Culture, integrity and profitability: results of an important new study

Is it enough that virtue be its own reward – with no expectation of a tangible benefit in being virtuous?  Given the evolutionary roots of humanity’s principal moral instincts – as described in Jonathan Haidt’s The Righteous Mind  – it is hard to see why this should be the case.   These instincts  help to explain, he shows, why some human societies survived and prospered while others did not.  Broadly speaking, being successful by being moral is not merely a slogan; it is part of who we are.

Moreover, in the business setting, there is a clear need to show positive outcomes for ethical conduct because of the enduring  influence of a free-market critique of business ethics associated with Milton Friedman’s 1970 article “The Social Responsibility of Business is to Increase Profits.”   While I do not agree with his view, I understand its appeal:  it has the virtue of simplicity – and hence being easy to apply;  and, particularly with respect to public companies – where managers act as stewards of other people’s money – it can certainly  be seen as fairness based.

But even if the case for a minimalist approach to business ethics was compelling in 1970 things are materially different today.  Companies in the US and increasingly elsewhere face significant punishment and other costs for various forms of transgressions.   In this setting, a strong ethics orientation in general and compliance and ethics programs in particular should be expected to produce measurable positive results – meaning reducing risks of harmful conduct (for instance, by increasing the likelihood that employees will report suspected violations to an appropriate company resource).  Indeed, C&E programs have been shown – in research by the non-profit Ethics Resource Center and Institute for Business Ethics – to produce such outcomes.  But one suspects that Friedman – whose paper was about maximizing profits, not avoiding prosecution – would need more than this to be persuaded.

Well, perhaps that case has now been made.  A paper published last fall –  “The Value of Corporate Culture” by Luigi Guiso, Paulo Sapienza  and Luigi Zingales    (which is available from SSRN here   and was summarized last week  in a post on the Harvard corporate governance blog) – takes direct aim at the issue of whether ethical behavior promotes profitability.

The authors – whose focus, I should stress, is more on culture than ethics – were not looking at all or even most aspects of business ethics but whether companies having a culture of integrity performed better in certain core areas than did other organizations.  For the study, they identified  companies with a culture of integrity by using responses to questions on an employee survey that sought to gauge the respondents’ agreement/disagreement with these two statements: “Management’s actions match its words” and “Management is honest and ethical in its business practices.” (The second is a bit more directly  ethics-related than the first, although the latter is certainly relevant to the meaning of integrity as consistency and also  to trustworthiness.)

“When we use these measures,” the authors write,” we find that high levels of perceived integrity are positively correlated with good outcomes, in terms of higher productivity, profitability, better industrial relations, and higher level of attractiveness to prospective job applicants.”   While you’ll have to consult the paper for the actual statistical results, the bottom line is that for C&E professionals seeking to show directors, officers and other employees of their respective companies that good ethics is good business, the news could not be better.

(Note that there is a lot more to the paper than this headline  – including findings on the irrelevance, from a performance perspective, of professing/advertising  – as opposed to actually practicing – values; on the greater difficulty that public, as opposed to private, firms have in maintaining a good culture – a striking result indeed; and on the small degree of impact that certain traditional measures of corporate governance have on culture.   Of interest, too, are the authors’ thoughts on how an integrity culture functions – as a commitment  not to engage in the sort of economic calculations that can lead to undesirable behavior, and how that  mechanism can address “moral hazard” related risks.  So, loads of good stuff – and I encourage you to read the original.)