In our meetings with representatives of companies and public organizations, we were often confronted with questions such as:
What is the added value of acting ethically?
Doesn’t adherence to ethical principles imply making losses instead of profits?
Is it possible to reconcile ethics and business at all or is it rather some sort of irreconcilable trade-off?
Of course, such discussions do not belong to the most comfortable ones, when consulting on business ethics, sustainability, human rights or digital ethics. Moreover, we often feel that decision-makers are anxious about engaging in ethics fearing negative financial repercussions or conflicts of interest. We have also witnessed that internal processes and bureaucracy impede the realization of corporate ethics or cultural changes. Additionally, engaging in ethics also means to experiment with something new and as humans, we tend to prefer the devil we know over the one we don’t know.
Well, we believe that it takes some courage in order to anchor ethics in an organization and that it is worth it. Constantly challenging the question “why ethics”, and improving our knowledge base about the likely consequences of implementing ethics is therefore one of our main tasks at iuvenal research.
In order to substantiate such debates also within companies, we took a look at what empirical literature tells us about the relationship between ethics and success.
When looking at the relationship between ethics and entrepreneurial success, we see six channels through which principles translate in entrepreneurial success. Here are our main takeaways:
Building Trust: Business organizations need to build trust and reputation among their customers, employees, investors, and other stakeholders. Ethical behavior helps to establish and maintain trust and reputation, which can enhance business success.
Legal Compliance: Ethical behavior is essential for legal compliance. Many laws and regulations are designed to promote ethical business practices, and violating them can result in legal and financial consequences.
Stakeholder Expectations: Businesses have a responsibility to meet the expectations of their stakeholders. Ethical behavior helps to meet those expectations, which can lead to increased loyalty and support from stakeholders.
Employee Engagement: Employees are more likely to be engaged and committed to their work when they feel that the organization they work for operates in an ethical manner. This can lead to improved productivity and retention rates.
Risk Management: Ethical behavior helps businesses manage risks associated with potential legal and reputational harm. By acting ethically, businesses can avoid or mitigate these risks.
Social Responsibility: Businesses have a social responsibility to contribute positively to society. Ethical behavior can help businesses fulfill this responsibility, which can lead to increased goodwill and support from society.
Of course, these channels do not apply to all business sectors and models to the same extent. The role of stakeholder relations expresses itself differently for instance when it comes to the health sector; in such high stakes sectors, the call for ethical behavior might be perceived as even more crucial. Moreover, some products are more complex in essence than others, making it difficult to gauge the actual performance of a company; the environmental performance of a financial institution for example is much more difficult to assess than in the case of an energy provider.
While most of us might think about the likes of Patagonia, empirical research has revealed some interesting correlations involving larger data sets. A study by the Ethisphere Institute found that companies that are recognized as "World's Most Ethical Companies" outperformed the S&P 500 index in terms of total return, return on equity, and earnings per share. Researchers of the Institute for Cognitive and Evolutionary Anthropology argue that the human need for collaboration necessitates a common understanding of morality. The ones adapting to this pattern are better able in realizing economic and social gains through cooperation with other individuals and organizations.
While the empirical base of the argument “Ethics Pays Off” is often challenged, we observe indeed different channels through which adherence to ethical principles supports entrepreneurial success. These channels are often not directly observable and it takes some time for ethics to take off. This necessitates the communication of ethical principles, standards and practices of an organization. Communication itself does not mean boasting or showing off, but illustrating how a company or an entrepreneur aims to gradually realize ethical aspirations.
Credit: AI generated image with craiyon.com
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