Ethical commitment leads to business success, new study finds

New research by the Institute of Business Ethics, leaders in promoting corporate ethical best practice, has shown for the first time that companies with a clear commitment to ethical conduct outperform those which do not.

The research is the most thorough study ever carried out in the UK of the relationship between business ethics and business performance in large companies. Using four indicators of business success - economic value added (EVA), market value added (MVA), price/earnings ratio volatility (P/E ratio), and return on capital employed (ROCE) - it compared two groups of companies: those with a demonstrable commitment to ethical behaviour through having a published code of business ethics, and those without. Their performances were then analysed over the five years 1997-2001. On three of the four indicators (EVA, MVA, P/E) the companies with codes were clearly superior, and on ROCE the results were less clear but supported the overall trend.

• On Economic Value Added, the sample of companies with codes outperformed those without over a four year period.
• On Market Value Added, the performance gap was even more marked.
• On Price/Earning Ratio, the more demonstrable ethical companies showed far less volatility than the remainder
• On Return on Capital Employed companies with codes underperformed those without between 1997 and 1999. Between 1999 and 2001, however, the trend was reversed, and ethical companies were clearly superior performers.

The report also suggests that having a code of ethics equates to a higher than average score in Management Today's ranking of Britain's Most Admired Companies and in the SERM Risk Reduction Rating, and is therefore a strong proxy indicator of genuine ethical commitment and a well managed company.

Commenting on the results, IBE Director Philippa Foster Back said:
"This research takes the discussion of the importance of business ethics on to a new plane. Not only is ethical behaviour in business life the right thing to do in principle, we have shown that it pays off in financial returns. This research deserves to be studied by boards, executives, analysts and investors as an important new tool in looking for companies with long-term prospects of growth."

The Rt Hon Patricia Hewitt, the Secretary of State for Trade and Industry said:
"The best businesses already know that ethical behaviour is fundamental to commercial success. I am pleased to welcome this report which helps to underline that it is not only the right thing to do but that it also pays off financially."

Alastair Ross Goobey CBE, Securities Institute Ethics Lecturer 2003, said:
"The IBE should be congratulated for undertaking this research. At a time when trust in companies is at a low ebb, a thorough approach to corporate ethics is even more important to reassure investors. Now that argument has been strengthened by the demonstration that doing the right thing pays."

ENDS

Contact:
*Simon Webley Research Director of IBE 020 7798 6040, *Philippa Foster Back Director of IBE 020 7798 6040
Martin Le Jeune, Fishburn Hedges 020 7544 3071
* are available for interview/broadcast

Notes for editors
Definitions:

Economic Value Added (EVA) is an estimate of true "economic" profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk.
MVA is a measure of the difference between "cash in" (what investors have contributed) and "cash out" (what they could get by selling at today's prices).
EVA and MVA data were supplied by Stern Stewart & Co.
The Price/Earnings ratio is calculated by dividing the market value per share by the earnings per share.
ROCE is calculated as profit before interest and tax divided by the difference between total assets and current liabilities. The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.

This research was informed by a similar but narrower study of US companies by Dr. Curtis Verschoor, School of Accountancy, DePaul University, Chicago: Curtis C. Verschoor (1998) A study of the link between a corporation's financial performance and its commitment to ethics, Journal of Business Ethics 17(13): 1509-1516.

Does Business Ethics Pay?-ethics and financial performance by Simon Webley and Elise More
will be launched on Thursday 3rd April at IBE, 24 Greencoat Place, London, SW1P 1BE. For copies of the report call 020 7798 6040 or visit www.ibe.org.uk. Permission to use short quotations will normally be given provided the source is acknowledged.

Price £25, ISBN 0 9539517 3 1

The Institute of Business Ethics was established in 1986 to encourage high standards of corporate and business behaviour and the sharing of best practice.
We enable companies to:

• Build relationships of trust with their customers, employees, suppliers, owners and the community.
• Exchange and discuss experiences on issues relating to the conduct of business
• Obtain help and advice on business ethics matters relating to their organisation
• Provide training in understanding and solving business ethics dilemmas.
  

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April 2003