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12 Sep

Why Ethical Companies Are More Profitable

Ethical Business and Profitability

There's a conventional wisdom floating around out there: Cut corners, and you get to keep more for yourself. In fact, because "short-term shareholder primacy" has driven so much corporate productivity since the 1970s, Americans expect companies to put profit first and assume that the more ruthless a company is, the better they are going to perform from a financial standpoint.1 At least, that's what the Harvard Business Review found when they conducted a survey asking people if they equated high profitability with low social value.2

The only problem with this reasoning is, it isn't true.

According to Just Capital, which ranks companies according to how ethically they behave, corporations that treat their workers and the environment well are also more profitable, receiving 3.5 percent higher five-year returns on capital investments.3 Just Capital's "Just 100," a list of the companies that most strongly meet their stringent ethical criteria, also pay eight times fewer consumer-related fines than their less ethical competitors.

Making an investment in ethical business practices allows companies to avoid the costly game of catch-up and the public relations nightmare that often ensues. It also can help ensure lower employee turnover, saving companies millions of dollars toward finding and training new workers and improving the morale and productivity of the people they retain.4

Nowhere is this discrepancy between perception and actuality more true than in the area of corporate compliance. Because the cost of compliance rose 43 percent from 2011 to 2017 alone, people assume that corporate compliance initiatives will bring down profits.5 But a recent study conducted by Ponemon Institute for the company Globalscape found that compliance is surprisingly cost-effective and that noncompliance costs companies on average 2.71 times more than doing the right thing.6 That translates into an average of $14.82 million spent on noncompliance, versus only $5.47 million to achieve compliance for a typical company.

Still not convinced? Here are some ethically and socially responsible companies that are also economic powerhouses.

Starbucks: Putting Out a PR Fire

Starbucks has been named one of the world's most ethical companies by Ethisphere Institute for 12 years running.7 Its response to a recent incident in which two black men, Rashon Nelson and Donte Robinson, were arrested at one of their locations while waiting for a business associate shows why.

Rather than ignore or downplay the incident, Starbucks enlisted the help of national organizations committed to racial equality and shut down 8,000 locations nationwide for racial sensitivity training. By acting in a direct and forceful way—and in a way that shows that the company values all of its customers—Starbucks sent a message to its shareholders that it was humbly listening and willing to learn.8 This public demonstration of an ethical internal culture may have saved Starbucks a worse hangover from the media firestorm; despite a dip in stock prices right after the incident, they have since recouped most of their market share.

Intel: A Reputation for Honesty

Intel is number one this year in the Just 100 and, like Starbucks, consistently makes Ethisphere's list of the world's most ethical companies as well. One reason for that is the emphasis Intel places on its code of ethics.9 Not only does Intel expect its own workers to uphold the standards it expresses, the company also holds its supply chain to the same standards.

Refusing to do business with companies that behave unethically, engaging transparently with its shareholders, and leaving a positive impact on the communities where they do business makes Intel a trustworthy company, and the value of this honesty far exceeds the cost of being a responsible corporate citizen.

AT&T: Focus on the Product

Everyone has some kind of gripe against the telecommunication industry, so it may be surprising to learn that AT&T is an industry leader in environmental sustainability and producing a quality product at a fair price, according to Just Capital. The company has committed itself to environmental efficacy since the release of its first Social Responsibility Report in 2006, and has made environmentally friendly changes to both its packaging and its supply chain.10

PepsiCo: Compliance Is Key

PepsiCo, yet another industry leader in ethical business practices, has made compliance one of their most important corporate initiatives, receiving the award for Best Governance, Risk and Compliance Program in 2014 from the New York Stock Exchange's inaugural Governance, Risk and Compliance Leadership Awards.11

PepsiCo's program Performance with Purpose is central to its compliance commitment.12 The program's focus is on sustainable business growth that also allows the company to manufacture healthier products and make investments in the communities it serves. This strategy ensures not only the continued success of PepsiCo as a company, but the improved health of its customers and the continued confidence of its shareholders as well.

Ethical Leadership Is Within Your Reach

Now that you know about the profitability of ethical behavior, there's no excuse not to aim for a career where integrity matters. Getting an Online Master of Legal Studies in Corporate Compliance from Santa Clara University School of Law will give you a foundation of legal knowledge you can put to work in a variety of careers, from finance to healthcare and human resources.

Whether you are just starting out or looking to advance your career in compliance, get in touch with a Santa Clara Admissions Advisor to learn how you could help make the world a better place and grow your company’s bottom line at the same time.

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