The Importance of Business Ethics: Why Ethical Conduct is Critical to Success (2024)

In today's complex business world, the importance of ethical conduct cannot be overstated. While profit and success are important, they must be achieved in a manner that is consistent with ethical principles and values. In this article, we will explore why business ethics matter, with references to relevant studies and data, provide practical tips for businesses to implement ethical standards and highlight some cautionary tales of ethical failures. We will explore Business Ethics by asking ourselves the following three questions:

1. Why do Business Ethics Matter?
2. What is the Problem Today?
3. What can Corporates do to make a Difference?

Why Business Ethics Matter:

Business ethics refers to the moral principles and values that guide business behaviour. It encompasses all aspects of business conduct, from decision-making to corporate social responsibility. Research has consistently shown that businesses with strong ethical values outperform those without, as they enjoy greater customer loyalty, employee retention, and stakeholder support.

According to a recent survey by Edelman (2021), 71% of people believe that companies should be transparent and ethical, and companies with high ethical standards are 10.7% more profitable than those without (Institute of Business Ethics, n.d.). In short, ethical conduct is not just the right thing to do, it's also a smart business strategy.

Business ethics is a concept that refers to the moral and ethical principles that govern the behaviour of businesses and individuals within the business environment. These principles include honesty, integrity, fairness, and responsibility, and they are meant to guide the decisions and actions of businesses in a way that is ethical and sustainable.

Business Ethics is important because the corporation is part of a larger network of stakeholders that include employees, the community, the environment, and Government bodies. Corporations being large and powerful members of this network have a greater responsibility to ensure its sustainability.

Ethical Corporations help in the following way:

1. They help to create a framework for responsible and sustainable business practices that benefit all stakeholders, including customers, employees, investors, and society as a whole. By considering the long-term impact of their decisions and actions, businesses can ensure that they are operating in a way that is sustainable and socially responsible. This can help to minimise the negative impact of business operations on the environment and society, while also creating long-term value for stakeholders.
2. They help to create trust between businesses and their stakeholders. When a business operates in an ethical and responsible manner, it is more likely to be trusted by its customers, employees, and investors. This trust can help to create a positive reputation for the business and enhance its brand image, which can lead to increased customer loyalty, employee satisfaction, and investor confidence.
3. They help to promote fairness and equality within the business environment. By adhering to ethical principles such as fairness and equality, businesses can create a level playing field for all participants, which can lead to increased competition and innovation. This can ultimately lead to better products and services for customers, as well as increased economic growth and prosperity.
4. They can help to prevent unethical behaviour within the business environment. By establishing clear ethical standards and holding employees accountable for their actions, businesses can reduce the risk of fraud, corruption, and other unethical behaviour. This can help to protect the interests of all stakeholders and ensure that businesses are operating in a way that is consistent with their values and principles.

What is the problem today:

Despite the overwhelming evidence that supports the importance of ethical behaviour, many businesses still fall short of meeting ethical standards. The consequences of ethical failures can be severe, ranging from loss of reputation to legal action.

Here are some examples of well-known ethical failures in recent years:

• Enron: Enron, a once high-flying energy company, collapsed in 2001 due to widespread accounting fraud and unethical behaviour by senior executives. The scandal resulted in the loss of thousands of jobs and wiped out billions of dollars in shareholder value.
• Volkswagen: In 2015, Volkswagen was found to have installed software in their diesel cars that cheated on emissions tests. The scandal resulted in billions of dollars in fines, a loss of trust among customers, and a significant hit to the company's reputation.
• Wells Fargo: In 2016, Wells Fargo was found to have created millions of fake accounts in order to meet sales targets. The scandal resulted in a $185 million fine, the resignation of the CEO, and a significant loss of customer trust.

In India itself, we've seen Satyam, Kingfisher, Nirav Modi and many more...

Some of the problems with business ethics in the corporate world today are that some companies:

1. Prioritise short-term profits over long-term success and ethical behaviour. This can lead to unethical actions such as fraud, corruption, environmental violations, and mistreatment of employees. In some cases, unethical behaviour can result in serious legal and financial consequences for the company, as well as damage to its reputation.
2. May not have clear ethical standards or may not prioritise ethical behaviour in their decision-making processes. This can lead to confusion among employees and a lack of accountability for unethical actions.
3. May create pressure on employees to prioritise business objectives over ethical considerations, such as meeting sales targets or hitting revenue goals. This can create a culture where unethical behaviour is normalised and goes unchecked.

Overall, the problem with business ethics in the corporate world today is a lack of emphasis on ethical behaviour and a focus on short-term gains at the expense of long-term success and ethical values.

What can Corporates do to Implement Ethical Standards:

1. Develop a code of conduct: A code of conduct is a critical document that outlines the ethical principles and values that guide business conduct. It should be communicated to all employees and stakeholders and serve as the foundation for all decision-making.
2. Train your employees: Educate your employees on ethical behaviour and the consequences of unethical conduct. Training should be ongoing and reinforced through regular communication.
3. Establish a whistleblowing system: Encourage employees to report unethical behaviour by implementing a confidential reporting system. This will allow you to address issues before they become more serious.
4. Integrate corporate social responsibility: Corporate social responsibility (CSR) is the practice of integrating social, environmental, and ethical concerns into business strategy and operations. Companies with strong CSR programs are more likely to build trust and loyalty among customers and stakeholders.
5. Emphasise transparency: Transparency is critical to building trust and credibility. Businesses should be open and honest in all communications and dealings with customers, employees, and stakeholders.
6. Build Ethical Leadership: Building Ethical Leadership requires a commitment to integrity, transparency, and accountability. Ethical Leadership is about creating a culture of trust, respect, and ethical behaviour, and leading by example. For instance, having a Board of Directors who can "walk the talk" on Ethics and are willing to go the long run instead of focusing on short-term gains.

Conclusion:

In conclusion, ethical conduct is critical to the success of any business. By implementing ethical standards, companies can enjoy greater customer loyalty, employee retention, and stakeholder support. However, as demonstrated by the examples of ethical failures, ethical behaviour is not always easy to maintain. The tips outlined in this article provide a starting point for businesses to develop and implement ethical conduct standards and serve as a warning of the potential consequences of ethical failures. By doing so, businesses can avoid reputational damage, legal issues, and financial losses associated with ethical failures. By creating a culture of ethical behaviour, businesses can build trust with their stakeholders and create long-term success.

While the steps to implement ethical standards may seem daunting, it's important to remember that ethical behaviour starts at the top. Business leaders must set the tone for ethical behaviour and hold themselves and their employees accountable for adhering to ethical standards. By prioritising ethics, businesses can build a strong foundation for success and make a positive impact on society as a whole.