The financial benefits of being a principled company

The financial benefits of being a principled company

A principled company is not the same as an ethical company. But ethics contribute to creating the principles that govern a principled company.

There are benefits of being principled, and similarly, there are benefits to building a business on a foundation of ethics. Many people believe organisations need to be unethical in order to survive in a competitive market. However, the question of resistance to ethics is more about the psychology of that resistance.

Why are businesses and individuals reluctant to behave ethically?

David Batstone’s book, Saving the Corporate Soul and (Who Knows?) Maybe Your Own has much to say about the financial and social benefits of being a principled business. Batstone asserts that the corporate challenge is not just about aligning resources in order to create products and services that meet client needs and thereby make a profit. Increasingly it’s about “whether, in the eyes of the employees and the public, it honours a common sense of justice.”

More and more, employees and consumers are saying that, even though what is being done by corporations and their leadership representatives may be legal, they question ‘is it ethical’?

To remain competitive, corporations need to take into account the shift in social values.

Staffing benefits for ethical companies

According to the Walker Information National Employee Benchmark Study, employee loyalty increases six-fold if workers believe that the company they work for acts with integrity. The reverse is also true. If workers mistrust management’s decisions and feel ashamed by their actions, then four out of five workers say that they feel trapped at work and are likely to leave their jobs soon.

Research shows that organisations with strong moral reputations are more attractive to job candidates. Job seekers rate reputation more highly than either the salary offered, or the fringe benefits. People put a high premium on working for a firm that can be trusted.

Customer service benefits from ethical organisations

When employees are inspired by the ethics of the companies that they work for, they will communicate this compelling message to the clients of the business through the way that they serve and respect those clients.

Reputation: the ‘brand’ guardian

The reputation of an organisation is the perceived character of the organisation in the eyes of the public. The organisation’s reputation depends on its ability to meet the expectations of all its stakeholders. As previously discussed, these stakeholders have different end goals, which make this journey a complex one.

Having a strong brand is not the same as having a good reputation. For example, Sony, Coca-Cola, or OMO are well-known – but not necessarily for their strong ethical standards. On the other hand, brands such as Volvo and Johnson & Johnson have reputations that uphold and fortify the brand.

As much as an organisation’s reputation gives its brand gravitas, should the business ever renege on its corporate responsibility, this will expedite its demise. For organisations where reputation is a critical component of the industry, ethics has an even larger role to play. When Arthur Anderson was implicated in the Enron issue, Enron’s brand was destroyed overnight because its very existence relied on them auditing company business in a careful and judicious manner. By comparison, the company that provided the marketing campaigns for Enron is not expected to report the truth, so they were not harmed by Enrons’ demise.

Per the 2001 Corporate Social Responsibility Monitor, “In today’s business climate, reputation has become as important as brand.”

“A brand is a visual, emotional, and cultural image that we associate with a company or a product. While the daily grind of business is about sales, brand building looks to create a bond of loyalty that lasts. Over time, customers develop a personal affinity with a brand; once they feel betrayed, their fury lashes out as it would toward a fallen politician or a movie star.”

Many of the large companies that have failed in recent years have not failed because of legal issues, but rather as a result of choosing not to be ethical while acting within their legal rights.

How reputation affects the decisions customers and investors make

“Customers and investors also are highly influenced by a firm’s reputation. Nearly four out of five Americans say they at least consider reputation when buying a company’s product, and 36 percent call it an ‘important’ factor in their purchasing decision, according to a survey conducted by Hill and Knowlton. The study goes on to show that more than 70 percent of investors consider reputation in their decisions, even if that choice means lowering their financial returns.”

The financial benefit

Towers Perrin, the management consulting firm, took a close look at twenty-five companies that enjoy a strong reputation for public integrity and are rated year in and year out as desirable places to work… Towers Perrin analysed the market performance of these principled companies over a fifteen-year period…. The result; the principled companies delivered a total shareholder return of 43 percent, while the shareholder return of Standard and Poor’s 500 performed at less than half that figure:19 percent.”

Even though the financial benefits of being a principled company are attractive, there are other significant benefits as well:

  • The reputations of principled companies are fortified.
  • The principled company will be more likely to avoid lawsuits. Lawsuits that do arise will be lower in value and fewer in number.
  • A principled company will manage its business network more effectively.

A case for ethical behaviour?

So, if we can show that there is such a strong correlation between an ethical/ principled company and strong financial returns on a sustainable basis, the question that has to be asked is why all companies are not ethical in the way that they conduct their business. The issues that need to be discussed are not so much the need for ethics in business, but rather, what it is that prevents businesses from being ethical.

At an individual level, we face exactly the same issue. We know that, in the long run, it is ‘better’ for us to a live virtuous life based on our values than not to do so. However, there are so many psychological and situational reasons as to why we justify not living that way – both in the work place, and in our personal lives.

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