ROI as the acronym for ‘return on investment’ is central to most businesses. Their investment of capital and resources is intended – and expected - to deliver a financial return.

But there is another ROI, the return on integrity. This rests on the investment in integrity which encompasses not only honestly, but ethical conduct relative to shareholders, stakeholders and the environment. There is often not as much focus on this ROI as on the return on investment. Yet, this ROI can also have a major impact on organisations.

f The two ROIs are similar as regards a failure to deliver, which, in both cases, can lead to numerous negative consequences. Continued failure to deliver a financial return does not merely risk losing shareholder confidence, but also risks the ongoing existence of the company. So too, failure to conduct a business honestly and ethically can erode shareholder confidence, damage the organisation’s reputation, reduce its brand equity, diminish customer support, incur financial costs and, in extreme cases, lead to the closure of the business.

The many ethical scandals, locally and internationally, have illustrated these costs, as in the case of South African estate agency boss, Wendy Mechanik, whose long established national business collapsed in 2010 after allegations that she had been misusing trust funds.

The financial costs can include fines, such as those levied by the SA Competition Commission, legal settlements, such as New Corporation’s payments to the victims of the News of the World phone hacking scandal, and losses, such as UBS’ $2.3 billion loss as a result of the unauthorised activities of one of their traders in London.

The requirement to conduct business ethically for multinational companies increasingly also extends to an expectation that the organisation’s suppliers conduct their businesses ethically as well. This is a very noteworthy extension of the company’s ethical responsibilities. Among the primary focus areas are suppliers’ labour practices, an example being the use of child labour in factories in the East and on cocoa plantations in West Africa and South America.

In the 1990s Nike, the sportswear manufacturer, faced a significant consumer boycott in Europe and the USA when they were accused of unacceptable labour practices in their factories in Indonesia and Vietnam. This not only affected their profits adversely, but had the effect of linking issues of ethics and ethical behaviour directly to an organisation’s (economic) bottom line.

The cost of unethical conduct is thus very clear. But, for business, the more pertinent questions are likely to be: Is there a return on integrity, and what is the return?

A company culture based on integrity and supported by ethical leadership can serve to reduce the risk of ethical failure, fraud or corruption and the associated costs. But, avoidance of a cost would rarely be considered a return.

A valuable return would be the creation of a more trustworthy workplace. This brings with it additional advantages such as faster and more consistent decision making, greater confidence in top management action and more individual accountability with less need for policing.

Another likely return of being considered an ethical organisation is the ability to attract and retain top staff and board members. In countries which face a skills shortage, such as South Africa, this is a notable benefit.

An organisation that can show consistent sound ethical behaviour can also benefit from improved investor and market confidence, reduced cost of capital and easier access to capital.

Enhanced corporate reputation and brand equity are also significant returns on a corporate investment in integrity.

Adding to these returns – which also reflect why workplace ethics makes good business sense - competitive advantage may well be regarded as the most important return.

Although competitive advantage is critical for almost all companies and industries, it is frequently limited because of the ease and speed with which many sources of competitive advantage can be copied. A unique source of competitive advantage, which cannot be easily copied, therefore has far greater value.

Workplace ethics offers just such a source: Ethics is not easy to copy, it cannot be bought or sold, it cannot be owned, but must be lived every day.

Being able to establish a unique source of competitive advantage may not deliver an easily measureable return, but that does not diminish its value. Ethics is one of the company’s most valuable intangible assets, and recognition as an ethical organisation delivers ethical capital as an important return.

For these reasons, among others, the view that ethics is a luxury which organisations can’t afford because of competitive pressure is increasingly giving way to an acceptance that ethics makes great business sense – not least because it delivers good returns.

However, getting from an acceptance of that approach to reaping the rewards of an ethical organisation is not automatic. It will rest on leadership commitment, organisational will and the effective measurement and monitoring of the company’s ethical status.

By Cynthia Schoeman
Published in Ethical Living, Issue 5, April 2012