The new ROI

ROI as the acronym for ‘return on investment’ is central to most businesses. The investment of capital and resources is intended – and expected - to deliver a financial return. But there’s another, new ROI, the return on integrity, which centres on an investment in workplace ethics.

The two ROIs are similar as regards failure to deliver. Failure to deliver financial returns and failure to conduct a business ethically both risk eroding shareholder confidence and, ultimately, jeopardising the on-going existence of the company. Unethical conduct can also damage the organisation’s reputation, diminish customer support, and incur financial costs in the form of fines or legal settlements. Yet there is often not as much focus on ethics and the return on integrity as on the return on investment.

Ethics in trust-based businesses

Ethics is especially relevant for businesses that are trust-based, such as financial services companies and legal practices. Their services and advice require a high level of client trust both as regards their expertise and their integrity - way beyond the level of trust required in, for example, the retail industry where a customer’s interaction may only entail a transactional purchase.Earning this trust necessitates that the return on integrity is recognised and acted upon – which, in turn, requires leadership’s commitment to ethics.

But an ethical culturewas not what was highlighted about Goldman Sachs when former executive, Greg Smith, resigned in mid-March. His use of terms like “morally bankrupt” and “toxic culture” raised the question of whether the financial services industry has changed from the self-serving culture that was perceived to have contributed to the financial crash.In legal practices the way many candidate attorneys are treatedalso does not reflectan ethical workplace.

Two polls in the US revealed further perceptions about these industries. A Gallup poll in late 2011 assessed perceptions of honesty and ethics in different professions. Nurses were considered the most honest and ethical, with a score of 84%. Bankers only scored 25%, and lawyers, business executives, and stockbrokers were viewed even worse, scoring 19%, 18% and 12% respectively. In April this year a Harris poll posed the question: “Do you believe that most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it?” The result was a very high ‘yes’ response (70%). Although this result should arguably be moderated since it is possible that other groups would have responded similarly, it nonetheless reflects poorly on the financial services sector.

Building an ethical culture

It follows therefore that paying attention to building and maintaining an ethical cultureis imperativewhenbusiness success depends on a high level of trust.

Leadership’s commitment to ethics is a primary factor to create an ethical culture. Their behaviour effectively demonstrates to their followers what is and isn’t acceptable, therebyshaping the company’s culture and reinforcing or undermining the company’s values.

The goals and strategies the company’s leadership pursue are also relevant. When, for example, they promote profits above all else - as Smith claimed Goldman Sachs did - this results in a culture which sidelines the interests of the clients. In the legal industry (as well as accounting and consulting firms) the goal of maximising billable hours reflects an ethical vulnerability. Delivering on the targets set for billable hours is generallyin employees’ best interests, earning them benefits such as recognition, a promotion, salaryincrease, or bonus. This can easily lead to expanding the scope of work unnecessarily or, worse, to inflating the billable hours. Although unethical, it can foster an ‘ends justifies the means’ view. Leaders therefore need to consider what behaviours their organisation’s goals and measures are likely to encourage, and avoid ill-conceived goals in an effort to avoid unintended consequences.

A high level of transparency is a further factor that adds to an ethical culture. Since transparencyis synonymous with openness and honesty and involves sharing all relevant information, it builds and maintains trust. The opposite is also true: a lack of transparency can be very damaging, such as whenan organisation chooses to handle serious ethical matters in secret internally. This approachcan be defended on the grounds that making unethical incidents publiccan undermine the organisation’s reputation, customer confidence, andthe share price for publicly traded companies. The risks, however, are far greater if misconduct is exposed by another party, such as the press.

Maintaining a high level of ethical awareness and regularly measuring and reporting on ethics all support the preservation of an ethical culture.

The returns on integrity

A valuable return of an investment in integrity is the creation of a more trustworthy workplace. This brings with it internal advantages, for instance, greater confidence in top management action, more individual accountability with less need for policing, and faster and more consistent decision making.A company culture based on integrity can also reduce the risk of ethical failure, fraud or corruption and the associated costs.

Adding to these benefits competitive advantage can be regarded as the most important return. Competitive advantage is critical for almost all companies, but is frequently limited because of the ease and speed with which it can be copied. A unique source of competitive advantage, which cannot be easily copied, therefore has far greater value. Workplace ethics offers such a source: it is not easy to copy, cannot be bought or sold, cannot be owned, but rather must be lived every day.

Creating an ethical culture is not a perfect panacea which will prevent all future misconduct. And the potential rewards may not be appreciated at companies where the goal of ‘profit at any cost’ dominates. But for many others getting this right – being seen to be ethical –can deliver a new source of capital, ethical capital, which can boost their conventional ROI.

By Cynthia Schoeman, MD, Ethics Monitoring & Management Services (Pty) Ltd
Published in Directorship
Jul/Aug/Sep 2012