Corporate governance: Does business ethics pay?

The UK's Institute of Business Ethics seminal 2003 research into the correlation between companies’ use of codes of ethics and business performance against a range of financial measures was followed up in 2007 with this rigorous statistical analysis of company performance and more infrastructural ethical criteria.

The research tested whether:

  1. companies with Corporate Applied Ethics perform better financially than those only with Corporate Revealed Ethics;
  2. business ethics has a stronger impact on accounting-based measures or market-based indicators.

Four financial performance measures (return on capital employed, return on assets, total shareholder return and market value added) were analysed. The financial performance measures were adjusted for size, risk and price-to-book value as these are some of the factors that affect a firm’s performance.

The long run analysis, in the five years 2001-2005, showed a significantly greater positive relationship between provision of training for business ethics (Corporate Applied Ethics) and financial performance compared to those which only disclosed ethical values and their financial performance. The study also found that accounting-based measures are more influenced by business ethics training than market based indicators.

The results of this research are consistent with the expectation that companies with a demonstrable ethics programme benefit from the confidence that is instilled in their stakeholders. This facilitates reputation building, enhances relations with bankers and investors, helps firms attract better employees, increases goodwill, leaves the firms better prepared for external changes, turbulence and crisis and generally helps the firm run better.