Once considered the realm of naive idealism, growing research shows a correlation between ethical behaviour and real McCoy profits.
A lot goes into making a company profitable: Smart business strategies, productive employees, market conditions. There are a lot of things that contribute to the financial ups and downs of being in business.
But what about ethics? Apart from the moral and legal obligations to act properly when doing business, could there be a potential profit motive as well?
A growing body of research says yes.
The study found a positive relationship between the mere existence of a business’s code of ethics and profitability itself.
“Regarding financial performance… it was found that those companies in the sample with a code of ethics…out performed a similar sized group who said they did not have a code.”
“Companies with a code of ethics generated significantly more Economic Value Added and Market Value Added…than those without codes.”
Not only were profits greater for companies with a code of ethics, but those companies were less volatile as well.
“Companies with a code of ethics experienced far less P/E ratio (price-earnings ratio) volatility over a four year period, than those without them. This suggests that they may be a more secure investment in the longer term. Other research has suggested that a stable P/E ratio tends to attract capital at below average cost; having a code may be said to be a significant indicator of consistent management.”
The data also indicated that those companies with “an explicit commitment to doing business ethically” produce profit/turnover ratios at 18% higher than those without a similar commitment.
“The general conclusion from this study is that there is strong evidence to indicate that…companies with codes of ethics, e.g. those who are explicit about business ethics, out-perform in financial and other indicators those companies who say they do not have a code.”
“Having a code of business ethics might, therefore, be said to be one hallmark of a well managed company.”
That makes sense. After all, unethical behaviour – such as fraud, dishonesty and bribery – can be expensive. But perhaps more importantly, a commitment to ethics produces positive benefits that permeate the culture of the company and the environment it’s operating in.
- Customers are attracted to ethical companies
- The best (and most ethical) talent is attracted to ethical companies.
- Investors are attracted to ethical companies
Click here to download the Institute of Business Ethics’ report, “Does Business Ethics Pay”.