Editor’s Note: This is the second in a series of articles by the author, Robert G. Hensley, on policies and procedures dealing with accounting and regulatory issues.

The Sarbanes-Oxley Act (“SOX Act”) requires public companies, including cooperatives that register their stock with the Securities and Exchange Commission (“SEC”), to disclose whether or not they have adopted a code of ethics for senior financial officers. While the SOX Act does not mandate that a public company have a code of ethics, the SOX Act does state that if a public company does not have a code of ethics, the company must disclose that it does not, and “the reason therefore.” The message to public companies is fairly clear - you should have a code of ethics.

The SOX Act defines a code of ethics as standards that are “reasonably necessary” to promote:

  • honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,
  • full, fair, accurate, timely and understandable disclosure in periodic reports required to be filed by the issuer, and
  • compliance with applicable governmental rules and regulations.

Most public companies have altered, developed or reviewed their code of ethics in order to adopt standards that are reasonably necessary to comply with the conduct legislated by the SOX Act.

The Role of the Board of Directors

In determining whether to adopt a code of ethics, the Board should address just exactly who the company is trying to protect in adopting a code of ethics. A public company has stockholders, often thousands or millions of stockholders, and the basic premise of the code of ethics is to protect the stockholders from the unethical business practices of employees. With respect to a private cooperative, there may be similar reasons to adopt a code of ethics.

Many private cooperatives have hundreds or even thousands of members. For example, REI, the successful retail cooperative that supplies outdoor gear, is a private cooperative with nearly two million members. In many private cooperatives, the members expect the directors, officers and employees to deal honestly and fairly with the customers, suppliers and competitors of the cooperative. Should the Board of a private cooperative be any more lenient than the Board of a public cooperative in prohibiting kickbacks from suppliers? Probably not. A written policy will manage the expectations of employees by defining what is acceptable and what is not acceptable in the operation of the business.

Content of the Code of Ethics

Cooperatives come in a variety of forms, and a code of ethics may need to be tailored to fit your particular business. Some public companies have one code of ethics for financial officers and another for employees. However, the approach that is more common is to have a single code of ethics that covers all directors, officers, employees, including consultants. Some topics frequently covered in a code of ethics:

Fair Dealing

  • Prohibiting bribes, kickbacks or any other form of improper payment to any representative of a government, a labor union, a customer or a supplier.
  • Prohibiting directors, officers and employees from accepting any bribe, kickback or improper payment.
  • Prohibiting gifts or favors of more than nominal value to or from customers or suppliers.
  • Limiting marketing and client entertainment expenditures to those that are necessary, prudent, jobrelated and consistent with company policies.
  • Reflecting accurately the sale price and terms of sales for products sold or services rendered.

Conflicts of Interest

  • Prohibiting officers or directors from being hired by or involved in the management of an outside business that competes with the cooperative or does business with the cooperative.
  • Prohibiting officers or directors from seeking or accepting any loans or services from the cooperative and any entity with which the cooperative does business.
  • Prohibiting officers or directors from conducting business on behalf of the cooperative with immediate family members.

Full, Fair, Timely and Understandable Disclosure

  • Not making false or misleading entries in books and records.
  • Not condoning any undisclosed or unrecorded bank accounts or assets.
  • Maintaining an adequate system of internal accounting controls.
  • Presenting information to members in a clear and orderly manner.

Compliance with Laws, Rules and Regulations

  • Promoting a workplace that is free from discrimination or harassment.
  • Supporting fair competition and laws prohibiting restraints of trade and other unfair trade practices.
  • Conducting activities in compliance with environmental laws.
  • Keeping the political activities of directors, officers and employees separate from company business.

Monitoring Compliance with the Code of Ethics

It does little good to adopt a code of ethics if there is no process in place to monitor compliance. Many larger companies have an “ethics officer” in order to ensure compliance. The position is usually assigned to an employee who has a number of job duties. If a cooperative does not have an ethics officer, potential violations can be reported to the audit committee chair, the human resources director or legal counsel.

Training is also an important aspect of compliance with a code of ethics. Employees, directors and officers should receive training on the code of ethics as part of new employee orientation and possibly as part of on-going training programs. To ensure familiarity, directors, officers and employees are frequently asked to read the code of ethics and sign a compliance certificate. The compliance certificate frequently states the consequences of violating the policy, including potential demotion or discharge.

But Can You Legislate Business Ethics?

Probably not. However, a written code of ethics can ensure that employees, directors and officers are aware of the “rules of the game” that have been adopted by your cooperative. Personnel who violate the code of ethics probably will not have a defense that “I wasn’t aware of the policy.”

If your cooperative does not have a written code of ethics and an employee, officer, or director engages in inappropriate conduct, the other officers or directors may be subject to criticism that the behavior could have been prevented if the cooperative had appropriate policies in place. Thus, while ethics cannot be legislated, a cooperative can establish expectations on how it will conduct its business and reduce its potential liability by enacting appropriate policies and safeguards.