Do ethics pay?

a brass plaque by the door saying your organisation is ethical is simple
enough. Proving that corporate social responsibility has a beneficial impact on
the bottom line is a different matter. Adele Kimber reports on the latest

Business leaders always question and often veto spending programmes that
cannot be shown to have a positive effect on the bottom line. And for those espousing
the case for corporate social responsibility (CSR), the task of proving a
financial benefit is notoriously difficult.

Examples of unethical behaviour by individuals or groups in corporations
that have seriously affected the reputation, if not the viability, of a
business are easy to find. The problems caused by Enron and Worldcom’s
accounting and financial practices are evidence enough of what can go wrong.
But proving that doing the right thing will boost business performance is much
harder to do.

The latest research from the Institute of Business Ethics (IBE), Does
Business Ethics Pay?, makes a convincing financial case for CRS. It shows that
companies with a clear commitment to ethical conduct outperform those that do
not and they are consistently more admired by their peers.

"This research takes the discussion of the importance of business
ethics on to a new plane," says IBE director Philippa Foster Back.

The study claims to be the most thorough investigation of the relationship
between business ethics and business performance in the UK’s large companies.

It compares two groups of companies in the FTSE 250 – those with a
demonstrable commitment to ethical behaviour through having published codes of
business ethics, and those without. Their performances were measured over five
years from 1997 to 2001.

Researchers used ratings for risk management by specialist agency SERM, and
peer group rankings published in Management Today’s survey of Britain’s Most
Admired Companies to conclude that a code of ethics could be used as an
indicator of a genuine commitment to ethics.

The research then scrutinised four indicators of business success. It found
companies with codes performed significantly better on two of the measures –
economic value-added and market value-added.

The third measure, price/earnings ratio showed the ethical companies to be
far less volatile, which researchers point out may make them a more secure
long-term investment. The fourth measure – return on capital employed – was
less clear cut over the five years, but between 1999 and 2001, ethical
companies were clearly superior performers.

Research director at IBE, Simon Webley, points out that the mechanisms by
which an ethical commitment is translated over time into financial results are
not well understood.

"A large firm with a culture of trust and high ethical standards may be
able to delegate decisions further down the management chain, for instance, and
save on bureaucracy," he says. "A company of this sort can more
easily identify unethical behaviour and save on expensive remedial action, not
least in terms of litigation and public relations."

Mike Littlechild, chief executive of the Good Corporation, a consultancy
that advises companies on ethical policies, says proving the business case has
become the Holy Grail of the corporate responsibility world. However, he
acknowledges it is almost impossible to come up with one formula that works for
all organisations.

"Companies must look at the individual elements of an ethical strategy,
such as being a good employer, the environment, or customer relations and see
if there is a business case for each one. Trying to pull it all together can be
like trying to add apples and oranges," he says.

Issues such as waste management and energy conservation can be relatively
easy to quantify, and other measures such as lower staff turnover, can also be
analysed to estimate a business value.

"It is more difficult with issues such as improved community
involvement. While fostering good community relations must be good for
business, it is impossible to measure and therefore difficult to prove as a
business case," says Littlechild.

Growing interest from the investment community in corporate responsibility
could be a driver for more thorough financial analysis. Indices such as
FTSE4Good and the Dow Jones Sustainability Index are a starting point to
identify companies with established CSR policies.

"Analysts are starting to ask questions about corporate responsibility
and have guidelines for investment. But they are still some way from asking for
the business case," adds Littlechild.

The first attempt to measure the effectiveness of CSR policies in the UK was
published recently by Business in the Community. While its Corporate
Responsibility Index is voluntary and essentially a benchmarking tool for
business, it hopes it will raise awareness and hence drive performance

Caroline Cook, senior manager of the Corporate Responsibility Index, acknowledges
there is a huge variation in both policy and practice within the companies
taking part. Some are just beginning to think CSR issues through, but she does
point to pockets of excellence. However, she also reveals that HR is rarely the
driver for corporate responsibility, and HR is often not as fully on board as
it might be.

"In many companies, corporate responsibility is still an adjunct to the
business. We are trying to get it embedded in corporate governance and risk
management," she says. "So when a company is thinking about choosing
a supplier, buying a new business or making redundancies, it always looks at
the implications for all its stakeholders," says Cook.

"There is a huge amount to do before the majority of major
organisations have done more than agree a strategy."

Case study – Safeway

External financial studies, feedback
surveys from customers and staff and detailed benchmarking studies all combine
to help food retailer Safeway evaluate the benefits of its corporate responsibility

Business in the Community’s Corporate Responsibility Index,
published for the first time this year, is just the latest in a series of tools
that help the retailer to evaluate its CSR progress.

"It provides the opportunity to demonstrate to our
stakeholders that we are serious about CSR and are committed to promoting
awareness and public reporting says Nicola Ellen, Safeway strategy manager for
CSR. "It tells stakeholders what is actually being done."

Safeway scores 90.21 per cent in the index, way above the
average company score of 67.87 per cent.

The survey finds that Safeway bucks the trend where most
companies have a significant gap between strategy on responsible practices and
the integration of that strategy throughout their operations.

In the performance and impact areas, Safeway scores well.
Recognition for social performance includes product safety and occupational
health, and in terms of impact the retailer performs well on energy and

Safeway runs staff surveys and omnibus customer surveys to
measure the value of CSR initiatives both internally and externally.

Results from external financial surveys also help the company
evaluate its strategy. A recent report from Store Brand Investments, which
reviews 86 retailers across the globe gives Safeway an investment
recommendation as a socially responsible retailer.

The Safeway CSR report for 2003, due to be published later this
month, will detail progress achieved against 12 employment and training
targets, including a commitment to run equal opportunity training for managers,
actively encourage job applications from all groups, and to monitor and publish
the percentages of women in management positions.

"The report will specifically demonstrate the importance
Safeway places on promoting fair treatment for all employees, investing in
their development, protecting their well-being and keeping them informed and
involved," says Ellen.

What is it? defining CSR

Corporate Social Responsibility (CSR)
is about the way in which companies meet their wider obligations, both to
employees and to the community at large.

A responsible organisation recognises that its activities have
an impact on the society in which it operates, and CSR emphasises the need for
companies to adopt a coherent approach to a range of stakeholders including
investors, employees, suppliers and customers.  

It has been described as a contribution to sustainable
development – meeting the needs of today without compromising the needs of
future generations. The idea is that a business has a duty to its wider
community – beyond staying within the law and satisfying stakeholders.

According to the Chartered Institute of Personnel and
Development, the key management challenges in CSR involve integrating it with the
company’s core purpose and values, developing effective partnerships with
stakeholders and translating policies into practice.

More information at:

Case study – Co-operative Bank

The Co-operative Bank, which
published its sixth Partnership Report last week, reckons its ethical and
ecological strategy contributed 19 per cent of its £122.5m pre-tax profits for

"Our ethical policies have had a real contribution to
overall performance – the bank has celebrated its ninth year of record profits
since the inception of the policy.," says Ken Lewis, executive director
resources at the bank. "We have been delivering an ethical approach to

The £23m profit contribution attributed to its ethical stance
was calculated by analysing feedback from customers. It says 24 per cent of
profits can be attributed to customers who claim ethics as an important factor,
for example, and 13 per cent to customers who claim ethics is the most
important factor in choosing products.

Each year the bank reports on all aspects of its financial,
social and ecological performance. It details the costs and benefits of
hundreds of separate elements – from savings gained from lower water usage to
the cost of community involvement schemes – and attempts to put a value on the
impact that its ethical reputation has on sales of products.

Lewis says the bank’s ethical policy pervades everything it
does. "It’s a state of mind. It has made us think, ‘if I act this way then
what will it do,’ " he says.

Lewis, whose role covers corporate and financial services
including HR, was part of the senior team which first worked on creating an
ethical brand in the late 1980s.

"A key role for HR is to ensure staff understand why the
ethical policies have been developed and how they are being implemented,"
he says.

Internally, the policies have helped increase staff pride in
the organisation. "We are still a relatively small player in banking, but
because of our success we have huge corporate recognition. It’s been very good
for staff morale and good for recruitment and retention," says Lewis.

Much of the bank’s CSR work is built on setting targets, monitoring
and measuring performance towards those targets, publishing the results and
setting future goals. The latest Partnership Report, for example, details both
improvements on staffing issues and areas such as pay and benefits where staff
satisfaction has fallen.  

Lewis recognises that targets do raise the expectations of
staff and senior managers. "We try to use all these targets as a positive
measure. They can be used as a management tool to improve performance," he

Comments are closed.