Ethical commitment brings business success

Companies with a clear commitment to ethical conduct outperform those which do not, according to new research by the Institute of Business Ethics.

The research is the most thorough study ever carried out in the UK of the relationship between business ethics and business performance in large companies.

Using four indicators of business success, the research compared two groups of FTSE 350 companies: those with a demonstrable commitment to ethical behaviour through having a published code of business ethics, and those without. Their performances were then analysed over the five years 1997-2001.

Companies with an explicit commitment to ethical business were found to have produced profits an average of 18 per cent higher than those that did not.

On three of the four indicators - economic value added (EVA), market value added (MVA), price/earnings ratio volatility (P/E ratio), and return on capital employed (ROCE) - the companies with ethical codes were clearly superior, and on ROCE the results were less clear but supported the overall trend.

• On Economic Value Added, the sample of companies with codes outperformed those without over a four year period.
• On Market Value Added, the performance gap was even more marked.
• On Price/Earning Ratio, the more demonstrable ethical companies showed far less volatility than the remainder
• On Return on Capital Employed companies with codes underperformed those without between 1997 and 1999. Between 1999 and 2001, however, the trend was reversed, and ethical companies were clearly superior performers.

"This research takes the discussion of the importance of business ethics on to a new plane." said IBE Director Philippa Foster Back. "Not only is ethical behaviour in business life the right thing to do in principle, we have shown that it pays off in financial returns."

Alastair Ross Goobey former chief executive of fund manager Hermes and an influential voice on corporate governance, said that the research came at an opportune time.

"At a time when trust in companies is at a low ebb, a thorough approach to corporate ethics is even more important to reassure investors," He said. "Now that argument has been strengthened by the demonstration that doing the right thing pays."

The report also found that having a code of ethics equates to a higher than average score in Management Today's ranking of Britain's Most Admired Companies and in the SERM Risk Reduction Rating, and is therefore a strong proxy indicator of genuine ethical commitment and a well managed company.