PUTTING ETHICS IN THE EQUATION: INTEGRATING CODE OF CORPORATE ETHICS IN THE GOVERNMENT CORPORATIONS

By Algamar Latiph (Nov. 2008)

I.

Introduction

In the past six years the world economic system has witnessed in monetary terms the largest dollar level of fraud, accounting manipulations and unethical behavior in corporate history and certainly the most economic scandals and failures since the 1920s.1 Well-publicized cases of corporate scandals such as Enron, Tyco and WorldCom demonstrate the enormous cost of corporate misconduct for employees, investors, and society as a whole.2 The failures of corporate responsibility have been shown to be not only failures of legal compliance, but more profoundly and fundamentally failures to do the right (ethical) thing; the current environment results from a loss of ethical, rather than simply legal footing.3 Due to the increasing concern of the general public about ethical issues in business many organizations have tried to control the problems by institutionalizing ethics.4 For example, some organizations have made structural and procedural changes such as creating new ethics positions (e.g., ethics ombudsmen and ethics committees) and increased the institutionalization of ethics in the forms of corporate codes of ethics and ethics newsletters.5 In the Philippines, ethics was codified as law as early as 1989 upon the legislation of Code of Conduct and Ethical Standards for Public Officials and Employees (CCESPOE).The 1987 Constitution mentioned ethics twice, both in the context of function. First, it is one of the functions of the Ombudsman to make recommendations for the observance of high standards of ethics and efficiency (Sec. 13[2], Art. XI, 1987 Const.) Second, that all educational institutions shall, among others, strengthen ethical and spiritual values, develop moral character and personal discipline. (Sec. 3[2], Art. XIV, 1987 Const.). The Philippine legal system surely is not lacking in statutes in punishing acts of malfeasance and misfeasance of government officers and employees. In fact, there is overlapping in jurisdiction on acts constituting disciplinary case against public servants by various

tribunals. While ours is replete with positive laws governing acts of public servants, there is declining interest in putting ethics as an alternative or complementary normative framework in enforcing obedience in the government. The government corporations (GC) are suffering from budget dependency, financial losses and bleak performance. From the series of decisions that these Boards and corporate officers had made, it is doubtful whether ethics played a role in rendering their decisions or crafting policies. It should be noted that decisions made in the regular course of operations or charters of the GCs are considered discretionary function and beyond administrative and judicial review. This paper delves on corporate ethics in government corporations. It will present, in general, the concepts and principles in ethics. Law and ethics will be discussed as well as practices of private corporations in adopting Code of Corporate Ethics and its impact to the CGs and the relevancy of adopting it in public sector. Conclusion and implications will be presented at the last part of this paper. II. Ethics in General

Ethics is derived from the Greek word ethikos, meaning ideal or excellence.6 In its generic sense, the study of ethics can be defined as the discipline relating to right and wrong, moral duty and obligation, moral principles and values, moral character,7 rules, obligations, agreements, and norms.8 Ethics can include a sense of honesty and fairness, prudence, respect for and service to others, keeping promises, being truthful s based on trust and integrity.9 Ethics involves thinking systematically about morals and conduct and making judgments about right and wrong.10 Aristotle espoused that the foundation of morality lied in the development of good character traits as virtues: a person is said to be good if he or she has virtues.11One author opined that it is a process by which we clarify right from wrong and act on what we take to be right and he says that by clarifying what is right, one opts for moral action and upholds moral standards. 12 Another author believes that ethics is a set of standards that guide our conduct and help us when we face decisions that involve moral choices.13

In the corporate world, ethics is not a set of impositions and constraints but rather is the motivating force behind business behaviors.14 Ethics in public service is about the practical application of moral standards in government.15 III. Constrained in Law: Freedom in Ethics

Law is concerned primarily with conduct and ethical requirements are centrally concerned with reasons, motives, intentions, and more generally with the character that expresses itself in conduct.16 On the other hand, ethics is concerned with what we are and not just what we do.17 It should be noted that legalism is an approach that emphasizes primarily the strict and precise observance of law while tending to overlook the purpose for which the law exists.18 It was argued that an overemphasis on legal compliance mechanisms could be at the expense of ethical reflection since people may have less reason to form their own opinions and take personal responsibility for the decisions they make.19 Because when humans are not allowed to understand why they are making the decision, they lose their joy because modern law tells them that their duty is only to comply, not to accomplish; understanding has been replaced by legal absolutism.20 Virtually every code of ethics discusses behavior that goes beyond the law or addresses the spirit in addition to the letter of the law.21 Ethical compliance reflects two types of ethics: (1) freedom of indifference which is the source of ethics of obligation and is seen as an external limit imposed on the agent, and (2) freedom for excellence which inspires an ethics of happiness and virtue and governs the dynamism and development of a persons faculties of action which tend toward perfection and happiness of the human person.22 IV. Ethics in Public Sector a. Emergence of Ethics in Public Sector Public service ethics has emerged internationally during recent years.23 In 1998, the Council of the Organization for Economic Development seen as high profile recognition of public service ethics
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as a global concern.24 Government ownership also seems to require of government employees a higher adherence to ethical standardsor perhaps adherence to a higher standard of ethicsthan is required of most private sector employees.25 Since governments need to ensure that ethics is placed center stage in the reform process, along with the goals of the economic efficiency and effectiveness.26 Ethics should guide the actions and performance of public servants, and values like morality should help them delineate right from wrong actions.27 This is so since citizens in representative democracies generally expect governments to abide by the rules and values of society, in much the same way as citizens are expected to abide by them.28 In representative democracies, these values generally include expectations that the structure and organization of government will promote justice, fairness and equality, and also that the behavior and decisions of officials will be consistent with those expectations29 and serving the public interest high standards of ethical conduct are expected of public servants.30 b. Putting Ethics in the Exercise of Discretion Ethics in public service is about the application of moral standards in the course of official work.31 One of the most critical challenges public service is the use of bureaucratic discretion in performing ones role, making decisions, and serving the public interest.32 Whenever public laws use such terms as adequate, advisable, appropriate, beneficial, convenient, equitable, fair, fit, necessary, practicable, proper, reasonable, safe, or sufficient, or their opposites, they oblige public servants to exercise discretion and make ethical judgments.33 Ethical decision making is the process whereby individuals use their moral base to determine whether a certain situation or issue is right or wrong.34 All decisions that involve discretion, at whatever level have ethical implications.35 And ethics should guide the actions and performance of public servants, and values like morality should help them delineate right from wrong actions.36 Institutionalizing ethics in GCs would necessarily result to greater accountability. c. Problems and Issues in Keeping Public Servants Accountable
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The search in ways to keep public officials accountable has lead scholars to identify various mechanisms of accountability.37 In the Philippines various bodies have been created both by statutes and presidential issuance to keep government officers accountable. In general, the Commission on Audit (COA), the Office of the Ombudsman (OMB), the Congress through statutory oversights, budget hearings and hearings in aid of legislation, Civil Service Commission (CSC), Commission on Human Rights (CHR), and, Presidential Commission on Anti-Graft and Corruption (PAGC).38 Under Administrative Code, GCs are under complimentary system of monitoring wherein the primary responsibility for monitoring and coordinating the activities of GCs are entrusted to the executive departments to which they are attached; and in addition thereto, a regular over-all supervisory body oversees them.39 The jurisdiction of the courts, OMB, CSC, and PAGC is to investigate and hear malfeasance and misfeasance committed by public servants.40 These bodies wield statutes as their source of jurisdiction to impose good governance but the legal system is inherently adversarial that discourages prosecution of cases due to the time, expenses and tensions in adversarial litigation. Even if there is eagerness to prosecute cases, they are, at times, barred because they are not the aggrieved party. Further, nature in taking jurisdiction of cases is remedial in inasmuch as they exercise jurisdiction when breach of official duty has been committed already; and passive as they assume jurisdiction only upon an instance of a complaint.41 These weaknesses in the legal framework in keeping public servants accountable undermine public trust. Ethics can complement the insufficiency in the enforcement of law. d. The Impunity of Discretionary Actions The exercise of discretion both in public and corporate sector are less regulated by law. Under the Philippines settings, official act is either discretionary or ministerial function. One can only be held accountable for failure to perform ministerial function. But in discretionary function abuse in the exercise of discretion is lawful so long as it is below the parameter of grave abuse of discretion.
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Official acts and decisions premised under discretionary function elude legal regulation because government officers are given wide latitude and autonomy to exercise that discretion function which might be either in the nature of political or corporate powers. Under the Constitution only when there is grave abuse of discretion amounting to lack or in excess of jurisdiction can the courts intervene in the exercise of discretion of public officer. The source of such judicial intervention, however, while explicitly based in the Constitution its source can nevertheless based on ethical considerations. Take for instance the case of De Vera vs Pelayo42 where the Supreme Court held that there is grave abuse of discretion when it is exercise on an arbitrary or despotic manner by reason of passion, prejudice or personal hostility. This juristic opinion is obviously premised on ethical considerations on the manner on how public servants should or ought to act. Presently, cause of action arises only when the abuse of discretion is grave but lesser than that public servants action can no longer be rectified judicially or administratively. Below that parameter, the law cannot hold public officials and employees accountable. This is where ethics becomes relevant and will glow the penumbra where the law fails to shine. In ethics, there is no middle ground it is not measured by gravity. Because of this lacuna, public ethics becomes more pertinent. As one author defines it, ethics is obedience to the unenforceable.43 Ethics, hopefully, can close the gap. V. Ethics: Influencing Positive Corporate Culture

Corporate culture should be built on doing the right thing on behalf of corporate constituencies including customers, employees, suppliers, and stockholders.44 The organization can influence the ethical reasoning of employees and it is reasonable for a society to hold firms legally accountable for the actions of employees, especially when ethics are neither espoused nor enforced.45 In short, besides the moral arguments for doing the right thing, it is also clearly in the best interests of the firm to influence its employees to behave ethically.46

In most administrative agencies, organizational culture is a modernizing agent that nurtures and fosters integrity and moral attitudes among workers and a strong organizational culture is hailed as critical in enhancing organizational ethics and performance.47 It has been argued that for an organization to be ethical, it must have an organizational culture that values ethics.48 This is since corporations culture is what determines how people behave when they are not being watched.49 There tended to be greater job satisfaction (and hence commitment) when top management stressed ethical values. 50 It is the Board that must be responsible for the values and ethics they seek in officers of the corporation to ensure a culture that supports, nurtures, fosters, and attracts individuals of high personal integrity.51 The Board must provide the oversight necessary to ensure that ethical behavior is noticed and rewarded.52 Corporation may be able to positively influence the moral thinking of their employees by providing a clear set of ethical values and policies, and also enforcing these policies.53 Thus, the need to formalize it in a written form such as the Code of Corporate Ethics (CCE). VI. Code of Corporate Ethics: Concepts and Impacts

a. Codifying Ethics A code of ethics is a formally written policy statement that describes an organizations primary values and the ethical rules it expects its employees to follow.54 It consists of moral standards used to guide employee or corporate behavior are often utilized to strengthen a companys ethical context.55 It can usually be found within the companys mission statement, the employee handbook, ethics statements and brochures, or other formal written media.56 This written policy, therefore, demonstrates a companys awareness of ethical issues and indicates how it will deal with such topics.57 In a research of 200 largest companies, it was found that that 58 percent of which have a code of corporate ethics.58 The study also disclosed that the content of these codes contained information about: company responsibilities regarding quality of products and services, adherence to local laws and regulations, protection of the
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natural environment, honesty, fairness, teamwork, discrimination, intimidation, conflict of interests, corruption, and fraud.59 b. Impacts The importance of values and ethics draws our attention to the human dimension in the concept of accountability.60 The content of codes could provide guidance that positively impacts employee conduct through the individual awareness of business virtues that represent a settled moral disposition towards ends a person ought to pursue.61 More importantly, ethical codes are known to improve individual ethical evaluations and work behavior.62 Thus, it is not true that actual results wont improve without ethics; rather, for sustained good results, ethical corporate management is essential.63 Corollarily, the intention of the codes of ethics is to capture the key values of a firm and to convey those values to both internal and external stakeholders.64 An important but underemphasized function of codes involves the fact that, by making a firms values explicit, an effective code equips members of an organization with ethical justifications that can be used in resolving individual and organizational dilemmas.65 Under existing law there is no policy requiring the adoption of CCE to each government agency and corporation. Its adoption is largely dependent on the initiative of the GC concerned like the Philippine Export-Import Credit Agency which has its separate Code of Corporate Ethics and Code of Corporate Governance. c. Distinguished from Code of Corporate Governance The Code of Corporate Governance (CCG) is distinguished from CCE, The former it is concerned with the relationship between the internal governance mechanisms of corporations, and society's conception of the scope of corporate accountability.66 It is a system by which the companies are directed and controlled.67 Corporate governance refers to the distribution of rights and responsibilities among different participants in a corporation (the board, managers, shareholders and other stakeholders) and it begins with a discussion of the role of the board of directors, who have a central role in corporate governance.68

The CCG concerns with performance of the corporation and the means of attaining corporate objectives and monitoring its performance. Most corporations adopts separate CCG and CCE in order to make it clear and delineate ethics from matters of corporate structure, relations and control. Albeit they are distinct, corporate governance depends to a large degree on the ethics of a few good and trusted men and women, not on a piece of paper.69 VII. The Code of Conduct and Ethical Standards for Public Officials and Employees Under CCESPOE, employees in the government service are bound by the rules of proper and ethical behavior. They are expected to act with self-restraint and civility at all times, even when confronted with rudeness and insolence.70 The State policy of promoting a high standard of ethics and utmost responsibility in the public service.71 This statute, however, is applied to all the machinery of the government in general. It is characterized by a top-to-bottom compliance of the ethical norms set forth therein. The law did not reflect the peculiarities of each agency or GC. But at least, this law has given GCs a guide in the drafting and formulation of their respective CCE. A code of ethics is relevant because it becomes a way of setting up a yardstick for the public sector to use in providing services to the public. The CCE has helped promote ethics in private as discussed above. The only problem with the CCESPOE is that its application is general in character. By adopting CCE by all GCs which is reflective of the distinct culture of the government corporations, the success it made in the private sector could be replicated. Hence, accountability will be further enhanced. The reason behind separate CCE for each corporation is the inherent peculiarities and culture distinct in every GC. Thus, the CCE of each GC may vary. To understand a particular GC it is necessary to develop a critical picture of the ethoses of said corporation. The sets of shared values and norms are expressed and negotiated by the officers and employees of the GC themselves. Their democratic participations in crafting their own code gave them sense of ownership and more reflective of their aggregate values and ethics.
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In this process the ethical expectations to public servants are clarified and communicated since if they are confusing and conflicting, if values are not clearly communicated, accountability would be undermined. It is generally accepted in corporate sectors in the world the establishment of ethics audit in order to monitor the progress and compliance. This is lacking the present law. Public service agencies should conduct an ethics audit to redesign work settings, create proper incentive systems, and modify patterns of interaction among employees.72 Such an ethics audit would identify sensitive situations that might tempt an individual to act unethically. 73 In Philippines, Ethics Audit is not yet institutionalized to monitor the progress of ethics in GCs. This is understandable since CCESPOE has not specifically provides for it. However, CSC exercises supervision over all public officers and employees acts and omissions although general in character. VIII. Conclusion and Implications The fact is that while ours is a government of law and not of men it does not men that ethics is excluded in the equation of accountability in the public sector. The Philippine is not short of laws that punish every conceivable malfeasance and misfeasance that may be committed or omitted by public officers and employees. The institutional mechanisms and oversights which keep the government accountable have demonstrated their inherent weakness. There are official acts and decisions which are legal but will not pass ethical considerations. For instance, contracting of trillions of pesos of foreign debts largely borrowed by GCs can be justified as sound corporate judgment and, hence, are legal in the eyes of laws. But is it morally right to incur that big amount of money to the prejudice of the entire populace, ethical considerations would raise question as to the appropriateness in rendering their decisions (series of decisions that gave the public coffers trillions of indebtedness). Ethical decision-making in public administration has various elements. First, there is consideration of the ethics of the actions taken by individuals in participating in a public decision. Second, is the consideration of the ethics of a particular outcome or decision in
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terms of those it impacts upon.74 Under the example above, they may pass the first element but not the second which calls on the corresponding impact attached to exercise of discretion by public officers. As discussed previously, as long as exercise of discretion is not attended with grave abuse it is guaranteed with impunity. Such impunity can be temper by ethics. But where is ethics in the psyche of public servants. In the Philippines, judicial ethics made the courts officers and employees accountable. Both houses of the Congress have their Committees on Ethics to investigate and possible impose discipline on their peers inappropriate behavior. Professionals such as lawyers, physicians and accountants have their own separate code ethical standards. On the other hand, few of our GCs have their respective CCE and the initiative in adopting CCE was in line with the trends and pressure from private sector. Studies as discussed above had found that ethics and its codification of CCE had strengthened and enhanced accountability. Unfortunately, there is a big hole in our system of governance and public accountability because of lack of public policy in the adoption and codification of ethics and integrating it GCs. Our laws, obviously, had not prevented corruptions and misbehavior in the public service. It is hope that by imbuing ethics and institutionalizing, it will give life to our laws.

END NOTES
1

Rockness, H. and Rockness, J., Legislated Ethics: From Enron to Sarbanes-Oxley, the Impact on Corporate America, Journal of Business Ethics, 2005, 57: 31-54. 2 Doig, A. and Skelcher, C.(2001)'Ethics in Local Government: Evaluating Self-Regulation in England and Wales', Local Government Studies, 27:1, 87-108. 3 Arjoon, S., Corporate Governance: An Ethical Perspective, Journal of Business Ethics, (2005) 61: 343352 citation omitted. 4 Vitell, S.J. and Hidalgo, E.R., The Impact of Corporate Ethical Values and Enforcement of Ethical Codes on the Perceived Importance of Ethics in Business: A Comparison of U.S. and Spanish Managers, Journal of Business Ethics (2006) 64: 3143 citations omitted. 5 Id. 6 Cacioppe, R., et al., A Survey of Managers Perceptions of Corporate Ethics and Social Responsibility and Actions that may Affect Companies Success, Journal of Business Ethics, (2008) 82:681700.

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Pelletier, K.L. and Bligh, M.C., Rebounding from Corruption: Perceptions of Ethics Program Effectiveness in a Public Sector Organization, Journal of Business Ethics, (2006) 67:359374 citations omitted. 8 Fleming, Scott and McNamee, Mike, The ethics of corporate governance in public sector organizations, Public Management Review, 2005, 7:1,135 144. 9 Supra., at note 6. 10 Kyarimpa, G.E. and Garcia-Zamor, J.C., The Quest for Public Service Ethics: Individual Conscience and Organizational Constraints, Public Money and Management, Jan. 2006. 11 Valentine, S., and Johnson A., Codes of Ethics, Orientation Programs, and the Perceived Importance of Employee Incorruptibility, Journal of Business Ethics (2005) 61: 4553 citations omitted. 12 Supra., at note 10. 13 Id. 14 Rockness, H. and Rockness, J., Legislated Ethics: From Enron to Sarbanes-Oxley, the Impact on Corporate America, Journal of Business Ethics, 2005, 57: 31-54. 15 Supra., at note 10. 16 Arjoon, S., Corporate Governance: An Ethical Perspective, Journal of Business Ethics, (2005) 61: 343352. 17 Id. 18 Id. 19 Id. 20 Id. 21 Schwartz, M.S., Universal Moral Values for Corporate Codes of Ethics, Journal of Business Ethics (2005) 59: 2744. 22 Supra., at note 3. 23 Supra., at note 2. 24 James, C., Economic Rationalism and Public Sector Ethics: Conflicts and Catalysts, Australian Journal of Public Administration, March 2003, 62(1): 95-108. 25 Id.. 26 Id. 27 Supra., at note 10. 28 Id. 29 Chapman, R.A., Problems of Ethics in Public Sector Management, Public Money & Management, Jan.-March (1998). 30 Supra., at note 10. 31 Supra., at note 29. 32 Supra., at note 10. 33 Latiph, A., Making Public Enterprise Accountable: Legislating Freedom of Information as a Mechanism of Constituent Accountability Oversight, 2008, (unpublished) citations omitted.. 34 Pelletier, K.L. and Bligh, M.C., Rebounding from Corruption: Perceptions of Ethics Program Effectiveness in a Public Sector Organization, Journal of Business Ethics, (2006) 67:359374. 35 Supra., at note 32. 36 Supra., at note 10. 37 Supra., at note 32. 38 Id. 39 Santos, M.F., Jr., The Imperative of Adopting the Pillars of Good GovernanceTowards a More Rational and Effective Monitoring and Coordination of Government-Owned or Controlled Corporations, 2007 (unpublished). 40 Supra., at note 32. 41 Id. 42 335 SCRA 281. 43 Supra., at note 10. 44 Supra., at note 1. 45 Supra., at note 4. 46 Id..

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47 48

Supra., at note. Id. 49 Supra., at note 1. 50 Supra., at note 4. 51 Supra., at note 1. 52 Id. 53 Supra., at note 4. 54 Supra., at note 7. 55 Supra., at note 11. 56 Supra., at note 7. 57 Id. 58 Donker, H., et al, Corporate Values, Codes of Ethics, and Firm Performance: A Look at the Canadian Context, Journal of Business Ethics (2008), 82:527537.. 59 Id.. 60 Wolf, A., Symposium on Accountability in Public administration: Reconciling Democracy, Efficiency and Ethics, International Review of Administrative Sciences 2000; 66; 15. 61 Supra., at note 10. 62 Id. 63 Mizou, J., Business Ethics and Corporate Governance in Japanese Corporations, Business and Society Review, 102/103: 6579. 64 Supra., at note 58. 65 Id. 66 Deakin, S. and Hughes, A., Comparative Corporate Governance: An Interdisciplinary Agenda, Journal of Law and Society, Vol. 24, No. 1, Corporate Governance. (Mar., 1997), pp. 1-9. 67 Ryan, C., and Ng, C., Public Sector Corporate Governance Disclosure: An Examination of Annual Reporting in Queensland, Australian Journal of Public Administration, June 2000, 59(2), 11-23 citing the definition of Organization for Economic Cooperation and Development. 68 Barrett, P., Balancing Accountability and Efficiency in a More Competitive Public Sector Environment, Australian Journal of Public Administration, 59(3)5871, September 2000. 69 Huehn, P., Unenlightened Economism: The Antecedents of Bad Corporate Governance and Ethical Decline, Journal of Business Ethics (2008), 81:823835. 70 Quiroz v Orfila, A.M. No. P-96-1210 May 7, 1997. 71 Alawi vs. Alauva, 268 SCRA 628 (1997). 72 Supra., at note 10. 73 Id. 74 James, C., Economic Rationalism and Public Sector Ethics: Conflicts and Catalysts, Australian Journal of Public Administration, March 2003, 62(1): 95-108.

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