Ethics and economic performance are interconnected. To thrive, companies need to ensure the wellbeing and satisfaction of stakeholders. This includes investors, employees, suppliers and customers. Recent times have seen how bad conduct results in negative publicity, poor company image and a drop in share price. Here is the case for ethics in business.
Ethics-related news influences a company’s share price for better or worse by 0.5% to 3%.*
News related to unethical behaviour negatively impacts the level of trust and confidence in management, key factors that influence shareholder sentiment. Negative shareholder sentiment does not attract investment.
This is also relevant to private companies, especially family businesses, where reputation and standing of the company impacts the family name. Family businesses also have other stakeholders to bear in mind – other family members used to dividend payouts.
Engagement and Retention
Employees prefer to work at companies where they will be treated with dignity, respect and fairness. Creating an environment where employees feel valued further encourages the creation positive customer experiences. However, if employees see, hear or experience negative behaviour, their trust in and loyalty to the company will erode. Hence ethics = higher engagement + retention.
Would you want to do business with a company you don’t trust? Other customers wouldn’t either.
Companies with high levels of customer satisfaction tend to generate a higher degree of customer loyalty, repeat business and greater market share. Moreover, businesses that genuinely contribute to their community and maintain good relationships with other businesses tend to be more successful in the long run.
However, there’s a caveat to this. Companies who have corporate social responsibility initiatives but poor business practices, are in danger of breeding cynicism and mistrust. This is counter-productive to building brand and customer loyalty.
The purpose of business is to focus on producing quality products and services that enable positive financial results for the company. Unethical practices are more likely to open a company up to unwanted distractions such as lawsuits. Why would a business engage in activities that detract from the mission and purpose? Ethical business practices are sound business practices.
Beyond regulatory requirements, accurate financial records are key for sound decision-making and long-term success. Financial records provide an overview of return on effort. This is an essential tool for a business to measure the effectiveness of market initiatives.
Sound and timely financial records are essential in determining the trajectory of the business, as well as the means to course correct where and when necessary. They also provide the ability to respond quickly to opportunities that arise, without adding strain or unwarranted risk.
A clear picture on the financial situation of the company ensures there is the cash flow required to fulfill its commitments. This is great news to employees and suppliers.
I was once told ‘whether you’re chopping trees or hugging trees, people look for returns.”
The fact of the matter is if you don’t keep an eye on your bottom line, the business will be unsustainable. The bottom line is affected by people’s perception, belief and likeability of your company. The internet and social media have provided stakeholders with greater insight into the impact businesses have on our environment and society. Customers seek to do business with companies that reflect their values. Suppliers and investors would be wise to follow suit.
Waiting until a crisis strikes to instill and encourage good behaviours is a poor strategy. It takes time to overhaul embedded systems, beliefs and practices. It is far easier to set off on the right foot than trying to course correct once calamity hits.
When bad news hits delayed decisions fuel negative public opinion. This causes a downward spiral in relationships with stakeholders. Not good practice for any business that needs customers, employees, suppliers and/or investors to thrive. That said, genuine errors and unforeseen circumstances do happen. The ability for a business to respond appropriately and speedily speaks volumes in the eyes of stakeholders.
Some may still argue why change when some are getting away with it. Others may wait for regulatory bodies to force them to clean up their business practices. But the fact of the matter is, we can no longer ignore the impact business has. We can no longer exonerate our actions through corporate social responsibility. We need to challenge the status quo bred under the guise ‘but this is business’. It’s smart to start right – acting responsibly in the first place.
As featured in Fresh Business Thinking
- According to a study by EIRIS