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Corporate Governance and Codes of Ethics

Article  in  Journal of Business Ethics · December 2009

DOI: 10.1007/s10551-009-0035-y

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Journal of Business Ethics (2009) 90:187–202
DOI 10.1007/s10551-009-0035-y
Corporate Governance
and Codes of Ethics
ABSTRACT. As a result of recent corporate scandals,
several rules have focused on the role played by Boards of
Directors on the planning and monitoring of corporate
codes of ethics. In theory, outside directors are in a better
position than insiders to protect and further the interests of
all stakeholders because of their experience and their sense
of moral and legal obligations. Female directors also tend to
be more sensitive to ethics according to several past studies
which explain this affirmation by early gender socialization,
the fact that women are thought to place a greater emphasis
on harmonious relations and the fact that men and women
use different ethical frameworks in their judgments. The
goal of this paper is to determine the influence of these
characteristics of the Board in terms of promoting and
hindering the creation of a code of ethics. Our findings
show that a greater number of female directors does not
necessarily lead to more ethical companies. Moreover,
within Europe as a continent, board ownership leads to an
entrenchment of upper-level management, generating a
divergence between the ethical interests of owners and
managers. In light of this situation, the presence of inde-
pendent directors is necessary to reduce such conflicts.
KEY WORDS: codes of ethics, business ethics, corpo-
rate social responsibility, corporate governance, Board of
Directors
Introduction
Recent corporate scandals have demonstrated the
need to create internal codes of conduct and apply
them to the members of Boards of Directors and top
management in order to uphold the reputation, eth-
ical behavior, and integrity of companies (Aldama,
2003; Australian Stock Exchange, 2003; Higgs, 2003;
New York Stock Exchange, 2003; OECD, 2004).
Furthermore, it has become necessary to state the
expected behavior of all other workers by adopting a

Springer 2009
Luis Rodriguez-Dominguez
Isabel Gallego-Alvarez
Isabel Maria Garcia-Sanchez
code of ethics (Australian Stock Exchange, 2003;
Independent Directors Association and the Russian
Institute of Directors, 2004; International Federation
of Accountants, 2007; Investment and Financial Ser-
vices Association Limited, 2003; New York Stock
Exchange, 2003).
Because business ethics is one of the factors in cor-
porate social responsibility (Carroll, 1991; Schwartz
and Carroll, 2003), and corporate governance has a
great deal of implications in an organization’s approach
to corporate social responsibility and business ethics
(Bonn and Fisher, 2005), the aforementioned entities
recommend that the Board of Directors develop and
implement ethical codes.
Previous research (e.g., Haniffa and Cooke, 2005;
Wang and Coffey, 1992; Webb, 2004; Williams,
2003) has examined the relationship between cor-
porate social responsibility and several characteristics
of corporate governance, finding that a greater
number of independent directors and female direc-
tors, as well as greater shareholdings owned by the
Board of Directors, both have a positive influence
on socially responsible behavior in organizations.
In this paper, we analyze the effect of these three
factors involving the Board of Directors on a com-
pany’s likelihood of having a formal code of ethics.
Our interest in analyzing the effect of such factors
on business ethics has arisen due to the results of
Ibrahim and Angelidis (1995) and Ibrahim et al.
(2003), who discovered that outside directors show
greater concern for the discretionary component of
corporate responsibility but not for the legal and
ethical dimensions. Moreover, Williams (2003)
found that the effect of a female presence is limited
to certain areas of corporate social responsibility,
such as community services and art, but not to
education or public policies.
188 Luis Rodriguez-Dominguez et al.
The results indicate that board stock ownership
leads to a divergence between the behavior of top
management in terms of ethical codes and stake-
holders’ objectives. Nevertheless, the presence of
independent directors on Boards limits this diver-
gence to a certain extent, promoting the creation of
an ethical code as a document which guides the
behavior of all the members of a company.
As for Board diversity, findings have emphasized
that the presence of female directors does not create
more ethical companies. These results increase the
inconclusive empirical evidence, which usually
shows no significant gender differences or finds that
females tend to be more ethically sensitive than
males (Lane, 1995; Loe et al., 2000; Webb, 2004).
The present paper is organized as follows: ‘‘Codes
of ethics: framework and empirical evidence’’ sec-
tion analyses the importance of codes of ethics, their
objectives, and some empirical research on this
subject; ‘‘Theories on ethical code development’’
section explains some of the theories which support
the creation of ethical codes; ‘‘Corporate gover-
nance and ethical codes: research hypotheses’’ sec-
tion describes likely relationships between corporate
governance and ethical codes and states the research
hypotheses; ‘‘Research design’’ section describes the
research methodology used; our empirical results are
reported in ‘‘Empirical results’’ section, and dis-
cussed in ‘‘Discussion of the results’’ section; we
summarize and conclude in ‘‘Conclusion’’ section.
Codes of ethics: framework and empirical
evidence
Ethics is currently an essential component in business
success (Arjoon, 2005), especially if we take the
problems of trust experienced after recent financial
scandals into consideration. Nevertheless, business
ethics is probably as old as business itself, ‘‘but only
recently has the implementation of ethical codes of
conduct in businesses taken on major importance as
part of many company agendas’’ (Fleege and Adrian,
2004, p. 1).
In recent years, in Europe, Australia, and the
United States, there has been a great increase in the
number of corporations choosing to adopt an ethical
code of conduct (Adam and Rachman-Moore, 2004;
Berenbeim, 2000; Stevens, 2004). Companies that do
not have such a code are increasingly spurred by their
stakeholders or even forced by Law to develop a code
(Waddock et al., 2002). These documents appear to
be ‘‘a clearly visible sign that companies are aware of
the need for ethical behavior and require a commit-
ment to such behavior from their workforce’’
(O’Dwyer and Madden, 2006, p. 218).
The ways of defining corporate codes have been
many. Ethical codes can be defined as ‘‘written
documents through which corporations hope to
shape employee behavior and produce change by
making explicit statements as to desired behavior’’
(Stevens, 1994, p. 64). As Kaptein (2004, p. 13)
specifies, they clarify the objectives that the com-
pany pursues, the norms and values it upholds and
those things for which it may be accountable. More
recently, Kaptein and Schwartz (2008, p. 113)
defined a code of ethics as ‘‘a distinct and formal
document containing a set of prescriptions devel-
oped by and for a company to guide present and
future behavior on multiple issues for at least its
managers and employees toward each other, the
company, external stakeholders, and/or society in
general.’’
In terms of the code’s objectives, there may be a
somewhat instrumental reason for adopting codes,
because they can help preserve or legitimate a repu-
table public image and prevent public criticism
(Bondy et al., 2004, p. 450). On the other hand, codes
can be reasonably designed to prevent wrongdoing
and to promote the following (Cleek and Leonard,
1998; Fleege and Adrian, 2004, p. 1):
• Honest and ethical behavior, including the
ethical handling of actual or apparent con-
flicts of interest in personal and professional
relationships;
• Compliance with applicable government
laws, rules and regulations;
• An increase in social responsibility; and
• An improvement in management and in cor-
porate culture.
Empirical evidence about ethical codes can be
divided into three groups based on their main ori-
entation, according to Helin and Sandström’s (2007)
recent review that these groups are content- (what is
in the actual codes), output- (what effects they have
on behavior), and transformation-oriented (how the
 Corporate Governance and Codes of Ethics
codes are or are not into practice within the orga-
nization).
In content-oriented studies, some articles have
focused on code formats. Schlegelmilch and Houston
(1989, p. 61) found three basic formats: (1) regulated,
detailed documents containing rules and punish-
ments, (2) short documents describing objectives,
philosophy, or values, usually in annual reports for
stockholders and employees, and (3) extensive docu-
ments including social responsibility issues meant for
the stakeholders.
Code contents have evolved in recent decades. In
the 1980s, Cressey and Moore (1983), as Stevens
(1994, p. 66) synthesizes, observed that ‘‘codes of
conduct reflected concern over unethical behavior
that might decrease profits and showed a weak com-
mitment to social responsibility.’’ Conflict of interest
was an important theme (White and Montgomery,
1980), as well compliance with laws (Sanderson and
Varner, 1984). Mathews (1987) performed a thor-
ough content analysis which showed that firms pri-
marily emphasized illegal activities and employee
misconduct in codes and placed little emphasis on the
environment, quality, or product safety. Therefore,
ethical code content was mainly designed to defend
organizations against illegal behavior and was found to
be lacking in visionary prospects and providing ethical
guidance (Stevens, 1996).
Nowadays, concerns over environmental impact,
workplace safety, and the achievement of long-term
relationships with customers and suppliers have
increased, and they have received a special emphasis
in codes, alongside classical topics such as employee
behavior, compliance with the Law and conflicts of
interest. For instance, in countries where codes have
recently been introduced, such as Ireland, the most
frequently mentioned topics in codes of conduct
involve a wide range of issues: employee confiden-
tiality, workplace health and safety, protecting
company information, and abiding by the Law
(O’Dwyer and Madden, 2006).
Also, it is worth emphasizing the differences
between codes written in different countries. Cul-
tural and institutional factors may affect the con-
tents of codes in different countries. Langlois and
Schlegelmilch (1990) initially found significant dif-
ferences between those of Europe and the United
States, especially with regard to employee conduct,
supplier and contractor relations, and political
189
interests. While European companies focused on
responsibilities and principles involving stakeholders
with codes that are mainly descriptive and for both
internal and external use, US companies’ codes dealt
more with conduct inside the firm, rather than issues
of social responsibility, and are mainly prescriptive.
But differences in the contents of codes also exist
between European countries, since ‘‘the different
countries of Europe have different histories, customs
and culture’’ (Guillén et al., 2002, p. 167).
Bondy et al. (2004) analyze the differences
between Canadian, German, and UK companies
when devising ethical codes. They reported that
Canadian firms focused on management, employees
and workplace issues, and are used for guiding
behavior. UK corporations place a greater emphasis
on the codes’ importance as tools for communicating
with internal and external stakeholders. German codes
deal with corporate governance issues such as the
Board of Directors’ structure.
Lefebvre and Singh (1996) compared the contents of
Canadian and American corporate codes of ethics,
concluding that the codes are remarkably similar and
predominantly focus on behavior toward the firm
rather than on issues of social responsibility (p. 156). In
the same vein, Farrell and Cobbin (1996) examined
and compared codes in Australian and American
companies, underlining that codes in both Australia
and the US were mainly inward-looking and protec-
tive, offering a low level of precise ethical guidance.
Likewise, Singh et al. (2005) compare codes in
Australia, Canada, and Sweden. Australian and Cana-
dian codes are similar, reflecting their similar culture
(p. 106). On the contrary, the codes in Swedish cor-
porations are very different from corporate codes in
Canada and Australia in some topics, a finding which
was also explained in terms of cultural differences
between the countries researched and the different
management styles.
Multinational companies also seem to be of par-
ticular interest (Bondy et al., 2004; Carasco and
Singh, 2003; Kaptein, 2004; Payne et al., 1997).
Ethical codes are especially important in multina-
tionals, because their activities force them to adapt to
very different cultures and regulatory environments.
As a result, their codes must overcome differences in
ethical standards among employees from different
cultures. To look at this, Kaptein (2004) analyses the
200 largest companies in the world, of which 52.5%
190 Luis Rodriguez-Dominguez et al.
have a code. More than half of these codes describe
company responsibilities regarding product and ser-
vice quality (67%), compliance with local laws and
regulations (57%), and protection of the natural
environment (56%). For example, environmental
responsibility is more frequently emphasized in
European codes than in American codes. In terms of
ethical principles, the most widely reported principle
in the world is transparency. With regard to cor-
porate values, the most frequently cited values are
teamwork (43%), responsibility (33%), and innova-
tion (29%).
Less numerous output-oriented studies generally
use quantitative methodologies to analyze the con-
nections between behavior and the effectiveness of
codes in influencing conduct, as well as key factors that
might explain such a potential influence. In this sense,
corporate codes may contribute to ethical behavior
‘‘by influencing the way in which employees perceive
the ethical values of organizations’’ (Valentine and
Barnett, 2002, p. 191).
Recently, Kaptein and Schwartz (2008) reviewed
79 empirical studies that examined the effectiveness
of business codes; 35% of the studies evidenced a
significant positive relationship, 16% displayed a
weak relationship, 33% showed no significant rela-
tionship, 14% found mixed results, and only one
study has detected a negative relationship. Among
these studies, Pierce and Henry (1996), Harrington
(1996), Boo and Koh (2001), and Peterson (2002) all
obtained a positive influence and claim that the
presence of a formal code does have an impact on
individual ethical decisions, while contributing to a
decrease in illegality within corporations. In this
sense, Peterson (2002) observed a difference in the
ethical climates of those organizations that have an
ethical code and those that do not.
However, Allen and Davis (1993), Healy and Isles
(2002), Farrell et al. (2002), Snell et al. (1999), Snell
and Herndon (2000), Schwartz (2001), Stevens
(2004), and McKendall et al. (2002) did not find any
significant relationship. Both Snell et al. (1999) and
Snell and Herndon (2000) suggest that the moral
standing even declined due to the code implemen-
tation process. Relying on 57 interviews, Schwartz
(2001, p. 253) argues that ‘‘few respondents were
able to provide specific examples of how they acted
differently as a result of the codes.’’ In their research,
McKendall et al. (2002, p. 380) indicate that ethical
compliance programs did not lessen legal violations;
on the contrary, ethics programs may serve as
window dressing to deflect attention or culpability
resulting from illegal activities. Consequently, as
Helin and Sandström (2007) and Kaptein and
Schwartz (2008) have recently underlined, these
results show a mixed picture of code effectiveness,
creating some uncertainty about whether ethical
codes lead to more ethical behavior.
The last category, transformation-oriented studies,
focused on the adoption of codes (e.g., Snell and
Herndon, 2000; Wood and Callaghan, 2003). These
works attempt to analyze the implementation process,
associated problems, and transformation mechanisms
inside the company. For instance, Kaptein and
Wempe (1998) analyze 12 dilemmas that companies
must solve when implementing ethical codes,
including the process, contents, implementation, and
enforcement of the code. Likewise, Adam and
Rachman-Moore (2004) stress that effectiveness is the
greatest when informal implementation methods are
used instead of formal mechanisms. Stevens (2008)
points out that culture and effective communication
are the adoption process factors which best ensure a
code’s success.
Nevertheless, with the exceptions of Snell et al.
(1999) and Wood and Callaghan (2003), any ori-
entation toward process in research approaches seems
to be rare and requires further examination. From
these studies, it can be deduced that explicit theo-
retical discussions are rare and that there is a lack of
transparency regarding how the results and recom-
mendations were empirically generated (Helin and
Sandström, 2007, p. 261).
In summary, the evidence shows a lack of
‘‘knowledge on how codes work, how they are
communicated and how they are transformed
inside organizations,’’ as emphasized by Helin and
Sandström (2007, p. 253). As a result, a variety of
research methods must be put to work in order to gain
a better understanding of how ethical codes work in
organizations.
Theories on ethical code development
Adopting an ethical code may be considered a way to
formalize, encourage and guide responsible behavior
among employees and organizations (Bondy et al.,
 Corporate Governance and Codes of Ethics
2004; Harris, 2004). Viewed from the outside, they
contribute to creating and maintaining a good cor-
porate reputation and stakeholder trust. In this vein,
the reasons behind the creation of a code have been
stated in several theories (derived from the ‘‘social
theories’’): stockholder theory, legitimacy theory and
stakeholder theory (Fleege and Adrian, 2004, p. 2).
According to the stockholder theory (e.g., Fleege
and Adrian, 2004; Hasnas, 1998), ‘‘companies are
only responsible to shareholders and all employee
actions should be aimed at maximizing shareholder
value without breaking the law.’’ Therefore, an
organization may adopt a code of ethics to satisfy its
stockholders.
Another theory within the social theories frame-
work is legitimacy theory (e.g., Deegan et al., 2002).
Legitimacy is a generalized perception that organi-
zation’s actions are appropriate within a given social
system. Legitimacy may be granted when either the
goals being pursued by an organization conform to
social morals or the procedures by which an orga-
nization pursues its goals are deemed appropriate
(Long and Driscoll, 2008, p. 175). Legitimacy theory
holds that companies are continually attempting to
ensure that their operations live up to the standards
of the societies where they do business, making a
code of ethics an appropriate mechanism for legiti-
mating corporate behavior. Legitimacy is granted
and controlled by people outside the organization,
and therefore the organization must report its
activities and its concern about ethics to the public.
Finally, the stakeholders theory (e.g., Gibson,
2000) states that an organization may adopt an ethical
code of conduct to satisfy its stakeholders. This theory
suggests that corporations are not only responsible to
shareholders, but also to all individuals, groups, etc.
that have a particular interest in a specific company
(Jennings, 2003). This theory is based on Argandoña’s
(1998) concept of the common good, which suggests
that corporations must contribute to the common
good, ‘‘which ranges from the common good of the
company itself to that of the local community, the
country and all of mankind, including future genera-
tions’’. Dillard and Yuthas (2002, p. 49) assert that, in
order to achieve responsible ethical behavior, an
organization must use the stakeholder theory in
conjunction with structuration theory. Structuration
theory is used as a framework for exploring the forces
that influence, and the changes that must precede, the
191
development and implementation of ethical decision-
making processes.
Corporate governance and ethical codes:
research hypotheses
As a result of recent corporate scandals, a new stream
of research has emerged with a focus on the role
played by Boards of Directors on corporate codes of
conduct. As Schwartz (2002, p. 38) states, ‘‘The
Board of Directors, CEO, President, and all senior
managers are required to demonstrate their support
for the code, particularly by acting as role models
through their own behavior.’’ This attitude has
recently been reinforced by certain rules which
encourage Boards of Directors to support the
development of codes of ethics in companies through
several guidelines (Australian Stock Exchange, 2003;
Independent Directors Association and the Russian
Institute of Directors, 2004; International Federation
of Accountants, 2007; Investment and Financial
Services Association Limited, 2003; New York Stock
Exchange, 2003).
According to investors’ preferences (Heidrick
and Struggles, 2004), the Board of Directors’ par-
ticipation in this process would lead to the planning
of corporate ethical behavior and the subsequent
monitoring of its fulfillment (Jones and Pollitt,
1999, p. 4). The critical role played by the Board is
especially important, given that ‘‘a high degree of
trust is placed in directors by shareholders’’
(Schwartz et al., 2005, p. 86). For instance,
Berenbeim and Kaplan (2004) show that the
involvement of Boards in designing and imple-
menting ethical codes has grown considerably. In
particular, they found that the Board decides ethical
code contents in 66% of US companies and 100%
of Indian companies, while it reviews the code for
54% of Japanese firms.
Business ethics is one of the factors in corporate
social responsibility (Carroll, 1991; Schwartz and
Carroll, 2003), and previous research has examined
the relationship between corporate social responsi-
bility and several characteristics of corporate gover-
nance. For example, Webb (2004) showed that
socially responsible firms have more outside directors
and female directors than non-socially responsible
firms; Williams (2003) found that companies with a
192 Luis Rodriguez-Dominguez et al.
higher proportion of women serving on their boards
give charity; and Wang and Coffey (1992) found
that the ratio of insiders to outsiders, the percentage
of insider stock ownership, and the proportion of
females are positively and significantly associated
with charitable contributions by companies. In this
study, we analyze the effect of three characteristics of
the Board of Directors on the likelihood that a
company has a formal code of ethics.
Outside versus inside directors
Practitioners, researchers, and governmental regula-
tors expect outside directors to advocate greater
corporate responsiveness to society’s needs by play-
ing a more active role in overseeing managerial
decisions (Ibrahim et al., 2003, p. 393; Wang and
Coffey, 1992, p. 771) due to the fact that their
presence is assumed to make the board more inde-
pendent and give it more effective monitoring
power (Fama, 1980). As a result, in theory, outside
directors are in a better position than insiders to
protect and further the interests of a larger set of
parties than stockholders and entrenched executives
(Ibrahim et al., 2003, p. 395), because they have
more experience and a greater sense of moral and
legal obligation (Goldberg, 1979).
With regard to the effect of director type on
corporate social responsibility, empirical evidence is
inconclusive. For instance, O’Neill et al. (1989)
reported that outsiders have a higher level of ori-
entation toward corporate social responsibility. In
addition, Ibrahim and Angelidis (1995) and Ibrahim
et al. (2003) found that outside directors show
greater concern for the discretionary component of
corporate responsibility, though no significant dif-
ferences were observed with regard to the legal and
ethical dimensions of corporate social responsibility.
Webb (2004) found a positive relationship between
the percentage of outside board members and differ-
ent measures of corporate social responsibility. On the
contrary, Kesner et al. (1986) reported that outsider
domination does not lead to improved social perfor-
mance. Wang and Coffey (1992) found that the ratio
of insiders to outsiders is positively associated with
charitable contributions by companies.
The relative scarcity of results on ethical code
existence and the divergence in previous findings
related to social responsibility have led us to test the
following hypothesis:
Hypothesis 1 A greater percentage of outside directors
on a Board of Directors positively influ-
ences the creation of a corporate code of
ethics.
Board stock ownership
Jensen and Meckling (1976) suggested that when
corporate managers have a significant ownership stake,
managerial incentives are more closely aligned with
those of shareholders. Moreover, when directors
control a significant stake in the firm they have a
greater incentive to be effective monitors of man-
agerial activity (Brickley et al., 1988; Brown and
Maloney, 1999). Therefore, increases in the percent-
age of stock owned by Board members should make
them more sensitive to ethical issues due to the positive
impact of social responsibility activities on the
firm’s financial performance (i.e., Tsoutsoura, 2004;
Waddock and Graves, 1997).
However, the literature on the link between board
share ownership and company performance (i.e.,
Morck et al., 1988) has sought to trace another effect,
an entrenchment by which board share ownership
provides top managers with increased security from
interference in their decision-making by other typi-
cally dispersed shareholding groups. If we accept this
assumption, then the Board’s participation in own-
ership does not favor the alignment of manager and
stockholder interests in ethical issues, but rather allows
the top management to achieve its objectives to the
detriment of those of stockholders, because managers
are thereby protected from dismissal.
Taking into account of both arguments, we then
checked the following hypothesis:
Hypothesis 2 Greater stock ownership by the mem-
bers of Boards of Directors influences
the creation of corporate codes of ethics.
Board diversity
Previous research findings argued that women tend
to be more sensitive to corporate social responsibility
(i.e., Kedia and Kuntz, 1981; Wang and Coffey,
1992; Webb, 2004; Williams, 2003). Moreover,
 Corporate Governance and Codes of Ethics
Bernardi et al. (2006) found that the presence of
women on Boards of Directors positively influences
the behavior of firms both inside and outside, by
verifying that such a presence significantly enhances
firms’ reputations (Zyglidopoulos, 2003).
This argument could lead us to believe that more
socially ethical corporations tend to have a higher
percentage of women on their boards. Therefore,
we can establish the following hypothesis:
Hypothesis 3 The percentage of women on Boards
of Directors positively influences the
creation of corporate codes of ethics.
Research design
After describing the main research hypotheses, this
section analyses the sample and the methodology
used to check them.
Sample description
In order to test these hypotheses, we selected public
corporations from two European continental coun-
tries, Spain and Italy, and one English-speaking
country, the United Kingdom, as our populations for
analysis. This choice was made on the basis of the dif-
ferences found in ethical codes and corporate gover-
nance mechanisms in previous studies for such
geographic contexts. More specifically, Enderle (1996)
identifies two different approaches to corporate ethics:
one approach for English-speaking countries, linked to
corporate strategies which attempt to lessen the effects
of scandals generated in business; and another approach
for European continental countries, associated with
philosophical motivations about optimal corporate
behavior.
With respect to corporate governance, several
studies (i.e., La Porta et al., 1999) illustrate differ-
ent stock ownership structures: dispersed (English-
speaking countries) versus concentrated (continental
countries). These different structures lead to relevant
differences in the makeup of Boards, especially in
relation to the presence of a higher number of inde-
pendent directors that protect minority shareholder
interests and those of other stakeholders.
Moreover, English-speaking countries are usu-
ally common-law countries, whereas continental
193
countries tend to codify their laws. This typology has
an important effect on business ethics given that ethics
is usually encouraged by means of codes of best prac-
tices; in civil law countries, compared with common
law countries, judges cannot enforce good governance
codes with the force of Law, because laws can only be
passed by the legislature (Cuervo, 2002, p. 85).
Starting with the target population, we selected
the sample for analysis. Because Spain is the country
with the lowest number of quoted companies, it was
initially used to determine the sample. Thus, we
have used a sample of companies which are listed on
the Madrid Stock Market. The initial sample was
made up of all the quoted companies. We removed
any firms belonging to the finance and insurance
sectors. As a result, our final sample was made up of
117 corporations from different sectors.
Subsequently, by using the size and activity sector
criteria which characterize the Spanish corporations,
we selected 117 companies from Italy and the UK.
Italy was selected because it is a European conti-
nental country with a relatively low number of studies
on ethical codes. Furthermore, it has a corporate
governance system quite different from Spain’s. Its
2006 Corporate Governance Code lets Italian com-
panies choose between two-tier (Management Board
and Supervisory Board) or one-tier management and
control systems (Board of Directors and the Board of
Auditors). Italy’s socio-cultural environment and
accounting system are similar, being a code-law
country (Garcı́a Lara and Mora, 2004). The United
Kingdom is used as an example for English-speaking,
common law countries, which differ in the develop-
ment of financial markets and in the main providers of
capital funds.
Necessary data were obtained from the AMA-
DEUS Database and corporate websites for European
companies. Therefore, our final sample for analysis
was made up of 351 quoted companies: 117 firms from
Spain, 117 organizations from Italy, and 117 compa-
nies from the UK, all similar in size and activity.
Variables
Dependent variable
The dependent variable is a dummy one which takes
a value of 1 if the company has drawn up a code of
ethics and 0 if it has not. These values were assigned
194 Luis Rodriguez-Dominguez et al.

after analysing the contents of the sample companies’
websites, because several acts require a minimum
content which must be available for stockholders and
other stakeholders on quoted companies’ websites.
As shown in Table I, Italy has the highest per-
centage of quoted companies with ethical codes
(59%), followed by the UK (31.6%). The lowest
percentage of UK companies which have an ethics
code may be externally justified because of the fea-
tures of the codes they create. As Bondy et al. (2004,
p. 456) have observed, that UK corporations place a
greater emphasis on the importance of codes as
communication tools with internal and external
stakeholders. However, they tend to use Combined
Codes, which are internal, punitive, mandatory
codes with overall low significance; their texts are
typically not found on corporate Web sites. It would
seem that some combination of factors to do with
the Combined Code – such as it being focused
internally, punitive in tone, and mandatory – bears
some relationship to it being of low significance on
corporate Web sites (Bondy et al., 2004, p. 457).
In Spain, few of the analyzed companies (14.53%)
have developed an ethical code. This percentage is
significantly lower than the figures recently found in
other countries including Ireland (O’Dwyer and
Madden, 2006), Belgium (KPMG Belgium, 2002),
and Sweden (Svensson et al., 2006). Therefore,
within the Spanish context, there is a significant
delay in creating ethical codes. However, as Melé
et al. (2006) argue that there is a great deal of cor-
porate concern about the importance of business
ethics, which leads to the inclusion of that concept
in several companies’ reports, such as Vision &
Mission Statements or documents which are similar
to an ethical code.
Independent variables
The independent variables used in the proposed
analysis model are shown in Table II.
Explanatory model proposed
After obtaining the necessary variables for the anal-
ysis, we checked the research hypotheses by ana-
lysing the impact of certain factors which may
influence the existence of a code of ethics.
With that goal in mind, we propose the following
model (1), in which the likelihood of a firm having
an ethical code is a function of the ratio of outside
directors on the Board, the proportion of female
directors, and the percentage of stock ownership by
the members of the Board.
Existence of a Code of Ethics
¼ f Outside Directors; Female Directors; ð1Þ


Board Ownership
Model (1) can be empirically estimated by using
Eq. 2:
ECi ¼ b0 þ b1 Outside Directorsi
þ b2 Female Directorsi ð2Þ
þ b3 Board Ownershipi þ e
In which ECi is a dummy variable, which takes a
value of 1 if company i has drawn up an ethical

TABLE I
Level of development of codes of ethics

Frequency Percentage

Spain
Companies with a code of ethics 17 14.53
Companies without a code of ethics 100 85.47
Italy
Companies with a code of ethics 69 59.00
Companies without a code of ethics 48 41.00
UK
Companies with a code of ethics 37 31.60
Companies without a code of ethics 80 68.40
 Corporate Governance and Codes of Ethics 195

TABLE II
Independent variables

Outside directors Numeric variable which represents the percentage of outside directors on the Board
Female directors Numeric variable which represents the percentage of female directors on the Board
Board ownership Numeric variable which represents the percentage of shares which are owned by
the members of the Board

code and 0 if it has not; Outside Directorsi is a
numeric variable which shows the ratio of outside
directors on the Board; Female Directorsi represent
the proportion of female directors who are mem-
bers of the Board; and Board Ownershipi is the
percentage of stock ownership by the members of
the Board.
Model (2) has been checked empirically using
logit regression, given the dichotomous nature of the
dependent variable.
Empirical results
with the dependent variable, with a negative sign
(-0.298). Then, the proportion of outside directors
also has a relatively high positive correlation with the
existence of an ethical code, except in the UK. On
the other hand, a lack of any relationship between
the presence of women on the Board and the ana-
lyzed issue of business ethics is detected. Moreover,
there are no significant correlations between the
independent variables, which prevent multicolin-
earity problems in the dependence model.
With regard to the multivariate analysis, the
results obtained after estimating the logit regression
are summarized in Table IV.

Before reporting the data calculated using the mul-

tivariate analysis, Table III summarizes the bivariate
correlations between the variables used in the esti-
mated model.
First of all, the variable related to the percentage
of board ownership shows the highest correlation
Multivariate analysis for European continental countries
For Spain, the global significance of the model (R2)
is 24.80% for the optimal prediction, with a confi-
dence level of 99% (p < 0.01). Two out of the three

TABLE III
Correlation matrix (Pearson’s correlation coefficients)

EC Outside directors Female directors Board ownership

Spain
EC
Outside directors 0.212
Female directors 0.002 -0.046
Board ownership -0.298 -0.160 0.057
Italy
EC
Outside directors 0.190
Female directors -0.145 -0.061
Board ownership -0.366 -0.040 0.123
UK
EC
Outside directors 0.078
Female directors 0.169 0.142
Board ownership -0.196 -0.106 -0.101
196 Luis Rodriguez-Dominguez et al.

TABLE IV the expected positive sign) and 2 (with a negative

Effect of corporate governance on the creation of a sign) and to reject Hypothesis 3, for Spain.
corporate code of ethics For Italy, the global significance of the model (R2) is
23.70% for the optimal prediction, with a confidence
Variables Coefficient Wald level of 99% (p < 0.01). Two of the three variables
show statistically significant coefficients. The outside
Spain directors variable has a positive effect on the existence
Intercept 21.907 6.334** of an ethical code, although it is just statistically sig-
Outside directors 2.518 2.805*
nificant for a confidence level of 95% (0.01 < p <
Female directors -0.005 0.000
0.05). The board ownerships variable is also statistically
Board ownership 20.059 5.684**
R2 Cox and Snell = 0.145 significant (p < 0.01), with a negative influence on the
R2 Nagelkerke = 0.248 dependent variable. For the female directors variable,
v2 = 15.555*** the effect detected is negative, but insignificant. These
Italy findings, again, lead us to accept Hypotheses 1 (with a
Intercept 0.192 0.114 positive sign) and 2 (with a negative sign) and to reject
Outside directors 2.298 3.870** Hypothesis 3, in this case, for Italy.
Female directors -3.255 2.365
Board ownership 20.029 11.146***
R2 Cox and Snell = 0.175 Multivariate analysis for UK companies
R2 Nagelkerke = 0.237 (the English-speaking world)
v2 = 19.631***
UK
For the UK, the global significance of model (R2) is
Intercept 20.950 8.040***
Outside directors 0.487 0.196 8.90% for the optimal prediction, with a confidence
Female directors 3.102 1.829 level of 90% (0.05 < p < 0.10). All of the three
Board ownership -0.061 2.132 proposed variables are statistically non-significant.
R2 Cox and Snell = 0.063 The outside directors and female directors variables
R2 Nagelkerke = 0.089 display positive effects on the existence of an ethical
v2 = 7.091* code, whereas the board ownership variable has a
negative influence on the dependent variable. These
The values of significant coefficients are expressed in
findings lead us to reject, for the English-speaking
bold.
ECi dummy variable, which takes value 1 if company i
world, the hypothesis proposed.
has drawn up a code of ethics and 0 if it has not. Therefore, we have found that female directors do
Outside directors is a numeric variable representing the not have any influence on the existence of a code of
percentage of outside directors who take part in the ethics, regardless of the corporate context observed.
Board; Female directors is a numeric variable showing the However, outside directors and board ownership
ratio of women directors on the Board; Board ownership is have a positive and negative influence, respectively,
the proportion of stock owned by members of the Board. on the implementation of codes for those companies
*p < 0.10, **p < 0.05, ***p < 0.01. operating in countries with a lower pressure or
requirements regarding the development of business
variables were shown to be statistically significant. ethical behavior – such as continental Europe.
The outside directors variable shows a positive effect Table V summarizes the hypotheses proposed in the
on the existence of an ethical code, although it is current study as well as the results obtained in the
only statistically significant for a confidence level of different legal and corporate contexts considered.
90% (0.05 < p < 0.10). The board ownership vari-
able remains statistically significant (p < 0.05), with
a negative influence on the dependent variable. As Discussion of the results
regards the female directors variable, the effect
detected is negative, but insignificant. Therefore, As for the interpretation of the results, this study has
these findings lead us to accept Hypotheses 1 (with confirmed that the participation of Board members
 Corporate Governance and Codes of Ethics 197

TABLE V
Summary of the findings for the proponed hypotheses

Hypotheses Variable Expected sign Continental Anglo-Saxon

European markets markets

Spain Italy UK

1 Outside directors + + + n/s

2 Board ownership ? - - n/s
3 Female directors + n/s n/s n/s

in continental European companies’ stock is related
to some limitations on the adoption of several ethical
policies, such as the adoption of ethical codes.
We know, on the one hand, that investors have a
great interest in business ethics, as observed in the
study by Heidrick and Struggles (2004). On the other
hand, theoretically there are certain opposite effects of
board ownership on business ethics. Initially, when
directors control a significant stake in the firm they are
more sensitive to ethical issues due to the positive
impact of social responsibility activities on the firm’s
financial performance (i.e., Tsoutsoura, 2004; Wad-
dock and Graves, 1997). However, several recent
studies have observed an entrenchment effect by
which the Board’s participation in ownership does not
favor the alignment of manager and stockholder
interests in ethical issues, but rather allows the top
management to achieve its objectives to the detriment
of those of stockholders, because managers are thereby
protected from dismissal.
In this study, we have observed that board own-
ership causes an entrenchment of top management
in ethics issues. In other words, participation in
ownership prevents them from being dismissed as
managers, and they attempt to satisfy other interests
instead of seeking overall ethical behavior in the
organization. Moreover, owing to the fact that codes
of ethics may be documents that could limit mana-
gerial actions, they could be defining an unethically
responsible policy strategically to complement their
entrenchment strategy.
Nevertheless, the presence of outside directors on
the Board may limit this situation to a certain extent,
promoting the establishment of an ethical code as a
document which guides the behavior of the corpo-
ration’s members. The reason behind this conduct is
that these types of directors may have extensive
experience and a sense of their moral and legal
obligations (Goldberg, 1979; O’Neill et al., 1989).
Also, outside directors are the main directors defend-
ing stockholders’ interests and their future contracts
by other companies will be strongly linked to the
activities carried out in the corporations they are
currently working for. Our results are in line, for
instance, with O’Neill et al. (1989), Wang and
Coffey (1992), and Webb (2004), who reported that
outsiders have a higher level of orientation toward
corporate social responsibility.
The insignificant results for outside directors in
the UK are in line with Ibrahim and Angelidis
(1995) and Ibrahim et al. (2003) for another Anglo-
Saxon market – the US – who found that outside
directors show greater concern for the discretionary
component of corporate responsibility, although no
significant differences were observed with regard to
the legal and ethical dimensions of corporate social
responsibility.
The divergence between the findings obtained for
continental countries and for the UK may stem from
differences in the firms’ motivations leading to the
creation of an ethical code in English-speaking and
European continental countries (Enderle, 1996;
Guillén et al., 2002; Vogel, 1993) as well as the role
played by directors in management control. In this
sense, in English-speaking countries, the dispersion
of stock ownership usually lead to a significant
number of independent directors on the Boards of all
quoted companies (La Porta et al., 1999). This
would explain the lack of differences regarding the
decisions which directors make on ethical issues,
hence avoiding an entrenchment of top manage-
ment in ethical issues.
In terms of Board diversity, the results highlighted
the lack of impact (of a female presence) on ethical
198 Luis Rodriguez-Dominguez et al.
issues in both of the two corporate contexts
observed. Unlike other studies which have found
that a greater percentage of women on Boards leads
to more socially-responsible firms (Webb, 2004),
our findings support the report of Williams (2003),
which indicate that the effect of a female presence
may be limited to some areas of corporate social
responsibility, such as community services and art,
but is insignificant in education or public policies. In
addition, the insignificant effect of female directors
on ethics may be a consequence of the limited
presence of women in the boardroom, which could
mean that the decision of this minority group may
not be considered in the decision-making process
(Carter et al., 2003). Moreover, according to Rose
(2007, pp. 411–412), women might be assumed to
adopt conventional behaviors and rules and even
tend to adopt a male role in order to preserve their
positions in the corporate structure. This attitude
involves the removal of the advantages and draw-
backs deriving from gender diversity.
Conclusion
Ethics is currently an essential component in business
success (Arjoon, 2005), especially if we have taken
into consideration that the problems of trust experi-
enced after recent financial scandals and the growing
demands regarding the need to take into account the
interests of all the individuals and groups which
have a special interest in the company. In this
respect, ethical codes may be appropriate mecha-
nisms for promoting, encouraging, and guiding
responsible behavior, at the same time that they
establish the corporate principles which affect
responsibilities toward employees, shareholders, cus-
tomers, the natural environment and society as a
whole. In addition, numerous investors are especially
interested in business ethics as a consequence of its
positive effect on financial performance (Spiller,
2002, p. 150). In this context, Boards of Directors
play a critical role in the process of creating and
implementing a code of ethics.
In this sense, we have adopted the characteristics
of Boards of Directors used by Wang and Coffey
(1992), among others, in order to analyze the effect
of the ratio of insiders to outsiders, the percentage of
insider stock ownership, and the proportion of
females on the likelihood that a company has a
formal code of ethics. Consequently, given that
there are several differences between continental
European and Anglo-Saxon markets as far as ethical
motivations and corporate-law contexts are con-
cerned, we used a sample of 351 quoted Spanish,
Italian, and UK corporations.
Our findings show that, in the continental Euro-
pean context, there is evidence in favor of the entr-
echment hypothesis on behalf of directors. Owing to
the fact that the code of ethics could be a document
that might limit managerial actions, managers may be
defining an unethically responsible policy strategically
to complement their entrenchment strategy. One
possible solution for this situation may lie in increasing
the number of independent directors on Boards, since
these directors promote the satisfaction of investors’
ethical interests, by encouraging the elaboration of
ethical codes.
The findings for the continental context cannot be
extrapolated to the English-speaking world, perhaps
due to the fact that they are required to implement
ethical codes in order to recover investors’ trust
– reduced as a consequence of the recent financial
scandals. On the contrary, continental markets
are only affected indirectly by these scandals, so
the improvement in business ethics could be closer
to philosophical motivations about optimal corpo-
rate behavior, according to the results of Enderle
(1996).
In this sense, we can conclude that in markets
which have not recently experienced financial
scandals and, thereby, are not pressured to promote
the elaboration of codes of ethics, outside directors
are the board members most interested in their
creation with the objective of satisfying investors’
preferences.
Board ownership, however, is an inadequate
mechanism for aligning management and shareholder
ethical interests. This conclusion could be justified by
the limited development of ethics codes in continental
European markets given that in these countries
insiders have a strong presence on the Board of
Directors (Melle, 1999) and, moreover, there is a
substitution between managerial ownership and out-
sider presence as a control mechanism (Fernández and
Arrondo, 2005).
 Corporate Governance and Codes of Ethics
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University of Salamanca,
Salamanca, Spain
E-mail: lrodomin@usal.es