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News Release

July 09, 2007

Corporate Ethical Codes Hold Little Weight, Prof Finds

High-profile corporate scandals have led to a majority of Canadian companies establishing ethical codes of conduct in an effort to restore investor confidence and business trust. But recent research by U of G professor Scott Colwell of the Department of Marketing and Consumer Studies has found these codes may have done little to improve corporate behaviour, especially when it comes to business relationships between buyer and supplier.

"There are ethical codes in place, but in many cases they don’t seem to be working,” he said. “My current thinking is that it might not be enough to have industry policing itself.”

Colwell worked with Michael Zyphur of the National University of Singapore on this research, focusing on the effectiveness of the codes of conduct established by supplier companies. To do this, they surveyed purchasing managers at 158 large Canadian corporations about the company’s relationship with its suppliers.

Forty-two per cent of the managers surveyed rated their suppliers as poor to moderate in terms of trustworthiness, said Colwell. And 34 per cent rated their suppliers as exhibiting moderate to high levels of opportunistic behaviours.

According to the Conference Board of Canada, more than 85 per cent of Canadian companies have ethical codes of conduct. But Colwell said he believes many suppliers may be establishing codes as a way of enticing business, rather than because they are legitimately concerned with acting ethically.

Although expensive to put in place, these codes are effective at attracting buyers because they signal that the supplier is a committed and trustworthy company, he said.

“Ethical codes of conduct may have become merely advertising tools. Building this trust is important to the supplier because the more a buyer trusts its supplier, the more likely the buyer is to increase its business commitment.”

The problem is that as the buyer’s commitment grows, so do the costs of switching to another supplier, said Colwell. So once a business relationship has been established, unethical conduct on the part of the supplier is often tolerated.

“The switching costs may force business relationships to continue regardless of the level of trust, which is one potential reason why we seem to still have ethical problems despite ethical codes of conduct being in place. In general, ethical codes seem to matter only at the beginning stages of the relationship when switching costs are low.”

In the end, unethical companies may not be penalized, and companies that fall victim to unethical treatment often feel they have little choice but to tolerate it, he said.

Colwell believes there needs to be more in place than simply relying on the corporate industry to solve the problem, but he suggests that additional research needs to be done to determine the appropriate mechanisms.

One option is for policy-makers to devise a credible system for conducting ethical audits of companies, he said. But companies themselves also need to invest in training employees and managers to live up to ethical codes.

“Just establishing ethical codes is not going to solve the problem.”