ETHICS PAYS- DOES IT ?

Abstract

Though business ethics is considered an oxymoron, the concern for ethical business practices has substantially increased since failure of prominent business organizations like Shell and Enron, owing to strong social condemning of some of their business practices .

This paper reviews whether it pays to incorporate ethical code of conduct and ethical practices with a view that it will have financial benefits. The concern is what happens if we can’t see the financial benefits. Do organizations try to create an ethical environment for the benefits? On achieving success does it then leads them to more ethical behaviour or does the belief that ‘ethics pays’ leads them a temptation to use unethical practices to achieve the end incase ethical practices are not showing financial benefits.

So for organizations to be ethical where do we look? Transformational leadership often considered to be ethical may be unethical despite the fact that transformational leadership was considered to be morally uplifting and required leaders with moral maturity.

There may be strong ethical intention but an individuals ethical behaviour is not always consistent with his or her ethical intention to act. The gap between intention and action.

What are the factors which will bring about action consistent with the intention? This is another area to study.

Another important question is not so much one about how leaders should act but rather one about why they act as they do. Why do leaders fail ethically when it is so obvious to the rest of us how they should act.

Thus the view that ‘ethics pay’s - is it an appropriate approach.

Introduction:

Ethics has become a matter of concern. More and more organizations are talking about it and more organizations are setting a code of ethics, becoming a member of the Ethics officer Association (EOA).

Societal expectations and pressures from legal and professional bodies have forced organizations to be more concerned towards their social responsibilities and ethical practices. For example in mid 1990’s Shell faced one of its worst public relations nightmare due to its unethical business practices in Nigeria and anti-environmental acts in North Atlantic. In 1997 the Financial times in its annual survey of Europe’s most respected companies, identified Shell’s ethical problems as the key reason for the company’s dramatic drop in ranking. Shell turned upside down in the aftermath of these unfavourable experiences and thus started correcting itself for a sustainable growth.(Donaldson& Dunfee, 1999).  Similar to Shell, many organizations whose business practices are perceived to be unethical and their products are considered to be harmful to the consumers(eg cigarette) face strong social condemn. Especially in recent corporate history, Enron and Arthur Anderson episode, insists on the importance of ethical practices in business..

However most are looking for a justification for being ethical or at least most research is working towards finding the link with ethics and positive outcomes.

Though  concern for morality in business and other organisations, is a growing area of academic inquiry and professional practice, there are many misconceptions related to the aims of those who pursue the subject and to its relevance for managers(Maclagan,1998).

According to Stark(1993), managers are not hostile to the idea of business ethics but they might consider it to be irrelevant. For example, financial performance might overweight ethical standards to reflect high short-term performance measures. It is important to examine how organization variables instigate managers to consider short term performance measures while ignoring the concern for ethics.

There is a partial overlap between Ethical commitment and Economic advantage Thus it is  a dynamic relationship.

However many executives are coming to see attention to values not as a frill or an indulgence but as an integral part of effective management touching all aspects of a company’s operations. Many now believe that adhering to the core principals  found in virtually all the world’s ethical traditions is neither naïve nor a sign if weakness, but rather smart and a source of organization strength. And some are coming to view moral judgement as a help rather than a hindrance in doing business.

David A Whetten provides the model shown below for considering the relative ethical position of people and organizations. As noted, ethical intentions and ethical behaviour may be classified on a relative scale that categorizes behaviour as ethically detrimental, ethically neutral and ethically virtuous  for all concerned or all stakeholders.  Whetten’s hypothesis and stewardship theory suggests that being content with ethically neutral behaviour suboptimizes  benefits to stakeholders and fails to honour the leaders full obligation ( Whetten, 1996).

There is a deep need in society for a model of leadership based upon teamwork, community and ethical and caring behaviour and which will best serve people and organizations in the long run.

The “ethics pays” argument depends on taking the broader view and looking to longer-term effects. If we appreciate that values represent certain patterns of thinking, behaving, and interacting with others over a period of time, we can see the logic of the argument. The commitment to ethics can lead to a long list of effects that can lead directly or indirectly to financial gain- through better cost control and risk management, through enhanced employee creativity and contribution, through strengthened reputation among key constituencies, and through expanded access to resources and opportunities etc. Within each of these , we have seen explicit ways in which economic gains are generated or preserved- through lower complaint costs, lower monitoring costs, lower compliance costs, greater trust, more knowledge sharing, improved product or service quality, strengthened brand equity, increased access to talent and more.

Given this extensive list of positive financial effects, we therefore expect companies with higher ethical competency to enjoy superior overall profitability? Research has shown that ethics do pay(Hosmer 1994). Also, since unethical practices cost industries billions of dollars a year (Jones and Kavanagh, 1997) and damage the image of corporations emphasis on ethical behaviour in orgnaisations has increased over the recent years (Trevino, 1986).

However there are many factors which may affect a company’s ultimate financial performance. For eg. An overly optimistic stock market can make bad companies look good, currency devaluation can instantaneously turn a good company’s profits into losses. A wrong bet on technology, a forecast gone awry, the collapse of  a major customer, a change in government policy , a terrorist attack any one of these events can change the equation of values and profitability .Definitional and measurement difficulties are also a problem for both sides of such equations.

Nonetheless, a number of researchers have come up with suggestive findings. For instance, one study that compared higher and lower yielding U.S companies in 10 industries over a period from 1977 to 1988 found a striking difference between the two groups. The more financially successful companies valued leadership, fairness and the interests of their constituencies more highly then did the lower yielding firms. Companies that were internally focused or that valued only one constituency  over others- whether the most highly valued group was employees, customers, or shareholders-performed less well.

Similar findings emerged from a widely reviewed 1985 study of 81 high-growth, mid size US companies. Here again, researchers found that leading companies had certain distinctive features. Most had articulated a guiding set of principles defining how value would be created for customers, the rights and responsibilities of employees, and what the organization stood for. The authors found that executives of these companies were motivated not only to make money but also to make a difference and that profit was generally viewed as a by product of doing other things well.

This is not to say these executives were unconcerned about financial performance ; they had rigorous systems to monitor financial performance , operations, and competitive position. But they also worked consistently to instill a stong sense of mission and shared values in their organizations.

Yet another study of US companies this one covering 18 pairs of companies all founded before 1950 – concluded that an enduring value system was a key driver of superior financial performance notably, however the study’s authors concluded that the content of the values mattered less then their authenticity. In other word, according to these researchers, genuine belief in their values was more important than what the values actually were, although a compelling sense of purpose beyond making money was a shared feature of the leading companies’ value systems. These three studies started with superior financial performance and then worked backward to try to identify its antecedents. Others have looked explicitly at some measure of ethical commitment and tried to determine its financial consequences. For instance a recent study of the 500 largest us companies appearing on the Business week 1000 list found that those with a defined commitment to ethical principals outperformed their peers.  

This study used a composite measure of financial performance for 1997 and the previous two years and determined commitment to ethics by reviewing statements in the companies’ annual reports . But statements on in an annual report are scarcely a convincing measure of corporate ethical competency, and a three year window on financial performance is too narrow to be of much significance, especially considering that the reported results are undoubtedly due in large measure to actions taken earlier in time.

Perhaps the best perspective on the ethics-economic performance issue comes from a recent review of some 95 academic studies of the relationship between corporate financial and social performance.  The studies of mainly us companies used some 70 diverse measures of financial performance and examined 11 domains of social performance including human resource practices, environmentsal performance, product safety and community investment. Eighty of the 95 studies sought to determine whether ‘ethics pays’ whether better social performance was a predictor of better financial performance. Nineteen considered the reverse- whether stronger financial performance could predict higher social performance.

Although there is much to question about these studies, it is worth noting that only 4 of the 95 studies found a negative relationship between social and financial performance. 55 studies found a positive correlation between better financial performance and better social relationships. Twenty two found no relationship between the two; and 18 found a mixed relationship.

Managing only for profit is like playing Tennis with your eye on the scoreboard and not on the ball.

What is most important is the perception of moral motivation.

The benefits that flow from acts of corporate citizenship depend on their being perceived as genuine acts of citizenship motivated at least in part by a sense of civic commitment . Purely altruistic motivation is not required , but the public is impatient with marketing dressed up as citizenship. Civic activities undertaken to distract the public from damage being done elsewhere are quickly seen through.  Likewise, if employees perceive a call to values as a litigation-protection programme for senior management or the board of directors , it is unlikely to stimulate creativity, energy commitment or any of the other positive effects.

These considerations suggest that it is exceedingly difficult to realize the economic benefits of an ethical orientation without actually having an ethical orientation. Because the economic benefits of moral action depend on the perception of moral motivation, and instrumental ‘ethics pays’ attitude is apt to be self defeating. Even from a purely financial point of view then, it makes sense to recognize the intrinsic value of values.

Conclusion:

In summary, there is clear evidence of a very strong connection between superior corporate performance and a public statement by corporate management of a strategic reliance on ethics as an element of internal control and corporate governance. The link exists for both financial and non-financial criteria. However, the mere presence of an ethics code or even a well-executed ethics program does not itself cause superior performance. The most critical factors appear to be both the nature of the values upon which the corporate culture is based as well as the strength of the top management commitment to ethical treatment of stakeholders which is expressed in actions and not just in words.

Unethical behaviour doesn’t pay . In ,most situations  it costs the organization a lot incase they have been unethical and caught, though believing that ethics pays is not necessarily the truest approach.

Legal issues in getting the unethical behaviour caught is one which may let businesses think that unethical behaviour pays and more so in the short run. Anyway in the long run everyone is dead (Adam Smith)

Not long ago, civil rights leader Jesse Jackson spoke to a group of Wall Street executives about hiring more minorities and African-Americans. Rather than appealing to ethical arguments about fairness, rights or equality of opportunity, Jackson appealed to the executives financial self interest. He told them that discrimination was costing them mondy and that they could not afford to deprive themselves of the talent residing in the non- white  population. Jackson’s argument would have seemed ludicrous 50 years ago, but in today’s economic , legal and social environment, it rings very true. As a result of social and institutional changes , the ethical argument and the economic argument have become much better aligned.

Another example, the revolution in information technology has opened up new opportunities for profitable theft, deception and invasion of personal privacy. It will take some time to close off these opportunities but eventually laws and social attitudes are likely to evolve in that direction.

At the same time this technological development has had something of an opposite effect by heightening the visibility of much corporate behaviour that was previously hidden from public view. In this aspect it has contributed to strengthening the overlap of ethics and financial advantage by increasing the likelihood that both positive and negative behaviour will be exposed to public view.

Though, the equilibrium between ethics and economic advantage is equally vulnerable to destabilization from within. Respect for basic ethical norms builds social trust. Yet, paradoxically, and increase in trust creates new incentive for opportunism, for the trusting community is a thief’s paradise.

It is not easy to be ethical. Much unethical  conduct is not just because of bad apples but of neglectful leadership and organizational cultures.

In the end, we must acknowledge that the link between ethical commitment and economic advantage is both fragile and ever changing. The increasing concern with ethics is less because of any inherent connection between ethics and economic advantage  than with changes in the business environment and the expectations from leading companies today.

So ‘Ethics counts” is a more appropriate approach as compared to ‘Ethics pays’ and hopefully a shift away from the original thought that ‘Ethics costs’.

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