Based on research by Jenny Gu, PhD, Greg Bell, PhD, Abdul Rasheed, PhD, and Sri Beldona, PhD
As the discussion of ethics within the context of business becomes more prevalent, firms have begun to assess their public images. Further, third-party organizations and committees have formed for the purpose of evaluating business actions and practices in terms of ethics.
In this study, businesses were examined in terms of the frequency of their presence on the Ethisphere's World’s Most Ethical (WME) Companies list. Rather than simply considering an individual year, though, this study reviewed perceptions of the companies over a period of time. This approach provided more valuable data, since the researchers could identify more in-depth information and interesting trends.
One notable trend was the benefit of receiving a repeated designation as a WME company—and the reputational hit companies take when that spot is lost.
Although the WME designation does not affect the short-term profitability of the firm, WME positively impacts company profits in the long term.
The market value of a firm reflects the market’s assessment of long-term profitability. This is a valuable measure because it factors in the year-over-year behavior of a firm, ensuring a commitment to sustained ethical leadership rather than one-off, superficial ethical actions. Additionally, ethical corporate actions are hard to define and even harder to verify, so evaluating the ethics of diverse companies can be complex.
Despite these logistical challenges, the market value of firms is a measure that provides nuance and is indicative of future desirability. Firms that are frequently listed as WMEs were found to have a higher market value than the WMEs listed only once.
Key Points
- More than ever before, consumers are scrutinizing the behavior of businesses in terms of ethical decisions and responsible leadership.
- In the short term, the profitability of firms is not significantly affected by public ethical behavior.
- In the long term, the market value of a firm is positively impacted by its publicly ethical behavior.
- Consistency and legitimacy are especially valuable when it comes to sustaining an ethical reputation in the long term.
Why This Matters
As ethical behavior is sustained, long-term profitability increases in the long term. This fact on its own should be motivation enough for companies to strive for a spot on the WME list. Additionally, ethical corporate actions do not negatively impact the short-term profitability of a company. In other words, becoming an ethical firm has virtually no drawbacks.
Market value is a helpful measure because it is predictive in nature, rather than retrospective. WMEs benefit from an increased reputation and more established legitimacy in the public eye, which boosts the confidence of consumers and shareholders. If businesses want to maintain their market value, they need to exhibit consistency in their ethical decisions. The frequency with which companies appear on the WME list can sway public opinion toward them.
Firms should ultimately strive to behave ethically simply because it is the right thing to do. But the boost to profits, market value, and reputation in the court of public opinion sure doesn’t hurt.
Based upon the following peer-reviewed manuscript: Gu, Y., Bell, G., Rasheed, A. A., & Beldona, S. (2024). Commitment to values: Examining the role of ethical and responsible business practices on short and long‐term value. Business and Society Review, 129(1), 96-129.
