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The bottom line on ethics; a fresh perspective on a worthwhile subject.

Is good ethics good business? Ninety-seven percent of the business respondents to a recent Dallas Times Herald survey said yes. But the same survey also showed 75% of all respondents believed businesspeople would bend the rules to achieve success. Sixty-eight percent of businesspeople said there were unethical practices in their industries.

Business ethics is not a comfortable topic. Some managers believe acting ethically makes a business vulnerable and places it at competitive risk. In fact, evidence suggests the reverse is true: Strong ethics equals high performance. Why, then, don't more businesses emphasize ethics?

Many organizations do not consider ethical issues when making decisions. In addition, American companies historically have been reactive when confronted with criticisms and accusatios about their ethical standards. If this attitude is to change, business leaders must understand the importance of an ethics program and what is necessary to make one work.


In a study of ethical, high-profit companies in the United States and Great Britain, the Lincoln Center for Ethics at Arizona State University used this working definition of ethics developed by Dr. Mark Pastin, author of works on ethics: "The ethics of an organization (person) is the set of ground rules by which the organization (person) operates and evaluates."

The same definition is used in this article. It assumes the ethics of individuals or organizations is based on how they respond when faced with ethical issues, not what they say. By describing the steps, procedures and tasks undertaken in response to ethics issues, the outcomes are observable, comparable and subject to modification, not theoretical or difficult to apply.

In attempting to evaluate what relationships, if any, exist between ethics and the performance of excellent organizations, the Arizona State study found that "ethics does play a crucial role in the interactions between a firm and its external constituencies and in internal social contracts." While there was no guarantee of outstanding economic performance for organizations adopting and implementing a strong ethical stance, substantial evidence exists that an ethical framework provides "innovative perspectives." The investigation also suggested ethics is becoming increasingly important to organizations--especially those often subject to scrutiny and criticism from the media, regulators and wide-ranging public interest groups. In fact, evidence strongly suggests that some highly regulated companies can turn a compliance problem into a competitive advantage.


What about the bottom line? Does good ethics really translate into increased profits? There is evidence that it does.

Ethics auor David Freudberg has written about a study that analyzed the relationship between public service and long-range corporate profitability. The companies selected had been in business at least 30 years and had a written set of principles on their public service policies. Among the 15 publicly traded companies (with accountability to shareholders), the average growth and profits over the 30-year period ending in 1982 was 11%. In contrast, the Fortune 500 companies during about the same period showed growth and profits of 6.1%. This suggests there is a long-term financial payoff for ethical management.

Of course, some conflicting studies show that organizations with ethical codes often have more ethical problems and receive more scrutiny and criticism. However, based on the author's experience, several of these studies have flaws in their basic investigative approach. Specifically, some organizations establish a code of ethics after they have been criticized or charged with wrongdoing. Research shows that increased ethical awareness (such as adoption of a code of conduct) sometimes results in increased reporting of ethics problems. People frequently are testing themselves and others to determine the degree to which they are out of compliance with new standards. This is a short-term result and usually is linked to a more candid environment and increased willingness to discuss ethical considerations.

When a code of ethics has been developed with the involvement of all concerned and when ethical considerations are integrated into the decision-making process (rather than treated as after-the-fact considerations), the organization is much better equipped to cope with ethical dilemmas that would otherwise seem insurmountable. It is important, then, to observe not only what organizations do about ethics but also when the started doing it.


While experts generally agree ethics can't be taught to adults, it is possible to encourage an environment in which the right questions are asked at the right time. Business ethics weighs ethical arguments and alternatives in a manner that considers the rights, privileges and anticipated responses of all "stakeholders" (that is, persons and groups likely to be affected).

The stakeholders concept is important to developing a better understanding of business ethics. Most ethical problems arise because what seems right--and is right--to one stakeholder is wrong to another.

Businesses must remember to take the human element into consideration or new technologies may be rejected. Organizations may be heading for trouble if decisions are based solely on technological improvements, production schedules and perceived markets. Markets are not the same as customers. Internal talent often is wasted in the quest for competitive edge. When trust is betrayed, stakeholders get even.

Considerable effort and commitment are required to create a strong ethical climate. Our practice suggests that effective ethical management is a process of asking timely and appropriate questions rather than merely identifying and solving problems. Leaders must ask why an action is being taken and who will benefit or suffer as a result. Most ethics complaints are based on miscommunication and more than half of the related problems concern the handling and management of people. Performance appraisals and consistency of supervision (within and across departments) are the most frequently cited areas of ethical conflict within organizations. If employees do not feel they have been treated fairly, an ethics program probably will fail. Employees get even by waging organizational war or quitting. Some quit but stay on the job.

Alienated customers get even, too. "As few as 4 out of 100 dissatisfied customers complain to the business. Those who don't complain to the business do complain--loudly and frequently--to as many as 20 or more other people," according to Jack Parr Associates Inc., a customer service and management development company. An undeniable link exists between effective ethical management and genuine customer service and support.

The interests and needs of stakeholder groups must be thoroughly and sincerely identified and addressed. Customers and employees are critical stakeholders; others are suppliers, regulators and the media.


Vital elements in any organization are the purpose and mission, which describe how the people of the business act and make decisions, or at least how they say they do these things. According to Dr. Pastin, "Purpose gives a company a sense of what it is, where its goals come from and why trying hard matters." Purpose and mission statements may be thought of as one, as long as the mission statement covers all interests served by the organization.

Thomas R. Horton, president and chief executive officer of the American Management Association, has written that "the best mission statement is a concise description of what business the company is in or what business it realistically wants to be in and how it serves its customers' needs." He specifically recommends evaluating management's ethics and the corporate values on which employee behavior is based. By so doing, many other stakeholders' interests are brought into the mission.

If all managers and employees are responsible for the organization's purpose, they can no longer excuse marginal ethical conduct. there can and should be an alignment of individual and organizational ethics. Business ethics also can be linked to other themes and priorities in the organization, such as quality, safety and customer service. However, piggybacking ethics on another program can be risky--especially if the other program is in trouble and its credibility has been questioned. For example, Total Quality Management is a statistically and fundamentally sound program, but its effectiveness can be sharply curtailed in a company in which trust and ethics are given low priority.

Another potential threat to the success of an ethics program is lack of follow-through in employee training. sometimes, organizations provide managers with awareness training and then expect them to train all their employees without adequate professional support. This approach frequently fails because supervisors often are responsible for others forms of training (such as technical standards, quality, safety, etc.) and because many managers and supervisors are not effective presenters of training sessions on "soft issues." Outside involvement in a companywide training program can be expensive, but the lack of follow-through can be even more costly in terms of the overall effectiveness of an ethics awareness program.

Important themes such as candor, true commitment to quality and customers service and increased sensitivity in performance evaluation are often integrated into a well-designed ethics awareness training program. All these issues can be linked under an overall business ethics theme. It ties the otherwise competing priorities together and makes them coherent and manageable.


The Harvard Business Review quotes Sir Adrian Cadbury, chairman of Cadbury Schweppes PLC, as saying, "Actions are unethical if they won't stand scrutiny. Shelving hard decisions is the least ethical course."

Organizations must allow and encourage employees to discuss tough questions and difficult ethical problems. Most ethical problems are solvable if they are discussed. If an organization does not allow for candor, there may well be an "unaccrued liability" in the business, no matter how favorable the financials look. If an ethical crisis besets the business (a crisis which could have been prevented through candor and questioning), the impact on the financial status of the business can be staggering. "Unaccrued liabilities" of this type often exist. CPAs have no acceptable methods to account for them.

Managers must remember there is a big difference between a strong corporate culture and an ethical environment. Culture simply describes the way things are done--good oo bad. If employees and executives have functioned in a culture that permits or encourages unethical acts, an effective business ethics program will be impossible to implement unless allowances are made for safe-harbor disclosures of prior acts. Because such disclosures can be risky, organizations must carefully consider the degree of violation permitted. Organizations must be very cautious in implying amnesty for prior illegal acts or existing illicit practices. Even though many ethical problems are not necessarily legal problems, this issue and the handling of it should be carefully reviewed by legal counsel.


To determine what changes are necessary to improve an organization's awareness of ethics, leaders must understand how problems currently are being handled. Here are some questions they can ask themselves to decide where their organizations stand:

* Do we inadvertently make false or inflated claims about our own products or services when comparing them to those of competitors? Also, do we misrepresent the competitor's effectiveness or knowingly create questions in customers' minds when we know a competitor's products or services are sufficient for their needs? Are the public's interests given priority?

* Do we place implicit pressure on employees to bend the rules and engage in actions that wouldn't stand up under scrutiny? Even when we don't exert such pressure, do we monitor employee behavior adequately? ARe we fair in evaluating and compensating our people or is our opinion based solely on volume and bottom-line results? Have we properly and effectively identified the stakeholders affected by our actions? Are their concerns integrated into our decision-making process?

* What other ethical questions and issues must be resolved to place the organization in a proactive--rather than a defensive--position? ARe we willing to tackle these questions and issues? What is the cost? What is the cost of not tackling these issues? If the problems aren't resolved today, will they return in the future to weaken or destroy the business?

* Is top management committed to implementing a code of ethics that reflects all significant stakeholders' interests? Is the organization able and willing to commit the resources for a companywide training program to ensure proper implementation of the code?

These questions focus leaders' and managers attention on important issues. Promoting the necessary discipline and commitment within organization leadership to address ethical issues and act responsibly is the next important step in the process.


Although many organizations talk a great deal about ethical behavior, leaders must take action to demonstrate their commitment to stated values. Business ethics is the bedrock of organizations and industries. A breakdown in this area often is an indication of other problems. If a firm or company is to remain strong, its leaders must understand that good ethics is good business.

LARRY L. AXLINE is president of Management Action Planning, Inc., an ethics-based organizational planning and human resources consulting firm in Boulder, Colorado. He is also chief operating officer of the Council of Ethical Organizations, Inc.
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Author:Axline, Larry L.
Publication:Journal of Accountancy
Date:Dec 1, 1990
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