The New ROE: Return On Ethics

Forbes | by Sharon Allen | July 21, 2009

With everyone’s current focus on the economy, you might assume I’m talking about that traditional financial metric, return on equity. But the ROE I advocate is different. It’s return on ethics. This ROE is really more mindset than measure, an approach to encouraging the highest standard of business behavior. It’s based on the premise that ethical decision-making can lead to strong performance and competitive advantage, while unethical decision-making leads to very different outcomes.

Lately we’ve all seen the chaos that can be unleashed when unethical behavior begins to infect organizations’ cultures. Ultimately, the economics of such behavior exacts a heavy toll that is often paid in damaged lives, tarnished brands and crippled bottom lines. Last year a survey conducted by the Association of Certified Fraud Examiners found that U.S. organizations lose an estimated 7% of their annual revenues to fraud. That’s equivalent to more than $1 trillion of the 2008 gross domestic product.

There are real, recurring and significant returns, however, for organizations that base their actions on a strong sense of ethics. Recently, Ethisphere published its 2009 list of the World’s Most Ethical Companies. Those companies’ stock had grown at a rate more than double that of the Standard & Poor’s 500 over the past five years.

That makes sense when you consider that organizations with superior ethical track records can attract the talent and customers they need to sustain their growth far more easily and with less expense than those burdened with questionable reputations. And they definitely can. A study done jointly by Stanford University and the University of California at Santa Barbara recently found that 97% of recent MBA grads polled said they would be willing to make a financial sacrifice of nearly $15,000 a year off their starting salaries to work for a company that practices good corporate social responsibility and ethical business conduct.

As for customers, I have seen firsthand the power of trust at work with them. Before our company could execute an agreement to provide extensive consulting services for a premier financial institution, I was asked to speak with one of that organization’s most senior executives. The company had expressed complete confidence in Deloitte’s technical capabilities, but he wanted to meet face-to-face to discuss our values. He wanted to learn more about what we said was Deloitte’s most important offering–trust.

We had a far-ranging and very thorough discussion. We emerged understanding just what we expected from each other and knowing that our priorities on both sides were built on firm ethical principles. Deloitte’s relationship with that company, now our client, has continued to grow–a return on ethics that has served both parties well.

When your most important offering is trust, it’s crucial that you have structures and mechanisms in place to safeguard that trust.

[…]

Trust is always a vital ingredient in enduring business relationships, but its importance in today’s challenging economic environment cannot be overstated. If the market’s belief in an organization’s integrity is confirmed time and time again, no one will be surprised when people become customers or clients with an unshakable allegiance to its brand.

The power of return on ethics is exponential. When any business relationship is established with trust as its cornerstone, everyone can win. On the other hand, with predatory, one-time encounters that are the economic equivalent of hit and run, nobody wins.

The business case for ethics doesn’t need studies and facts and figures to support it. Ethics, or the price of right, is essentially priceless. Once a reputation is lost, no amount of money can buy it back. At Deloitte we’ve found that what’s most important about the ethics program we have in place is not what it costs but what it’s worth in terms of dollars protected. By my calculation, Deloitte’s ethics program is worth somewhere in the vicinity of $11 billion–which just happens to be the revenues of the Deloitte U.S. firms last year.

The new concept of return on ethics can help businesses and their people recognize some timeless lessons–that stakeholders invest their trust long before they invest their dollars, that relationships account for far more than goodwill on a balance sheet and that ethical behavior can appreciate over time into lasting value.

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