Tannen: Ethical behavior a critical factor in corporate reputation

Money managers say they are prioritizing ethics. Why? Because they can save valuable time and money and lead to more customers.

Warren Buffett has been quoted on what he looks for when hiring: "Somebody once said that in looking for people to hire, you look for three qualities – integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you." Integrity is, of course, linked to ethical behavior.

Earlier this month, Barron’s unveiled its annual World’s Most Respected Companies survey. Among the annual media-sponsored corporate reputation rankings, the Barron’s project may be the most unique because it focuses only on one audience, money managers. It also asks them to rank the criteria each year that inspire their respect, so these criteria rankings usually change from year to year. This year, the 101 money managers who voted selected "ethical business practices" as the second most highly ranked criterion of respect, just a few points below "strong management." This seems curious, given that money managers have one fundamental job: increase the value of their clients’ investment portfolios.

Why do money managers rank ethical business practices so highly? A cynic might say that what they mean is simply that companies should stay out of trouble. After all, if you look at the magnitude of the fines and the huge investment in C-suite time and legal and PR expenses incurred by companies that ran into trouble with federal regulators over the past six years, staying out of trouble by behaving ethically would be a very good thing. In these cases, unethical business behavior crossed over into illegal behavior, as it often does.

Remember that following the Great Recession, a parade of CEOs from both the banking and manufacturing sectors were called before Congress, including the US Senate Permanent Subcommittee on Investigations, headed by Sen. Carl Levin (D-MI). How much time was spent in the preparation of their testimony that would have been better spent on business strategy or meeting customers, employees, or investors? And in most of those cases, whether finance-related or manufacturing-related, the companies ended up paying settlement fees ranging from millions to several billions of dollars.

That is undoubtedly why some money managers rank ethical behavior so high – higher in the Barron’s survey than "sound business strategy" and "competitive edge" and much higher than "product innovation." At its extreme, unethical behavior can destroy a company. Remember Enron, once on everyone’s "best corporate reputations" list before the scandal? You can still find a few of the "star" CEOs of the early years of this millennium in prisons around the country, such as Jeff Skilling of Enron, Bernard Ebbers of Worldcom, and, until recently, Dennis Kozlowski of Tyco who was paroled after eight years in the slammer.

Yet other money managers, including some I have talked to, have come to realize that companies that communicate strong ethical values and a clear corporate responsibility focus are going to avoid trouble, therefore saving productive time and money. They will also have a more engaged workforce, which surveys show can lead to better financial performance over the long term.

One money manager I spoke with pointed out that strong corporate ethics in the best companies is linked to CSR, and that CSR programs can often lead to new business by connecting to new customers as well as helping to recruit talented skilled labor.

The bottom line is that with either money manager viewpoint, ethical behavior is critically important. As Securities and Exchange Commission Chairman Mary Jo White recently stated in a speech at Stanford University’s Rock Center for Corporate Governance, "Ethics and honesty can become core corporate values when directors and senior executives embrace them."   

The lesson here is that senior corporate communicators need to be sure that their annual communications plans include articulating how their companies define ethical behavior, and that investors understand it is a high priority. That would help make those communications plans truly "strategic."

Andy Tannen is an SVP in MSLGroup’s corporate practice.

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