Ethical business need not dent profitability

DR RODGER SPILLER opens a three-part series on ethical accounting.

Evidence is increasing that there is a strong correlation between ethics and sustainable financial performance.

Leading businesses internationally and local companies such as the finalists in the recent New Zealand Business Ethics Awards - 3M New Zealand, Datamail and Auckland International Airport - are committed to ethical leadership.

Businesses are explicitly incorporating ethics in their statements of purpose and principles, creating codes of ethics and supporting these with training. These commitments are being monitored through ethical accounting that reports on financial, social and environmental performance.

The increasing interest in ethical business has highlighted the need to define more explicitly just what is an ethical company. My doctoral research addressed this question, using international investment and business case studies to create four Ps of ethical business: Purpose, Principles, Practices and Performance measurement.

Purpose involves creating a triple bottom-line of environmental, social and financial wealth, thereby making a positive contribution to the environment and society in a financially responsible manner.

Ethical principles such as fairness, caring, honesty and courage guide individual and business behaviour.

Business practices address the concerns of stakeholders, including shareholders, customers, employees, suppliers, the community and the environment.

Performance measurement involves accounting for environmental and social as well as financial performance. This involves qualitative and quantitative measures, using both stakeholder perceptions and company data to determine performance in terms of the triple bottom-line.

I presented this research at the 12th European Business Ethics Network Annual Conference in Amsterdam last September. The growing numbers attending this and related conferences are another indicator of interest in this area.

The financial performance of ethical business can be seen in the Domini Social Index (DSI) of the leading 400 United States publicly listed ethical companies, as rated by Boston investment research firm Kinder, Lydenberg, Domini and Co.

The DSI has outperformed the S&P 500 and the S&P MidCap index since its inception in 1990.

For the five years to last September 30, the annualised returns for the DSI were 27.31 per cent, in contrast to the S&P 500 at 25.03 per cent and the S&P MidCap index at 18.57 per cent.

Last year, Dow Jones, of Princeton, New Jersey, joined with Sustainable Asset Management to create the Dow Jones Sustainability Group Indexes based on research of 3000 multinational companies. This showed outperformance by sustainability-driven companies of 5 per cent over their conventional counterparts in the last half of the 1990s.

Criteria included high standards of management responsibility and stakeholder relations, along with a commitment to society.

Tom Donaldson, of the Wharton Business School, reported that of the 50 main academic studies into the relationship between corporate ethics and financial performance, 33 showed a positive relationship, 13 were neutral and only four showed a negative relationship.

Research in Britain found that socially responsible companies have higher stock market returns, and taking account of ethics when investing is fundamentally sound since this selection criteria helps to effectively lower investment risk.

US research found that environmental performance and economic performance were positively correlated, with environmentally responsible portfolios achieving better returns compared both with the S&P 500 index and those companies considered not environmentally responsible.

Many investors and business leaders now believe that consideration of ethical issues does not compromise financial performance and can often increase return and reduce risk.

They cite factors such as attracting, retaining and enhancing the productivity of employees; improving customer sales and loyalty; increasing supplier commitment; contributing to environmental sustainability; reducing legislative demands; and strengthening community and Government relations.

They believe that management quality can be improved, and when combined with enhanced relationships with stakeholders, this can result in improved financial performance for shareholders.

New Zealand businesses are now able to access the types of support that international counterparts have been working with to enhance their ethical and financial performance.

For example, the recently launched New Zealand Centre for Business Ethics (NZCBE), supported by and working with the Auckland University of Technology, the University of Auckland, Manukau Technical Institute and the private sector, is encouraging business ethics research, education and practice.

New Zealand Businesses for Social Responsibility, following the lead of BSR in the US, is providing opportunities for New Zealand businesses that want to develop their capacity to increase their social, environmental and financial performance.

Its membership includes 160 companies ranging from The Warehouse and Deloitte Touche Tohmatsu to smaller companies such as Ponsonby Pies and Urgent Couriers.

Chairman Dick Hubbard has made hundreds of speeches to audiences including business groups such as Rotary and the Institute of Directors.

Transparency International, a non-profit, non-governmental organisation with over 60 chapters worldwide, has been established in New Zealand and is helping to counter corruption in international and national business transactions and to enhance business ethics.

The New Zealand Business Council for Sustainable Development, a partner of the world council, provides leadership as a catalyst for change.

These initiatives provide access to international examples, along with local examples such as those provided by the recent New Zealand Business Ethics Awards.

These awards are a joint venture between the Deloitte/Management Magazine Top 200 awards, sponsors Brookfields Lawyers and the NZCBE.

The winner of the inaugural New Zealand business ethics award was 3M New Zealand for its commitment to environmental management.

The company met the criteria of the four Ps: purpose and principles through a clearly documented, ongoing ethical commitment; practice through innovation and ethical leadership; and performance measurement that showed how the practice benefited the company, shareholders and other stakeholders to achieve a triple bottom-line of environmental, social and financial wealth-creation.

3M's environmental achievements in New Zealand include: installing a $1.3 million solvent recovery system to reduce plant air emission by recovering 90 per cent of solvents and then reusing them; a water conservation policy that has achieved close to a 65 per cent saving in water; a 50 per cent reduction in head office power costs by replacing fluorescent tubing; recycling office waste paper and cardboard, plastics and glass; and the Pallet Programme, which has recycled 80 tonnes of wood in the past 18 months.

Last May, 3M became an inaugural member of the New Zealand Business Council for Sustainable Development. All members of this group, which includes Fletcher Challenge and The Warehouse, are committed to producing triple bottom-line accounting reports this year.

That commitment to reporting and the examples of companies such as 3M are heralding an era in which business ethics are set to enter the mainstream of business practice.

To nominate a company for this year's business ethics awards or to learn more about the NZCBE, BSR or TI, contact rodger@moneymatters.co.nz

* Dr Rodger Spiller is managing director of the personal investment advisory firm Money Matters, NZ Financial Planner of the Year, director of the NZCBE, and a director of NZBSR and TI (NZ).