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What is the return on cost and effort in ethical business?

The cost of ethical failure

After the recent VW scandal, for example, where it was shown that the company had doctored emissions tests on its diesel engine, the financial repercussions were huge. VW’s behaviour had not met either investor or consumer expectations and its share price dropped by 23 per cent – almost a quarter of its market value. Barclays estimated VW’s losses at about A$33 billion.

We need to remind ourselves to guard against the unethical behaviours that sometimes seduce executives, politicians and union leaders. These behaviours stem from greed, poor values, underestimating the risk of getting caught and an insidious disease I call “short-termism”. Many organisations and their executives do the right thing because they have a good value system, yet the percentage of those who do the wrong thing is also high.

We need to remind ourselves to guard against the unethical behaviours that sometimes seduce executives, politicians and union leaders.

We should also differentiate between the line of ethical compliance with community expectations and legal compliance. In the US in the 1970s, I encountered the case of the Ford Pinto with the exploding petrol tank. Ford allegedly buried a cost-benefit analysis indicating it was unprofitable to spend US$11 per vehicle to correct a design flaw, as opposed to paying out claims that would result from 180 deaths and 180 burn injuries. In the end, that decision was undoubtedly unprofitable for Ford, which lost community respect and brand value when all was revealed. The number of death and burn cases was also far higher than assumed.

We can all recall the Australian “entrepreneurs” of the 1980s, some of whom went to jail, some to Spain – and some who did not get brought to account at all.

In the 1990s, the spotlight fell on unethical practices by Australia’s big banks, specifically the foreign currency loans scandal. Banks advised and arranged loans in European currencies for local businesses, particularly farmers, then let them take the fall (often bankruptcy) when the Australian dollar dived. It was Westpac that received a public caning, but this was also common practice among most of the bank’s competitors.

Return on ethics

Acts of ethical bravery also occurred when the currency loans banking scandal blew up. At the time, I was working with the leadership team of NAB. We’d just launched the NAB Group Vision, and a statement of values and objectives that included “the highest standards of professionalism and ethics in all our actions” as core elements.

NAB used these statements to guide its actions and assume liability for the advice it gave, taking a short-term hit on costs, but gaining in the longer term on brand reputation, market share and profitability

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