In order for a company to thrive, it needs to ensure the wellbeing and level of satisfaction with its stakeholders – investors, employees, suppliers and customers. Recent times have seen how bad conduct results in negative publicity, poor company image and a drop in share price. So should a company adopt ethical practices as a means of improving and securing a company’s economic performance?
According to EIRIS, studies show that ethics-related news influences a company’s share price for better or worse, revealing effects of between 0.5% and 3% of share price.
The lesson to be extrapolated from the shift in share price is the underlying knock on effects on the dynamics and relationships that enable that business to thrive, and ultimately the level of trust and confidence in management. Without this trust, stakeholders tend to limit investments, negatively affecting growth.
Although on the surface private companies may argue this doesn’t affect them since they don’t have a share price to worry about, they still have other stakeholders to bear in mind, especially customers, suppliers, employees and themselves as the ultimate owner of the asset – its value, reputation and standing.
People Taking Care of People
Employees prefer to work at companies where they will be treated with dignity, respect and fairness. Creating an environment in which employees feel they matter has a residual benefit in propelling them to create positive experiences for customers. But if employees see, hear or experience negative behaviour, it erodes their trust in and loyalty to the company, and the quality of care they feel compelled or empowered to portray to customers.
Companies with high levels of customer satisfaction tend to generate a higher degree of customer loyalty, repeat business and more market share in the long run. Customers may decline to deal with a business that causes them to be suspicious and afraid. Businesses that genuinely contribute to their community and maintain good relationships with other businesses tend to be more successful in the long run. On the flip-side, those who have corporate social responsibility efforts on the one hand but poor business practices on the other, are in danger of breeding cynicism into their customers, and mistrust.
Ethical business practices are sound business practices. Instead of being consumed by unnecessary lawsuits and other activities that detract from the mission and purpose, the business can focus on producing quality products and services that enable positive financial results for the company.
Beyond regulatory requirements, accurate financial records are key for sound decision-making and long-term success. Financial records provide an overview of return on effort, a tool to support business to measure its rewards for initiatives taking place in the marketplace. Sound and timely financial records are essential in determining the trajectory of the business, providing the means to course correct where and when necessary. They also provide the ability to respond quickly to opportunities that arise, without adding strain or unwarranted risk. Furthermore, a clear picture on the financial situation of the company will enable it to have the cash flow required to fulfill its commitments, a sound business practice to keep employees and maintain relationships with suppliers.
I was once told ‘whether you’re chopping trees or hugging trees, people look for returns.”
The fact of the matter is if you don’t keep an eye on your bottom line, the business will be unsustainable. The bottom line is affected by people’s perception, belief and likeability of your company. The internet and social media have provided stakeholders with the tools to have greater insight into the impact businesses have on our environment and society. Customers seek to do business with companies that reflect their values, and suppliers and investors would be wise to follow suit.
It is far easier to set off on the right foot in the first place than trying to course correct once calamity hits. That said, genuine errors and unforeseen circumstances do happen. The ability for a business to respond appropriately and speedily speaks volumes in the eyes of stakeholders. But waiting until a crisis strikes to instill and encourage good behaviours is a poor strategy given the time it takes to overhaul embedded systems, beliefs and practices. These changes result in delayed decisions, negative public opinion and a downward spiral in relationships with stakeholders. Not good practice for any business that needs customers, employees, suppliers and/or investors to thrive.
Some may still argue why change when some are getting away with it. Others may wait for regulatory bodies to force them to clean up their business practices. And there will be those who choose to see the tide is shifting – that the manner in which products and services are produced and delivered matters, the impact business has matters. Now is a good time to challenge the ills we tolerate under the guise ‘but this is business’ and start by acting responsibly in the first place.
As featured in Fresh Business Thinking