The Ethical Wave In Business

Throughout the country, companies are shifting their business models to better align with their ethical values. However, these new changes may bring new risks.

November 27, 2024 | by BCCCC Staff

Companies today have no choice but to recognize that image and reputation are vital to sustainable success. In today’s world of public, rapidly distributed scrutiny, the need to be viewed as operating ethically is more important than ever before.

The need for an authentically ethical business culture stems from a powerful wave of change that is not going to ebb any time soon.

To minimize risk and maximize business outcomes, companies strive to be clear about how ethics and culture sit in this matrix of shifting influences, from shareholders and stakeholders alike.

A Constant Churn of Challenges

Within the global marketplace, myriad cultural and moral values are in play, and sometimes in conflict. In a world where citizen journalism has created infinite networks of information-sharing and potential exposure, the ability of companies to control the narrative around their reputation is increasingly challenging.

In the context of reputation management, the shifting role of ethics in business stems from a variety of sources:

• Investors and shareholders are measuring company performance against environmental, social, and corporate governance (ESG) indexes, as well as against the quarterly balance sheet.
• Employees, clients—and other stakeholders, such as wider society—are scrutinizing companies in terms of diversity, equity, and inclusion (DEI) commitments.
• Customers wishing to consume ethically are influenced by strong corporate social responsibility (CSR) indicators.

Being Ethical

What is an ethical company?

The general public often thinks of ethical companies as those that put stakeholder interests—for example, employees, customers, community, the environment, and society—above or on par with shareholder interests.

Ethics, as we know, refers to the rules or guidelines that establish what conduct is right and wrong. However, many people use the terms “ethics” and “morals” interchangeably.

As such, the definition of an ethical company is infused by an individual’s perception of their own ethics—their own decision-making framework.

Tom Tropp, Chief Ethics Officer at Gallagher, points out, “If you ask a company whether it’s ethical, the answer will likely be yes. However, the next step should be to ask for a definition of what its ethics are.”

With the increasing role of ethics in business success, coupled with each individual employee’s perception of ethics, how is a company to mitigate potential ideological conflicts when making critical business decisions?

Tropp continues, “When we at Gallagher talk about doing business ethically, we mean conducting business in alignment with our beliefs, values, and culture… what we call The Gallagher Way—doing what’s right by our clients, communities, and people. We’ve documented what ethics look like to us so that we can reinforce them across all our teams and behaviors.”

Minimizing the Risk of Damage

Reputational factors, though less tangible than the numbers on the quarterly balance sheet, are nevertheless of vital importance in reducing long-term risks.

Public perceptions of the degree to which a company behaves ethically (or unethically) can ultimately affect revenue generation. A company’s ethical stance, then, becomes a central pillar of its financial success.

“Every company has a culture, whether good, bad, or indifferent,” commented Ray Iardella, Vice President, Investor Relations at Gallagher. “If I were an investor, I would want to have conversations with management and understand the culture before investing.

”While there are examples of successful corporations enjoying continued success despite multiple instances of bad press or legal action, it’s nevertheless advisable for all companies to consciously consider their own ethical footprint to ensure they are enabling their teams to make informed decisions with regard to how their behavior is perceived externally and alignment to its core values.

Documentation and reinforcement at every level of operation is needed to minimize risk of reputational damage. And this need doesn’t stop in the business world: The Supreme Court of the United States adopted its first formal code of conduct governing the ethical behavior of its nine justices in November 2023.

Codifying an organization’s definitions of right and wrong behavior is an important tactic that drives alignment on values and ensures consistency in actions across the organization that impact public perception.

This external brand image is critical to long-term reputational factors that feed sustainable success.

Being ethical—and being recognized as such—is core.

Advertisers certainly have a keen understanding of this: according to a Statista August 2023 survey among chief marketing officers (CMOs) in Canada and the United States, 56% of respondents said they were allocating 11-40% percent of their marketing budget to the promotion of business sustainability efforts.¹

Increasingly, the challenge is to embody a set of authentic values that permeate a company’s whole culture.

The key is for everyone in the company to understand the company’s ethics and to embody them every day in their work.

Deep-Seated Changes Bring New Risks

Ethical companies can be more attractive to clients and, importantly, to talented employees—fueling success, while unethical behavior can create risks such as reputational damage and costly legal actions.

“When identifying an organization’s biggest threats and determining the best ways to manage them,” commented Lisanne Sison, Managing Director, Enterprise Risk Management at Gallagher. “The key to thriving comes down to organizational culture, which is driven by ethics, values, trust in leadership, and the purpose and direction of the organization.”

Stakeholder vs. shareholder decision-making

The top-down hierarchical shareholder model used to dominate how business was done. In this model, the primary responsibility of the CEO is to grow value for the shareholders. The goal: To maximize profit.

Towards the end of the 20th century, the stakeholder model gained traction.

In this model, the primary responsibility of the CEO is to grow value for a wider group of beneficiaries—the company’s stakeholders, including employees, shareholders, suppliers, clients, and society. The goal: To bring value to all stakeholders while pursuing the company’s wider purpose.

The importance of shareholder values

While the stakeholder model stresses a wider set of priorities than the shareholder paradigm, shareholders are nonetheless also interested in a company’s ethical dimension. Iardella points out, “Some shareholders in our base focus on ethical behavior and prioritize companies they perceive as being at the forefront of ethics.”

Here, as elsewhere, it’s essential that a company’s ethical position is perceived to be authentic, with a set of embedded practices carried out by engaged, empowered personnel, rather than a notional, rhetorical commitment, with ethical practices simply layered on top of historical company practices and culture.

“Our mission statement includes four stakeholders: clients, employees, insurance carrier partners, and shareholders,” notes Iardella. “We prioritize taking care of our employees, developing and growing them. Clients are crucial to our business, and insurance carrier partners provide the products we sell. If we fulfill our responsibilities to these stakeholders and conduct ourselves in the right way, shareholders are likely to be rewarded.”

From Hierarchies to Circles

The emergence of the stakeholder model was paralleled by a shift towards companies using their employees’ insights to improve the way the business operated.

“This shift led to the development of a more circular business culture—one where ideas and input from middle management and employees were valued and implemented,” says Tropp. “This concept of listening, requesting input, and respecting it became the foundation for developing a company's culture.”

The senior management cohort plays an essential role in establishing and maintaining a circular culture. Without senior managers’ buy-in and demonstrable commitment to seeking and taking on board feedback, the circular flow of information and reality-led improvement will seize up, and the wheel of the virtue will stop turning.

Compliance and Ethics

Another aspect of employee engagement and behavior centers on the distinction between compliance and ethics.

“Compliance tells us what we must do, while ethics tells us what we should do,” says Tropp. “Compliance is about adhering to the law and not violating any regulations. Ethics, on the other hand, is about beliefs, values, and culture.”

In this context, the provision of guidance documents is essential.

Many companies have programs wherein employees formally sign off their review and understanding of legal compliance obligations, but the ethical component is more difficult to document and make meaningful.

“Doing business ethically, to me, means more than just focusing on profit,” says Sison. “It's about ensuring that your work aligns with your values and regulatory requirements, and that you can trust the organization to do the right thing, even in the absence of specific, documented guidance. Ethical culture acts as guardrails to guide the organization when specific direction or policies are lacking.”

The Engaged Employee

Beyond the implications of the stakeholder model and the idea of a circular culture, the question of how employees engage with their work is another factor in the ethical risk equation.

A recent LinkedIn survey showed a 154% increase in entry-level job ads that feature culture and values over the previous two years; job postings that mention values such as culture, flexibility, and well-being now receive nearly three times more views and twice as many applications.²

Digital Risk Exposure/Mitigation

The closer alignment of employees’ personal values with their work, coupled with the parallel desire to influence what happens in the workplace via the circular model, could be seen as reflections of broader trends in society that have been facilitated by digital democratization.

As well as opening an infinite supply of alternative viewpoints, where once upon a time gatekeepers limited the breadth of discussion, the internet has created avenues for individuals to share information about companies and their behaviors more quickly and widely than ever, creating another vector of risk for companies.

Employees’ desire to align their own values with the company’s values can contribute to risk mitigation.

Embedding an Ethical Culture 

Walk the walk

Changing culture is hard and often involves a change of leadership or a new vision. Commitment to change of this kind requires embodiment of values from top to bottom.

For example, Sison says, “Studies I’ve seen recently indicate that executive and senior leaders are more likely to declare that their company has a strong ethical culture than are individual contributors and front-line employees. This is a gap in alignment that can lead to risks for those organizations.

”Iardella adds, “You really need a new vision and a long-term process to ensure that vision is spread throughout the organization. It keeps coming back to leadership; it starts at the top. An organization either has it or it doesn't, and it's challenging to make significant changes.

”It’s worth noting that the growth of ethics and values within a company can only really be measured internally.

Tropp adds, “Quantifying the values of a company is challenging, and is something external organizations may struggle with. Change and authenticity can only come from within, drawing on the commitment and expertise of all staff.”

Conclusion

The risks related to reputation management and staying competitive are influenced by the changing landscapes of business culture, shareholder and stakeholder interests, employee aspirations, and the internet’s ability to broadcast vulnerabilities.

Statements of values, acting as a flag to rally around, is an important part of embedding a set of ethical principles and behaviors, if the statements are authentic and are adhered to from leadership down. As Tropp points out, “It’s crucial for companies to demonstrate publicly what they stand for.”

Likewise, the provision of a robust reporting system, coupled with a credible investigation and disciplinary process that is understood and trusted by employees, is also key.

Generational and societal shifts will keep on coming. Stasis is no longer an option: company cultures can benefit from documenting its ethics as a consistent decision-making framework, monitoring how their ethical stance—and, vitally, the way their ethics are put into practice—affects their ability to respond to changing circumstances, and has a measurable impact on talent and its profitable and sustainable growth.

Tropp notes, “When it comes to our business, people don't buy from companies; they buy from people. They are introduced to a company through individuals, and then they start doing business with the company. It all starts with the people.”