Financial metrics reveal that ethical organizations outperform those without. So why does it take legislation to motivate the laggards?

by Lara Ryan

In a study by Wilfred Laurier University and the National Post, 84% of CEOs said they believe ethical behaviour contributes to profitability. Can we then assume that 16% don’t believe ethical behaviour is important? Maybe that smaller group contains the “unethical” leaders we’ve been hearing so much about lately. Too bad for the first group, tarnished by the same brush.

One of the pillars of corporate social responsibility, along with environmental and social policies, is accountability and transparency. This is loosely translated as ethical business practices. If your organization has ethics, you can be assured that the good work you do isn’t for naught. If it doesn’t, no matter what your philanthropy budget is the public won’t believe or trust you.

Open a newspaper or turn on the TV and you can find numerous examples of unethical leadership dominating the news. Politicians in Nova Scotia and Newfoundland and Labrador underestimated public response to their shifty expense practices. A sense of entitlement in spending public money has many calling for closer scrutiny. South of the border, despite the assurance of change, we aren’t seeing the attention promised from the corporate community regarding the issue of executive compensation. And we need another high-profile sex scandal to hit the press like we need a few more months of winter.

In the U.S., the Sarbanes–Oxley Act is driving some change in corporate transparency. The legislation sets new standards of reporting for all American publicly traded companies and covers such issues as auditor independence, corporate governance, and internal controls. There’s an expectation that companies will do more than simply adhere to the legislation, and rather strive to build public trust and gain competitive advantage for their efforts.

Corporate Canada is responding too. Following the lead of other exchanges around the world, in 2011 the TSX is adopting new international financial reporting standards that will require publicly traded companies to report their CSR. They will have to report—and presumably audit—their community investment and environmental performance, as well as their governance and accountability. All of these reports will be transparent. For some, this will be business as usual; for others, it will be an adjustment to the status quo.

Just about every aspect of business can and should be held under an ethical microscope: financial practices examined for fraud and bribery; HR policies for harassment and discrimination; marketing and PR practices for false claims; and operations for product liability and environmental standards. Perhaps public officials in this region will take notice of the heat the corporate community has taken and try to regain public trust. Studies have shown that the world’s most ethical companies consistently outperform those on the S&P 500. So if ethics contribute to profitability in the corporate world, surely it must contribute to prosperity in the public sector.

Moral hypocrisy is when we hold ourselves to different standards than we hold others. This could explain the sense of entitlement we’ve seen recently in cases within top ranks of the military and clergy. Equally, corporate CEOs accepting bonuses with one hand and stimulus bailouts with the other raises moral and entitlement questions.

So does leadership corrupt? The question assumes that people are inherently selfish and, along the lines of Sarbanes–Oxley, need to be regulated in order to be good. If that’s true, how could we have any good examples? Are they flukes? In any organization, public or private, our trust of leaders must be cultivated by making values visible, engaging stakeholders, rewarding ethical behaviour, and punishing the unethical.

As usual, we don’t celebrate the leaders who are doing good work as much as we should. Salacious details get the most ink. But as consumers of that information, we can change the game. Let’s start talking about ethics and celebrating successes.

Lara Ryan is a business consultant specializing in CSR. She can be reached at lara@lararyanconsulting.ca.