issue 1 - Roland Berger

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 issues. 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 issues
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