporate ethics is relevant articles on corporate social responsibility
vital for management, employees, shareholders, stake and financial performance.
and the at In addition, we have and Schlegelmilch a code
holders, community large. Langlois (1990) defined
tested and confirmed five hypotheses that are used to of ethics as a statement that cor
corporate registers
illustrate corporate ethics behavior and performance. rules of conduct,of codes
porate principles, ethics,
practice, or company
KEY WOPDS: codes of ethical
philosophy concerning
ethics, corporate values,
responsibility to stakeholders, the environment, or
values, firm performance
any other aspects of society external to the company.
Kaptein (2004) states that a code of ethics clarifies
Introduction the objectives the company pursues, the norms and
values it upholds and what it can be held accountable
The classical theory of a market economy assumes for. A code of ethics contains the company's
the naive belief that the pursuit of economic effi responsibilities, values and/or norms. A
principles,
ciency and entrepreneurial dynamism
are automati code of ethics thus demonstrates a company's
cally linked with common good. Due the to this awareness of ethical issues and indicates how it will
assumption, it is also assumed that the market merely deal with such topics.
follows a logic of means the use of the fact that many teachers of business
(maximizing Despite
resources measured by profit) and not a logic of ethics teach that business ethics is good for business,
ends, purpose, or raison d'etre. As Milton Friedman to the extent that codes of ethics are indicators of
(1970) articulated this perspective, the sole respon business ethics, much of the general literature on the
of business is to maximize profit for the of
sibility impact having codes of ethics on decision making
shareholder and obey the law. Many articles in the within has been In
organizations disappointing.
business ethics
literature have examined what impact a number of studies, Lere and
reviewing empirical
codes of ethics have on an organization. Do codes Gaumnitz (2003, p. 365) note '[t]he evidence from
have an on behavior? Do they those studies that have been conducted
impact organizational suggests that
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528
Han Donker et al.
codes of ethics
apparently do not have a major ob of the society. In the 21st century, what might have
servable impact on decision making.' The conclu seemed straightforward, if contentious to some in
sion of Lere and Gaumnitz is to suggest that most 1970, is far less so today. It is not entirely clear what
codes do not have an impact if the individual is al the necessary and sufficient conditions are for
to act in a manner consistent with the
ready going increasing profits and further how much increase is
code, that is, the code directs an ethical choice that necessary. In addition, in our and
pluralistic morally
the individual would already make. Lere and relativist world, it is not clear what 'the ethical
Gaumnitz provide a model to identify the cases norms of the society' are or how
cross-culturally
where codes could have an impact and further these might vary. What is clear from the recent
provide helpful insights into other roles which codes history of corporate scandals is that overwhelmingly,
may serve. leaders of the Enron, Worldcom, Tyco Interna
While not directly on codes, there are comple tional, Arthur Andersen companies and their cor
mentary articles on the relationship between cor porate relatives were seen as exemplars of egregious
porate social responsibility and firm performance. moral as well as legal wrong doing. Further, that
Pava and Krausz (1996, p. 321) evaluated the wrongdoing brought down those companies with
financial performance of "53 firms which have been significant negative and tragic economic conse
identified by the Council on Economic Priorities quences for many stockholders. The question arises
(CEP) as being socially responsible" compared with would moral 'right doing' have been profitable or
a control sample comparable in size and industry. more profitable? In the case of Enron, we know that;
negatively affecting corporate relations. ture the key values of a firm and to convey those
values to both internal and external stakeholders. An
stockholders and obey the laws and the ethical norms will consider these ethical justifications alongside
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Corporate Values, Codes of Ethics, and Firm Performance 529
economic and legal justifications before arriving at a regulations (57%), protection of the natural envi
choice 2005, p. 45). ronment fairness
(Boatright, 2000; Coughlan, (56%),
honesty (50%), (45%),
Clearly we can agree with Friedman that a key teamwork (43%), discrimination (44%), intimidation
- -
function if not the only function of business is to (43%), conflict of interests (52%), corruption (46%),
be profitable. While there are many good reasons for and fraud (45%).
a corporation to articulate a code of ethics and for a Langlois and Schlegelmilch (1990) reported the
corporate culture to operationalize that code 'ethics gap' between Europe and the U.S. They found
manifest ethical behavior, the relationship that while only 41% ofthe 189 firms from the U.K.,
through
between ethics and profitability for companies is not France, and Germany had introduced codes of ethics
disinterested or coincidental. Evidence-based models in 1988, 75% of respondents to a survey of Fortune
of business ethics are critically important to business. 500 companies in the United States stated that they
As Loe et al. (2000, p. 185) note, had a code of ethics. They concluded that there were
hope that the data here provide part of the evidence Singh (2006) analyzed the content
ofthe codes of
to support business people who wish to incorporate ethics of 80 listed companies on the Toronto Stock
ethical values into codes of ethics for their companies. Exchange (TSX) in 2003. He found that more ofthe
codes were concerned with conduct that is contrary
to the self-interest of the firm (e.g., conflict of
Code of conducts interest and insider trading) than with conduct that is
consistent with the self-interest of the firm (e.g.,
Caracsco and Singh (2003) examined the content of relations with customers/suppliers and competitors,
the codesof conduct of the world's 50 largest product quality, and environmental affairs). The
transnational non-financial firms (ranked by foreign results are consistent with a previous study of Le
assets) in 2000. They analyzed three main areas: (a) febvre and Singh (1992) where they concluded that
behavior and actions covered by the code, (b) the focus of codes of ethics was on the protection of
enforcement procedures, and, (c) penalties for non the firms. The proportion of codes of ethics that
found that firms were concerned mentioned enforcement or
compliance. They compliance procedures
about conductthat promoted positive values and increased significantly from 1992 to 2003. Singh
relationships (e.g., relations with customers/suppli (2006) concluded that this result implied a deter
ers, employees, and the environment) and conduct mined effort to make the code of ethics more
that was negative either in a legal or ethical sense effective. Wood (2000) examined the codes of ethics
(e.g., conflict of interest and insider trading) but it of 83 of the top 500 companies in Australia, with
should be noted that concerns relating to the latter findings similar to Lefebvre and Singh (1992).
were more emphasized in the codes the authors Weaver et al. (1999) argued that the vast majority
examined. of firms have adopted a code of ethics for symbolic
Kaptein (2004) investigated the codes of ethics of reasons (low cost approach). However, many firms
the 200 largest companies in the world in 2001. He went further and installed organizational procedures
found that 58% of the 200 largest companies in the and policies to put these in action.
world have a code of conduct. the Schwartz (2005) identified a set of universal moral
Specifically,
content of these codes contained information about: values for corporate codes of ethics: trustworthiness,
company responsibilities regarding quality of prod respect, responsibility, fairness, caring, and citizen
ucts and services (67%), adherence to local laws and ship. In the current study, we adopted these core
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530
Han Donker et al.
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Corporate Values, Codes of Ethics, and Firm Performance 531
such as negative net present value projects. The over bent management teams can be entrenched and are
investment problem can be reduced by issuing debt. hard to
replace.
As a result, issuing debt motivates managers to For empirical testing, we use SIZE (company size)
overcome
organizational resistance to retrenchment. and ROA (return on assets) as control variables. We
We expect that increasing debt will reduce agency expect a negative relationship between SIZE and the
costs and increase firm value. market-to-book (MTB) value, because ofthe small
firm size effect (Banz, 1981).
Hypothesis 3 The relation between small block
ownership and company shareholder value is
positive. Sample description and methodology
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532Han Donker et al
courage, [3] excellence, [4] fairness, [5] honesty, [6] spect, trust, integrity and responsibility.
honor, [7] respect, [8] trust, [9] integrity, and [10] HI small = the percentage of shares owned by
responsibility. the largest shareholder who held less than 25%
= of shares owned
Hllarge the percentage by
the largest shareholder (=controlling share
Impact on market-to-book values holder) who held 25% or more.
Further, we investigated the effect of corporate Descriptive statistics for key variables for 240 com
values on MTB values of equity, and, we regressed panies are presented in Panel A of Table I. On
the following model: average, the ROA is negative (-5.03%), because we
ranked the largest 1,000 firms based on their after
MTB, = a0i+ &SIZE, + jS2LEV,
+ j33ROA, tax profits in their most recent fiscal year, excluding
-
+ j84CV Index,+ j85 gains or losses and selected the largest
Hlsmalk + P6Hllargei extraordinary
firms (1-50), medium-sized firms (500-600) and
= small-sized firms (900-1,000). The median ROA is
MTB the market value of the firm's equity
still positive (2.65%). We categorized firms with a
divided by the book value of the firm's assets.
owns more
SIZE = log total assets.
shareholder (i.e., shareholder who
large
than firms with a small
shareholder
LEV = the percentage of total book debt over 25%), (i.e.,
shareholder who owns less than 25%), and firms with
total assets
= the over dispersed ownership. Firms with a large shareholder
ROA percentage of net earnings =
market (n 67) control 53.83% ofthe votes. The control
capitalization.
ling power of these large shareholders is substantial
CV = the log of the sum of indicator variables,
a firm and can impose entrenchment and cause dilution of
which equals one if the Code of Ethics of
TABLE I
The table reports descriptive statistics and the correlation matrix for the sample of 240 firms that appeared in the 2004 The
Globe andMail 1000 hst of the largest publicly traded Canadian companies. SIZE is the total assets inmillions. LEV is the
of total book debt over total assets. ROA is the percentage of net over market Hlsmall
percentage earnings capitalization.
is the percentage of shares owned by the largest shareholder who held less than 25%. Hllarge is defined as the percentage of
shares owned by the largest shareholder (=controlling shareholder) who held more than 25%.
an CV-Index, = where E{j is an indicator variable which equals 1 if the
Corporate values are measured by Ylj=\ ?{/>
i states a corporate value the number of times ismentioned in the
corporate Code of Ethics of firm j 6 [0,10] regardless E{j
Code of Ethics. The corporate values^ G [0,10] contain the following terms: accountability [1], courage [2], excellence [3],
fairness [4], honesty [5], honor [6], respect [7], trust [8], integrity [9], and responsibility [10].
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Corporate Values, Codes of Ethics, and Firm Performance 533
shareholder's minority interests (Grossman and Hart, ethics across different sizes of firms, we used total
Firms with a small shareholder = assets as a measure
1980). (n 55) for firm size. Panel A illustrates
control on average 16.2%. Panel B of Table I shows that 84% of the large-sized firms and 54% of the
the correlation
among the
independent variables. small-sized firms have a published code of ethics
The highest correlation coefficient is 0.464 (between while 25% of the medium-sized firms have a pub
SIZE and CV). The correlations between other lished code. Hence, a substantially lower
portion of
variables are low. it indi medium-sized firms have a
explanatory quite Hence, published code of ethics.
cates that the extent of multi-collinearity problem is Panel B shows that in all sectors but finance, the use
minor. of a code of ethics is almost 50%. A majority of the
finance sector does not report having a code of
ethics. We found this pattern across firm size and
Empirical results industries to be surprising.
In Panel C of Table II, we demonstrate that
To identify whether or not firms publish a code of with a code of ethics are
companies statistically and
we searched the websites of the respective
ethics, significantly larger in size than companies without a
companies. The results on the use of a code of ethics code of ethics (p = 0.02). The difference in means
appear in Table II. To analyze the use of a code of with respect to the MTB ratio between companies
TABLE II
Code of ethics
Panel A
Large-sized firms (1-50) n= 38 (84%) n = 7 =45a
n(16%)
Medium-sized firms (500-600) n= 24 (25%) n= n=96a
72 (75%)
Small-sized firms (900-1,000) n= 53 (54%) n= n=99a
46 (46%)
I =
Total 115 (48%) I = 125 (52%) S = 240a
Panel B
Oil, gas, and mining ? = 23 n =
44n- 21
? = 39 ? =?=36
Industry 75
n ? 14
Finance ? = n=23
37
? = 39
Others ? =?=45
84
S = 115 (48%)
Total 2 = 125 (52%) Z = 240a
CodeC of ethics
Panel No code of ethics A inmeans
(standard deviation) (standard deviation) (p-values)
MTB
1.24 1.34
-0.10
(1.02)(1.40) =
(p 0.52)
SIZE (inmillions) 20,598 5,168 15,430**
=
(66,218) (31,341) (p 0.02)
The sample contains statistics of the code of ethics of 250 publicly traded Canadian companies on December 31, 2004.
The sample is selected from The Globe andMail 1000 Hst of the largest publicly traded Canadian companies, measured by
assets and ranked to their after-tax in their most recent fiscal or
according profits year, excluding extraordinary gains losses.
The largest firms (1-50), medium-sized firms (500-600) and small-sized firms (900-1,000) were extracted from the
sample. MTB is the market divided total assets. ROA is the of net over
capitalization by percentage earnings market
capitalization. SIZE is the total assets in millions.
* Indicates statistical at the 1% and 5% and 10% levels,
***, **, significance respectively (two-sided
a tested).
Sample misses in total 10 observations, because financial data were not available.
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534
Han Donker et al.
Integrity 1.700 Zn = 408 0 25 ratio is often used as a measure for growth oppor
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Corporate Values, Codes of Ethics, and Firm Performance 535
TABLE IV
variable
Dependent
Independent variables Predicted sign OLS 1 All MTB OLS 2 High MTB (>1) OLS 3 Low MTB (<1)
Number of observations 92
106 198
= ao, +
a
This table reports regression of the form: MTB,
estimates from /^SIZE, + j32LEV,+ j83ROA,+
j?4CV,+ P5Hlsmalli -f P6Hllargei, where MTB is defined as the market capitalization divided by total assets.
SIZE is the log of total assets. LEV is the ratio of total book debt over total assets. ROA is the ratio of net earnings over
market capitalization. Hlsmall is the percentage of shares owned by the largest shareholder who held less than 25%.
Hllarge is defined as the percentage of shares owned by the largest shareholder (=controlling shareholder) who held more
than 25%.
values are measured an CV-Index: = where is the of the sum of the indicator
Corporate by CV, ^)> CV, log
Ylj=\
variables is an indicator variable which 1 if the corporate Code of Ethics of firm / states a corporate value
Ej. Ej equals
j? [0,10]. The corporate values j contain the following terms: accountability [1], courage [2], excellence [3], fairness [4],
honesty [5], honor [6], respect [7], trust [8], integrity [9], and responsibility [10].
The standard errors are in
parentheses.
* Indicates statistical a
***, **, significance at the 1% and 5% and 10% levels, respectively (one-sided tested). Two-sided
tested.
corporate values are among the three most In such cases, the entrenchment that
signifi theory suggests
cant out of the six variables listed for companies with the market value of a firm will decrease for high
low MTB ratios. levels of
ownership
concentration.
The variables related to ownership structure differ Our regression results indicate that the MTB
significantly between small and large shareholders. value decreases for
high levels
ownership of
We expected some form of entrenchment when (Hllarge). The estimated regression models have
there is a large shareholder (Hllarge). The coeffi adjusted R values ranging between 0.13 and 0.27,
cients for Hllarge are negative and significant for with F-statistics
corresponding statistically signifi
OLS 1 and OLS 3 (10%). This result is consistent cant. Diagnostic checks for the OLS estimation (not
with the entrenchment theory. Our findings are reported here) revealed no significant concern with
related to Morck et al. (1988) and McConnell and heteroskedasticity (White test).
Servaes (1990), although they focused their studies In sum, taking all firms together, the findings of
on
managerial entrenchment. We argue that the the multivariate analysis show that firm performance:
market for corporate control is ineffective when the (a) increases with increases in the appearance of
ownership structure of a firm is highly concentrated. ethical value terms, (b) decreases with firm size, (c)
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536
Han Donker et al.
decreases with debt ratio, (d) increases with ROA, rather in an integrated fashion incorporates ethics and
and (f) decreases with shareholdings of large share firm performance as part of a rational decision
holders (holdings more than 25%). making model of operation.
Separating firms into high and low MTB, results
show that increases in the appearance of ethical value
terms in annual reports has no significant impact on Conclusions
the former and a significant impact on the latter. In
fact, it is only the latter association that seems to In this empirical study, we introduced two new
drive the result in the first regression. As well, 4 of models, identified a set of parameters (values) that
the 6 predictors of firm performance in the high represents a CV-Index and generated a set of
MTB case have no significant impact. hypotheses to test the impact of the CV-Index on
Boatright (2000, p. 9) argued that when faced with calculates the influence of corporate values on
an ethical problem, "the ideal resolution is not a MTB-value. Our findings suggest a positive and
trade-off between ethics and other consider statistically significant relationship between corpo
ations... but a decision thatis ethically defensible rate values and firm performance. This article
while at the same time satisfying the legitimate emphasizes the significance of business ethics and
demands of economic performance and a company's corporate social responsibility for business strategies
of business is to increase firm performance, rather than financial performance data in this study.
empirical
evidence that reinforces consistency between
does not, as in the Enron example, wed itself to profit the Ethical Decision-Making Process', Journal of
over all other values, ethical values but Business Ethics 59, 45-53.
including
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Corporate Values, Codes of Ethics, and Firm Performance 537
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3333 University Way, Prince George, BC,
Ethics on Decision Making: Some Insights from
Canada, V2N 4Z9
Information The Journal
Economies', of Business Ethics
E-mail: donker@unbc.ca
48, 365-379.
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