Ethics in Business

by Simon Webley

The business case

Boards of directors now have to take corporate ethics seriously. The pressures on them to do this range from new legislation and increased employee requirements, to media reports of corporate misconduct and the growth of Socially Responsible Investment (SRI). But most board members want to know if there really is a business case for adopting such a policy.

A vital first step is to convince a company’s board of directors that there is a sound business case for setting out corporate values and applying those values in the form of a code. Without the wholehearted support of the board, little if anything can be done to operate a business on the basis of non-negotiable values and standards.

Benefits

There are a number of commonsense arguments that ethical business practices positively affect company performance. For example, if employees are being treated well, workplace productivity will increase. Similarly, the provision of responsive customer service may result in increased customer loyalty.

Beyond the obvious, however, companies with active business ethics policies perceive a range of benefits from having a code.

Surveys show that about two thirds of the 350 largest corporations in the UK have detailed codes of ethics. Many testify to the positive effects of providing guidelines to employees on how to handle the difficult situations that arise in the course of day-to-day business. This, however, is not the only benefit. The process of producing a code of business ethics compels boards of directors to reflect on how the company operates, how it relates to the communities in which it does business and how to express the corporate values it considers to be important.

Ethical codes are also proving to be a useful management tool. Besides providing guidance in day-to-day decisions, management benefits include the following:

  • Company training programmes can use codes to raise ethical awareness among staff
  • Codes reassure customers, investors, suppliers and even competitors about the integrity of the business
  • Employees generally wish to work for organisations they trust and that make them proud
  • An increasing number of graduates are requiring assurance that the company recruiting them has appropriate values and standards.

IBE research published in 2003 indicated that those larger UK companies with codes of ethics in place for five years or more have financially out-performed similar companies without codes. This finding was demonstrated in three of four measures of financial performance in the years 1997 – 2001. The study (Webley and More, Does Business Ethics Pay?) concluded that ‘having a code of ethics was the hallmark of a well-managed company’.

Note

Recent research (Ugoji, Dando and Moir, Does Business Ethics Pay? revisited, 2007) has found that companies that provide training about their ethics policy out-perform those who simply send employees the code.

Good governance

Having a code of ethics is good corporate governance practice.

The Cadbury Report on Financial Aspects of Corporate Governance, 1992 states: We regard it as good practice for boards of directors to draw up codes of ethics or statements of business practice and to publish them both internally and externally.

Producing a code of business ethics helps companies to understand and address ethical issues. It is a useful tool for embedding values and behavioural standards in a business, encourages consistent and confident behaviour amongst employees, and raises awareness of company polices, such as ‘speak up’ phone lines or corporate gift registers.

It also serves to show that the company is concerned about its responsibilities to investors and staff, as well as to other stakeholders and those with an interest in the organisation.

Small and medium-sized businesses

Ethical standards are just as important to SMEs as to larger companies, but the key issues and concerns can be very different.

Today’s multinational corporations were yesterday’s SMEs. It is therefore sensible for SMEs to address ethical concerns as early as possible. Many companies make the mistake of only tackling ethical behaviour standards when problems arise. A reputation takes years to build, but can be lost overnight.

In addition, SMEs are finding that having an ethics policy is now becoming a condition of tendering for contracts as larger businesses extend their ethical standards to those in their supply chains. SMEs that have paid attention to the way they do business can find that they have a competitive advantage.