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Ethical Behaviour Pays Off Financially!
With thanks to: The Institute of Business Ethics (www.ibe.org.uk)
New research by the Institute of Business Ethics has shown for the first time that companies with a clear commitment to ethical conduct outperform those that do not.
This UK study was undertaken to explore indicative measures of ethical commitment/corporate responsibility and then to compare them against financial performance measures over a period of four years. In this way, the research set out to investigate whether it can be shown that a commitment to business ethics does pay.
Seven indicators were chosen – four of corporate financial performance [Market Value Added (MVA), Economic Value Added (EVA), Price Earnings Ratio (P/E/ratio) and Return on Capital Employed (ROCE)] – and three of corporate responsibility [having a code of ethics, ratings for managing socio/ethical risks and being cited consistently in the annual list of Britain’s Most Admired Companies].
The sample consisted of between 41 an 86 UK companies which were divided into two cohorts: those who have had codes of ethics/conduct/principles for five years or more and those who explicitly said they did not.
Findings
A review of similar research shows that the relationship between good financial performance and other indicators of corporate responsibility (environmental management, corporate social responsibility, sustainability etc.) is positive but not definitive.
This study sought to find out whether or not the presence of an ethical code could be used as an indicator of genuine ethical commitment. Good practice for a sample of UK companies with and without a code was tested by looking at:
- a rating for risk management;
- a peer evaluation which included, for example, competent management, financial soundness and quality of goods and services;
- yes, the presence of an ethical code is an indicator of genuine ethical commitment;
- yes, there is a positive correlation between an accessible ethical code and financial performance;
- a positive relationship was found. Having an accessible ethical code was then used to investigate the relationship between ethical commitment and financial performance over the four-year period;
- on Economic Value Added, companies with codes outperformed those without. Regarding financial performance, from three of the four measures of corporate value used in this study (EVA, MVA and P/E ratio) it was found that those companies in the sample with a code of ethics had, over the period 1997-2001, outperformed a similar sized group who said they did not have a code;
- companies with a code of ethics generated significantly more economic added value (EVA) and market added value (MVA) in the years 1997 – 2000, than those without codes;
- on Price/Earning Ration, the more demonstrable ethical companies showed far less volatility than the remainder. Companies with a code of ethics experienced far less P/E volatility over a four years period, than those without them. This suggests that they may be a more secure investment in the longer term;
- on Return on Capital Employed, ethical companies were clearly superior performers. No discernable difference was found in ROCE between those with or without a code for 1997 – 98. However, from 1999 to 2001 there was a clear (approximately 50%) increase in the average return of those with codes while those without a code fell during this period;
- yes, the presence of an ethical code is an indicator of genuine ethical commitment;
- yes, there is a positive correlation between an accessible ethical code and financial performance.
This research takes the discussion of the importance of business ethics on to a new plan, says IBE Director Philippa Foster Back. Not only is ethical behaviour in business life the right thing to do in principle, the study now shows it pays off in financial returns.
For more information on this study and business ethics, contact the Institute of Business Ethics at http://www.ibe.org.uk
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