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Are Ethical Companies Really More Profitable?

Are Ethical Companies Really More Profitable?

We take a look at the numbers behind the question and what they mean for your company.

Each year, the Ethisphere Institute names the World's Most Ethical companies based on governance, company culture, ethics programs and more. Many of the honorees proudly announce the title on their websites, but I started to wonder: does operating ethically come with other perks besides this recognition?

Ethisphere shows that, over the past five years, their honorees have outperformed a comparable large cap index by 7.1 percentage points. Still, I wanted to see for myself if 2020's Ethical Companies were more profitable than their competitors. Here's what I learned.

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Are Ethical Companies More Profitable?

To find out the answer, I compared the 2020 Ethical Companies honorees' profits with an average profits of a few of their top competitors. I found that, in general, ethical companies make similar or higher profits than their peers. In addition, 40 per cent of the ethical companies achieved more than double the profits of their competitors.

However, the final tally was close. But does that mean running an ethical company isn't really worth it? I asked some experts to weigh in, and they gave a resounding "no."

Other Benefits of an Ethical Company Culture

"Embedding genuine ethical values in a company does not guarantee success, but it is an additional benefit that can help the organization in the long run," says Robert Bird, professor of business law and business ethics at the University of Connecticut.

Whether or not a company sees higher profits during any given quarter, conducting ethical business comes with other, less tangible but still important, benefits.

Lower Risk of Fines and Punishments

"In the short-term, unethical behavior can be wildly profitable. In the long-term, it is always more expensive," says Anthony Babbitt, MS, from Babbitt Consulting.

"When a company is only thinking about the next quarter, you tend to have a rise in unethical behavior. Fines, fees, and penalties are a future problem and possibly someone else will have to deal with it. Companies that look at the long term have realized that ethical behavior is more profitable."

Unethical behavior is often also illegal and/or doesn't comply with industry regulations. Taking shortcuts might be easier, faster or more profitable at the time. However, getting caught could result in fines or punishments that far outweigh any benefits, especially if it's been going on for years.

RELATED: Ethics at the Top: How the C-Suite Affects Company Culture

Better Public Reputation

In decades past, it was easier for companies to hide ethics lapses. Corruption, bribery, nepotism, harassment and shady procurement practices might have been office gossip, but didn't go much further.

Today, though, social media and the 24/7 news cycle ensure that when a company is revealed to have unethical business practices, the whole world knows in a matter of hours.

"The advantage ethical companies have is mitigated risk," explains Reuben Yonatan, founder and CEO of GetVoIPwho strives to run a transparent, ethical business. "With an unethical company, if someone probes deep enough, they will find skeletons that might cost the company a lot of business."

Furthermore, the public will see right through ethical companies that don't practice what they preach.

According to Bird, a company's "ethical values must be authentic. They cannot be temporary, faddish or only window dressing. If executives speak about ethical values one day, and then ignore those values the next day when they are inconvenient," they'll become known as not only unethical, but dishonest as well.

An ethical company not only leads to higher profits, but can also protect your company. Download our free ethics checklist for fraud prevention to learn ways you can encourage ethical behavior and, in turn, reduce internal fraud.

Stronger Customer Loyalty

In the same vein, customers want to give their money to companies that share their ethical values. Babbitt shares the example of TOMS Shoes. The company started by giving a pair of shoes to a child in need for every one they sold, which they've updated to donating $1 for every $3 they make.

Babbitt wonders, "Without such a program, would they ever have become so popular? Alternately, several clothing lines have gone under after it was discovered they used child labor."

When a company behaves ethically, customers take notice. They're more likely to stick with you and you'll likely gain more new customers, too.

RELATED: 3 Critical Reasons to Establish a Culture of Ethics in Your Company

"When a business is looking at the cost of ethics, they fail to see the unrealized gains," says Babbitt.

"Businesses will proudly exclaim, 'We saved X millions of dollars by not doing Y,' but they fail to realize the untold tens of millions they would have gained from Y's increase in sales. Everyone focuses so much on how large their piece of the pie is, but they fail to realize how much larger the pie could have grown!”

Whether or not your company's quarterly or annual profits beat out your competitors', ethical behavior is a must. The cost of unethical business can be disastrous if you get caught, while incorporating ethics into your company's identity helps gain customers' trust and their dollars.