Empirically Speaking, Does Ethics Pay Are Firms Who Are More Ethical Top Performers
Ethics is a branch of philosophy.
In recent years, there have been many instances of companies indulging in unethical practises and this is a major area for concern. Lefebre and Singh (1992) reported that there is growing concern in society about business ethics. Corporate concern for ethical practices is evident in many corporations developing and implementing codes of conduct. This paper explores the use or neglect of ethical practices in companies.
Ethics in Business and the Business of Ethics
We may find universality in some issues relating to ethics but broadly speaking, ethics is very dependent on perception. What may be right for one person may be wrong for another. These variations in perception may be due to culture, religion, or demographics. For example, a woman may wear a swimsuit in Florida. If she wears the same attire somewhere in Saudi Arabia, the people there will consider it incorrect as it is not in line with their culture and religion. Some things are universally unethical lying, cheating, stealing, or murder is such a practice. There is a fine line between being ethical and unethical and as such some universal unethical acts may be viewed as ethical. Capital punishment, abortion and euthanasia are examples of ethical dilemmas that have yet to be termed as completely ethical or unethical.
Blackburn (2009) says that human beings are ethical animals. We grade and evaluate, and compare and admire, and claim and justify. We prefer that our preferences are shared. If it is hard to distinguish between ethical and unethical behavior, then how does one define these In a simple way, we can say that being ethical helps you sleep at night with a free conscience. Of course, what bothers ones conscience may not bother another. Even though ethics may vary from people to people, we will try and look at this without any relativity. We will look at practices that are either ethical or unethical (Lama, 2001).
Business ethics are more than moral values and principles that determine our conduct in the business world. These refer to the commercial activities, either with other business houses or with a single customer. They can be applied to all aspects of business, from generation of an idea to its sale. Business uses the society for its resources and functioning, thereby obligating it to the welfare of the society. While the objective of all business is to make profits, it should contribute to the interest of the society by ensuring fair practices. However, greed has led the present business scenario towards unethical business practices, legal complications and general mistrust (Aadityaa, 2010). According to Stojnov (1996), though Kellys work did not explicitly aim to produce a special theory of ethics, it offers enough basic principles to give us an idea of what a personal construct theory of ethics would look like. He articulated the implicit theory of moral construing and reviewing its similarities to, and differences from, other theories. He proposed that personal construct psychology be construed as a universal and constructivist approach to ethics.
Business ethics refer to the collective behaviour that a business adheres to in its daily dealings with the world. Evans (2010) defines business ethics as the moral standards which guide the running and transactions of businesses. According to him, the fundamental issue is why we need different sets of ethics for different sections of our lives. Why, for instance, is there an implicit assumption that business ethics need to be in any way different from the ethics which govern our family lives The bottom line is that business ethics come in many guises, depending on how broad moral paradigms play out against specific corporate culture - and they certainly feed directly through into the trading bottom line.
Aadityaa (2010) lists a few ethical business practices that should be followed to build an honest reputation and ensure smooth running of any organization
Investors Ensuring safety of their money and timely payment of interest.
Customers Complete information of the service and product should be made available. Personal information of the customers should not be used for personal gain.
Competition Unscrupulous tactics, competitor bashing and wrong methods should be avoided while handling competitors.
Government Rules and regulations regarding taxes, duties, restrictive and monopolistic trade practices and activities like corruption and bribing should be adhered to.
Corporate Response to Ethics
Corporations respond to expectations in organisationally integrated ways, one such process is formal corporate ethics programs. American businesses are now investing in formal ethics programmes. A recent study of American companies showed that 78 of them had codes of ethics, 51 had telephone lines for reporting ethical concerns, and 30 had offices for dealing with ethics problems (Weaver, Trevino, Cochran 1999). All companies in the 21st century have established their formal and informal codes of ethics. These codes of ethics directly impact their business practices, reputation in their respective industries, and customer perception. Companies try to inculcate ethical behaviour into their employees through training and by imposing consequences on people who breach the code of ethics. Business ethics along with corporate governance have become the new buzzwords in the field of management.
Ethical codes state the major philosophical principles and values in organizations and function as policy documents which define the responsibilities of organizations to stakeholders. They spell out the conduct expected of employees and articulate the acceptable ethical parameters of behavior in the organization. To be effective they must be communicated well and become a part of the culture of the organization (Stevens, 2008).
According to Howard and Korver (2008), we often make small ethical compromises for good reasons we lie to a customer because our boss asked us, or we exaggerate our accomplishments on our rsum to get an interview. Temptation blindsides us and we make snap decisions we later regret. Minor ethical lapses can seem harmless but they instill in us a hard-to-break habit of distorted thinking. We lose control of our decisions, fall victim to the temptations and pressures of our situations, taint our character, and sour business and personal relationships. Howard and Korver (2008) explain how to master the art of ethical decision making by applying distinctions to clarify our thinking and committing in advance to ethical principles.
With recent increased attention on how businesses conduct themselves internally as well as how they impact their local and global environmentscommunities, the importance of business ethics has increased as rules and regulations have been established and enforced through various governmental agencies to protect the rights of consumers, employees and shareholders of companies. Kaptein (2004) suggests that business codes are an oft-cited management instrument. Of the two hundred largest companies in the world, 52.5 have a code. These codes describe company responsibilities regarding quality of products and services (67), adherence to local laws and regulations (57), and the protection of the natural environment (56). Many codes make reference to principles governing stakeholder relations, corporate core values, appropriate conduct among employees and treatment of company property by employees. Scwartz, Israeli, Murphy (2004) carried out a study of 57 employees including ethics officers at four large Canadian companies and found that in terms of code content, effectiveness is potentially improved when provisions are clearly justified and examples are provided.
When Ethics Go Amiss
Unethical practices break the laws of the country the company is working in. To this we can add the moral behaviour of a company that shows unethical behaviour. There are many unethical practices that have been identified. Some of these are window dressing, inside trading, discrimination, sexual harassment, bribery, price fixing, and claiming anything which is not the truth (Frankena,1988).
Window dressing and unethical accounting practices have become very common, as companies want more people to invest in their companies. Like every other unethical practice, this practice can be deemed as short term in nature. Investors look at the financial data of companies before deciding on investing in the stock of the company. In case of unethical practices, they would eventually realize that they had made a mistake and they would not invest in the company again. The truth does not remain hidden for a very long time. When it does, the company may face fines and the investors would demand their money back. Capital would start to pour out of the company.
According to Aadityaa (2010), the following are some of the activities that come under the ambit of unethical practice
Resorting to dishonesty, trickery or deception.
Distortion of facts to mislead or confuse.
Greed to amass excessive profit.
Creation of false documents to show increased profits.
Harming the environment by exceeding the government prescribed norms for pollution.
Sexual discrimination.
To strengthen this point we can look at some examples that relate to and are a part of daily lives of many people. We are faced with ethical dilemmas daily. If you cheat in an examination you are bound to get good marks and pass that course. If you are caught you might face consequences like expulsion, suspension, failure or humiliation. It is a risk one can take if one really wishes to pass the course. If one is not caught then it would mean that the person ends up passing the course without doing any work for the course. In the short run this person may also be recognized as passing the test but in the long run, this person would have no idea or clue about the concepts that he had studied. One has to realize that knowledge learnt is an asset that never goes to waste. In this case we can see that being unethical may seem an easy path towards success but it might also lead to knowledge that is lost in the long run (Thiroux, 2008).
Regarding the practice of bribes, according to Cohen (2010) Peter Drucker, the famous management guru, noted that bribery was hardly desirable from the viewpoint of the victim from whom a bribe was exhorted. This was a gross violation of business ethics. Most countries have laws against bribery. Yet it is a fact that bribery is routine and even expected in some countries. Bribes are an issue that has plagued both the developed and developing countries. Bribes can be made to government officials to look the other way for a violation of building regulations, or be given to individuals within client companies to get preference for your company. Bribes are also used to win over contracts from different clientele from competitors. Bribing is giving material benefits to someone in authority so that he does something unethical to help a company gain an unfair advantage. This brings an ethical dilemma for a company. If it acts ethically, it ends up with a disadvantage against its competition. By the looks of things it seems that ethics actually gives you a disadvantage over your unethical competitors. In such a scenario what does one do, act ethically and let your competitors trample over you or act unethically yourself (Curley, 2005)
The biggest unethical practices that companies use today are in marketing. The consumer is led to believe things that are not true. Marketing is all about getting your brand in the mind of the consumer. Many companies play with the minds of their consumers and make space for their brands in their minds. Sublimation, sex in advertising, children in advertising, and defaming your competition, are all practices that are used in marketing to gain an advantage over the companys competitors. All these practices are unethical and even marketers agree on this, yet companies use such practices to gain a competitive edge over others.
Makepeace (2010) says that promotions that create unrealistic expectations for the product invariably result in lower pay-up on the back end. Hard-offer marketers know that over-the-top promises result in much higher cancellation rates and much lower response to secondary sales and renewals. What can you do to narrow or eliminate the gap between your promotional promises and the reality of the benefits your product or service delivers Or, even better, what can you do to deliver MORE than your promotion promises
Unethical Practices in Companies
Let us look at some of the top performing companies in respect to ethical practices. HYPERLINK httpwww.businessweek.combiosShoshana_Zuboff.htm Zuboff (2009) reported that The financiers at HYPERLINK httpbx.businessweek.comAIG AIG were awarded millions in bonuses because their contracts were based on the transactions they completed, and not the consequences of those transactions The economic crisis is not the Holocaust, she says, but it derives from a business model that routinely produced a similar kind of remoteness and thoughtlessness, compounded by a widespread abrogation of individual moral judgment. As we learn more about the behavior within our financial institutions, we see that just about everyone accepted a reckless system that rewards transactions but rejects responsibility for the consequences of those transactions.
For Enron, the consequences of its collapse were widespread. A heavily publicized result of the companys filing for Chapter 11 was the disintegration of millions of dollars invested in personal employee pension funds. With 21,000 employees worldwide, Enrons destruction was a devastating and irreparable setback for many working and middle-class families (BBC, 2002). Combined with millions of subscribers who lost a functional service provider, the population represents the dire consequences of the misappropriation of a corporate entity with so many stakeholders. The relationship between ethical business practices and business survivability cuts across a great many human path. The effect of a business culture without real or defined behavioral parameters will ultimately be the subversion of economic rights for a great many innocent parties.
It was in response to Enron, WorldCom and other corporate scandals, that the US Congress passed the Sarbanes-Oxley Act of 2002 as a stopgap solution to corporate corruption and ethical breaches. The bill provides new or greatly enhanced standards for all U.S. public companies in terms of their boards, their management, and the public accounting firms that are linked to their management and services (Sarbanes-Oxley Act, 2002).
The consequences of being unethical far outweigh the short-term benefits as was experienced by Microsoft after its legal wrangle. Companies today face a lot of competition and to sell their products they need to properly manage their relationships with their customers. In an age where information is freely available and so many competitors are fighting for the same set of customers, companies that are able to build relationships with customers are the ones that are able to achieve success.
Texaco was fined 176 million when it discriminated against its employees. It lost its lawsuit and had to compensate a staggering amount for their unethical practice. Mercury Finance overstated its profits and this eventually led to its losing 2.2 billion in stock almost overnight. Investors pulled out from the company when they found out about its unethical practices. The largest criminal fine ever paid was 100 million by ADM and that was for price fixing. The CEO of Genentech lost his job trying to obtain a 2 million loan as part of a business deal. The CEO of W.R. Grace lost his job on charges of sexual harassment. All these examples point to the fact that unethical behaviour costs you big time. If any company is found guilty of unethical behaviour, consumers, investors and even employees look at the company as disgraced. The fines, lawsuits and bad publicity hamper the companys performance. Investors stop investing, customers switch to more ethical companies to register their protest, employees wish to work for ethical companies, and the lawsuits are costs incurred (Cahn, 2008).
The Strategy of Good Ethics
Let us now look at how ethical behaviour helps a company. We know that an investor always looks at the track record of a company before investing in it. According to Verschoor, (2005), a study by Booz Allen Europe in 2003 that surveyed the top 150 companies in Germany, Austria, and Switzerland, found that living the corporate values indeed pays off economically. It also benefits the company by enhancing the public image. A later study by Booz Allen reported that out of the leading outperforming companies, 98 of these include ethicalbehavior issues in their values statements compared to 88 of other public companies (Verschoor, 2005.) Another study titled Deriving Value from Corporate Values involved responses from 9,500 senior executives from 365 companies in 30 countries. These further strengthened the findings and concluded that strategic awareness and commitment to social and environmental issues does in fact bring greater success to the bottom line (Verschoor, 2005.) All these studies show clearly that companies with ethical practices are able to attract more investors and that their customers are more loyal to them.
The Australian Government (2007) issued the National Statement on Ethical Conduct in Human Research, consisting of a series of guidelines made in accordance with the National Health and Medical Research Council Act 1992. This Statement replaced the 1999 National Statement on Ethical Conduct in Research Involving Humans. Many of the Fortune 500 companies are seen as ethical companies. Their codes of ethics are role models for others. The companies that have adopted ethical practices are successful and are looked upon favourably by the governments, customers, investors and regulatory bodies. Of course, their ethical practices are not the sole reason for their success but the ethical practices do indeed help.
Microsoft (2010) now proclaims As a company, and as individuals, we value integrity, honesty, openness, personal excellence, constructive self-criticism, continual self-improvement, and mutual respect. HP says We conduct our business with uncompromising integrity. HP employees are expected to be open and honest in their dealings to earn trust and loyalty of others. Every employee adheres to the highest standards of business ethics and understands that anything less is unacceptable (Kegel, 2010). The way Johnson and Johnson solved its Tylenol issue is an example that is lauded and praised. It did what was ethical and the short-term loss they incurred then has now got converted into long-term benefits. The loyal customers they have gained after the Tylenol incident are a legion. Johnson and Johnson is a role model for any company that does not think that ethical behaviour would eventually pay off (Lama, 2001).
According to Wygal (2004), accountants and their profession have come under fire as a result of breakdowns and misdeeds in the financial reporting process. An apparent lack of ethical behavior exhibited by decision makers forms a core area of concern. The predominantly negative media coverage of the financial and accounting activities of Enron, Tyco, WorldCom, Adelphia, and such other U.S. companies has been exhaustive. One starting point in developing a case for public trust in the accounting profession is to consider how ethical perspectives have been breached in the past and how to avoid these violations in the future. The Institute of Management Accountants (IMA) Standards of Ethical Conduct for practitioners of management accounting and financial management convey how ethical behavior should be practiced in the profession. In these Standards, IMA has identified some of the areas of ethical professional conduct for its members as competence, confidentiality, integrity, and objectivity.
The Six Sigma business management strategy is built around implementing improvements within a business structure that not only improves the bottom line but the product as well. Six Sigma training understands the importance of having smooth running wheels in the best businesses of the world. Six Sigma not only puts high standards and ethics in your work force, but charts the progress, which ensures that the standards are being followed showing the loyalty and ethics you expect in all aspects of your company.
It is therefore clear that ethics pay off eventually. The main aim of any company is to make profits through sales to customers, and achieving financial stability or growth by using the investors money. Companies that have adopted ethical practices are in the good books of both investors and consumers. Ethical and moral behaviour by companies helps them in getting customers and relationships with customers that are bound to last a long time. The consequences of unethical behaviour can deter companies from behaving unethically. Cohen (2010) says that Drucker concluded that business ethics as we know today are not that at all. If ever business ethics were to be codified, Drucker thought they ought to be based on Confucian ethics, focusing on the right behavior rather than misbehavior or wrong doing.
Conclusion
Does ethical behaviour pay the companies back Are ethical firms top performers These were the two questions that this study set out to answer. From this analysis we come to the conclusion that ethics does indeed pay. The firms that are ethical are indeed todays top performers. Ethical behaviour helps firms in getting better investors and more loyal customers. Ethical behaviour helps one win in the long run. In the short run, unethical behaviour may indeed bring success, but that success is very short-lived and is not something that you can count on. Ethics is an integral part of all the companies that have achieved success.
Ethics is open to perception and is very subjective in nature. What is wrong for one may be right for another. Companies need to ensure a code of ethics and to inculcate it in all their employees. Companies need to train their employees about what decisions to take during ethical dilemmas. Formal training is required so as to ensure that the employees understand the importance of ethics as the employees have the responsibility of maintaining the goodwill of the company. The values that are to be inculcated from the code of ethics need to be followed by both superiors and junior staff members. The higher level management needs to ensure that they act as role models for their peers. Strict check is also required on the code of ethics being followed (Cahn, 2008). In the age of globalization where borders have shrunk and different cultures now inter-act, companies need to ensure that during ethical dilemmas their employees make the right decisions. The importance of ethics cannot be overemphasized it is what differentiates the long-term players from short-term players.
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