What Counts as Proof that it Pays to Be Ethical?

Ethisphere Magazine just released its 2009 list of the World’s Most Ethical Companies. Accompanying their ranking is the graph pictured here, the caption of which reads:

Need proof that it pays to be ethical? The World’s Most Ethical Companies consistently outperform the S&P 500. The graph…depicts the average stock growth percentile of the public World’s Most Ethical Companies vs. the Standard & Poor’s 500 index over the last five years.

It’s an interesting graph, to be sure, but it doesn’t show what they claim it shows. What it shows is correlation, not causation. I hope their conclusion is right, but the graph they present doesn’t establish that. For this to count as evidence of causation, you’d have to be able to rule out alternative explanations for the correlation: such as the possibility that successful companies are wealthy enough to spend money on the sorts of things that Ethisphere and others measure when they want to do this sort of ranking. Of course, I doubt this cynical, alternative, hypothesis is correct either; I suspect the truth is more complicated than that. But I think truth in advertising is a good thing, even in the promotion of ideals I like.

5 comments so far

  1. A voice in the wilderness on

    I suspect that the companies that close attention to ethics also pay close attention to all the rest of their practices that contribute to success.

  2. Doug Cornelius on

    What caught my eye was that the graph stopped a year ago. I am very interested to see what has happened since the crash.

  3. pl on

    You are exactly right that correlation is a preresiquite, but not a guarantee of causation. This is a common mistake – perhaps even human nature – and we cannot be reminded too much to avoid it.

    There is a second common mistake here that applies to stock markets – greater return is almost always accompanied by greater risk. A company generating higher returns than the overall market must carry higher risk. Otherwise, risk-averse investors would be willing to pay an ever higher price, until the return matched other investments with similar risk.

    If you consider risk along with return in your definition of a stock (and a company’s) “performance”, the it is not clear from the chart that these companies are even out-performing the market.

    As Chris (and the previous commenter) say, we hope that there is a relationship between ethical business practices and the performance of a company. Perhaps we can even prove it – but not with the chart shown above.

  4. Frank on

    Dear Mr. MacDonald:
    I hope you see http://www.ethicsworld.org from time to time…perhaps you can feature our link on your pages?…I would hugely appreciate your criticism and comment so we can improve our site, which seeks to be a gateway from research, surveys and news.
    As for your comment on the Ethisphere survey — I cannot think of a single survey of business that names names of corporations that really has much credibility. At Transparency International, which is a global anti-corruption organization which i co-founded, we struggled with the issues in great depth in developing our Bribe Payers Index and found it impossible to include the names of companies; in our survey of the transparency of oil company royalty payments we did name names, but this too was not easy to accomplish in an objective manner and we placed some caveats around the findings in our report.

    if you go to http://www.ethicsworld.org you will find a UN Global Compact annual review on the Home page – take a look at its sur vey results on human rights and anti-corruption in particular – this is quite insightful and again they make no effort to rank companies in any way.

    Sincerely,

    Frank Vogl
    Editor of http://www.ethcisworld,.org
    202 331 8183

  5. Kevin Goodman on

    This comment is really inspired by your title – less the content. I am just curious if you seen the study published by June Cotte and Remi Trudel”Does it pay to be good” published in the winter 2009 edition of the MIT Sloan Review. Their work seems to offer empirical evidence that customers reward ethical business and punish (more severely) unethical business by the price there willing to pay.

    < HREF="http://kevin-goodman.com" REL="nofollow">Kevin Goodman<>


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