The problem of lax ethical standards in business is nothing new, but in recent years it seems to have escalated. In addition, public reaction has been swift and unforgiving. Any ethical misstep can cost a company its reputation and hurt its profitability and performance. Consider Martha Stewart within months after she was charged with insider trading, her company’s market capitalization plummeted $400 million. After a jury found her guilty in early 2004 some were concerned about whether the company could even survive. Companies like Nike and Gap have been hurt by accusations of exploitative labor practices in Third World factories. Oil companies have been targeted for allegedly abusing the environment and contributing to a host of social ills in developing nations, while pharmaceutical firms have been accused of hurting the world’s poor by pricing drugs out of their reach. Some have also been accused of withholding information about their reach and their products. Organizational stakeholders including employees, shareholders, governments, and the general community are taking a keen interest in how companies conduct their business.
One reason for the proliferation of ethical lapses is the turbulence of four times. Things are moving so fast that managers who aren’t firmly grounded in ethical values can find themselves making poor choices simply because they don’t have the time to carefully weigh the situation and exercise considered judgment. When organizations operate in highly competitive Industries, rapidly changing markets, and complex cultural and social environment a strong corporate culture that emphasizes ethical behavior becomes even more important because it guides people to go do the right thing even in the face of confusion and change.
The combination of a turbulent domestic environment, the globalization of business and increasing public scrutiny has convinced many managers to pay close attention to ethics and social responsibility as a business issue. New global standards are emerging that raise the public’s expectations about corporate responsibility to environmental and social ills. For example in 1999 the United Nations General Assembly completed a global compact that outlines global ethical principles in the areas of human rights, labor standards and the environment. At the same time varied stakeholders are pushing new reporting initiatives connected to the sustainability movement that emphasizes the triple bottom line of economic, social and environmental performance.
The relationship of a corporation’s ethics and social responsibility to its financial performance concerns both managers and management scholars and has generated a lively debate. One concern of managers is whether good citizenship will hurt performance after all ethics program costs money. A number of studies have been undertaken to determine whether heightened ethical and social responsiveness increases or decreases financial performances. Studies have provided varying results but have generally found that there is a small positive relationship between social responsibility and financial performance. For example a recent study of the financial performance of large US corporations considered best corporate citizens found they have both superior reputation and superior financial corporate governance ratings agency in New York found that the stocks of companies run on more selfless principle perform better than those run in a self serving manner. Top ranked companies such as Pfizer, Johnson Controls, and Sunoco also outperformed lower ranking companies in measures like return on assets, return on investment and return on capital. Although results from these studies are not proof they do provide an indication that use of resources from ethics and social responsibility does not hurt companies.
Source: New Era Management