The Effects of

Business Ethics

Andy Gustafson

Creighton University

Point #1: Business Is Global

• Effects of Mortgage Securities failure in US:

• 1. IMF calculates worldwide losses in Trillions

• 2. Multi-Billion in Rescue Packages in US

• 3. 572 Billion in Rescue assurances in Ireland

• 4. France 280 Billion Euro Bank Bailout

• 5. 90 Billion British rescue package

• 6. Spain ‘’Bank Assurances” 72 Billion

More Effects of US Problems

• 7. German DAX index -38%

• 8. Brazillian BM&F Bovespa -40%

• 9. Shanghai SE Composite -60%

• 10. Russian RTS -67%

• 11. US S&P -33%

• 11. Iceland is perhaps going to go bankrupt

• 12. Sovereign Wealth Funds have pulled out

Billions from US

Current Financial Crisis is Due to

Ethical Lapses at Every level

• 1. People borrowing for houses beyond their means

• 2. Banks and Mortgage Brokers not taking responsibility for shaky loans

• 3. Financial Firms wrapping shaky loans into debt securities, a novel financial tool.

• 4. Creative Accounting Irregularities

• 5. Investment/Financial firms focused on short-term

• 6. Analysts under-representing risks

• 7. Wall Street & Stock Consumers acted recklessly

• 8. Lack of regulation and oversight

• 9. Conflicts of interests throughout system

Root Symptoms

• Imprudence (unwise risk taking)

• Taking responsibility without

understanding risks

• Short term view

• Unrealistic optimism

• Greed

• Passing consequences to the unknowing

Our Financial Crisis is In part due

to ethical Lapses

• Failure to lead

• Failure to take responsibility

• Failure to watch out for interests of others

• Self centered exuberance

What is Ethics?

• Minimal: What we shouldn’t do • Don’t steal, don’t kill, don’t lie

• Better: What we should do (justice) • Be fair, Be honest, Fulfill duties, work hard

• Best: What we could do to make things

excellent for all of us…• Improve Current Methods

• Aim High & Create a Beautiful World as we make $

Business: Its purpose/goal

The purpose of business is to make me

money, and increase stockholder value

(Milton Friedman)

Business as a Means to Transform

Culture and Society

• How can we use our power, position, and

money to leverage real change in the

world around us through business

decisions which will change the face of our

cities and communities

where we are?

Business Ethics???

• Business needs ethics to thrive:

1. Trust is foundational to contracts

2. Customer Satisfaction/loyalty

3. Happy Employees = productive employees

4. Transparency is essential to development

5. Unethical practices ultimately undermine business

6. Globalization requires some common values

7. Many Customers want ethical businesses

8. Ethics is important for branding/marketing

Question:

• Does Ethical perception play a

significant role in consumer

behaviors?

--In other words—

• Do Customers really buy products

according to the ethics of companies??

Answer: Yes.

1. Boycotts by ethical shoppers cost big

brands at least £2.6bn a year

2. 2002 ethical consumption in the UK

was worth £19.86bn in 2002

(Co-operative Bank EP Index, 2003)

Consumers Care about Ethics

• In 2002 every household in the UK spent

an average £366 ($730) in line with their

ethical values

• In 2006 they spent £664 ($1330)

(+ 81 per cent)

Co-operative Bank

Ethical Consumerism Report

The “Ethics Factor”

• In developed competitive markets,

many companies distinguish

themselves by positioning their brand

as ‘ethical’ or ‘socially concerned’

Ethics Rankings • The 100 Best Corporate Citizens list ranks

firms based on eight categories:

1. Shareholders

2. community

3. governance

4. diversity

5. employees

6. environment

7. human rights

8. product

Business Ethics 100 Best Corporate

Citizens 2007

1. Green Mountain Coffee 13. Texas Instruments

• 2. Advanced Micro Devices 14. Herman Miller

• 3. NIKE 15. Rockwell Collins

• 4. Motorola 16. Interface,

• 5. Intel Corporation 17. Steelcase

• 6. IBM Inc. 18. Dell Inc.

• 7. Agilent Technologies 19. Cisco

• 8. Timberland 20. Lam Research

• 9. Starbucks 21. Johnson & Johnson

• 10. General Mills 22. Adobe Systems Inc.

• 11. Salesforce.com, Inc. 23. Kimberly-Clark Corp

• 12. Applied Materials 24. Gaiam, Inc.

Business Ethics 100 Best

Corporate Citizens 2007• 25Gap, Inc. (The) 39United Parcel Service

• 26Chaparral Steel 40Microsoft

• 27Pitney Bowes, Inc. 41Chittenden, Inc

• 28Freddie Mac 42PepsiCo, Inc.

• 29Google, Inc. 43Energy Conversion Devices

• 303M Company 44McGraw-Hill

• 31Heartland Financial USA 45Ecolab

• 32Chicago Mercantile Ex 46Wells Fargo

• 33Southwest Airlines Co. 47Autodesk

• 34Eastman Kodak 48Xilinx,

• 35Cummins, Inc. 49Xerox Corporation

• 36American Express 50TradeStation Group

• 37Northwest Natural Gas 51Kellogg Company

• 38Wainwright Bank & Trust

Most Ethically Perceived Brands

• United Kingdom United States Germany

• 1. Co-op 1. Coca Cola 1. Adidas

• 2. Body Shop 2. Kraft 2. Nike

• 3. Marks Spencer 3. Procter Gamble 2. Puma

• 4. Traidcraft 4 Johnson & Johnson 4. BMW

• 5. Cafédirect 4. Kellogg’s 5. Demeter

• 6. Ecover 4. Nike 5. gepa

• 7. Green Black 4. Sony 7. VW

• 7. Tesco 8. Ford 8. Sony

• 9. Oxfam 8. Toyota 8. Trigema

• 10. Sainsbury’s 10. LEVI 10. Bio Produkte

• 11. Innocent 10. Starbucks 10. Body Shop

• 12. Waitrose 12. Ben Jerry’s 10. Hipp

• 13. Clipper Tea 12. Dell 10. Mercedes

• 14. Asda.. 14. Campbell’s 10. Wrangler

BIG Brands want Ethical Brands

• Cadbury Schweppes bought Green & Black's,

a niche but fast growing UK-based organic and

fair trade chocolate firm.

• Nestlé launched Fairtrade certified Partners'

Blend coffee

• Kraft Foods introduced their Kenco

Sustainable Development coffee brand

Unethical Behavior Costs

Companies:

• Corporate Scandals—United States

• - Enron

• - Tyco

• - Adelphia

• - Xerox

• - Rite-Aid

• - Martha Stewart & Madoff

• - ImClone

• - K-Mart

• - Boeing

• - WorldCom

Corporate Scandals-- Europe

• - Mannesmann

• - ELF

• - Royal Dutch Shell

• - VW

• - ABB

• - France Telecom

• - ABN-Ambro

• - Heidelberg Cement

• - Ahold

• - Bank of Italy

• - Siemens

• - Daimler-Chrysler

• - Parmalat

Recent “Subprime” Scandals

• AIG

• Goldman Sachs

• Bear Stearns

• Pricewaterhouse Coopers

• Countrywide

These Scandals cost $

• Settlements

• - AIG ($1.6B)

• - Time Warner-AOL ($510M)

• - KPMG ($465M)

• - Adelphia ($715M)

• - Tyco ($750M)

• - HCA ($1.7B)

• - Prudential ($600M)

• - Tenet ($325M)

• Marsh McLennan ($850M)

• Cardinal Health ($600M)

Results of Recent Scandals

a. Investors have become more demanding

about transparency

b. Consumers have become more

demanding about corporate behaviors

(accounting, environment, production

methods, etc)

c. In U.S., government has become

involved to ease investors’ concerns–

more regulation for business!!

Environmentally “green”

• “Today, social norms regarding the

environment are changing and consumers

are increasingly holding brands

accountable for what they do … As a

result, more and more companies are

making investment decisions that

incorporate brand impact and brand risk

into their equations.” (David Wigder)

What Can Be Done?

• There are a number of ways to improve

the ethical image of your brand.

• Superficial changes are not enough, and

authentic ethical commitment of a brand is

displayed in real action on the part of

companies in order to have real effect.

Some Examples

Example: CocaCola• Coke is proactively

redesigning its bottle to

reduce material use and

pledging to recycle 100% of

bottles sold in the US.

• Results:

1. Reduce Material Costs 10%

2. Improve Public

Relations/Image with Public

Ethical Production

• Nike was criticized for sweatshop labor

issues in East Asia, and many consumers

boycotted Nike.

Nike’s Response

• Nike responded to these criticisms, changed some of their production arrangements, and returned to the list of the “100 most ethical companies” list

Financial Honesty and

Transparency

• Bad Example:

Financial Honesty and

Transparency

• Wells Fargo Bank is known for its

disclosure of financial data.

Treatment of Workers

• Costco is well known for its great

treatment of employees

vs

• 48% Insured 82% Insured

• 2 yr wait for ins. 6 month wait

• 66% paid by walmart 92% paid by costco

• 50% Turnover 92% Turnover

• $7.50-11.45/hr $10.50-17/hr

Strong Moral Leadership

• “CEO leads troubled Tyco into turnaround”

• Ed Breen, CEO

• “Cleaned House”:

• Fired Management

• Fired Board

•

What Causes Unethical Behavior?

1. Irrational exuberance + uninhibited self-interest2. Arrogance3. Fraud4. Conflicts-of-interest5. Preferential treatment6. Accounting arbitrage7. Failure of independent auditors8. Failure of analysts9. Failure of rating agencies10. Failure of regulators11. Failure of board oversight12. Culture of greed

Corporate Culture and Performance

StarbucksNordstroms

FedExSouthwest Airlines

CostcoKiewitGoogle