Can you afford not to be ethical?

“Does business ethics pay?” is a question we often get asked at the Institute of Business Ethics (IBE) and we often respond by saying you do the right thing because it’s the right thing to do.

Since the Enron scandal first broke nearly 16 years ago, the potential risk of severe reputational damage has persuaded businesses that unethical behaviour comes at too high a price. IBE research back in 2003 indicated that business ethics pays in the long-term. Yet the pressure on companies to perform in the market in the short-term persists. The drive to produce higher profits quicker leads to bad practice and cutting corners – as the recent Volkswagen scandal illustrates.

VW sold 11m cars with software deliberately designed to deceive the authorities, emission testers, customers and the public into thinking that their diesel cars were environmentally friendly. Much has been written about the scandal since it first broke in 2015, with estimates that the total cost to the company is $30bn.

Results like these mean that the investor community must finally start to realise that the demand for short-term returns is unsustainable. Almost £8bn was wiped off British Telecom’s (BT) stock market value after the telecoms group revealed that an accounting scandal at its Italian business was much worse than originally thought. Add to this the hefty fine imposed on VW and it’s clear that unethical corporate behaviour is starting to impact shareholders where it hurts.

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 might 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?

‘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’s a question of priorities

Business ethics is the application of ethical values to business behaviour (such as fairness, honesty, openness, 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? Is it open to dialogue with its local communities? Does it acknowledge its responsibilities to wider society?

Too often, however, there is a ‘say/do gap’ – with top leadership espousing ethical behaviour, but failing to ensure there are sufficient systems and controls in place to support that behaviour.

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 regarded 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 are 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 much 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. When an employee cannot speak up or challenge, there is a higher risk of an ethical lapse and, possibly, reputation loss.

The 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 on shareholders.

Companies consider their ethics because it’s the right thing to do; but now they can’t afford not to. It’s time that investors too shared some responsibility and encouraged businesses to re-engage with their social purpose, as well as their fiduciary one.

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