_This article was co-authored by Clive Bonny and Chris Moon and has been extracted from the conclusions in the book Business Ethics published by The Economist._
There is evidence that business is facing up to ethical issues. Clearly unethical conduct can damage reputation and hit the bottom line and the share price. In some cases it can even force a company out of business. Firms that do not have ethics programmes run the risk of more stringent legal and financial penalties – just one legal transgression can cost a firm millions of dollars. And bad publicity can have a profound impact on brand value and a company’s ability to attract and retain the best people, thus eroding its competitive edge.
On the other hand, companies who apply ethical auditing and measure the triple bottom line of economic, environment and social sustainability are shown by independent surveys to have outperformed since 1990 other S & P 500 index companies. Not only does an ethical approach increase shareholder value but other stakeholders gain too. Organisations that measure and respond to staff feedback on culture and motivation regularly outperform their competitors. This is shown in the UK and USA employee surveys of the best companies to work for. Trust and openness also strengthens supplier and customer partnerships, and engenders community respect and integration.
Different countries have taken different approaches to business ethics. The United States has taken a more compliance-based approach and has led the way in the international criminalisation of bribery of public officials. The OECD has only relatively recently endorsed this legislation. Europe’s recent human rights legislation has widened the scope of organisations’ responsibilities towards their stakeholders, though the European approach to business ethics has been less regulatory-based than that of the United States. While North America has formalised the role of the ethics officer, Europe’s ethics champions have developed their roles alongside other management responsibilities.
Two other international differences are also now merging. The western preference for business unit autonomy and the eastern practice of economic networking are coming together. Japanese and Korean industrial conglomerates have, for many years, successfully interlocked family, private & public business networks. This has demonstrated to the West how such connectivity can bring greater operational efficiency and more consumer choice. The benefits of teamwork however can only be unlocked by values and behaviours that support group goals and minimise internal competitiveness. This book argues that the integration of different international approaches, balancing compliance with values, and balancing the rights of the individual with the respect for the community, creates alignment for sustainable success.
The new economy has brought greater transparency and greater flexibility but also greater complexity – and therefore new and greater risks. Companies need to have robust systems in place to manage reputation risks. Employees who have more power in delayered organisations and more pressures to perform in a globally competitive environment have less management supervision. Only 42% of employees are reported to feel allegiance to their employer and access to communications technology makes it easy for an individual anywhere in the world to damage a brand’s international reputation in a matter of days, if not hours. Surveys show 50% employees trawl the web at work for personal reasons; 85% use the company computer for personal mail. This can lead to loss of intellectual property, inadvertent contracting, system viruses and libel. Most firms do little to monitor their Internet traffic, yet over 90% of employees would accept company monitoring if introduced after consultation.
To ensure that there is trust and accountability managers must create a climate that will allow those they manage to make responsible decisions aligned within a framework of shared standards and consistent values. Clear standards of operation and behaviour are necessary to draw the lines between acceptable and unacceptable conduct. Constitutions and codes create the building blocks of acceptable behaviour. They should be drawn up in consultation with all those in the supply chain and presented in a way that people understand and accept. Such frameworks need to reinforce local and international regulations, be tailored for each business, and be checked in their application for gaps between what is said and what is done. Codes of conduct however will not, by themselves, ensure ethical practice. There must be commitment behind them and they must be shown to work. Auditing their effectiveness requires competent and independent help.
Corporate social responsibility is being encouraged by a new breed of active shareholders who have been helped by greater transparency and regulation, such as recent disclosure laws on pension funds and increasing legal liabilities for managers and directors. The annual general meeting has become prone to unexpected shareholder resolutions and solicitations through third parties. The extension of share ownership that has taken place in recent decades has included activists determined to make their point and vote with the aim of getting companies to balance private profit with public good.
For self-regulation to work, the supply chain must believe in the same ethical principles and values – and those principles and values should be explicit and linked to the firm’s brands. The process of defining what those principles and values are needs to be driven and championed by top management, and developed and assessed in a structured way. Opinions about a firm should be sought from customers, suppliers and the wider community. Line managers and other employees should be asked their views about the values demonstrated inside the business. Survey results should be published and stakeholders actively engaged in addressing the gaps they reveal between the reality of what people think about an organisation and what the organisation wants people to think about it. These gaps represent risk to brand integrity and are often caused by ineffective corporate communications or poor individual skills in decision-making. Training programmes can help resolve the latter.
Training in business ethics provides the opportunity for discussion and group commitment to achieve a consistent way of working. Yet only three in five organisations who give ethics training involve all employees, and nearly half of company codes of conduct are not publicly available. Training can also resolve difficult personal decisions and help employees understand corporate values. Business ethics involves many tricky issues and there is no single best route to ensuring that an organisation deals effectively with them. However, one strong message of this book is that an “inside out” approach that considers issues from employees outward is likely to be more successful than a simple top-down approach in companies. The supply chain is as strong as its weakest link and shared values act as the glue to hold people together across different nations and cultures.
In summary, corporate profits are being enabled by ethical practice. Ethics is now on the management agenda as increasingly values sustain value. Those who fail to consider ethics as an integral support to business strategy put profits & people at risk. Business ethics is about consistent acceptable standards of behaviour across all operations. Undoubtedly there may be short term costs involved when a business raises its ethical game. In the longer term, however, businesses that are trusted and respected by their employees, suppliers, customers and the wider community are more likely to provide their shareholders with a better return than those who ignore the ethical dimension.