Asked what interest he took in the ethical constraints of his newspapers, Daily Express owner Richard Desmond snorted at the 2012 Leveson enquiry: “Well ethical, I don’t quite know what that means.” What he probably meant but didn’t quite say is: “ethics is for wimps!“
When the Arthur Andersen global consultancy collapsed in a matter of weeks for failing to act ethically, nobody suggested then it was for wimps. Since then businesses around the world businesses have been busily designing and implementing business ethics programmes. Possibly it makes them wimps, but the evidence suggests they are in fact making logical and sound business choices — they are after the ethical advantage.
The belief amongst some business leaders that ethics is hardly useful and for some is just for wimps remains all too prevalent. It is taking time for the “ethical advantage” to penetrate the higher echelons of many businesses. Yet as City editor of the London Evening Standard James Ashton explains: “Maybe it’s the banks' tarnished images, BP's life after the Gulf of Mexico spill, G4S' Olympic high jumps, tax avoiding Amazon, or rip off gas companies, but corporations seem more concerned than ever at getting it right in the eyes of shareholders, customers and governments. (1)
The ethical advantage consists of both pull and push factors. The pull factors are all the tangible attractions: why acting as a responsible business pays handsomely, and why it’s an entirely sensible and logical business strategy. Based on well-documented research these include:
• Enhanced reputation and good will
• Reduced risks and costs
• Protection of employees and agents
• Stronger competitive positions
• Expanded access to capital, credit and foreign investment
• Increased profits
• Sustained long term growth
• International respect
• Improved recruitment: lower retention costs
Of the many pull factors, perhaps the most immediately compelling is companies aiming to act responsibly in their business performance tend to do better financially than ones that don’t.
Quite simply, responsible companies tend to be more profitable, certainly in the longer term. For example, figures from the World’s Most Ethical Companies show dramatically how in the S&P top 500 companies the most responsible companies out-perform those regarded as less responsible.
In the UK, a 2003 study by the Institute of Business Ethics concluded companies with an explicit commitment to doing business ethically produced profit/turnover ratios 18% higher than those without a similar commitment.(2) More recently it also reported “a direct association” between companies that train their staff in business ethics and their financial performance, compared to those which merely disclosed ethical values.
Further underlining this pull factor is the significant trend towards ethical investing. That is, an increasing number of investors and investing institutions are choosing to seek out companies committed to acting ethically, or responsibly.
Admittedly, the proportion of total investment devoted to ethically-minded companies remains only a small proportion of the total, and the picture is based on US data. Socially Responsible Investing (SRI) in the US has grown 486% since 1995, while the rest of US assets only grew by 376%.
So ethical ventures attract rather than repel investors. In simple terms it can be easier to raise capital if you are clearly a responsible company, with some clear ethical standards and an investment in ethical training.
Then there’s the push factor — namely the high price a business may end up paying for failing to act responsibly. There are now numerous examples of the extraordinary high price that may arise from not possessing a strong corporate and leadership moral compass — that is, failing to bring ethics in business into a sharp focus.
For example, spare a thought for JPMorgan’s CEO Jamie Dimon. Recently he has been spending a large slice of his time negotiating a settlement over the bank’s unethical behaviour. The resulting fines, penalties and damage to the bank’s reputation are in a league of their own. For instance, the bank’s international fines are likely to be double those faced by BP for its disaster in the Gulf.
In the same sector, Rabobank is currently facing a potential fine of almost $1bn for its alleged manipulation of Libor and other lending rates. Regulators continue to push for retribution from the architects of a scandal that has “shaken trust in the financial system”. (3)
The ever-growing list of financial institutions facing swingeing penalties for unethical behaviour may seem outside most companies’ daily experience. Yet the push factor can be sudden and devastating in losing hard-won customer confidence. The evidence is fairly conclusive —customers prefer dealing with a company that is ethical or responsible, rather than one that is not.
When it was revealed that Starbucks, previously a high flyer in the ethical league of companies, was avoiding paying its full share of taxes, the company faced a serious consumer backlash. Within days, the company reversed its previous self-righteous stance and promised to pay an extra voluntary tax.
So what does it mean to be an ethical or responsible company? It is not nearly as vague as some like to imply. Studies show that we can recognise a responsible company by at least five criteria — see table.
Of these, having the right culture is probably the most critical, even more so than having the right strategy.
1 - Ashton, J. (2012) Reputations on the Line, Evening Standard 29th November
2 - Does Business Ethics Pay? Institute of Business Ethics,2003
3 - Rabobank faces second biggest fine of $1bn amid Libor Scandal, C Binham and D Schager, FT 23.10.13
Andrew Leigh is a director of Maynard Leigh Associates (www.maynardleigh.co.uk) and author of the recently published book Ethical Leadership: Creating and Sustaining an Ethical Business Culture (Kogan Page October 2013.) His blog is at www.ethical-leadership.co.uk read more