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The Importance of Being Ethical

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Companies with strong ethics programs have found that these efforts can reduce potential costly fines, decrease vulnerability, improve reputation, provide access to capital, favorably influence their bottom line, positively affect their employees' commitment to work and enhance customer loyalty. These benefits are outlined below:

Potential Avoidance of Fines:Companies and their employees are required to comply with national, international, and local laws governing their operation. Failure to comply with these standards can be costly in terms of time, resources, brand image and employee and customer loyalty. In addition, the development of strong ethics initiatives can greatly reduce the chance of fines resulting from wrongful, fraudulent, discriminatory or illegal activities. With the revision of the U.S. Sentencing Guidelines, companies developing "good corporate citizenship" actions can substantially reduce potential penalties when misconduct occurs.

Decreased Vulnerability:As companies develop or enhance their overseas operations, decentralize their business functions, and empower their workforce, it is imperative for them to develop ethics practices that provide the necessary training and tools to assure that their employees throughout the world can make ethical decisions. This decreases a company's vulnerability to misconduct and the harm it can cause to profitability, brand image and management focus.

Improved Brand Image and Reputation:Several ethics awards and media lists on corporate reputation (e.g., American Business Ethics Awards, Better Business Bureau Torch Award for Marketplace Ethics, and Business Ethics "100 Best Corporate Citizens") consider a range of ethical criteria for determining the companies' rankings. In addition, a 1998 Burson-Marsteller study on the link between CEOs and corporate reputation reported that a CEO's ethical reputation enhances a company's ability to attract investment capital, recruit the best employees, and earn a company the benefit of the doubt in times of crisis.

Access to Capital:The Social Investment Forum reports that, in 1997, more than $1 trillion in assets is under management in the United States in portfolios that use screens linked to ethics, the environment, and corporate social responsibility. In 1995, the figure was $639 billion. The 1997 portfolio amount accounts for nearly 9% of the $13.7 trillion in investment assets under professional management in the United States. Given these numbers, it is clear that companies addressing ethical, social, and environmental responsibilities have growing access to capital that has not otherwise been available.

Financial Performance:As early as 1988, a study by The Business Roundtable, "Corporate Ethics: A Prime Business Asset," reported that "a strong corporate culture and ethics are a vital strategic key to survival and profitability in a highly competitive era" and that "sound values, purposes, and practices are the basis for long-range achievement." More recently, some academic studies have shown a positive link between the existence of corporate ethics programs and financial performance. A 1997 DePaul University study found that companies with a defined corporate commitment to ethical principles do better financially (based on annual sales/revenues) than companies that don't. Similarly, another study by the University of Southwestern Louisiana, titled "The Effect of Published Reports of Unethical Conduct on Stock Prices," showed that publicity about unethical corporate behavior lowers stock prices for a minimum of six months.

Employee Commitment:A 1997 Walker Information survey of employees' views on business ethics revealed that 42% of respondents said that a company's ethical integrity directly influences their decision to work at the company. In addition, a 1994 survey by the same organization, titled "Corporate Character: Highlights of a National Survey Measuring the Impact of Corporate Social Responsibility," reported that the most important factors for employees in deciding where to work were employee treatment and business practices, ahead of quality, service, or price.

Customer Loyalty:A 1996 survey by Bozell Worldwide, The Wall Street Journal International Edition, and Nihon Keizai Shimbun, titled "Global Corporate Good Citizenship: Improving Perceptions in the '90s," reports that business ethics matter to consumers. When compared with nine "extremely important" general corporate citizenship categories or activities, "ethics and values" ranked highest in the United States and Europe and third highest in Japan.

Copyright ©1999 BSR Education Fund. All Rights Reserved.




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