I had a huge problem at my call center. Create written documents outlining what employees can/can't do on the Web and distribute it. Remind employees that they are there to work, not surf the Web!

You can use web assessment tools to monitor Internet use and use site blocking software to prevent them from accessing objecitonable sites, which is a MUST!! You can get into legal trouble if employees visit sites that have porn or other bad material because it creates an uncomfortable work environment. This site has some good info: http://www.lctjournal.washi..
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Depending on the type of business you have, you may want to allow your employees to assist in the creation of the policy. Maybe you'll decide it's ok to use facebook during your lunch break, for example. If the employees can have input, and if you are willing to allow small concessions, you will probably have better productivity and happier employees.

You definitely need a policy in place and it should cover off what kinds of sites are deemed inappropriate for the workplace. I also agree that you should solicit the participation of employees in developing the policy to enhance buy in.

Without know what kind of business you're in, I have one additional thought. Many of the most successful businesses have found ways to channel their employees social networking for the good of their bysiness. Rather than simply shutting down your employees use of social media, perhaps you could tap some of it to help your business.build awareness of programs, products, services etc that you offer. Maybe you could set up a Twitter Page or a Facebook page for employees. Best Buy has a great example of an employee managed Twitter page.

If you can build a policy that rules out offensive surfing and replaces it with positive business building, it's a win-win for you and your people.