Leadership Matters: Focus on Your Ethical Bottom-Line

The business press produces a constant stream of articles discussing organizational culture. We see almost daily messages about the challenges and dynamics of culture, as well as the growing emphasis on creating an ethical culture in organizations. With increased debate over environmental, social and governance investing, diversity, equity and inclusion integration, and taking a stand on other ethical issues, more attention is now being placed on ethics and culture. Why is that?

Three trends dominate the rise of ethics in today’s organizational culture:

1. Ethics and profitability. Based on research by Ethisphere, among other organizations, the most ethical companies outperform less ethical companies on traditional business metrics by 12.3%. Organizations that focus on ethical business practices and culture appear to be more profitable.

 2. Customer loyalty. While quantifiable data is harder to come by, anecdotal evidence suggests that customers (and credit union members) make buying decisions in part due to perceptions of ethical behavior associated with the selling company. Sustainability, treatment of employees and customer service are cited frequently as means of building (or destroying) customer loyalty.

This is especially relevant for your youngest members. According to a McKinsey study, 73% of Gen Z of Gen Z reported trying to purchase from companies they consider ethical.

 3. Generation Z. Growing evidence driven by the rise of a younger workforce indicates that employees want to purchase from and be associated with organizations that have a larger purpose than profitability.  On the employment side, “Gen Z no longer forms opinions of a company solely based on the quality of their products/services but also now on their ethics, practices and social impact,” according to a Deloitte report.

Younger employees are quite clear that they want to belong to companies that are concerned about their community, the environment and a broader purpose. Many are also pushing their employers to become more active in staking out a position on social justice or political issues.

The combined trends make the case that, on the one hand, a correlation exists between ethical behavior and profit, and on the other hand, for companies who aren’t focusing on ethics, profit may suffer. A company may send manufacturing overseas for cost reasons (more profit) while mandating higher wages and fair treatment of the manufacturer’s employees (less profit). In other cases, an ethical decision may have very real implications for the loss of revenues. 

Take the case of Dick’s Sporting Goods deciding to remove assault rifles from its stores after a U.S. mass shooting. Dick’s historically had a large customer base among hunters and gun enthusiasts, which the move jeopardized. But as this Harvard Business School article points out, the change paid off.

The Dick’s example also strongly suggests that compliance and ethics are different concepts. Dick’s sold assault rifles following the laws of the land, but still decided to stop selling assault rifles based on its values. 

Make no mistake, compliance and obeying the law are critically important, but just like justice and the law, compliance and ethics aren’t necessarily synonymous. And realistically, saying that your company is compliant and obeys the law is not a huge recruiting tool. 

Candidates for jobs assume companies are obeying laws, but today, they want their employer to be something more. A truly ethical company will go beyond compliance to live its values and consistently do the right thing. 

How to become an ethical company with a culture that consistently supports and acts on ethical issues is the critical question. If leaders aspire to have an ethical culture, the following actions must be reinforced:

 1. Align values. Organizational values or guiding principles should be living, breathing statements that express aspirations, guide behavior and serve as the foundation for decision-making. Not only do guiding principles need to be current and focused, they also must be central to all communications efforts. Leaders need to live and communicate the values.

 2. Take stands. Taking a stand on expected behavior—for example, “We do not tolerate sexual harassment”—or supporting sustainability efforts are highly appropriate. Leaders could go beyond these types of positions and take a stand on issues that conflict with the organization’s values, such as gun control, social justice and immigration. The younger generation expects this and, we suspect, so do the older generations.

 3. Share dilemmas. Too often people think of ethics as being measured by clear standards of right and wrong. While some people prefer clear-cut answers that don’t entail ambiguity, most situations don’t have absolute answers and involve shades of grey. Bringing ethical issues to light by sharing moral dilemmas, discussing cases and allowing others to express their opinions helps to develop an organizational “moral mindset.”

 4. Make heroes of people who do the right thing. Leaders must promote and publicize those who step up and do the right thing, even when challenged or in the face of opposition. Frequently lionize the heroes of ethical culture in communications, both internal and external.

Focusing on ethics pays off in both an organization’s financial bottom-line and ethical bottom-line. Successfully creating or maintaining an ethical culture requires the same dedicated attention that organizations pay to their safety or sustainability efforts, as well as their financial results.

Claas Florian Engelke provides consulting services in the fields of leadership advisory, assessment and development. He invites clients to question themselves in order to foster incessant learning and aspire to be the best versions of themselves. Richard B. Swegan is an author and the founder and principal consultant of ARCH Performance. With a background in human resources and safety, Rick provides consulting to a variety of organizations on the developmental needs of potential leaders. Their new book, The Practice of Ethical Leadership – Insights from Psychology and Business in Building an Ethical Bottom Line (Routledge, March 28, 2024), offers effective suggestions for developing ethical leaders. Learn more at ethicalbottomline.com.