Business ethics: principles and applications

Business Ethics

Most people agree that businesses are and should be driven by motivations for profit. Some believe that behaving ethically will limit a company's ability to make money. However, the long-held notion that companies will profit from unethical behavior is now being dispelled by many important studies that shows that the reverse is actually the case.

In fact, studies have shown that companies with a clear commitment to ethical conduct outperform those that do not. The Institute of Business Ethics carried out research on large companies in the United Kingdom with a commitment to ethical behavior through having a published code of business ethics, and those without over a five-year time period from 1997 to 2001. The research concluded that (Webley and More):

On economic value added, companies with codes outperformed those without.

On market value added, the performance gap was even more marked.

On the price/earnings ratio, the more demonstrable ethical companies showed far less volatility than the remainder

On return on capital employeed, companies with codes outperformed those without.

Some manufacturers irresponsibly release pollution or consume scarce natural resources. These manufacturers bear no costs for their actions; instead, costs are unethically imposed on downstream parties that did not cause them. While these companies think they will benefit by their actions, there is ample evidence to suggest otherwise (Franco, 2001):

The Alliance for Environmental Innovation reviewed 70 research studies in 1998; all revealed a positive relationship between environmental and financial performance. Companies that outperformed their peers environmentally performed better on the stock market by as much as 2%.

The Storebrand Scudder Environmental Value Fund selects firms that rank in the top third in environmental performance within their industry sector. The fund grew 51% between 1996 and 1998, and outperformed the comparable Morgan Stanley international World Index by 8% over the same period.