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Can you afford not to be ethical?

May 2018  |  SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS

Financier Worldwide Magazine

May 2018 Issue


‘Does business ethics pay?’ is a common question.

There is no escaping the current increasing political pressure for exemplary ethical behaviour from our businesses. Indeed, the draft new UK Corporate Governance Code contains a provision requiring directors to monitor and assess their corporate culture to satisfy themselves that behaviour throughout the business is in line with the company’s values.

Doubtless, businesses should ‘do the right thing’ because it is the right thing to do. But there are also benefits for organisations that take their ethical values seriously.

It is good for staff morale to work in an open culture, with possible benefits of increased productivity and staff loyalty. These are vital ingredients in the current climate. An organisation known for fair and responsible practice is likely to attract high quality employees and ‘stand out from the crowd’ and find it easier to retain quality employees.

Demonstrating sound ethical practices can often be a condition for tendering for contracts with large customers needing to ensure the integrity of their supply chain. Good relationships with customers, based on a commitment to honesty and transparency, will enhance a company’s reputation. Businesses that are familiar with these demands will have a competitive advantage.

Ethical companies outperform their peers financially in the long term. IBE research back in 2003 indicated this and subsequent research continues to show how organisations which take their ethical responsibilities seriously and embed ethical values within the fabric of how they operate, do better financially over the long term.

There is pressure on all sides for companies to perform. The demand for profits means companies need to sell more, quicker, cheaper and retain more market share. Just as incentives create unethical behaviour in employees, so the pressure to meet targets creates ethical problems for company culture.

Goal-setting has long been seen as an effective management technique, and one which helps companies to measure and improve their performance. The best way for organisations to measure and report on how they are doing, both internally and externally, is to create targets and drive to meet them. However, research indicates that, although most people are basically honest, those who set specific goals were more apt to cheat than those who were simply asked to ‘do their best’, regardless of whether there was financial encouragement.

Although employees respond well to the motivational use of targets and goals, it seems that when there is a lot at stake, for example if a job is on the line or a significant bonus is in jeopardy, employees are more likely to behave unethically in order to achieve targets. If an employee cannot speak up or challenge, there is a higher risk of an ethical lapse and, possibly, reputation loss.

The potential risk of severe reputational damage should be enough to persuade any organisation that unethical behaviour comes at too high a price. We are not even half way through 2018, and scandals like Cambridge Analytica and Facebook, the collapse of Carillion and sex scandals at Oxfam have already shown how quickly an ethical scandal can destroy a reputation.

Fines which read like telephone numbers are also beginning to show that businesses cannot afford not to be ethical. Rolls Royce was fined $671m for historic bribery cases. Tesco was fined £129m for mis-reporting. Volkswagen has already paid out $25bn in the US and is now facing a class action lawsuit in the UK.

Creating a culture of integrity and openness, where ethical dilemmas are discussed and debated and employees feel supported to do the right thing, is a powerful way to mitigate against the risk of ethical failure. A healthy, trustworthy culture is the basis of a sustainable business in the long term. No company should feel this is anything other than good management sense.

But it can be a challenge for companies to communicate to employees what they mean by “doing business ethically”. Sometimes, unethical behaviour may be so ingrained into a company’s culture as to be considered business as usual, and may not be considered unethical at all.

Culture is ‘the way we do things around here’. So, for example, a company may have excellence as a business value. But how is excellence defined in that organisation? How is it achieved? Is it with integrity, or is it at the expense, for example, of child labour, ‘creative accounting’ or by cheating an emissions test?

But ‘the way we do things around here’ may subtly be working against the company’s ethical values. No matter what communications come from head office, employees will share their own stories regardless. So, for example, the organisation may say that it has zero tolerance for bribery, but the reality may be that employees believe that they must secure business, whatever the cost.

It is a question of priorities

Business ethics is the application of ethical values to business behaviour (such as fairness, honesty, openness and integrity). Ethics is about how an organisation does its business, not what it does. Does it treat its employees with dignity and respect? Does it treat its customers fairly? Does it pay its suppliers on time, recognising mutual benefit in doing so? Is it open to dialogue with its local communities? Does it acknowledge its responsibilities to wider society?

Too often, however, there is a ‘say and do gap’ – top leadership espousing ethical behaviour, but failing to ensure there are sufficient systems and controls in place to support that behaviour. Perhaps these companies are too preoccupied with chasing short-term profits, without thinking about the long-term implications.

But the current climate means it is imperative that business leaders realise that the demand for short-term returns is unsustainable.

Pressure to perform financially means that corners can get cut, and ethical issues swept under the carpet. As the author Edward Abbey said, “Growth for the sake of growth is the ideology of the cancer cell”. But in today’s leaky and transparent world of social media, unethical behaviour is being exposed and, as a consequence, the hefty fines imposed are having an impact.

Companies should consider their ethics because it is the right thing to do, but now they cannot afford not to.

 

Philippa Foster Back CBE is a director at the Institute of Business Ethics. She can be contacted on +44 (0)20 7798 6040 or by email: info@ibe.org.uk.

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