Corporate Ethics: The Impact on Organisational Sustainability
What makes an organisation sustainable? Businesses carry on as long as they have people to buy their products and services. But nowadays, how these businesses put together those products and services are becoming of interest to groups of stakeholders who are not necessarily financially invested in the business but are important nevertheless because their opinion counts. These stakeholders may be ordinary members of the public but if they feel that the way the business is being run is less than ethical, their opinions could influence the opinions of others. Public distrust of the business could grow; confidence in it could decline. The end result could be detrimental to the company.
Stakeholders are increasingly favouring corporations with a highly-developed sense of corporate ethics – companies which realise their obligations to their stakeholders not just by producing quality goods and services, but by being responsible corporate citizens through stronger corporate ethics and governance practices. Recognising this trend, businesses today are moving to align their strategies, products, services and operations in a more responsible, transparent manner, and embedding processes that they hope will help them retain their growth, customer base and competitiveness. That, essentially, is sustainability – maintaining a presence and creating value over the long term.
Businesses are being viewed increasingly through a corporate social responsibility lens, i.e., how they operate in harmony with their environments and engage with the communities where they do business. This can have far-reaching consequences as commerce globalises and businesses expand abroad. Consider, for example, how clothing and footwear manufacturers who capitalise on cheap labour outside their own countries often fall afoul of interest groups because of unethical labour practices. Their products are often boycotted in more affluent markets, with adverse financial impact.
Companies are expected to be fair and truthful about how they operate, and be aware of how their operations affect their environments and the communities therein. They not only have to be aware of environmental degradation, they need to also be sensitive to local cultures and practices. The higher the profile of the corporation, the greater its ethical responsibility towards its stakeholders. Ethical corporate responsibility does not stop at balance sheet transparency; it goes beyond. Corporations have obligations to fulfil towards their shareholders, suppliers, distributors. They have a range of accountabilities of non-financial nature, related to company ethics policy and governance matters.
These may not be clearly defined by the laws operating in particular jurisdictions but they are important nevertheless because they have a long-term impact on the organisation’s operations and its bottom line. Some companies have put in place extensive corporate social responsibility (CSR) programmes in support of their reputations as good corporate citizens. These programmes are often viewed as long-term investments that “give back” to their communities while helping to enhance their public image. There have been indications that such programmes have had a positive effect, benefitting local communities and boosting firms’ reputations.
This has in turn improved public opinion of their products. There is evidence which suggests that corporate ethical responsibility has been successful in attracting customers to a company’s products. Research has shown that employees of companies that have clear ethical policies also tend to stay with the business longer. In some cases, it has even become easier for the organisation to not only source new talent but also new funds from investors who are attracted by the firms’ focus on ethics, environmental sustainability, social responsibility, transparency and good governance. This effectively increases the value of the firms, as reflected in their share prices.
On the other hand, where there was public perception of poor governance, tolerance of fraud or corruption, poor environmental management or suspicious labour practices, investors and other stakeholders were inevitably “turned off” and confidence in Board and management declined. Stakeholders generally want organisations, especially large ones, to do business ethically; this includes making business decisions that could affect the communities they live in, the work they do and their lifestyles. They are aware that businesses operate on the basis of making profits but this should not be at their expense or have adverse impacts.
Ethics is broad and subject to many definitions; it is not subject to fixed rules, standards or controls. But organisations that want to be perceived as ethical have to consider many aspects of what constitutes being “ethical” in today’s environment. Some issues linked to ethical practices include management and leadership, fair trade, corporate governance, human resource deployment and work-life balance. Perceptions of businesses as ethical entities do not occur overnight; they take a long time to develop. Public opinion can often be more influential than rules, regulations or guidelines, and manifest in the behaviour of not only the organisation’s customers but its employees as well.
Public opinion can also influence investors. Ethical investment has intensified in recent years as investors look to invest in companies with proven track records of ethical practices. There is generally a more favourable perception of companies which demonstrate corporate ethical responsibility and which have an ethical organisational culture. They are seen to be leaders, more adaptable, flexible and responsive to customers’ wants. What the public does not want to see is corporate dishonesty, profiteering, exploitation, abuse of authority, lack of transparency, environmental damage and the lack of compassion and humanity.
Corporate ethics is one of the cornerstones of corporate governance, and guides how ethical issues in companies should be dealt with, internally and externally; and sets the tone for organisational leadership and management. Good corporate governance and ethical leadership accrue significant benefits. For example, customers’ preference for ethically-manufactured products may increase a firm’s market share and competitive advantage. Ethical practices also work well in attracting good staff and investors; and the public is generally more supportive of ethical firms which are perceived as doing the right thing, even if their efforts go awry. Ethics may well sustain a firm when all other courses fail.