Does Business Ethics Pay - Essay Example

Business and Ethics Introduction Debates on business ethics are, more often than not, disheartening conversations that leave people in cul-de-sacs. On one side are people who argue that anything that impedes organizations’ goal of profit seeking-seeking will affect general welfare by increasing costs and prices and is, therefore, wrong, by definition. However, this is a he misconception; at least according to people on the other side, who opine that businesses which transfer their costs on to society and pollute the environment should not be allowed to escape punishment; they should be “made to pay.” However, there is a huge irony here: both parties share the same assumption, which is that welfare and ethics are opposites (Arbogast, 2013:29). Consequently, it is a war, or at least a barter trade in which one can only have more of one to the detriment of the other. This should not be the right way. However, what if that assumption was wrong and the opposite was true? After all, the rationale for trade-off has been proven to be fallacious in other areas where better management is precisely focused on marrying the two ends of the spectrum. This is how Japanese firms demonstrated to the world that they could manufacture products that were both low cost and high quality (Bowie, 2013:34). Michael Porter, of the Porter’s Forces model, argued over 20 years ago that the same applies in arguments pitting the economy against the environment. There is no permanent trade-off – organizations can be, simultaneously, lean and green, but one factor necessarily affects the other. Until today, studies on the financial results of “ethical” versus “unethical” organizations have been sketchy. Now, however, the United Kingdom’s IBE (Institute of Business Ethics) claims to have contributed significantly to the proof that virtue rewards; handsomely. In a report titled “Does Business Ethics Pay?”, the agency determined that in a sample of FTSE 350 companies “ethical” firms outperformed those that made no such statements on 3 out of 4 financial standards – MVA (market value added); EVA (economic value added); and the price/earnings ratio. Between 1997 and 2001, the report concluded, there was a strong indicative proof that large UK corporations with codes of business conduct/ethics recorded above-average results when measured against another group without “codes.” If they hold, these are vital, even landmark, findings (Buckley, 2013:95). However, the ethics are difficult to measure. So, it is important for companies to be wary of the provisos before claiming too much. The researchers based their methodology on a past research by a US scholar – Dr. Curtis Verschoor – which also revealed a positive correlation between ethical conduct and excellent financial results. Verschoor employed the mention of an ethics mechanism in the annual report as a route to being good. The IBE wanted to refine this by choosing organizations that had used, for five years, published codes of ethics. Of course, this does not reveal much in itself. Enron, for example, had a code of ethics – arguably a very good one – but still went down through probably the biggest case of ethical violation in business history. However, the problem was not with the code; it was perfect (Zsolnai, 2013:28). The problem was that nobody at Enron bothered to adhere to it, and this is the problem plaguing most 21st century businesses in terms of ethical violations. To ensure that companies were actually adhering to the codes, the IBE researchers studied how they measured up in Management Today’s yearly “most admired company” category table, an investigation of industry experts and corporate counterparts on non-financial results characteristics. This was checked vis-à-vis a rating of the companies’ socio-ethical risk management – characteristics like human rights abuses, lack of community participation, bad corporate governance, etc. – by professional ratings firm SSERM. The first result was that there is a strong positive correlation between implementing codes of ethics, effectively managing non-financial risks and being an admired firm. In short, having a code of ethics indicates that a firm views ethics gravely (Gupta, 2010:26). As a result, nineteen out of the twenty-four firms which have featured consistently in the magazine’s league ranking over the past 5 years had codes of ethics and were ranked highly by SERM compared to those without codes. Financially, the IBE tried to reinforce the US results by expanding its MVA estimate with a contrast of EVA, ROCE (return on capital employed) and price/earnings ratio. Again, the results were positive here. Consequently, over 5 years, companies with codes performed much better on MVA and EVA compared to their competitors – and the chasm appears to be widening. There is also “solid” evidence that firms with codes have more consistent price/earnings ratios compared to ones that do not. On the 4th measure, ROCE, the results were less explicit; the “ethical” sample underperformed until 1999 and then usurped their rivals (Parboteeah and Cullen, 2013:36). What can explain these findings? Although the relationship between ethics and performance is surely string, that does not show that one implies the other. It could be, for example that high-performing firms implement codes of ethics instead of the other way around. According to Foster Back, since Enron and others have shown that the code alone is not important; the research has sparked new questions about how the correlations work. The How of the issue instead of the What will be the focus of a future IBE research project. In the meantime, the conjecture is that it is the way the ideals represented by the code are entrenched in the company that makes the difference (Newton, 2013:49). The more the values are practiced, the more effective and consistent the decision-making at all levels, the more optimistic, confident and inspired the staff, the greater the degree of trust, and the less the probability of expensive damage to the firm’s image. The virtuous merry-go-round can be expected to embrace clients, suppliers and other shareholders. Verschoor also agrees with this perspective. Another way of framing it, Porter-style, could be that anti-social conduct is a type of waste. On the green example, planning it externally to organizational processes from the beginning is likely to be far less costly than repairing the damage following the event. Just like being green, being ethical can encourage innovation that gives companies a competitive advantage over rivals that stay on the “ethics have no place in business” road. Either way, by strongly insinuating that there is no intrinsic contradiction between performing well and being good, the IBE results signal a positive shift of the ethics conversation to more fertile territory (Lin, 2013:8). How it functions might still be a dark room which needs lights to be switched on, but we can at least begin from the IBE’s discrete statement that “having code of business ethics can be said to be one sign of a well-run firm,” instead of a waste of stockholders’ money. Although it is widely accepted and acknowledged that a massive failure of markets and their control was central to the 2008 financial and economic downturn, not enough focus has been on the failure of business ethics and the absolute ignorance of any shred of social responsibility on the part of Wall Street companies like Merrill Lynch. Although the focus was on them, it was not just the Bernie Madoffs who were liable; they were just a few big fish caught in the net (Gibson, 2012:25). The insatiable appetite for profits to the detriment of anything and everything – ethics included – punctuated all Wall Street companies, despite those executives at Merrill Lynch being clearly among the worst offenders. The emphasis on business ethics and corporate social responsibility (CSR) by Daniel Ritchie and Bill Daniels more than ten years ago at the University of Denver’s School of Business is now coming to the fore as a specific stroke of genius and long-term ambition and that it might as well be used as a national framework for business education in other regions. The Daniel’s College formed a whole faculty of Business Ethics and Legal Studies and research into the relationship between ethics and business was incorporated into numerous undergraduate and graduate programs all across the curriculum. For example, the Vice Chairperson of General Mills pushed the concept that the company should accept an ROI (return on investments) on specific projects that bore social value (Ferrell and Fraedrich, 2013:24). Consequently, the company purchased several apartment complexes in poor neighbourhoods, renovated them and rented them out to lower-income families at affordable rates. In the process, the company transformed a poor and maligned neighbourhood into a safe, sustainable, middle-class community. The middle ground is to acknowledge that every business and economic action should be shepherded by an ethical compass. The middle ground entails the recognition that the best and most comprehensive regulations can be avoided through unethical and dishonest conduct. Enron and Qwest are good examples in this regard and how their cases have informed ethical regulations and actions by businesses and governments (Deslandes and Painter-Morland, 2012:21). However, when honest businesspeople subject their decisions and actions to serious ethical evaluation, then regulation becomes a formality, and the type of regulations needed are far more likely to be completely and fairly adhered to by all who are subject to them. As a result, regulation without an ethical basis may be ineffective while regulation enhanced with ethical agents will, more often than not, succeed. The question is, is more regulation need or do we need simple enhancements in ethical standards for all business operations? What if ethics informed those mortgage brokers who designed those subprime mortgages that the buyers could surely not afford when they re-set after just two years? What if ethics had informed Wall Street companies like Merrill Lynch when they kept issuing synthetic loan default obligations for more than 12 months even after AIG would no longer insure them? In the 2008 financial downturn, the list of “what ifs” is quite long – and the basis for ethics and social responsibility is the missing factor in all of them (Beverungen, Dunne, and Hoedemaekers, 2013:109). The current popular theoretical approach in economics shows that we are just utility-optimizing acquisitive people and that all firms are only profit-maximizing entities. Should we, then, be really amazed that we and our firms have morphed into what that theory says we are? Conclusion In concluding how our mental processes become our realities, I would like to state that what we think we are; we are not what we think we are. When we think and encourage others to think ethically, we are likely to behave ethically (Shaw, 2014:20). On the other hand, when we focus only on profit-optimization and self-interests, all our behaviours are likely to be informed by that myopic focus – sometimes with serious negative implications for almost all the world. There should be more discussion of ethics in all business programs at all business schools in the world, if possible; this is desperately needed and will significantly help to prevent a repeat of the ethical mistakes of the past decade. References Arbogast, S. (2013) Resisting corporate corruption cases in practical ethics from Enron through the financial crisis, Hoboken, New Jersey, John Wiley & Sons. Beverungen, A., Dunne, S. & Hoedemaekers, C. (2013) The financialisation of business ethics, Business Ethics: A European Review, vol. 22, no 1, pp. 102-117. Bowie, N. (2013). Business ethics in the 21st Century. Dordrecht: Springer. Buckley, M. (2013) On the Essential Nature of Business, Business Ethics Journal Review, vol. 14, no. 3, pp. 92-98. Deslandes, G. & Painter-Morland, M. (2012) Power, Profits, and Practical Wisdom, Business and Professional Ethics Journal, vol. 31, no. 1, pp. 1-24. Ferrell, O. & Fraedrich, J. (2013) Business ethics: Ethical decision making and cases, Mason, OH, South-Western/Cengage Learning. Gibson, K. (2012) Ethics and business: an introduction, Cambridge, Cambridge University Press. Gupta, A. (2010) Ethics, business and society managing responsibly, Los Angeles, Response Books. Lin, S. (2013) Resisting Corporate Corruption: Cases in Practical Ethics From Enron Through The Financial Crisis, 2nd Edition., Administrative Sciences, vol. 3, no. 2, pp. 6-8. Newton, L. (2013) Ethical decision making: introduction to cases and concepts in ethics, Cham, Springer. Parboteeah, P. & Cullen, J. (2013) Business ethics, New York, NY, Routledge. Shaw, W. (2014) Business ethics, Boston, MA, Wadsworth, Cengage Learning. Zsolnai, L. (2013) Handbook of business ethics: ethics in the new economy, New York, Peter Lang. Read More