by Merlin Hernandez

In our exploration of ethics in business, we tend to look at the issue from the perspective of corporate responsibility. Ethical conduct in business is even more important than whether the firm is profitable in the short term in that it enhances long term viability. The key is to establish broad barometer guidelines that provide a framework for ethical conduct. A company’s reputation for ethical behavior is an important factor in its market power and its partner and supply chain relationships. Sustainability is derived from a business model that will face growth or decline with the same ethical standards.

But what is a manager’s ethical role? The ethical profile of the business rests in the hands of its managers who stand at the frontline of how the business is perceived. Attendant pressures and deadlines of a new situation can cloud the issues and lead to expedient behavior that may not necessarily be ethical. The goal of a business is to maximize profits but the goal of a manager is to achieve his/her divisional and even personal self-interest. In order to maintain ethical conduct, it is necessary to have these two goals coincide. Manager engagement is a critical factor as it expands to employees. Engagement can be achieved through recognition and incentive programs and benefits that are tied to performance (like bonuses, stock options, professional development etc.)

Another dimension to the manager dilemma is the regulatory environment. Government’s quarterly profit disclosure requirement for public corporations puts pressure on corporations to be transparent and ethical in the conduct of their business. But the added pressure of needing to show increasing profits each quarter may be an ethical crisis waiting to happen. The problem is that investors will not wait a few years to see if the firm’s ethical position is working for its long term viability. Businesses need to show the potential of their stock in the short term to attract investors. With stock value as the primary indicator of the quality of an investment, there is strong incentive to keep the value of the stock high even using various and sometimes questionable ways to massage accounting statements to show improved profitability.

Managers are usually rewarded for reported short term success which has become a value in itself. Sometimes this comes at the expense of the long term survival of the business. Long term viability, on the other hand, could sacrifice short term profits or mean operating at a loss in the very near term. Recognizing these options across the board in a business makes it easier to see an ethical perspective as strategic. This requires emphasizing sustainability, brand equity, employee engagement, and customer loyalty over short term profitability. As features of an ethical culture, these values give managers the leeway to operate within the ethical framework.

In proposing other ways to address a system that almost lays the foundation for unethical behavior, Paul J Updike suggests a measure similar to “backwards accounting” as the best measure of ethical behavior. A “rolling revision” like what is done with quarterly GDP measures can be used for corporate profits. Once the interests of managers and the firm are aligned, quarterly or even monthly revisions of profitability measures would ensure that a combination of quality, price, and value delivery is used to measure short term profitability. Used repeatedly, long term viability will be taken care of in an atmosphere of ethics and profitability.

Category: ETHICS

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             Point well taken

Merlin Hernandez is an entrepreneurial development and management consultant with extensive experience in the fashion, hospitality, and construction industries, among other areas of business. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

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