In the last decade, awareness of the importance of environmental, social and governance (ESG) criteria in assessing businesses has risen. Investors and consumers are attuned to the impact of business activity on the environment, communities, politics, privacy and many other dimensions of life. In this environment, businesses have been more keen to demonstrate that they understand their impact on their stakeholders. The Business Roundtable, which represents some of the biggest firms in America, declared in its 2019 “Statement on the Purpose of a Corporation”, that shareholders are no longer supreme in their businesses, instead, they said they wanted to act for all stakeholders. Businesses understand that in today’s environment, a business’ ethics are important to the standing, market value, and ability to grow and earn economic profits, of that business. Indeed, a failure in business ethics can do remarkable harm to a business’s brand. Not only that, as the Enron scandal showed, bad business ethics can result in decisions that ultimately destroy a business’ economic value. In this article, we will discuss why business ethics matters.
One of the most obvious reasons that business ethics matter is that they have a material effect on shareholder value and ultimately, on stakeholders. Consider the Enron Scandal, perhaps the single greatest breach of business ethics in modern business history. In a study conducted by the Global Reporting Initiative in 2011, 84% of consumers interviewed reported that they were more likely to do business with responsible businesses. For millenials, ethical behavior is especially important, with 78% of them saying it was decisive in determining which businesses they purchased products from.
Not only are business ethics important for a firm’s economic value, they are also a key part of the regulatory frameworks under which businesses must operate. Some industries, for example finance and healthcare, have especially onerous demands on businesses in terms of business ethics. A failure to comply with the business ethics demanded by regulators can result in fines, cancellation of licences or even the end of the business. Other legal sanctions may follow. A business that ingrains ethics into its practices is less likely to commit fraud, evade tax, engage in bribery or other acts of corruption, break employment laws, act in discriminatory ways, or other unethical and illegal activity.
Creating business ethics is a challenge. The biggest challenge is creating incentives that reward ethical behaviour. Yet, often the search for profit is so paramount that ethical considerations are only given lip service, and actors within the organization behave unethically. This can happen even if management earnestly wants their business to behave ethically. Aligning incentives to desired behaviour is key to creating an ethical business culture. Without the right incentives, at least some of the company’s employees will act unethically. Incentives are the hidden force that shapes behaviour.
Nurturing the right behaviour through the use of programs such as LPC supervision, is another way in which managers and business owners can create an ethical business culture. Principles such as honesty and fair dealing toward consumers should not only be pursued, they should be accounted for in the incentives management uses to motivate its employees.