Expert Q&A: How Does CSR Contribute to Corporate Value?
23 Nov 2018 7:45 am by Mark Dunn
Rajita Kulkarni is the President of the World Forum for Ethics in Business (WFEB), which promotes ethical approaches to business and corporate governance. It has organised global forums to discuss ethics in sport and ethical approaches of young people. In an exclusive interview with LexisNexis, Rajita tells us that the evidence for the benefits of ethical business is now overwhelming.
Why is it important that companies embrace the values of ethics, good governance and sustainability?
Though conducting ourselves with the highest standards of morality and ethics should be the norm of leadership, if we need proof and validation that it is important, there is enough of it available.
The World Bank estimates losses due to corrupt acts at $1.3 trillion USD. The amount estimate refers to the annual worldwide transactions only and does not account for the significant losses in investment, private sector development, and economic growth to a country, or to the increases in infant mortality, poverty and inequality—all resulting from corruption and mis-governance. Countries weak in government effectiveness, rule of law, and control of corruption have a 30 to 45 percent higher risk of civil war. This has a direct impact on economic development and societal prosperity.
In recent research, more than a third of international business managers estimated corruption increases international project costs by more than 10 percent, while one-sixth believed corruption inflates costs by more than 25 percent.
There is also direct organisational impact of corruption and compromise of ethics. Organisations lose an estimated 5 percent of their annual revenues to fraud, according to a report published in 2013 by the Association of Certified Fraud Examiners (ACFE). Theft alone costs organisations as much as $660 billion annually (Meiners, 2005).
Unethical behaviour worsens efficiency and employee retention. 21 percent of employees polled in recent research said their firm's insufficient concern for ethics is a key reason to leave. Unethical behaviour can harm sales: 80 percent of people in one study said they decide to buy a firm’s goods or services partly on their perception of its ethics. Unethical practices can harm stock price: 74 percent people polled said their perception of a firm’s honesty directly affects their decision about whether to buy its stock.
What are the risks for companies that are unethical?
Organisations stand to lose out with respect to every stakeholder. Unethical practices reduce profitability over the long run, lower customer satisfaction & loyalty, impact employee engagement and loyalty, not to mention damage to brand and reputation
How do ethical businesses benefit from their approach?
There is a lot of research and data that proves that ethical businesses are sustainably profitable in the long run. According to the Ethisphere Institute, firms on the World’s Most Ethical Companies list have outperformed the S&P 500 by an average of 7.3 percent since 2007 in terms of shareholder return. In addition to increased financial performance, ethical companies benefit from better brand recognition, consumer loyalty and higher employee retention rates. Even consumers are willing to pay substantially more for ethically produced goods than for unethically produced goods, suggesting that there is a financial reward for socially responsible behaviour.
Companies are increasingly recognising that managing ethics and compliance risk holistically is key to fostering and sustaining a strong ethical corporate culture, and that by acting ethically, they have a greater opportunity to outperform their peers and win in the marketplace.
As the founder of WFEB, Sri Sri Ravi Shankar, says: "Trust is the breath of business, ethics its limbs and uplifting the spirit its goal".
How important is the tone from the CEO and leaders of a company in promoting ethics?
It is extremely vital and important. The code of conduct cascades from the top. If the CEO is ethical and demonstrates this in her day-to-day interactions and behaviour, that sets the norm for the rest. It builds the culture of the organisation. It’s the responsibility of the CEO and the leaders to walk the talk. Even if the institution has watertight policies but senior management doesn’t embody them, sustainable ethical behaviour is impossible.
You work with leaders. What advice do you give them about how to promote ethics in their company?
I say three things to my leader friends and colleagues: Have the conviction that it is possible to be profitable ethically, have the courage to behave ethically, and have the commitment to demonstrate this behaviour every day.
It is sometimes not easy. What can help is strength of the self. I have personally benefited from techniques like meditation and pranayama (breathing techniques) to find the strength within. It has ensured I stand tall and strong when personally faced with environmental and circumstantial challenges.
Are there countries or regions in the world with better or worse reputations for ethics?
Transparency International publishes a corruption perception index that annually ranks countries on this. It gives a good insight into how countries are getting better or worse on governance and transparency. Governments around the world are increasingly taking initiatives taken to fight and reduce unethical behaviour. I welcome these efforts.
At the same time, we must recognise that at the core of unethical conduct is the individual. While the governance framework is important, we must empower the individual and provide the right education to ensure that we do the right thing even when no one is watching.
Have you noticed any trends in ethics in business? For example, are businesses becoming ethical, and why?
In recent times we have observed the power of millennials in striving for purpose-driven business. While there are still challenges and a need to instil ethics and human values across various fields, we are observing a tendency that ‘business at any cost’ is no longer the driving factor. Instead, businesses and their people are becoming more and more aware of their social responsibility.
I am delighted to see that businesses around the world and their corporate leaders are beginning to embrace competitive strategies built on positive social and environmental impact even beyond the conventional CSR strategies, such as impact investing, shared value, inclusive capitalism and the triple bottom line approach. These companies are creating shared value by addressing societal needs in ways that improve their bottom line results.
How can companies use technology to implement an ethical approach and improve governance?
Companies today have the great advantage of leveraging technology, telecommunications and social media to create awareness about ethics. Campaigns, programs and digital communication can be used to engage employees on an ongoing basis. Success stories can be highlighted setting benchmarks and standards to be aspired to. Online training and education can be integrated in induction programs for onboarding new employees. Apps that guide in iterative ethical decision making can be made. There are many examples in the world today that can be emulated.
1. Download our eBook on Ethical Expectations to explore the topic further.
2. Learn how due diligence and ongoing risk monitoring help companies meet ethical standards.
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