Ethical Conduct Pays Off for Corporations - Probably

THE financial scandals of the 1980s and early 1990s have focused unprecedented attention on issues of business ethics, giving rise to a veritable mini-industry among academics, consultants, and publishers. Arguably, the question most asked of experts in this area is: "Will an ethical company make more money in the long run than a less-than-ethical concern?""I believe that you can make a case," answers James Burke, former chief executive officer of Johnson & Johnson. "But you have to do it subjectively. There isn't a whole lot of data on the subject." William Norris, founder and former CEO of Control Data Corporation, agrees. "It's very clear that in the long run an ethical company will outperform a company that is not." It could be expected that Mr. Burke and Mr. Norris would embrace such a position. Both earned acclaim for the social responsibility exhibited during their tenures as heads of major corporations. Burke was the executive who led Johnson & Johnson so forthrightly through that company's Tylenol poisoning crisis back in the early 1980s. Others doubt that good ethics result in good profits. "It's not true," asserts David Vogel, a business professor at the University of California, Berkeley. "If good ethics led to good profits, there would be nothing to worry about." Lots of ethically flawed characters do quite well in a market economy, Mr. Vogel says. Drug dealers are one example. The notion that good ethics leads to good profits is "part of American moralism," he observes. "No one outside of America thinks good ethics is good business." Burke counters that trust is critical if a business enterprise is to prosper. "A brand-name is vastly more valuable to a company than a patent," he says. "And what is a brand name other than the trust that exists between a company and the consumer?" The same sort of "trust" has to be forged between employees and managers. "And to keep that trust requires ethical behavior," Burke says. Some years back, Burke commissioned a study to determine whether companies that were driven by a "simple moral imperative," i.e., "serving the public in the broadest possible sense better than the competition," would also outperform them at the bottom line. The "moral" companies selected included AT&T, Coca Cola, Gerber Products, IBM, J.C. Penney, Johnson & Johnson, John Deere, Kodak, 3M, Pitney Bowes, Procter & Gamble, and Xerox. How did they perform? From 1950 to 1990, the annual compound rate of growth in terms of market value of the 12 companies was 11.3 percent, compared with 6.2 percent among all Dow Jones industrials. Not all the 12 "public service" companies are doing so well today. Xerox and IBM, to cite two, have underperformed the market in recent years. But Burke is confident that, given those companies' commitment to "serving the public," they will eventually rise above their problems. Joan Bavaria, president of Franklin Research and Development, a social investment firm, tends to agree with Burke. Franklin has done research on various issues in the last 10 to 15 years, and while "I wouldn't call it a direct correlation" there is "definitely a link" between ethics and profits, she says. "Ethical management keeps firms away from some of the problems" that have bedeviled other companies. Berkeley's Vogel is unimpressed. Much depends on the industry in which one operates. If one does business in an sector where cheating or deception is the norm, then a company that behaves ethically could well find itself cut off at the knees. "It's often situational," he says. And as for the J&J study: "Johnson & Johnson was just found guilty to stealing trade secrets from its competitors," Vogel notes, suggesting that even so-called ethical companies may have chinks in their moral armor. Vogel has even suggested that in many cases corporate responsibility "rather than being the cause of increased profitability, may instead be the consequence of it." Profitable companies may simply have more money to lavish on employees, the community, philanthropic causes. Burke himself acknowledges that while ethical conduct "makes it easier to be successful, it doesn't ensure success." By the same token, "operating unethically won't make it any easier, either."