A relatively modest investment in a strong set of corporate values can help a business to improve its productivity and profitability. It seems that mere mission statements are no longer enough: an increasing number of organisations, particularly large companies, are issuing corporate values too. The idea is to define the business's core principles, its culture and the modus operandi to which all employees are meant to adhere.

"Corporate values are what an organisation believes in and stands for. They are the focal principles it lives by, which define its identity and purpose," say Gill Shaw, strategic coach of a consultancy firm in the UK that specialises in helping companies to develop values. "They should link into its business planning to achieve its vision and mission, and they should be reflected in its behaviour."

Companies often want their employees to deal with customers, business partners and suppliers in a specific way. By setting corporate values they are making those expectations clear. Done well, they can be an effective PR exercise, casting the employer in a good light both internally and externally. Done badly, they can have the reverse effect. According to Shaw, the values most commonly espoused are "integrity, excellence, transparency, quality and innovation".

Most companies stick to the term corporate values or use a code of ethics, but at Vodafone they are called passions. "Our Number One passion is for customers," says Tim Brown, group corporate affairs director. "Then there is a passion for our people, a passion for results and a passion for the world around us."

Vodafone decided that it needed this set of passions as part of a rebranding and unifying process. With 57,000 employees around the world and acquisitions occurring regularly, the company "needed a common culture of vision and values", Brown says. "So the chief executive chaired several sessions with 20 of his most senior people around the world, from which they had to generate a vision and set of values that each of them wanted to buy into." In order for the values to work, they need to be clear and succinct - otherwise people won't remember what they are or even why they exist.

Tim Haigh, communications manager at Reed Business Information, says the publishing giant will be spelling out its values for all to see. At the moment only employees know them, but the plan is to tell customers as well. "We have five values," Haigh says. The first is customer focus which means understanding customers and exceeding their expectations. The second is valuing people, which means recruiting, developing and retaining the best individuals. There is a passion for winning, which means setting goals and beating the competition. Then there's innovation – i.e. taking risks. And then there's 'boundarylessness'. This means working positively with colleagues and with customers and suppliers. We need to break down some barriers."

Once the senior management team has decided what the values ought to be, some firms then ask the workforce for feedback and ideas. At Reed, staff representatives from each part of the business were invited to discuss the values in focus groups. Haigh says this process was crucial for ensuring that they were defined properly and that everyone took them seriously. "We asked employees to think about their own personal values to start them thinking about what values are all about," he says. "We didn't want to stamp them on people."

Once they were finalised, Reed's values were communicated to all employees in 2001 via the company's intranet, workshops, presentations and a handbook. Six months later, it conducted an opinion survey to find out how well the values had been received. According to Haigh, the response was extremely positive: 90 per cent of employees knew what the values were and most of them understood their relevance.

The values have now become part of the company's appraisal system. "They have been incorporated into everyone's personal development programmes," Haigh says, "People have to come up with objectives for their own development and everyone is assessed quarterly on them. They are judged on how they live the corporate values."

Angela Baron, an adviser at the Chartered Institute of Personnel and Development (CIPD), says that employee involvement and assessment are essential if a firm's values are to underpin its corporate culture. The CIPD recently issued a research report on how companies' financial performance is affected by the way they manage their employees. Called Understanding the People and Performance Link, it's the result of a three-year study involving prominent employers. A key finding was that the most financially successful companies had a clear vision and set of values - what the CIPD has called "the big idea" - and that these visions and values were deeply embedded in the culture and operations of those organisations.

"Vision and values are a very important part of the research," Baron says. "We found that factors such as having strong values that people can adhere to was instrumental in making companies more effective and profitable."

But she points out that a lot of work must be done to ensure that the values are not forgotten a few months down the line, which is where many companies fail. "Writing them out is the easy bit," she says. "The hard thing is getting them embedded. They need to be reflected in everything that people do and they need to be backed up with action. Otherwise they become meaningless."

This puts the onus on senior managers to lead by example. "There needs to be board-level commitment to the values, because they are useless unless they're embedded throughout the culture," says Simon Webley, research director at the Institute of Business Ethics. "Enron, for example, had a code of ethics but there was absolutely no evidence to show that this was embedded in its culture."

Writing the foreword to Enron's code of ethics in July 2002, Kenneth Lay, the company's chairman and chief executive talked about morals, fairness, honesty and reputation. When leaders espouse these kinds of values and then behave in a way that contradicts them, it is easy to see why critics dismiss them as a PR fad. To ensure that this does not happen and that a company's values are worthwhile, it is essential to assess people against them, according to Webley.

"Senior and middle managers need to be tested against dilemmas that are often to do with ethics and values – how important are the customers, the employees and the shareholders? In a good value statement, there would be fairly a clear prioritisation,” he says.

Values should also help employees - especially managers to take a more strategic view of an issue. Carolyn Pickering, chief financial officer at Reed, says the process of creating and implementing values has given her department a new impetus. "It gave us all a chance to think about the bigger picture: how do we support innovation, product superiority and boundarylessness. It has been very powerful in developing the finance team's relationship with our business teams."

Pickering says that the cost of the project was modest for a firm of Reed's size. "It was under STG100,000, but a considerable amount of time was put into the debate concerning that approval of the values and their communication, as well as the roll-out process." In fact, the biggest expense was probably the amount of time that employees spent away from their desks at the workshops. Even with a substantial outlay, the return should soon become apparent. The CIPD's research shows that firms which have a clear vision are more successful than those that do not.

The Institute of Business Ethics has also published a research report, Does Business Ethics Pay?, which confirms that link between clear values and high performance. The study measured four financial indicators: market value added (MVA), economic value added (EVA), price-to-earnings (P/E) ratio and return on capital employed (ROCE). Of the companies polled, those with a code of ethics outperformed those without one during the period 1997 to 2001. The EVA and MVA figures of companies with codes were significantly higher and the P/E ratios were less volatile. From 1997 to 1998 there was no discernible difference in ROCE for those with or without codes. But from 1999 to 2001 there was a 50 per cent increase in the average return for firms with codes.

According to Webley, who co-wrote the report, the findings confirm that strong values are important. "Having an ethics policy is a hallmark of a well-managed company," he says. "Those with codes almost certainly out-perform those without them. If the culture is deeply embedded and you are known to be sticking to those values, people are more likely to want to work for you, buy from you and invest in you.” Potentially, corporate values represent a minimal investment with a hefty return.