Ethics: Good for Goodness’ Sake

What we mean when we talk about ethics.

If companies truly valued integrity, employees would be empowered to shine a light on wrongdoing. Of course, when the top executives are doing wrong, it takes particular strength to call them on it. In practice, many companies make life difficult for whistle-blowers, and some actively stifle dissent.

Good Ethics May Equal Good Business

Some ethics consultants will argue that good ethics equals good business. Often this is true, because some of the principles of good management — treating employees fairly, rewarding positive performance, being honest with customers and investors — mirror sound ethical behavior. Indeed, studies have shown that companies practicing more than just a desire to boost stock prices have outperformed companies more exclusively focused on the bottom line.

In the early 1990s, John Kotter and James Heskett, two Harvard Business School professors, studied the performance of 207 large companies (including Hewlett-Packard, ICI, Nissan, and First Chicago) over an 11-year period. “Corporate culture can have a significant impact on a firm’s long-term economic performance,” they wrote in Corporate Culture and Performance. They found that the companies that paid attention to all constituencies — customers, employees, and stockholders — and took their needs into account when making management decisions, simultaneously putting an emphasis on leadership from managers at all levels in the company, “outperformed by a huge margin firms that did not have those cultural traits.”

During the period studied, companies whose focus extended beyond the bottom line “increased revenues by an average of 682 percent versus 166 percent for the latter; expanded their workforces by 282 percent versus 36 percent; grew their stock prices by 901 percent versus 74 percent; and improved their net incomes by 756 percent versus 1 percent.”

While it’s nice to think that making ethical choices always results in a better bottom line, that’s not necessarily the case. Sometimes a leader must make an ethical decision even when he or she knows it might result in a short-term financial hit to the company’s bottom line.

Ed Shultz, the former chief executive of Smith & Wesson, the gun maker based in Springfield, Massachusetts, made such a choice. In March 2000, as he faced lawsuits from 29 different municipalities accusing handgun manufacturers of being responsible for violent crimes, Shultz decided to make some changes. He agreed to start including locks on Smith & Wesson’s handguns and to continue research into smart gun technology that ensures only a gun’s owner can operate his or her gun.

The company’s customers and retailers were furious. Sales dropped dramatically. By September 2000 Shultz had left the company, and by October Smith & Wesson had laid off 125 of its 725 Springfield employees. Shultz might have known his decision would prove unpopular, but he said that he had made it because when he asked himself, “Would I put locks on our guns if it might save one child?” the answer was yes.

What’s Needed Now

To stem the tide of bad corporate behavior, Washington is calling for a wide variety of reforms. But it’s all meaningless unless companies begin to reward ethical behavior as clearly as they reward bottom-line performance.

Sadly, at best, companies usually offer a negative reward against unethical behavior rather than a positive reward for ethical behavior. They have yet to find their way to rewarding integrity in the same way as they reward, say, achievement of a monthly sales quota. Until management does the hard work of deciding that it really values integrity as much as it values financial performance, and then finds a way to hold employees equally accountable for both, the public has a right to be cynical about talk of a renewed commitment to corporate responsibility.

Jeffrey L. Seglin teaches at Emerson College in Boston and is the author of The Good, the Bad, and Your Business: Choosing Right When Ethical Dilemmas Pull You Apart (Wiley, 2000). He also writes a monthly business ethics column for the Sunday New York Times.

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