Mar. 31, 2010
Can an Ethical Approach Boost a Business's Bottom Line?
At a time when Toyota Motor Corp. faces Congressional and regulatory grilling-not to mention an avalanche of lawsuits-over allegations of fatal unintended acceleration and brake failure, Knowledge@Emory discusses the costs and benefits of an ethical business strategy with Paul Root Wolpe, a chaired professor of bioethics and director of the Emory Center for Ethics. Wolpe, an internationally renowned author and speaker, is considered one of the founders of the field of neuroethics and also serves as the first bioethicist for the National Aeronautics and Space Administration (NASA).
Knowledge@Emory: If we start with the bottom line, will a company generally enjoy higher long-term profits by acting ethically, even if they incur higher research, development, and other costs in the short run?
Wolpe: In most cases, there's no question it will.
Knowledge@Emory: Then why do so many companies seem to resist it? Toyota, of course, is the latest poster boy, but there is a long list of firms that have engaged in everything from bribery to accounting scams in order to reduce their costs or pump up their top-line revenue.
Wolpe: First, ethics has to trickle down from an organization's top leaders, and even when that leadership exists, the system isn't always structured to financially incentivize or to otherwise encourage ethical behavior. People may get more recognition for pushing sales than they do for pushing quality and openness. Toyota president Akio Toyoda, who is also the grandson of the company's founder, admitted in Congressional testimony that the company "pursued growth over the speed at which we were able to develop our people and our organization."
Knowledge@Emory: It seems like some companies, such as pharmaceuticals, almost have to be straight arrows because of the nature of their products.
Wolpe: It's tempting to think that, but in off-the-record conversations I've had with company sales representatives, a number have advised me they've been told to "do whatever is necessary" to sell the product. The top executives in many industries may pay lip service to ethics, but in the end, most sales representatives are paid for getting their products into the right hands. Ethical concerns can be left behind.
Knowledge@Emory: Is the problem with the companies themselves?
Wolpe: The way a company is structured can thwart a CEO's plan to pursue an ethical approach. One such example came to light on an episode of Undercover Boss that featured David Rife, head of the hamburger chain White Castle and great-grandson of the company's founder. Rife says he wants to maintain the founder's commitment to job security and innovation, but when he worked undercover at a White Castle shop, he was surprised to find that there was a disconnect between corporate policy and the real experiences of his workers.
For example, many workers come in every day fearing for their jobs, and they have to follow mind-numbing requirements that dictate, for example, putting the cheese on the hamburger before the pickle instead of putting them on together. So sometimes a CEO may have great intentions but is foiled by his own corporate policies. But the broader market can also place a lot of pressure on a company to take shortcuts.
Wolpe: One great challenge is that the market itself rewards quick performance, often through short-term improvements in a company's stock price. But in the long term, it also tends to punish companies that achieve those results improperly. Look at the banks that rejected the quick, steep returns that subprime mortgages seemingly offered a few years ago. They're not the ones that had to be bailed out by the government.
Knowledge@Emory: In terms of ethics and operations, are things getting better, worse, or remaining about the same?
Wolpe: They are getting better. Within individual companies, there are a number of chief executive officers who realize the shareholder value of operating ethically and are trying to instill that culture-I think there are more out there than we realize. It's still an uphill battle, but these days you don't see many companies trying to squeeze out a few more pennies per share by dumping toxic chemicals in people's backyards.
Knowledge@Emory: What's behind the better behavior-increased law enforcement and regulations like the Sarbanes-Oxley Act of 2002, or investor pressure?
Wolpe: Again, I think we're seeing elements of both at play. There's been a big regulatory push to clean up and protect natural resources, backed by fines and other penalties on offenders; we've also seen more financial regulation after Enron and other scandals. And of course there's been a push for more financial regulation following the collapse of the mortgage market. But we're also seeing increased interest among investors in buying a stake in socially responsible companies. Some of that may spring from an altruistic commitment, but for others, it appears to be a realization that a company's ethical approach can yield good long-term returns.
Knowledge@Emory: Would you agree thatit can be difficult, in some cases, to pin down the definition of "ethical" behavior? For example, it's straightforward to say polluting a river is not ethical. But what about companies like Nike that may create jobs in an impoverished third-world nation, which is good, but where the factories use child labor, which is abhorrent in the U.S. but may be encouraged in the local economy of the host nation?
Wolpe: That has become a textbook example of the way that right and wrong may not always be easy to define. A company that pays relatively high wages in the U.S. may also outsource work to countries where worker pay can be extremely low. Or companies that offer generous health benefits here may also have overseas factories where workers don't get any health benefits, in compliance with local customs. It's tempting to say that the American firms should simply increase the wages of the overseas workers, or offer U.S.-style health benefits packages in the name of social justice. But in fact actions like those could disrupt the local markets by creating a favored class and possibly end up doing more harm than good.
Knowledge@Emory: So is it better to do nothing about changing local conditions, even if they're wrong by American standards?
Wolpe: Those aren't the only choices. Companies can also contribute money and other resources to local schools, charities and other organizations that can help to improve the local social infrastructure. This way the efforts will benefit the greater population instead of splitting it into haves and have-nots.
Knowledge@Emory: Outsourcing, of course, continues to gain traction as companies look to cut costs by transferring labor-intensive activity to low-wage countries. But as the supply chain gets longer, do you think it can be tougher to maintain quality control?
Wolpe: That's a possibility, and it's something that auto manufacturers and other companies have to consider. In a broader context, they should also consider taking steps to ensure that ethical guidelines issued at the top of the organization are percolating across boundaries to all of the employees, regardless of where they're physically located. In some cases, it could mean giving more autonomy to line-level workers, which may be a challenge in a control-oriented environment.
Knowledge@Emory: Do you see any kind of correlation between the prevalence of the Internet and the increased interest in organizational ethics?
Wolpe: It appears that high-tech businesses, like software companies, tend to offer employees better benefits, more childcare options, and other socially responsible initiatives. But much of that was in place before the widespread use of the Internet, and socially responsible investing had its start before the Internet became enmeshed in society. But I do think the Internet has had an effect on the spread of ethics, simply because it speeds up the flow of information. If a company does the right thing, more people will hear about it and will find out in a fast manner. Conversely, if a company does the wrong thing, it's tougher to limit the spread of the news.
Knowledge@Emory: Looking ahead, do you see more organizations making a real commitment to ethical operations, or will the stressed economy derail the movement?
Wolpe: I think that more organizations see that an ethical approach will actually cost them less in the long run. I recently spoke with a mayor of a reasonably sized city about providing advanced ethics training to more than 100 of his top administrators, and the basic message would involve this: when you're faced with a tough decision, ask yourself what the ethical approach would be. There's a growing recognition that ethical actions will help to lead to the best results for all the parties involved.