May 26, 2014

How Ethics Benefits Corporate Profits

By Ron Robins*, Founder & Analyst - Investing or t!e "oul
#!is arti$le irst eatured in %ision &aga'ine, ((()vision)ae
*ust as strong et!i$s are ne$essary or benei$ial relations!i+s (it! riends and
a&ily, so t!ey are vital or driving a $o&+any,s long-ter& inan$ial +eror&an$e) A
$o&+any,s strong et!i$al $ulture e-uates (it! !onesty, res+e$t or e&+loyees,
$lients and s!are!olders ali.e)
I began to understand t!e value o et!i$s in $o&+any aairs &ore t!an 40 years
ago) As a inan$ial analyst or a /anadian invest&ent &anage&ent ir&, I sa( t!at
$o&+anies (it! an et!i$al $or+orate $ulture a++eared to !ave above average +roits)
0ver ti&e, t!is 1et!i$al $ulture2 be$a&e identiied and branded as $or+orate so$ial
res+onsibility 3/"R4) 5o(ever, &y belie t!at $o&+anies (it! strong et!i$s !ave
!ig!er +roits (as not a$ade&i$ally $onir&ed until 2004)
#!at resear$!, $ondu$ted by t!e 6niversity o Io(a, ound a signii$ant +ositive
asso$iation bet(een $or+orate so$ial +eror&an$e 3/"74 and $or+orate inan$ial
+eror&an$e 3/F74) It also dis$erned a virtuous $ir$le (!ereby /"7 in$reased /F7,
t!en /F7 in$reased /"7, and so ort!)
As an analyst, I .no( t!at t!e $alibre and tena$ity o &anage&ent and (or.or$e
are +robably t!e &ost i&+ortant deter&inants or $or+orate su$$ess) And $o&+anies
(it! good re+utations are li.ely &ore su$$essul in attra$ting t!e&, as t!e indings in
a 2018 /R Maga'ine & Allegis 9rou+ "ervi$es survey illustrates) 0 1,010 6" adults
surveyed, 16: +er $ent o A&eri$ans (ould not ta.e a ;ob (it! a $o&+any t!at !ad a
bad re+utation, even i t!ey (ere une&+loyed2)
Anot!er a$tor I !ave observed is t!at robust /"R +oli$ies oten grant ir&s a lo(er
$ost o inan$ing, (it! invest&ent in good e&+loyee relations, environ&ental +oli$ies
and +rodu$t strategies re(arded (it! a redu$ed $ost o e-uity)
"trong et!i$s and /"R +ositively inluen$e su++lier relations, too, and so !el+
&a<i&ise +roits) It !as been observed t!at t!e -uality o a ir&,s net(or. +artners
$an de$line ater t!e $o&&ission o an unet!i$al a$t) =-ually, litigation $osts
resulting ro& bad et!i$s $an destroy +roits) #!is !as been evident or ban.s in
re$ent years) My vie( is t!at t!ese legal +enalties !ave been insui$ient to date) But
t!ere is !o+e o urt!er substantial ;usti$e or$ed by &ar.ets)
"o&e (ould argue t!at a o$us on et!i$s $an a$tually i&+air a $o&+any,s
+roitability) But a study +ublis!ed by t!e 6" >ational Bureau o =$ono&i$ Resear$!
in 2011, revealed so&et!ing really as$inating) It ound t!at out o 8,000 +ubli$ly
traded $o&+anies, t!e &ore a $o&+any is $or+orately 1irres+onsible2 3&ig!t e-uate
(it! being unet!i$al4 t!e &ore it tries to be $or+orately so$ially res+onsible)
I /"R a$tivities (ere not benei$ial to $or+orate inan$es, t!en (!y (ould
irres+onsible $o&+anies turn to /"R? And (!y do &ost large +ubli$ $o&+anies today
engage in /"R? Be$ause t!ey believe t!at /"R en!an$es re+utation and i&+roves
$or+orate +eror&an$e and +roitability)
#!us, I +redi$t ever-!ig!er et!i$al and /"R standards or $o&+anies every(!ere)
Furt!er&ore, $o&+anies (ill need to issue standardised and inde+endently audited
/"R re+orts to &eet t!e de&ands o t!eir sta.e!olders, in$luding s!are!olders and
sto$. analysts (!o in$reasingly value t!is inor&ation) =veryone (ill be able to
evaluate t!e ee$tiveness o a $o&+any,s et!i$s and /"R a$tivities as t!ey relate to
its o+erations and +roitability)
@e see t!at a strong $ulture o et!i$s A re-uired or su$$essul +ersonal relations!i+s
A si&ilarly beneits $or+orate +roitability in &any (ays) #!is in$ludes attra$ting and
retaining a loyal (or.or$e, o+ti&ising a ir&,s re+utation, redu$ing a $o&+any,s $ost
o e-uity, en!an$ing su++lier relations, and &itigating litigation and asso$iated $osts)
Bes, !ig!er $or+orate et!i$s is a re-uire&ent or all $o&+anies interested in driving
t!eir inan$ial +eror&an$e) And it is a $aring $a+italis&)
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*Ron Robins, MBA, is founder, Investing for the Soul, (http://investingforthesoul.com/),
a globall popular and respected ethical investing !ebsite. "e advocates, !rites and
teaches on the sub#ect of ethical investing. $o contact him, e%mail to Ron Robins or call
&'(%&)*%+'),.