Investors should determine whether the Company has adopted a code of ethics and whether the Company's actions indicate a commitment to an appropriate ethical framework.

A Company's Code of Ethics sets standards for ethical conduct based on basic principles of integrity, trust, and honesty. It provides personnel with a framework for behavior while conducting the Company's business, as well as guidance for addressing conflicts of interest. In effect, it represents a part of the Company's risk management policies, which are intended to prevent Company representatives from engaging in practices that could harm the Company, its products, or Shareowners.

Reported breaches of ethics in a Company often result in regulatory sanctions, fines, management turnover, and unwanted negative media coverage, all of which can adversely affect the Company's performance.

Investors should determine whether the Company:

• gives the Board access to relevant corporate information in a timely and comprehensive manner;
• is in compliance with the corporate governance code of the country where it is located;
• has an ethical code and whether that code prohibits any practice that would provide advantages to Company insiders that are not also offered to Shareowners;
• has designated someone who is responsible for corporate governance;
• has an ethical code that provides waivers from its prohibitions to certain levels of management, and the reasons why;
• waived any of its code's provisions during recent periods, and why;
• regularly performs an audit of its governance policies and procedures to make improvements.

Practice Question 1

Which one of the following is least likely to be an ethical action by a board member?

A. Aligning their interests to those of the shareowners (for example by being investors themselves).
B. Avoiding conflicts of interest with their position as a board member.
C. Having strong connections with the governments in the countries the company operates in.

Correct Answer: C

This might involve some kind of political favor that would not necessarily benefit the long-term interests of the shareholders.