p food for thought ethics and management
the profit-revenue ratio is 18 percent higher at ethically managed companies food for thought f Generating profit ethically Companies that link management and ethics generate greater profits in the long run, according to findings from US government adviser, David Steiner. He is convinced that Europe is currently poised to take a leading role in developing a comprehensive model for ethical standards. : When David Steiner wants to explain how transparency is created, his job at British merchant bank SG Warburg comes to mind: “It was the first bank to open all incoming mail centrally and make it available to all employees in an abbreviated form.” This rigorous transparency model left its mark on the American ethicist. “I learned my first lesson in business ethics at SG Warburg,” he says. These days, the Institute for Corporate Cultural Affairs (ICCA) in Frankfurt, Germany is profiting from Steiner’s experience. Its job is to encourage companies to think about social and environmental <strong>issue</strong>s. The need for them to do so is pressing: As the influence of state and religion on society wanes, companies are being called on to fill the gap. But instead of chiding companies, the ICCA plays up the benefits of good corporate citizenship. “We can prove that compliance with ethical standards has a positive impact on performance,” says Steiner. For example, the Dow Jones Sustainability Indexes (DJSI), which list sustainably operated companies, beat the MSCI World Index by 42 points between December 1993 and September 2004. Likewise, the powerful US pension fund CalPERS invested $700 million in companies committed to protecting the environment and posted gains for its efforts. In September, the ICCA met with experts and executives like Rolf-Ernst Breuer, former chairman of Germany’s Deutsche Bank, and Richard Edelman, CEO of Edelman Public Relations Worldwide, to talk about the corporate code of conduct. “The first companies are expected to sign up to the code of conduct as early as 2005,” he says. The ICCA is also developing an “Ethics Standard of Excellence” to define the highest possible level of social responsibility for international companies, with a role that extends beyond their usual areas of operation. Says Steiner: “This is a process in which Europe, with the help of the ICCA, can take a leading role.” The ICCA wants to serve as a think tank in this context and channel the ethical efforts of corporate groups. It also wants to create an award for ethical corporate governance. Of course, senior managers may be hesitant to introduce moral and social standards out of fear of diluting shareholder value. Steiner reassures them: “The interests of shareholders are a priority for us as well. But we want to prove that companies can both satisfy DAVID M. STEINER is a professor at Boston University and department chairman of the School of Education. On behalf of the Institute for Corporate Cultural Affairs (ICCA), he is studying <strong>issue</strong>s relating to ethical corporate leadership and social responsibility. Steiner, who studied philosophy and ethics in Oxford, England, and earned his Ph.D. at Harvard University, is a recognized expert in the fields of ethics and education. He has been serving as director of the National Endowment for the Arts in Washington, DC since June 2004. This government organization’s purpose is to strengthen the role of the arts in culture and education. shareholder expectations and serve the community at the same time.” Steiner’s argument is backed by Simone Webley and Elise More. Working for the Institute of Business Ethics, in Britain, these two researchers have discovered that ethically managed companies generate 18 percent higher profits than their competitors. Moreover, these companies present a less volatile price-to-earnings ratio and are able to increase their return on capital employed (ROCE) by approximately 50 percent, while LACK OF TRANSPARENCY AND ETHICAL AMBIVALENCE CAN BE VERY COSTLY this value actually fell for companies without a code of conduct. The equation also works the other way around, because those who take an active approach to acknowledging and tackling mistakes generally suffer no loss in sales. “Lack of transparency and ethical ambivalence are more expensive than simply telling the truth,” says Steiner. The biggest obstacle to introducing new standards is the gap between short- and long-term expectations. Says Steiner, “It’s true that ethical management involves considerable costs up front, but these more than balance out in the long run.” The code of conduct currently being discussed by the ICCA forbids fraud and discrimination, promotes transparency and cultural diversity, and requires companies think: act 15