Is Ethics Profitable?

Many people interested in business ethics are fascinated by the idea that ethics is good business, or that you can “do well by doing good.” Others think that idea is obvious hogwash.

So, are ethical behaviours profitable? Well, are swans white? The answer is yes, mostly, except when they’re not.

The obsession some people have with the obviously-partly-true and obviously-partly-false claim that “ethics brings profits” is regrettable. It seems to me a truism of commerce that, in the long run, you’ll tend to do well if you deal honestly with customers, treat your employees well, deal honourably with suppliers, etc. But everyone in their right mind knows that that basic truism doesn’t mean you can’t ever make a little more (sometimes a lot more) by doing something bad. And so, “ethics is good business” is a lame sales pitch, at least when the person trying to sell it implies that it applies to every single decision, at all levels, and that it implies the very highest level of virtue.

Now, of course, there’s of room for some interesting empirical work, here. Somewhere between “ethics never brings profits” and “ethics always brings profits” lies the truth, and it would useful to know just where the truth lies, and what the relevant variables are. Even though doing the right thing is (by definition) the right thing to do, even when it’s not profitable, it would be nice to know under what circumstances those two things are liable to go hand-in-hand.

The key philosophical error people make here is in thinking that the “ethics is profitable” idea applies on a decision-by-decision basis. It doesn’t, and it can’t, any more than it’s true that “honesty always pays” in our personal lives. Now, it’s clearly true that having a set of ethical rules that we (mostly) all (mostly) abide by is “profitable”, socially. (See, e.g., Nobel-prize-winning economist Ronald Coase on how moral rules make commerce more efficient.) And it’s clearly true that generally acting ethically is a pretty decent route to success for any given individual or firm. (Though it’s important to note, here, that I think the list of ethical “oughts” for business is much smaller than some people, particularly people in the world of CSR, seem to think.) But is ethics profitable all the time? Obviously not.

So, if people try to sell you or teach you the dumb version of the profit-ethics connection, they’re selling & teaching an obvious falsehood. But that doesn’t mean there’s no connection at all, and it certainly doesn’t mean that being profitable should be seen as somehow being definitionally opposed to acting ethically.

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This blog entry began life as a comment on this useful blog entry by Charles Green: Financially Justifying Ethics: A Faustian Bargain?

13 comments so far

  1. divinedelights on

    Being profitable through being ethical depends on what you’re selling, and who your shareholders are. Divine Chocolate is selling something delicious that everyone loves and making money for the cocoa farmers who are the major sharedholder.

  2. Franklin on

    It seems antithetical to decide to act ethically because of the bottom line. We choose to act ethically because it’s the right thing to do. In fact, acting ethically sometimes results in losses both financial and otherwise. Ethical behavior is what keeps things going.

  3. Chris MacDonald on

    Franklin:

    Question: should we care why a company does the right thing? Should we care whether they do it “because it’s the right thing to do,” or instead because they’re deeply committed to the idea that doing so is profitable? If so, why?

    Thanks,
    Chris.

  4. Franklin on

    I’m not as concerned about the why as much as I am about the what. Motive, even altruistic motives are in one’s self interest. Therefore, for a company to make any statement about why they act ethically is incomplete and maybe even illusionary. As a company I may say I’m interested in the environment, therefore I have put policies in place that benefit the environment. We’ve seen too many companies that give great lip service to ehtics but act unethically. The public can’t judge their motive, but it can judge their actions. And as I said in the earlier post, acting ethically may in fact have financial and/or personal negative consequences. So, basing ehtical decisions on whether in the short/long run it’s profitable put the cart before the horse.

  5. S. on

    To me, the tone of this article is disturbing, as it seems to (perhaps unintentionally) suggest that business ethics is somehow “optional”. My understanding of the “point” of individual social ethical standards is to — on average — maximize benefit to society. Should companies not be looked upon as just “big” (or at least, richer than usual) individuals in our society?

    I am not sure what purpose drawing up a corporate ethical policy would have if the implication was made to employees that this was optional “if the price was right”? How could any manager expect ethical conduct on behalf of any of their employees under these circumstances?

    I think that the only way that the “ethics is always profitable” rule can be looked upon as “the dumb version” is if one makes the mistake of looking at ethics from an individual instead of a societal viewpoint. Unethical conduct on the part of individual employees or individual corporations is not (by the previous definition) beneficial to society. So “ethics always brings benefits” on average to society would seem to be a true statement — the point of the ethics policies of good corporate citizens, I would hope.

  6. Chris MacDonald on

    S:

    It’s actually pretty understandable to be disturbed by the topic here; though to be clear, I didn’t *invent* the debate.

    As for ethics being optional: it depends what you mean by optional. If that means “is it ok to be unethical,” well then no. But if it means “is there actually a choice to make?’ well then yes, often there is.

    My point is just that if anyone tries to promote the idea that making the most ethical choice is the always going to be profitable, that’s clearly false.

    Chris.

  7. Franklin on

    If you look at the evolution of ethics in American business there seems to be a flow from the ethical to the legal. Issues that start off as ethical choices and are ignored by individuals and/or businesses end up being legislated because those individuals/businesses did not follow those implicit ehtical standards. Then, the acts of a few impact the rest of society at the expense of all. Regulations and laws watched over by company lawyers and regulators effect all business. In many cases, this makes the cost of doing business impossible to bear, particularly for small business and/or businesses that have always acted ethically. In that sense, it does become a matter of profit.

  8. Max on

    Very well written, Chris…what more can I say?

    Perhaps the relationship of ethics and profits can best be understood by looking at the recent problems faced by Toyota and Maple Leaf Foods, and the approach adopted by these firms.

    On another note, the blind pursuit of profits has resulted in bribes, environmental problems, injured workers, unsafe products, closed plants, and unnecessary expenses, with adverse effects on the bottom line, because of unethical practices.

    Ethics is concerned with “doing the right thing” but…moral standards differ between individuals depending upon their upbringing, traditions, religion, social and economic situations, etc. Hence, the existence of grey areas, depending on different perspectives, but there are also areas of “black” and “white”. Leaders should lead by example and refrain from adopting an approach which conflicts with the interests of stakeholders: owners, managers, other employees, customers, suppliers, the community, etc.

    For free abridged books on leadership, ethics, teamwork, motivation,women, bullying and sexual harassment, trade unions, business law, etc., send a request to crespin79@hotmail.com.

    Maxwell Pinto, Business Author
    http://www.strategicbookpublishing.com/Management-TidbitsForTheNewMillenium.html

  9. Jhon on

    I think ethic is very profitable in now a day’s, cause good business ethics should be a part of every business, business ethics is a form of applied ethics or professional ethics that helps to find out ethical principles and moral problems that arise in a business. Business ethics is not only how to cooperate with the world, but also to dealings with their single customer.

  10. Tiffani Prananto on

    This entry certainly pinpoints the question that everyone is wondering about, but afraid to ask because it is considered as taboo. Is ethics always profitable? I think you did an excellent job in discussing this issue, especially with your metaphor of the situation as “So, are ethical behaviors profitable? Well, are swans white? The answer is yes, mostly, except when they’re not”. I realized that a lot of people want to believe that if they do the right thing, then everything will go as planned. However, the world is not perfect. Doing the right thing would not necessarily be beneficial for you. I notice that with new fraud cases surfacing continuously, business schools are putting more time and effort at teaching ethics to their student. With the creation of Sarbanes-Oxley and laws such as the Whistleblower Protection Act, it seems that the government is going through a great length to make sure that we will always behave ethically. I cannot help but to wonder if there would be enough rules and laws in this world that would prevent unethical behaviors to happen.

    I come from Indonesia, one of the most corrupt countries in Asia, and as I grew up I learned to think that ethic is the least important thing in the business world. We do still keep the ethic rules of mankind, but with regards of corruption and frauds, ethics would be the last thing you think about. If you could get wealthier by any means, then why not do it, especially when everyone around you is also doing it. In Indonesia, you could see a wide gap between the rich and poor. While there are people who can afford jet planes and lavish lifestyles, there are also people who are making less than $10 a day, working 24 hours around the clock for the whole 7 days. Here, I have to agree that “profit-ethics connection…[is] an obvious falsehood”. However, there is also the bright side. With Indonesia’s current move towards democracy, the government had implemented more rules and laws to fight corruptions, and certainly the rate of corruption and white-collar crimes are decreasing as we speak. I believe that people might be intrigued to do the unethical thing and benefit in the short-run, but at the end, the law will catch up with them. The bottom line is, doing the right thing should be first and foremost. Ethics is not only profitable for your business endeavors, but it is also profitable for your personal life.

  11. Joe on

    You make a good point that ethics can be profitable, but I think the real issue for businesses today is not whether ethics is profitable, but whether ethics is necessary, in which case the answer is yes.

    Followers and believers of Milton Friedman’s (1970) Profit Maximisation Theory are following an outdated theory that no longer applies to today’s world. His theory suggests that the purpose of business and corporations is to increase its profits (whilst acting in an open and free manner and abiding by the laws of the land). What this could mean is that a business may conduct poor ethics as long as it is within the laws to do so. There are many examples of companies polluting the environment (and know of cleaner but more costly methods of destroying their waste) but are doing so legally – but is this right, and (more importantly for that company), is it profitable for that company in the long term?

    In the wake of the Enron catastrophe in 2001, thirteen other of the largest bankruptcies ever to happen in US history occurred. The root cause of many of these bankruptcies were a result of ”substantial and well documented failure of ethics” as found by Thomas, Schermerhorn and Dienhart (2004).

    Businesses that do not apply good ethics may be short sighted, motivated by the quickest and easiest way to make money thinking that good ethics ‘cost too much’. They may also be suffering from a lack of innovation and a laziness to think outside the box. With the popularity and use of social media in today’s world, it only takes a few seconds for someone to upload a comment, photo or video of a business or corporation conducting poor ethics to the world wide web and the damage and backlash from the public can be huge. Prior to the age of social media, customers and employees experiencing poor service of any kind had only word of mouth to use with their friends. The power of the general population has increased considerably with information passing through social media very quickly. It has become increasingly difficult for companies to conduct any damage control and attempt to keep things ‘in house’. The following URL takes you to an article about how many customers are now turning to social media for complaints:

    http://www.mycustomer.com/topic/customer-experience/dissatisfied-us-consumers-turn-social-media-customer-service-study/141969

    Bear in mind however, that social media is as good as it is bad. Do good, and watch the posts fly!

    Other problems resulting from poor business ethics include the risk of fines and penalties from breaking rules and procedures (not to mention court costs as well). Employee performance will be affected as well. Employees are less likely to be more productive when they don’t respect their boss or are placed in situations that go against their own moral compass. Fines, penalties, drops in production and moral equal lower profits!

    Already we are seeing more and more businesses adopt corporate social responsibility (CSR) into their own business models as awareness of good business ethics rise. Many have implemented codes of ethics to guide employees in their decision making and ethics as part of leadership training. By educating and training their employees, and employing good ethical processes into their everyday working life, businesses are making strides and earning the rewards that good ethics provide in the long run particular in their reputation and repeat business. Of course there is still much to do and many businesses have still to adopt to this way of being.

    To summarize the above, with all the increased power consumers have today coupled with the consequences for businesses being caught conducting bad ethics, it’s just not worth! Is ethics profitable? Sure. Is ethics necessary? Absolutely!

    References:
    Brandwiener, N. (2012, May 8). Dissatisfied US Consumers Turn to Social Media for Service – Study. Retrieved May 20, 2015, from http://www.mycustomer.com/topic/customer-experience/dissatisfied-us-consumers-turn-social-media-customer-service-study/141969

    Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. The New York Times magazine, 32–33, 122–124. Retrieved from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp business.html

    Scholes, V. (2015). Module Four. 71203 Business Ethics, Lower Hutt, New Zealand: The Open Polytechnic of New Zealand.

    T. Thomas, J.R. Schermerhorn, and J.W. Dienhart. (2004). Strategic Leadership of Ethical Behavior in Business. Academy of Management Executive, 2004, Vol 18, No. 2 Retrieved May 19, 2015, from http://www.mned.net/file/academy-of-management-executive-2004-vol-18-no-.html

  12. bongstar420 on

    This assumes profiting is ethical to begin with. I don’t believe that is possible unless the workers own the enterprise, the profits are only generated by doing better work than the “competition” and not by any other means. Additionally, ownership cannot be predominately allocated to management and there cannot be any idol owners at all. Everyone involved must have a percent take of the enterprise and everyone must vote on what positions have what value.

    • Chris MacDonald on

      So, paying someone to do work is unethical? That’s an odd proposition.


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