September 25, 2018

Is there a correlation between ethical leadership and business success?

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Consider these propositions regarding ethics in business:

  • Proposition 1: Ethical considerations are not of concern (as long as we are lawful) because they may actually interfere with profitability and our first consideration needs to be the shareholder.
  • Proposition 2: Business is much more than a profit-making enterprise; it is a means for improving the lives of its stakeholders; therefore, ethical considerations are paramount.
  • Proposition 3: Ethical behaviour is a long-term business advantage; therefore, morality aside, good ethics is good business.

Could you find merit in each proposition? And would you have questions about the propositions? Let’s take a quick look at each of them.

Proposition 1 appears to be unconcerned about anything but the profit motive. And some would criticise, for example, employing an offshore workforce that is paid low wages and has poor working conditions. But if your firm doesn’t go abroad, won’t your competitors do so and thus gain a competitive advantage? And if your company wasn’t providing employment, might the workers have none at all? So perhaps ethical behaviour is nice to have but does not particularly impact the bottom line.

What about Proposition 2? Isn’t it a bit idealistic? After all, which entrepreneur starts a business with the primary purpose of improving lives? Surely, if the firm is successful, people will have good jobs and shareholders will get a return on their investment, but, really, must ethics be the deciding factor in all decisions?

And Proposition 3? Sure, it sounds interesting, but let’s have some proof.

Some proof is emerging. The Saylor Foundation identifies four positive outcomes for companies that are perceived (for it is largely a perception) to be ethical: customer loyalty, employee retention, fewer legal issues and a good public image. A number of other studies show that a CEO who is seen as being highly ethical influences the behaviour of his/her subordinates and, in turn, how the firm treats its stakeholders.

Of particular interest following the recent Volkswagen emissions scandal is an article by Tim Wallace, a reporter for The Daily Telegraph (6 Oct 2015, Business Section, p 5). Wallace writes that Hermes, a large investment house, sold its stake in Volkswagen earlier this year because ‘they feared its corporate governance standards were not up to scratch’.   Earlier, Hermes conducted a survey of institutional investors, which showed only 46% believed that companies that focus on environmental, social and governance issues (ESG) produce better returns than those that do not. But Hermes’ CEO, Saker Nusseibeh, states that the financial cost to Volkswagen could be greater than that of BP’s Deepwater Horizon disaster or Tesco’s accounting problems. Such disasters, he believes, will force investment houses to change the way they analyse companies.

It would seem the evidence for good ethics being good business is building.

Dr Richard Bunning, Teacher, EBS MBA Programme About Dr Richard Bunning, Teacher, EBS MBA Programme

Co-author of Leadership with Tony Berry and co-examiner for the Leadership elective.