Fairtrade obligations and social responsibility are both examples of ethical change becoming more important and mainstream within businesses
In recent years, business ethics—the morals, values and principles that guide an organisation—has become increasingly important. Fairtrade, social responsibility and good governance have all followed from heightened levels of corporate scrutiny.
Take the fallout from the BHS debacle. A former paragon of retail, it once had 180 stores on the high street. Then, in 2015, Sir Philip Green sold it for £1 to Dominic Chappell and his firm Retail Acquisitions—offloading £1.3 billion in debt, which included a pensions deficit of £571 million in the process. In 2016, BHS went into administration with the fallout nearly losing Green his knighthood and resulting in his paying of £363 million into the BHS pension scheme.
Rising prominence
According to Philippa Foster Back, director of the Institute of Business Ethics (IBE), ethical principles have shot up the corporate agenda. In her view, ‘there is no escaping current increasing political pressure for exemplary ethical behaviour from our businesses’.
Corporate scandals, including misreporting and poor management practices, are a key driver for change for Mel Green, research adviser at the Chartered Institute of Personnel and Development (CIPD), a professional body for the HR sector. She says that ‘they have continued to shine a light on the issue of ethics at work. They can damage an organisation's reputation, erode wider public trust in business and harm individuals. There is broad recognition that business needs to be conducted in an ethical, transparent way for sustainable long-term success, but there has previously been a lack of clarity about how to go about it’.
»Companies could start with what behaviour is rewarded, and how individuals are incentivised, for instance, having broad metrics for success and rewarding employees, not just on short-term profit«
Emma Scott, representation manager at Chartered Institute of Procurement & Supply (CIPS), notes that the problem is that news travels quickly but bad news travels at lightning speed, ‘consumers, customers, suppliers and investors vote with their feet when it comes to dealing with businesses that are not doing enough or have been exposed for doing the wrong thing’.
On a positive note, there are benefits for organisations operating ethically. Being responsible does not mean that a business cannot make a profit or cut costs, according to Scott. In fact, it is her view that it can open up opportunities to increase market share. She highlights how the recent trends in veganism and reduced use of plastics ‘has made organisations look at their products and adapt them, or even introduce new products to make them more attractive to a wider market’.
Green takes a similar stance, commenting on the recent focus on corporate governance reform and statutory regulation. She says that ‘this has led to investors showing more interest in how businesses create long-term value for shareholders, employees and wider society’.
Interestingly, Back notes that ethically run companies can outperform their peers financially in the long term. She points to IBE research back in 2003, which indicated that ‘this, and subsequent research by others, continues to show how organisations that take their ethical responsibilities seriously and embed ethical values within the fabric of how they operate do better financially over the long term’ (Webley and More, 2003).
Unethical behaviour is common
Unethical behaviour takes many forms, from full-blown illegal activity, like fraud, to so-called ‘pro-organisational unethical behaviour’, when questionable actions are taken because they seemingly benefit an organisation in the short term. For the latter, Green has seen situations where ‘an employee might oversell the benefits of a product in order to hit sales target. The short-term impact is financial gain, but down the line, the client and employees lose out, trust is eroded and reputation is damaged’.
She details recent research from the CIPD on the causes and solutions to unethical behaviour: ‘individuals, organisations and the issues and challenges people face are all implicated in unethical behaviour. This means a range of factors, from organisational norms, time pressures and individual personality traits interacting to increase the likelihood of unethical behaviour’ (CIPD, 2019).
The real world
So, moving away from the theory, how does business ethics actually play out in the real world?
By taking a definition of business ethics to mean applying ethical values to business actions and behaviour, it should be clear that ethics has a direct relationship with how business is done. In Back's opinion, ‘business ethics can be seen as being about big news stories of misconduct, corruption, black and white bad behaviour or big issues like human rights, sweatshop labour or climate change … we are all making ethical decisions every day’.
The practical reality means considering what supplier to go with, asking staff to work late, choosing who to employ or fire or whether to bend the rules for a client—often, there is a choice. Where the ethical business comes to the fore is how it is applied in times of uncertainty and economic pressure.
However, is business ethics just another layer of bureaucracy, something that requires lip service, and nothing set in concrete? For Back, the answer depends on how embedded the organisation's ethical values are: ‘if your ethical values are just words on a wall, rather than embodied in how you do business, then they are going to be viewed with cynicism’.
Creating an ethical organisation is more than an exercise in image management in Green's view. She says that ‘business ethics requires all stakeholders to be valued and treated fairly. This includes employees, suppliers, customers and wider society. Making decisions in isolation, or not thinking about impact, makes unethical outcomes more likely’. Organisations need to weave ethics throughout the business using checks and balances and behaviour nudges.
Writing a code of ethics
How should ethics be engrained within operations? Firstly, procedures, policies and practices need to support employees to be ethical in their behaviour and decisions. For Green, this means aligning policies and practices with ethical behaviour—‘this is not a simple task but companies could start with what behaviour is rewarded, and how individuals are incentivised, for instance, having broad metrics for success and rewarding employees, not just on short-term profit, is a good place to start. Reward strategies could explicitly call out the importance of unethical behaviour’.
Not only can unethical practice cost companies millions of pounds, it can also damage a company%s reputation
Back echoes this view. She suggests starting by identifying the core values to which the business wishes to be committed and held accountable. She says these might include responsibility, integrity, honesty, respect, trust, openness and fairness. ‘Communicate them through everything you do, from client material to your Facebook page. It is important to insist that ethical values underpin the businesses mission statement, strategy and operating plan’.
Next comes the important part, translating those ethical values into guidance for all employees on how to act responsibly in different circumstances. Here, Back says that ‘if ethical values are the compass that guides how you do business, then a code of ethics is like a map. It sets out the expectations that the company has for how employees should behave in any given situation, to assist with decision-making’.
However, no matter what is included in the document, Green cautions that, while a code of ethics can be effective, it will only be so when it is actually used in practice. She adds: ‘a code or policy will be of limited value if it is an ‘empty shell’ and behaviour, reward and business values do not align with it. For example, if a top performer ‘gets away’ with unethical behaviour because they benefit the bottom line’.
Dealing with mistakes and unethical behaviour
Having policies means that it is inevitable that infringements will occur. This raises the question of how they should be dealt with.
For Back, the response should depend on the nature and the seriousness of the mistake: ‘A good rule of thumb, to encourage an openness in the discussion of honest mistakes, is to investigate the mistake, rather than looking to apportion blame’.
Should an organisation maintain a zero-tolerance to unethical behaviour? Back says possibly not—‘little in life is black and white. It tends to be fuzzy and grey’. She gives an instance: ‘You may say you have zero-tolerance on harassment, but find it difficult to fire your most successful sales person who has multiple allegations against them. This is where the true test of ethical values comes in—‘putting your money where your mouth is’.
Green makes a further point, that when communicating about ethics, businesses should focus on positive examples and what the organisation stands to gain, rather than what is to lose: ‘While businesses should be transparent about any issues, they must strike a balance between transparency and creating a sense that unethical behaviour is not the norm. Businesses need to communicate that ethics is ‘business as usual’ and provide clear guidance on what is and is not acceptable. This can help line managers and employees challenge unethical behaviour too.’
To summarise
In 1970, American economist Milton Friedman famously said that ‘the social responsibility of business is to increase its profits (Friedman, 1970). While that still holds true, it is just as relevant to point out that businesses need to have an eye on generating profit in a manner that will elicit public approval. A failure to act properly and treat everyone fairly will soon get noticed—and from there, it is a downward spiral.