Being good is good for business

Research demonstrates that being ethical and socially responsible contribute to higher profitability

Indian tradition, since the days of Patanjali, has always considered greed or "lobha" to be one of the six disturbing elements of human harmony. However, as Indian markets increasingly become more and more capitalistic, driven by the "greed for profit", unethical or irresponsible corporate behaviour can certainly be a very tempting proposition to enhance short-term profitability. This can be by misleading customers, circumventing regulation that has a high compliance cost, by simply avoiding taxes or not being conscious of the environment or people. Surprisingly, both research as well as corporate practice from around the world has demonstrated quite the opposite-that being ethical and socially responsible actually enhances share prices and profitability in the longer term.

This is due to a number of reasons:

• First and foremost, multiple studies have highlighted a strong investor preference for ethical and socially responsible organisations, resulting in higher share prices and therefore richer shareholders. Nir Kossovsky, in his book "Reputation, Stock Prices and You" demonstrates, through the use of forward-looking big data that "the upside measure of success is an expected additional 4.3 per cent annual return on equity".
   
• Secondly, empirical research with American and European organisations have demonstrated that this also results in an increasing number of loyal customers, willing to pay a higher price for the company's products, thus increasing top-line and bottom-line.
  

 

The Institute of Business Ethics supported by the Kelly Services Survey reconfirms that an overwhelmingly larger number of employees (88 per cent) would like to work for ethical and socially responsible organisations, while 26 per cent would even accept a lower pay to be able to do so.

 

Last but not the least, increasing regulation around the world around ethical behaviour makes it financially attractive to avoid the penalties, litigation costs and activist behaviour. Prosecutions under the US Foreign Corrupt Practices Act for instance, which impacts all industries across all geographies, have resulted in fines to Fortune 500 companies up to US$800 million. In India, the recent Companies Act mandate for companies to spend at least 2 per cent of a qualifying company's three year average net profits to fulfil its CSR has also focused leadership attention to this important issue.

Ethics and CSR are thus becoming important and integrated elements of the strategic governance responsibilities of Indian Boards. This is replacing the fragmented, superficial approach that typically existed in the past, focused on producing glossy brochures and reports "for the main reception area of the corporate head office."

It is only now that progressive companies in India are beginning to realise that a strategic rethinking and operational alignment can, inter alia, not only enhance their effectiveness in preventing "bad things happening" (e.g. facing regulatory action for ethical failure or reputational damage), but also in positioning them for reputation-building and other strategic opportunities.

Michael Porter and Mark Kramer in their seminal paper in the Harvard Business Review, as early as December 2006, have set out their recommendations on how to better establish the link between competitive advantage and CSR which can now be applied to the Indian scenario. The fundamental principle here is to think win-win for business as well as for society in making these choices around potential initiatives by prioritising those initiatives that have the highest extent of social impact and the highest impact on the firm's long-term competitiveness.

In this way, an objective rationale for CSR activities based on shared value is established that is tied to the strategy and operations. "Pursuit of sustainable shared value to catalyse business growth alongside social impact outcomes must become embedded in the corporate cultural DNA.

The most adaptive and innovative organisations achieve this through a strategic re-orientation that is coherent, transparent and applied from C-suite to operational management" (Eaves, Aston Business School, cited in British Academy of Management, 2014).

For instance, a manufacturing company can have multiple initiatives around, say, emissions and waste management, labour welfare and worker safety, energy and waste management. Companies can opt for initiatives that are most aligned to their strategy and operations and have the maximum possible impact.

Thus an Indian automotive company may focus on carbon emissions, which is a significant social issue as well as a source of long-term competitiveness. For similar reasons, an engineering and construction company that focuses on delivering projects outside the metro cities can choose to focus on rural development projects that can be a source of recruitment of local workers.