The benefits of an ethical business

Ethical policies can boost the bottom line, but it’s important to clearly define goals and measure outcomes

An increasing number of businesses are adopting ethical trading policies. Many are taking steps towards reducing their carbon footprint, making more efficient use of resources and committing to fair trade and charitable giving. These companies are acknowledging the need to minimise any harm associated with their operations whilst acting as a positive force within their communities.

And this is more than good deeds in a wicked world. Ethical trade can deliver genuine commercial benefits, including:

• Improved customer perception: Ethical companies tend to be viewed positively by customers. In some cases – Body Shop being a pioneering case in point – when ethical trade is built into the DNA of the brand it can become a major selling point.
• Cost: A commitment to recycling or carbon reduction can become part of a virtuous circle that ultimately brings down costs.
• Recruitment: Ethical policies can often help business attract and retain high quality staff, while also creating a positive atmosphere in the workplace.
• Legality: All businesses must be compliant with legislation and regulation, but those who operate according to ethical values that comply with the spirit as well as the letter of the law are less likely to run into legal difficulties.

On paper, the case for running an ethical business is compelling. But here’s the rub: does a commitment to integrity and sustainability really create a better business? Well, it can, but as with any commercial strategy it’s important to be clear about the objectives, while measuring the outcomes. So how can that be achieved?

Clear goals

The first step is to identify clear targets based on what you want to achieve. When Marks & Spencer launched its Plan A initiative, its aim was to become the world’s most sustainable retailer by making measurable commitments to be achieved over a set timescale. To get there, the company made 100 pledges (now extended to 180) across areas such climate change, waste, sustainable supply chains, fair partnerships and healthy living. In practical terms, the company pledged to become carbon neutral, send no waste to landfill, extend its use of sustainable supply chains, improve the condition of those in the supply chains and promote a healthier lifestyle among customers. The devil was in the detail. M&S published metrics that allowed progress in these areas to be measured over the five years of the plan and it has continued to publish progress reports.

Putting the case

Building a business along ethical lines is a reward in itself, but if an initiative is backed by a strong commercial case, it is more likely to survive the financial pressures of running a business year-to-year.

When M&S put its case to investors, it estimated that Plan A would increase costs in year one, become cost neutral in year two and deliver benefits over the remainder of the five-year plan, with the bulk of that coming from improved resource efficiency. However, there is also a business case to be made around improved staff retention and recruitment, protection of supply chain and increased sales on the back of customer approval.

Measured benefits

There are at least two components to the measurement programme. First, are you hitting your targets? Has energy use fallen? Are you recycling more and to what extent? Are you involved in community projects? Are you using sustainable suppliers? These outcomes are measurable as they involve the implementation of decisions.

“Building a business along ethical lines is a reward in itself, but if an initiative is backed by a strong commercial case, it is more likely to survive the financial pressures of running a business”

Second – and often less tangible – is the benefit to the business itself. Some of this will be relatively straightforward. For instance, more efficient use of resources may require an initial investment in new systems, but over time it will go straight to the bottom line in the form of reduced energy or raw materials bills. The key is to have the processes and policies to ensure that resources are used more efficiently and systems can capture the extent of the savings.

Less tangible

But what about the less tangible aspects of the business case? Companies with active ethical policies find it easier to attract staff, and in particular, key individuals who can pick and choose where they work.

Such policies may also improve retention. Measurement usually requires qualitative research, such as carefully designed staff attitude questionnaires, which can be used to uncover: a) whether ethical policies are being practised at grass roots level, and b) the impact of policies on morale, motivation and retention.

It is also possible to assess staff attitudes through appraisal interviews and less formal discussions. As an empirical test you should also chart metrics such as churn over time as the ethical policies bed in.

Ethics pays

But what about customer perception? There is evidence that being ethical pays. A test carried out by the Wall Street Journal in 2008 found consumers would pay a slight premium for ‘ethical’ coffee and t-shirts and would expect a steep discount on their non-ethical counterparts.

How about your company? Initially, market research will tell you whether your customers place a premium on ethics. In the longer term you should track sales or your ability to charge a premium for any correlation with your ethical initiatives.

Bear in mind, though, that it is a long process and that customer and indeed supplier loyalty and the perception of values behind the brand will develop over years.