You're in Good Hands with Good Ethics
In the long term, good ethics pays off. But the question I grapple with is how long is long term?
In their research, the authors looked at the melamine incident in 2008 when the Sanlu Corporation, one of China’s largest dairy manufacturers, announced that its products – baby formula and milk - had been contaminated by the toxic chemical melamine. They took these products off the market but it was later revealed that top management knew of the contamination but were afraid to recall product earlier because it would have hurt their reputation and sales. In 2009, three people involved in the scandal were sentenced to death.
“Using the melamine contamination incident in China as a natural experiment, it is found that neither the individual investors’ nor the institutional investors’ behaviors are influenced by firms’ CSR performance before the incident. Nevertheless, in the post-event period, institutional investors’ behaviors are significantly influenced by firms’ CSR performance that exceeds a certain threshold,” the authors wrote.
In other words, while good ethics pays off in the long run, it pays off immediately when a negative incident occurs. We saw this with the well-known Tylenol murders in which Johnson & Johnson’s reputation remained intact despite the incident because of their strong ethical stance beforehand.
This is an important finding because academic studies have often shown mixed financial benefits based on a company’s ethical behavior. The one bugaboo was the time frame. The authors note: "… studies on CSR (corporate social responsibility) and firms’ performance on the financial market report mixed findings even though some investors (e.g., socially responsible investment funds) explicitly favor firms that are socially responsible. Some researchers detect a positive relationship some discover a negative relationship and others find no relationship.”
They continue: “One plausible explanation for the discrepant results is the time frame of CSR activities: the costs of CSR are immediate, whereas many of its benefits are not realized promptly; therefore, investors with different time frames value firms’ CSR performance differently.”
Takeaway: Good ethics are like an insurance policy protecting your company’s bottom line from unexpected disasters.
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Larry Kahaner has been a business journalist for more than 20 years, a former Business Week Washington correspondent, and the author of many books about business ethics including: Values Prosperity and the Talmud: Business Lessons from the Ancient Rabbis; Competitive Intelligence: How to Gather, Analyze, and Use Information to Move Your Business to the Top; and Say It and Live It; The 50 Corporate Mission Statements that Hit the Mark, (co-author).