Can An Ethical Corporate Culture Increase Business Success?

Companies with ethical corporate cultures can reap several rewards, including better reputations, fewer legal headaches and higher returns.

Can the values a corporate board espouses, the corporate culture it creates and a commitment to ethical decision making increase the chances a company will enjoy sustainable long-term success? In the era of stakeholder capitalism, which suggests that companies should view the welfare of workers, customers and communities in high regard, maintaining an ethical corporate culture has become a business imperative.

A recent report from LRN Corporation and Tapestry Networks surveyed 40 directors who occupy 80 board seats, asking them to weigh in on the subject of creating an ethical corporate culture. Survey respondents that included board members from Cigna, Coca-Cola, Goodyear, John Deere, Motorola, United Airlines, Verizon, Walt Disney, Wells Fargo and others, indicated that with the increased attention to stakeholder demands, company culture has become a key driver of business performance. How a company operates is becoming just as important as what a company does.

We’ve seen plenty of evidence of this over the last six months: Coca-Cola and Delta Airlines were strongly encouraged to take a stand against voter suppression laws enacted in Georgia where their headquarters are based; 10 climate-related shareholder proposals received majority support this year, including an effort by hedge fund Engine No. 1 which cost ExxonMobil three board seats; and after repelling an effort to unionize its warehouse workers in Alabama, Amazon now faces a national effort by the Teamster Union to unionize its workers. These are just a few examples of how the general public’s view of ethical behavior is affecting the business operations of major corporations.

The report, “Activating Culture and Ethics from The Boardroom,” revealed four themes that corporate directors need to monitor in order to make sure they maintain ethics and compliance in their corporate culture:

• Measurement – Board should insist that the management team determine key drivers of ethical culture, implement them and measure their effectiveness.

• Oversight – Boards should give greater attention to putting oversight structures in place that can properly monitor ethics and compliance at the company.

• Accountability – Boards must find ways to hold executives accountable for establishing and maintaining an ethical corporate culture.

• Trust – Boards must find ways to “prioritize, model and maintain trust” throughout their organization.

When companies are able to maintain an ethical corporate culture, they can reap several benefits:

• Great reputation, great returns: If a company is viewed as ethical its reputation among workers, customers and the community generally improves. That great reputation generally translates into better financial performance. When a company is viewed as ethical, customers buy its products at a higher rate, shareholders invest more dollars into the company and communities are more apt to welcome the company’s expansion into their areas. The Ethisphere Institute’s 2021 Ethics Index, which is made up of what it calls the “World’s Most Ethical Companies” outperformed a comparable index of large cap companies by 7.1 percentage points over the last five years.

• Less corruption: Companies that implement effective compliance and ethics procedures tend to have less corruption and fewer lawsuits. Whistleblower hotlines and anonymous reporting systems help root out major problems that can save companies millions of dollars. Strong compliance measures keep companies in good standing with regulators, avoiding fines and penalties.

• Higher employee satisfaction: When a company can demonstrate it operates ethically, it generally treats its employees more fair, which generally leads to higher employee satisfaction and greater employee loyalty. Loyal employees tend to be more productive, which definitely adds to financial benefit for the company. Higher employee satisfaction can also lead to employees staying with the company longer, which also saves money.