The Code of Ethics and Conflict of Interest and Its Importance in Corporate Governance of a Company
According to the Financial System Law, Corporate Governance is defined as:
The set of rules that regulate internal relationships between the Shareholders’ Assembly, the Board of Directors, management, officers, and employees; as well as between the financial system institution, the supervising institution, and the public. (National Congress of the Republic, 2004)
In other words, Corporate Governance consists of a set of policies and procedures necessary for a company to manage its risks adequately, efficiently, and transparently, through clear conduct guidelines that ensure good practices in the company’s relationship with its stakeholders.
While in Honduras, only supervised financial sector companies are required to implement a Corporate Governance system, as regulated by the Financial System Law, Corporate Governance Regulations for Supervised Institutions, among other agreements and circulars, it is recommended—and a growing practice—that all commercial companies implement Corporate Governance policies and procedures due to the benefits they offer.
Implementing robust and appropriate Corporate Governance rules and policies has become a necessary resource to protect the efficiency of business management and to ensure the best results in its operations. It is vital to ensure that the policies and procedures created are appropriate and proportional to the size and nature of the company; that is, these policies and procedures should not be excessive or rigid, but rather dynamic and suitable.
In other words, implementing Corporate Governance policies that slow down the company’s operations due to ineffective mechanisms or excessive bureaucracy may result in a decline in productivity. Conversely, implementing appropriate, proportional, flexible, and efficient policies can enhance the company’s image, reputation (commercial fame), and profitability, making the company more attractive and trustworthy to investors and clients.
A well-implemented Corporate Governance system should: a) Involve top management in risk management, from policy approval to monitoring and ensuring its proper execution; b) Create a culture of compliance within the company at all hierarchical levels; c) Increase economic efficiency, preventing resources from being wasted or underutilized; d) Protect the company’s reputation or commercial fame, building market trust and, as a result, higher profitability and better market value; e) Ensure continuity in business operations by establishing clear rules and protocols for participation and succession (this element is especially important in family-owned companies).
Historically, corporate governance regulations and standards have focused globally—like in Honduras—on companies in the financial sector and those listed in stock markets. However, there is a paradigm shift, and the importance of implementing Corporate Governance in non-listed companies, particularly family-owned companies, is being recognized.
Examples of this include the German, Austrian, Belgian, and British Corporate Governance Codes, which extend the principles and best practices of Corporate Governance to non-listed companies due to the competitive advantages it offers. Additionally, Switzerland has prioritized the existence of Corporate Governance policies in family-owned companies (Hierro Anibarro et al., 2014). Therefore, it is a recommended practice for non-listed and family-owned companies in Honduras to implement Corporate Governance policies.
An essential part of implementing good Corporate Governance in companies is defining the values that the company will embrace in its business and which should be the cornerstone for building good Corporate Governance. These values should be reflected in a Code of Ethics and Conflict of Interest.
The provisions of the Code of Ethics and Conflict of Interest should be applied and reflected in the actions of all company members, regardless of their hierarchical level. These should become part of the company’s identity and serve as a differentiator in the market. The conduct rules should be written in such a way that they govern the behavior of the company members in their daily professional activities and extend to their interactions in media, social networks, social meetings, and any aspect of the lives of the people who make up the company.
For this reason, particular care should be taken in constructing the Code, as doing so correctly requires understanding the company’s organizational culture and its operational environment. Below are some tips for creating an appropriate and effective Code of Ethics and Conflict of Interest:
Company Knowledge: It is essential to ensure that the person responsible for creating the Code of Ethics and Conflict of Interest takes the time to understand the institution’s organizational culture and the services it offers. The Code should be tailored to your company; copying a code from another company, even if it is in the same industry, will be useless and ineffective.
Construction: When creating the Code, consider: a) conducting a survey to gauge employees’ and stakeholders’ perceptions about the company’s ethical behavior; b) reviewing current legislation to integrate relevant deontological laws according to the company’s industry (For example: a law firm should consider the Code of Ethics for the Honduran Legal Professional); and c) considering international standards of good practices in the field for companies in the industry.
Involvement of Top Management: It is necessary for top management to be a sponsor and promoter of ethics within the organization. Therefore, top management should be involved in the creation, approval, and updating of the Code and ensure that their actions reflect its provisions.
Institutional Commitment: The Code should explicitly include an institutional commitment statement at all hierarchical levels for the application of the company’s core values and the collective and individual benefits of ethical behavior.
Values: The Code of Ethics should define the company’s core values that will guide its actions in its commercial activity and define its market identity. Recommended values to incorporate include: Integrity, legality, and transparency.
Definitions: It is important to include a section that develops the relevant definitions for the purpose of the Code of Ethics. Some important concepts to address include ethics, personal interests, financial interests, and real, apparent, and potential conflicts of interest, among others.
Topics to Regulate: Some very relevant topics to consider within the Code of Ethics include: a) Discrimination; b) Harassment; c) Conflict of Interest; d) Equality; and e) Confidentiality of Information.
Reporting, Investigation, and Sanction System: It is necessary to: a) create a reporting system that allows employees and stakeholders to report actions against the company’s values; b) establish an appropriate procedure for investigating reports and sanctioning valid cases; c) integrate or link penalties for non-compliance with the Code to the internal work regulations and employment contracts to ensure effectiveness.
Training: Socialize the Code of Ethics with employees and stakeholders and create effective training for its correct application. These should be periodic and validate understanding of the Code’s content and interpretation.
Examples: In the appendices of the Code of Ethics, it is recommended to create hypothetical scenarios based on real situations that have occurred or could occur in daily operations, so that company members can better understand the behavior expected of them in specific situations.
In conclusion, implementing Corporate Governance policies is mandatory (for listed and financial sector companies) and recommended (for non-listed companies) in Honduras, with the goal of regulating relationships between the company’s stakeholders. Implementing Corporate Governance will make your company more trustworthy and attractive to employees and investors and will improve its efficiency and productivity. Within these policies, creating a Code of Ethics and Conflict of Interest is necessary to establish an adequate Corporate Governance framework and protect the company’s reputation. If the company or any related party becomes involved in unethical practices, it can directly affect its reputation, clientele, and profitability.
If you are interested in learning about Corporate Governance and its advantages or wish to implement a Corporate Governance system to protect your company’s reputation and improve management efficiency, feel free to contact us at cpecorelli@lexincorp.com. We have a specialized team with over 20 years of experience, with favorable results throughout Central America.
Bibliographic Reference
National Congress of the Republic. (September 21, 2004). Financial System Law. Decree 129-2004. Tegucigalpa, Honduras: La Gaceta.
Hierro Anibarro et al., S. (2014). Corporate Governance in Non-Listed Companies. Marcial Pons.
[1] According to the Corporate Governance Regulations for Supervised Institutions, contained in Circular CNBS 015/2022, a Stakeholder Group is defined as follows: It involves all areas and persons influenced by the Supervised Institution or Financial Group, such as: shareholders, officers or executives and employees, users, competitors, regulatory control and supervision bodies, the community, and suppliers of goods and services, as applicable.
Written by: Carlos Pecorelli
