Business Ethics and the Bottom Line Donna J. Wood Wilson Chair in Business Ethics University of Northern Iowa

What Is the “Bottom Line”? In ordinary language, it’s a metaphor for what we care the most about. In business – we are talking about PROFIT. What Contributes to Profit? Revenues – Expenses = Profit To contribute to profit, ethics must keep the balance of revenues and expenses better than it otherwise would have been. How does this happen?

Market Ethics Systemically, free markets can’t exist without honesty, loyalty, trust, and respect for property and contracts. For companies, there’s no sustainable profit without ethical treatment of customers, workers, suppliers, and communities.

Ethics and Agency Costs Monitoring & controlling agents’ behavior is much harder and more costly if there is no trust. How expensive is it to make sure customers & employees don’t steal, suppliers don’t cheat, etc.?

Ethics and Catastrophes Consider: Factory explosions Product liability problems Sabotage, tampering Environmental leaks, disasters Train wrecks, sinking ships, plane crashes More examples?? What do all these have in common?

Catastrophes (continued) Damages to property, the environment, and people. Possibility of criminal charges and fines. Strong likelihood of civil suits by those harmed. THESE ADD TO EXPENSES AND MAY ALSO DECREASE REVENUES!

Catastrophes (continued) Is there an affect on stock price as well? Event study methodology from finance Meta-analysis methodology Results: for all disasters except ‘acts of God,’ stock price takes a hit that is never made up.

“Ethical Consumption” Globalized environment Stakeholders discover market power Boycotts, choice of “responsible” or “ethical” products

Ethical Investing In 15 years has become a mega-industry. Social and ethical screens are difficult to establish and monitor, but more investors are demanding them. Institutional investors are leading the charge. Screened funds do as well as others, on average. There’s no necessary “hit” for such investments.

Back to the Beginning: What We Value Most Remember: “bottom line” also means “what we value most,” “what it all comes down to.” There are times when doing the right thing costs more or decreases revenues. These can be more difficult choice points for business leaders. And so it’s vital to keep our strongest values in mind.

Examples Johnson & Johnson and Tylenol The fire at Malden Mills Merck and Mectizan

The Bottom Line: There’s good evidence that ethical choices and ethical conduct is related to stock price. There’s more ambiguous evidence that ethics relates to profitability. There are certainly times when ethics costs more or decreases revenue. Thus, the central question is: What IS your bottom line?