Codes of Conduct for CFOs and Others

Much of the post-enron debate has focused upon the particular governance role of the non-executive or “independent” directors, but less comment has been directed at the role (and behaviour) of executive directors such as the Chief Financial Officer (CFO).

“No code of business conduct and ethics can replace the thoughtful behaviour of an ethical director, officer or employee”. – NYSE Recommendations June 2002.

The global debate on corporate governance that has erupted in the wake of the Enron collapse and the accounting scandals at Worldom, Xerox and others has put the role and responsibilities of the Board under the microscope. Much of the attention, however, has focused upon the particular governance role of the non-executive or “independent” directors, and less comment has been directed at the role (and behaviour) of executive directors such as the Chief Financial Officer (CFO).

With respect to the position of the CFO, attention has tended to focus on the tension inherent in the relationship between the CFO and the Chief Executive Officer (CEO ) on the one hand and between the CFO and the Audit Committee on the other. It has been suggested that by improving the financial literacy of the Audit Committee and by enhancing or upgrading its responsibility for issues such as management of the audit relationship, one can somehow defuse or neutralise the possibility of an errant CFO embarking on aggressive earnings management schemes in order to satisfy the demands of his/her CEO.

Wiser counsel dictates that rebalancing the various elements of corporate governance is only part of the solution, and that attitudes and behaviour have to change as well, not just at the top of an organisation, but throughout.

This article examines the implications for executive directors of recent calls (for example, in the US and Australia) for codes of conduct to govern their activities. The relevance of this issue is underlined by the requirement of the recent US Sarbanes Oxley Act for relevant companies to disclose whether or not they have adopted a code of ethics for their principal financial officer and principal accounting officer, and if not, why not.

A briefing note prepared by the law firm Clifford Chance indicates that under Sarbanes Oxley, a code of ethics is defined to mean standards necessary to promote:

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