By Phillip Nichols, Joseph S. Kolodny Professor of Social Responsibility in Business
Professor of Legal Studies and Business Ethics
The Wharton School, University of Pennsylvania
Patricia Dowden, President and CEO, Center for Business Ethics and Corporate Governance
Every business firm has a unique culture. Its culture is made up of the cumulative knowledge, experiences, institutions, beliefs, attitudes, and other social artifacts acquired over time. Whether acknowledged or not, the culture of a firm has a powerful influence on how that firm interacts with society, and a very powerful effect on how people within that firm interact with each other. Understanding and improving its culture could be very valuable to a business firm. Stakeholder trust might be the most illuminating window into the ethicality of its culture, and measuring stakeholder trust might be the most effective practical method of improving the ethicality of that culture.
We have in previous posts suggested that all businesses have a duty to maximize stakeholder trust. We define trust as an expectation that someone or something will do the right thing when there is a risk that they will not. One way that trust is created is through repeated successful interactions. Stakeholders are persons who are significantly affected by the actions of a business firm (for example, employees; customers; third parties, including suppliers, distributors, professional service providers; and owners or shareholders). Thus, stakeholder trust is an expectation among different stakeholders that a business firm will do the right thing, when there is an opportunity for a business firm to not do the right thing. More importantly, stakeholder trust is created because, over time, those hundreds or thousands of stakeholders have watched the business firm do the right thing under exactly those conditions.
We have written, in previous posts, that business firms have an obligation to maximize stakeholder trust because those firms benefit from the market, and that their ethical behavior ensures that the market can continue to function. We have also pointed out that stakeholder trust itself directly improves the performance of a business firm. There is also a less direct, but just as powerful benefit: improving the ethical culture of a business firm.
Strengthening Its Ethical Culture Makes a Firm More Competitive
When we talk about a business firm’s “ethical culture” we are not saying that the firm is ethical. The phrase “ethical culture” is just the phrase that people who study businesses use to talk about the part of a business firm’s overall culture that has to do with ethical or social issues.[i] It can be “strong” – highly ethical – or “weak” – not very ethical – or somewhere in between.
A lot of that will depend on norms. Norms consist of the generally understood informal rules that help people make decisions and interact within an organization. In some organizations, for example, it might be considered “normal” to smile and say hello in the morning, while in other organizations it might be considered “abnormal” to do anything other than go straight to work. Norms, of course, also provide guidance for far more serious issues, and may deal with almost any question regarding how a person or a business firm should act.
People who study how individuals behave in organizations find that norms are far more powerful than formal rules, even formal rules that are backed up by legal sanctions.[ii] Thus, a norm that guides people to not steal is going to be more effective than a formal rule that prohibits stealing. Therein lies the benefit to a business firm. A strong ethical culture will be far more effective than formal rules (although of course there is still a need for formal rules).
When the “ethical culture” component of a business firm’s overall culture is strong – when norms and other things guide people in that firm to make sound ethical and social decisions – the firm benefits in two ways: it enhances the positive and controls the negative. In terms of enhancing the positive, a strong ethical culture increases the amount of loyalty and commitment that people associated with a business firm have towards that firm.[iii] A strong ethical culture also contributes to higher levels of job satisfaction.[iv] People who are loyal and committed to a business firm are more likely to make “sacrifices” for that firm, meaning they are more likely to do things like working late or on weekends in order to get a project done, or help another department when that department needs extra help. People who are loyal and committed to a firm are more likely to defend that firm against accusers, and to stand by the firm in times of crisis. Workers who have high levels of job satisfaction are more likely to stay with a firm, and are more likely to refer customers to that firm and to recruit others to work for that firm.
In terms of controlling the negative, a strong ethical culture significantly reduces bad behavior.[v] Bad behavior includes things like lying, stealing, defrauding, criminal acts, bullying other workers, enriching oneself at the cost of the firm, money laundering, not doing the assigned job, and more. These are all behaviors that inflict costs on a firm and that make a firm less productive. Again, a strong ethical culture is far more effective at controlling these negative behaviors than are formal rules.
Creating a Strong Ethical Culture by Measuring Stakeholder Trust
There are, therefore, tangible, bottom line benefits to a business firm that flow from the creation of a strong ethical culture. A smart business leader will want to create just such a culture. The problems with setting out to do that, however, are first that culture by itself is difficult to measure, so creating measurable goals will be difficult; and second that cultures are unique to each firm, so there is no convenient guidebook on how to do this.
Those problems may be resolved through the use of stakeholder trust as a proxy for the strength of an ethical culture. Trust can be measured – it is already measured by political consultants, by sociologists, and as a component of reputation. Because it can be measured, measurable goals and objective can be set. And once measurable goals and objectives are set, managers – who have the best knowledge of the nature and the capabilities of their part of a business firm – can devise plans for achieving those objectives.
This already happens in other contexts, for example when business firms use the triple-bottom-line accounting method[vi] or the balanced scorecard performance enhancement tool.[vii] It may take time, and some trial and error, but business firms have shown that if given a measurable objective they can devise plans for achieving those goals. Maximizing stakeholder trust gives firms a measurable goal, which will have the effect of strengthening the ethical culture of a business firm, which in turn will make that firm stronger, more productive, and more competitive.
As we have explained in previous posts, our interest in maximizing stakeholder trust lies in the benefits to society as a whole, and our rationale for believing that firms have a duty to maximize stakeholder trust is based on a moral obligation of business firms. An understandable stakeholder trust metric could force business firms to be publicly accountable for their ethical culture, in the same way that financial reporting makes them accountable for their financial performance.
We cannot, however, ignore the fact that individual business firms will ask for a more compelling reason. In previous posts we have given several of those reasons. Higher levels of stakeholder trust directly benefit a business firm. We have talked about the fact that trusted firms are more resilient and are less susceptible to shock, that trusted firms are more likely to survive unexpected market fluctuations and turbulence. Trusted firms have stronger and more productive relationships with suppliers, distributors, and other members of value chains. Trusted firms receive better business terms when working with other entities. Trust enhances the likelihood of innovation and successful entrepreneurship. Trusted firms have more loyal, productive and engaged employees.[viii]
In this post we offer yet more reasons. Setting a goal of maximizing stakeholder trust may, in the way that we described, result in a stronger ethical culture. A strong ethical culture will enhance the positive attributes of workers, including their loyalty and productivity, and will reduce the kinds of behaviors that impose costs on a firm, including theft, rule breaking, and the commission of crimes. It will confer both of these benefits far more effectively than do rules. The creation of a strong ethical culture makes sound business sense, and it can be done by measuring and maximizing stakeholder trust.
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