The Inextricable Link Between Ethical Culture and Profitability
Corporate governance frameworks seek to maximize management efficiency, risk mitigation, and business success. The most important tool for accomplishing these objectives is straightforward – a Culture of Ethics and Compliance. Business leaders have found religion and started to embrace a culture of ethics as an engine for success.
Compliance professionals have been singing this song for years. Suddenly, corporate leaders are starting to ask questions about culture, considering ways to advance corporate culture, and speaking a new language using culture. Senior leaders are embracing the importance of leading by example as an effective mechanism to embed an ethical culture.
To convince corporate boards and senior executives on the important link between ethical culture and profitability, chief compliance officers should present information confirming this link. CCOs need to assemble evidence supporting this claim.
Employees that work at companies with strong ethical cultures are less likely to leave the company or engage in misconduct. Similarly, employees at ethical companies are more productive and therefore, profits are likely to increase. Emotionally Intelligent Bosses Make for Happier, More Creative Employees, Yale News, March 6, 2020 (available at https://news.yale.edu/2020/03/06/emotionally-intelligent-bosses-make-happier-more-creative-employees).
Ethical business principles involve making decisions and having your business adhere to morally acceptable behaviors. While a specific moral line may vary among individuals, most decisions can be understood in a right versus wrong framework. Other decisions may entail a careful stakeholder analysis. At bottom, ethical cultures foster good working environments for employees.
Sticking with ethical behaviors advances a business’s sustainability. Ethical conduct builds customer trust, retains more customers, improves employee behavior, maintains brand recognition, and increases positive employee reviews.
Ethical companies do not guarantee profits but it increases overall profitability. A positive corporate reputation is a valuable intangible asset. Ethical companies decreases costs, increases sales, and stronger financial health. Conversely, poor reputations impose additional penalties from regulators and customers.
Research findings have established a strong relationship between positive business reputation and market performance. ( Trevino & Nelson, 2011; Saeidi et al., 2015; Liu et al., 2019). Companies with a positive ethical reputation created twice the value to shareholders than companies that did not have an ethical reputation. (Sims, 2009). Investors also place high value on ESG commitments. (Stuart et al., 2020). Companies that maintain positive and ethical reputations attract more competitive and diverse workforce. (Osburg et al., 2020; Pfister, 2020). A Company’s financial performance increases when employees perceive top managers as trustworthy and ethical (Guiso, Sapienza & Zingales, 2015; Kim & Thapa, 2018; Saha et al., 2020).
A company’s culture enhances an employee’s ability to make decisions about appropriate behavior. The risk of employee misconduct is higher for companies with ambiguous ethical standards. An academic study examining more than two decades of fines imposed on firms for financial misconduct determined the average regulatory penalty to be $23.5 million (Karpoff, Lee & Martin, 2008).
Companies with positive governance structures and policies earn higher profits, sales, market value and stock prices. Ghosh & Zaher, 2011). Weak corporate governance structures and policies typically increase employee misconduct rates.
The cited studies paint an unmistakable message – ethical companies perform financially better than unethical companies.