Code of Ethics: Trade-off versus Necessity

Caulkin (2003) in his article entitled, "Ethics and profits do mix" dealt with 'ethics' and 'welfare' of business. To draw conclusion, it cited about the report of UK's Institute of Business Ethics (IBE) entitled, 'Does Business Ethics Pay?'. IBE observed that in a sample of FTSE 350 firms 'ethical' companies outperformed those which made no such claims on three out of four financial measures (market value added [MVA], economic value added [EVA] and price/earnings ratio). Between 1997 and 2001, it concludes, 'there is strong indicative evidence that large UK companies with codes of business ethics/conduct produced an above-average performance when measured against a similar group without codes'. While selecting companies for the study, IBE used those companies which actually had a published code of ethics in place for five years. Now Simon Caulkin was very forthright to mention, Of course, even that doesn't prove anything in itself. Enron had a code of ethics, and in many respects a good one, according to Philippa Foster Back, IBE director. The problem was that no one followed it. Hence, to make sure that the companies were actually living by their code, the IBE researchers investigated how they stacked up in Management Today's annual 'most admired company' league table, a survey of corporate peers and industry experts on non-financial performance aspects. This was cross-checked against a rating of the firms' 'socio-ethical risk management' (aspects such as poor corporate governance, lack of community involvement, human rights abuses) by specialist ratings agency SERM. The first finding was that there is a strong correlation between having a code of ethics, addressing non-financial risks effectively and being an admired company. In other words, having a code suggests that a company takes ethics seriously. Thus, 19 out of 24 companies which have figured consistently in Management Today' s league table over the past five years have codes of ethics and are rated more highly by SERM than those without codes. Code-equipped companies did significantly better on MVA and EVA than their rivals - and the gap seems to be widening. There is also 'compelling evidence' that companies with codes have a more stable p/e ratio than those that don't. On the fourth measure, ROCE, the findings are less clear-cut, with the 'ethical' sample underperforming until 1999 but then overtaking their competitors. However, considering Enron and others have proved it's not the code in itself which is important, IBE's cautious assertion was 'having a code of business ethics might... be said to be one hallmark of a well-managed company', rather than a waste of shareholders' money. My own comment after reading "Ethics and profits do mix" by Simon Caulkin is: As excellence cannot be achieved in parts, business can be well-managed only by following total code of ethics of the company.

Reference Caulkin, S. 2003. Ethics and profits do mix. (http://www.guardian.co.uk/business/2003/apr/20/globalisation.corporateaccountability), The Observer, UK.