The economics of good and evil

Does it pay to be good? It is a question that businesses and economists should ask, but seldom do. In his book Enterprise Rules, business psychologist and former industrialist Don Young argues the answer is an emphatic “yes.”

You argue that it pays to be good, but aren’t there ethically dubious companies that make lots of money?
It depends on the time spans you’re looking at. We all know about some of the big names that have wowed the analysts for a few years before falling off a cliff. Over a longer time span, they did not prosper because they had not invested in their products, systems or staff, and weren’t being fair with their customers.

Economist Milton Friedman famously argued that the only ethical obligation of business is to maximize earnings. There is plenty of evidence, however, to suggest that ethical behavior leads to profits.

It was once common to treat workers as slaves, paying a pittance and shortchanging customers. But then, along came the Quakers in the 19th century, who were major industrial entrepreneurs and pioneers in the UK. For religious reasons, they treated staff with dignity, providing fair wages, education and some housing. They produced good value for customers.

The happy coincidence was that you could treat staff as humans, and motivate them to do well and produce good value for customers while making a fortune. It’s not just a happy coincidence that we see a similar pattern globally. Many of the largest and most successful companies worldwide are family owned, and many share a similar ethos.

Do those insights still apply to large businesses in an era of welfare states and tougher employment laws?
The values possessed by the Quakers are exactly the same as those of sustainable, long-term, high-achieving companies today. Credit Suisse’s research into corporate performance showed that the biggest family-owned companies outperformed publicly quoted companies by around 8% between 2007 and 2012. The big listed companies facing pressures from investment markets do far less well. Many more studies have backed this up over the last few decades.

What are the common features of these consistently high performers?
Successful leaders value products and colleagues, not financial products. They do not believe shareholder returns are the ultimate aim; rather that shareholder returns come as a consequence of other things. We’re talking about companies that motivate staff to give their best, work hard, be creative and keep learning. There tends to be high trust between management and staff. An ethical and moral stance in relation to customers or clients is also important. Companies that are trusted by their customers benefit in the long run.

What should companies do to become more ethical?
It means bonding closely with staff, avoiding outrageously unbalanced pay differentials, building social capital in the organization and encouraging everyone in the company to learn continuously. Keeping the organization flexible and open, and not bestowing great disruptive top-down revolutions, is also important.

Most of the knowledge in any large organization lies somewhere close to the front line. The strategy won’t work if your frontline people don’t help shape it or aren’t committed to it. It’s a continuous process too; organizations that don’t learn, die.

But it’s different for every company, so simply describing what other companies do is not actually that helpful. Your company is different; you’ve got to tailor these insights to your own organization and identify your own strengths and weaknesses.

The article was written by:

  • Andrew Stone

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