Ethical actions of people and businesses when conducting business affairs are now very common in large business organizations. All employees are obliged to follow ethical policies set by a company in the form of The Ethical Code of Practice.
But, is this really the case? Should companies really set ethical objectives or should they focus only on maximizing earnings for their owners?
Benefits of setting ethical objectives
In the long-term, there are substantial benefits from acting ethically toward business stakeholders:
1. Avoiding fines and penalties. By acting ethically, the business will avoid potential lawsuits that may results in long and expensive court cases due to irresponsible business activities, therefore reducing costs of fines (expenses associated with legal action taken against a business).
2. Reduced costs. Socially responsible behavior can help to cut certain costs, e.g. being environmentally friendly can reduce excessive packaging.
3. Higher sales. These days customers prefer to buy from companies that act morally correct. Also, as pressure around the world grows for Corporate Social Responsibility (CSR), this group of customers is also increasing. Also, ethical businesses are more likely to be awarded government contracts in Public-Private Partnerships (PPP).
4. Increased customer loyalty. Nowadays, many customers are more likely to be loyal to a company that does morally correct, for example not testing its products such as cosmetics on animals, or using recycled materials only for packaging.
5. Good corporate image. Acting ethically can help to enhance the corporate image and reputation of a business organization. Being ‘caught’ acting unethically can lead to bad publicity from the media which will report unethical business behavior. It will lead to serious damage to the firm’s corporate image. In the long-term, the business will lose consumer loyalty that will result in reductions in sales. On the contrary, ethical policies can lead to good publicity and increased sales revenue.
6. Increased employee loyalty. Ethical and socially responsible business behavior can help to attract and retain highly motivated staff. Well-qualified and highly skilled workers may not be willing to work for an unethical business. Therefore, it is easier for companies that are socially responsible to attract the best staff, so recruiting will be easier.
7. Higher staff morale and improved motivation. People are more likely to work hard for the business, if it acts ethically and obeys the laws. Thus, business ethics can be a driving force for improved productivity.
Shortcoming of setting ethical objectives
However, adopting the ethical code of practice in decision-making and strictly requiring all employees to act morally, can be expensive in the short-term:
1. Attitudes toward Corporate Social Responsibility (CSR) are subjective. People living in different countries will have different views about what is considered ethical or unethical as individual beliefs and principles held by individuals will be mostly determined by the society they live in. Also, business owners will have different views towards the role of businesses in delivering Corporate Social Responsibility (CSR).
2. Falling sales revenue. For some companies, it may be difficult to win contracts as they are not strong enough to compete with other businesses on the market without manipulative actions. For example, construction companies may not secure business contracts without giving bribes or toy companies may not sell toys successfully without advertising to children using ‘pester power’.
3. Lower prices. Not being able fix prices with competitors (colluding with others to set the price instead of allowing market forces to set it), will lead the company to let competitive market-oriented prices, which will lead to lower profits.
4. Increased compliance costs. Because the company complies with ethical actions, the costs of being socially responsible are potentially very high. For example, a restaurant will spend more on purchasing only organic raw materials which are far more expensive to harvest than genetically modified fruits and vegetables. Or, paying production workers fair wages rather that exploiting teenagers will also increase the cost of production.
5. Decreased profit. Because of higher compliance costs, the business will achieve lower profitability that will result in lower dividends paid to the owners.
6. Stakeholder conflict. While employees want to work in a very ethical business and customers want to buy only from fully socially responsible companies, the owners of the business may not be so keen on the business adopting Corporate Social Responsibility (CSR). Many businesses have profit maximization as the main business objectives where shareholders and other financial investors are more concerned with short-term profits than long-term ethical practices. So, they put pressure on managers into pursuing objectives other than ethical goals.
So, the ethical dilemma for the business managers exists, if higher costs resulting from doing business in an ethical way cannot be passed on to consumers in the form of higher prices, should the owners accept lower profitability? Or, should they adopt more profitable courses of action that unfortunately involve unethical decision-making?
