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How does business ethics pay?
Webley, Simon Hamilton, Kerry
Webley, Simon
Hamilton, Kerry
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Webley.pdf
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Abstract
In 2002/3 the Institute of Business Ethics (IBE) undertook research that showed that for large UK companies having an ethics policy (a code) operating for at least five years, correlated with above average financial performance based on four measures of value. The performance of a control cohort of similar companies without an explicit ethics policy – no code – was used for comparison. This was published by IBE in April 2003 under the title Does Business Ethics Pay? [See Appendix 2]. The present pilot study investigates what, if any, are the distinguishing features of the governance operation of companies with explicit ethics policies compared to those without such a policy. [It should be viewed as a progress report] In order to try and recognise differences of policy and approach, we focused on three areas: 1. Employees and Human Resource Policies We would expect that the companies with ethics codes would be more effective in engaging with their employees, provide a good working environment and have an ethics culture that ensures that unethical behaviour is easily identified and dealt with. There is evidence that staff prefer working for such organisations and that good quality staff are attracted and retained. Consequently, we would expect labour turnover to be lower and for companies to have less costs associated with union disputes and employment litigation. The paper explores these hypotheses using data in the public domain. 2. Reputation and the Customer The literature suggests that reputation is a key factor from both an employee and customer perspective. Economies on marketing expenditure may be expected when customers select firms or brands that they trust. Companies with a good reputation may also expect customer loyalty resulting in a more stable or increase in turnover over time. This study has not attempted to show the link between reputation and financial performance but has relied on the evidence from other studies in this area. It has however, considered whether companies with codes of ethics do actually enjoy a better reputation than those which are not explicit about business ethics. 3. Cost of Capital and Insurance It is suggested that a company with an effective ethics management culture will be perceived by investors to be of lower risk than a company without one. As a result of this reduction in perceived risk, it has been suggested that companies will pay less for capital raised and this will result in a direct impact on profitability. We have considered the cost of capital of our 41 sample companies using credit ratings as a proxy for cost of capital and have determined the pricing differential between those companies with codes of ethics (24) and those without (17). In order to explore these three areas, and one other related to the selection of top management, a number of data sources largely in the public domain were identified and our hypothesis tested. So far some appear to be valid while others need more refinement. Prima facie, the cost of capital appears to be significantly cheaper for those having an explicit ethics policy over an extended period.
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2004
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With permission of the license/copyright holder