| Executive summary of a paper delivered
at the ISBEE Congress, Melbourne, July 2004 by Simon Webley and Kerry Hamilton
(Institute
of Business Ethics, London)
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? .
This paper outlines a
pilot study which 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 and their effect on the financial performance of the
business. It first sought to identify relevant methodologies; secondly,
to evaluate their feasibility by identifying data sources in the public domain
and thirdly searching for evidence of links between financial performance and
aspect of corporate ethical culture. [It should be viewed as a progress report].
A
review of the literature led us to investigate any differences of policy and management
style between companies in the sample with and without explicit ethics policies.
We focused on:
1. Employees and Human Resource Policies
Evidence
suggests 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. Other
evidence points out 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 for profitability and sustainability
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).
4. Sources of Top Management Selection
Collins (1994 & 2001)
suggests that CEO appointments from within companies provide a consistent ethics
culture. We examined the sources of CEOs in our sample companies between 1997
to 2000. In order to explore these areas, a number of data sources largely
in the public domain were identified and our hypothesis tested. At this
stage, some of the hypothesis appears 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. Furthermore, 'home grown'
CEOs are more likely to be appointed by companies with an ethics policy than those
without.
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