Business Ethics as a Driver of Organisational Success

Executive Summary Many companies view their compliance programme as an ethics programme, but it is essential to recognise the clear differences between the two.

Leaders must communicate clear and ethical messages , highlighting that the means of achieving profit are as important as the profit itself.

Stakeholder capitalism , which factors in the interests of employees, consumers and regulators, is starting to displace shareholder capitalism.

Companies should not depend solely on regulatory bodies to set standards; instead, ethical companies must proactively exceed existing regulations.

To build an ethical culture, companies must create an environment in which speaking up and whistleblowing are not just encouraged, but also seen as a crucial self- governance mechanism .

. The pressure of delivering strong results quarter after quarter can tempt even the best companies to be myopic on ethics and fair business practices. Sometimes, this gives rise to the sort of scandals that can destroy the very foundations of a business. While some may view 'fair practices' as resource-draining and growth-impeding, companies that adopt a values-based approach to ethics and compliance gain a long-term competitive edge in the market place. At recent combined sessions of the India CEO, CFO and CHRO Forums across India, Sabina Sudan, a corporate lawyer and active speaker on ethical and legal issues, discussed effective strategies for melding profitable growth with ethical practices, and how organisations can embed ethics into the corporate culture, including in their code of conduct, CSR initiatives and whistle-blower policies.

. The Dilemma Between Profits and Ethics EY’s 2024 Global Integrity Report paint a troubling picture: nearly 40% of respondents admit they would act unethically for career or financial gains, a staggering, 150% increase over previous years. (Tellingly, this annual report, which was previously known as the ‘Fraud Report’, was renamed as the ‘Integrity Report’ in 2022, reflecting a shifting corporate narrative around the subject.) However, there is a silver lining: 49% of respondents believe that integrity and compliance standards in their organisations have improved. This contrast highlights a critical challenge: while ethical risks are on the rise, so is the push for stronger corporate integrity. The question remains – Which of these two trends will define the future?

Companies often face a choice between legal compliance and ethical responsibility . While certain practices may be legally permissible, they may not always align with high ethical standards. A notable example is Uber's alleged practice of charging different fares based on the user's phone type, with reports suggesting Apple users may be charged higher rates. Uber defends this as a factor of timing, but investigations indicate otherwise, raising ethical concerns about transparency and fairness in pricing strategies. This issue underscores the importance of a company’s leadership in setting the ethical tone within the organisation. Ethical business practices should not be an afterthought but a core strategic focus. One simple yet effective approach – practiced by a prominent business leader – is to begin every meeting, whether with sales teams, executives or distributors, with a slide emphasising the company’s ethical conduct.

Many companies label their compliance programmes as ethics programmes, but it is important to distinguish between the two. Whereas compliance focuses on adhering to laws and regulations, and framing company policies so as to avoid legal penalties, ethics involves adhering to moral principles and values, which guide behaviour beyond what is legally required. Many organisations fail to meet this basic threshold, not recognising that ethics is no longer an optional ‘value’ but a business necessity. The financial impact of ethical non-compliance can be severe, affecting stock prices, talent acquisition and retention and market share. It can also result in product bans and heightened regulatory scrutiny. Beyond financial penalties, a growing number of business leaders face jail time over fraud and ethical violations, creating major reputational risks in the process. Forward-looking business leaders must therefore convey clear, ethical messages, emphasising that the path to profit is as important as the profit itself .

. Stakeholder Capitalism – Gaining Ground The primary responsibility of any business, as Milton Friedman famously argued in a seminal 1970 article, is to generate profit. However, this does not mean it is a zero-sum game. After all, profitable companies drive employment, foster innovation and benefit society at large. Even Mr Friedman acknowledged that investing in employees and communities, thus generating goodwill, is strategically beneficial, and not just a moral obligation. However, this crucial aspect of his argument is often overlooked. Today, slowly and steadily, the concept of stakeholder capitalism – which focuses on the interests of employees, consumers, regulators, and society at large – is gaining traction. While profitability remains essential, the focus is shifting toward ethical ways of achieving those profits . Amul exemplifies this balance, proving that long-term profitability and stakeholder- driven values can coexist, helping to build a strong and resilient brand. Conversely, companies that ignore stakeholder capitalism risk collapse, especially since today’s consumers favour brands that are driven by values, not just profit. Clearly, then, ethics and profits are not opposing forces – they must work together, making integrity-based business practices a necessity rather than a choice. Unfortunately, India’s CSR law, which is often mistaken for an ethics programme, has diverted attention from genuine moral practices, undermining true ethical commitment.

. Setting Ethical Standards Beyond Regulations It would be a mistake to rely solely on regulators to set corporate ethical standards. Instead, companies should proactively go beyond the existing regulations. The challenge lies in the subjectivity involved in defining what is 'right'. This inherent tension, between the law on the one hand, and individual ethics on the other, creates a large grey area.

Novo Nordisk , known for its expertise in diabetes care, has seen unexpected success with a new drug that – though originally meant to treat diabetes – is being used as an effective, off-label treatment for weight loss. While it is permissible for doctors to prescribe drugs off-label, pharmaceutical companies face ethical challenges if they actively promote such usage. The enormous popularity of the drug, for both uses, put the spotlight back on Novo Nordisk, which is carefully managing its supply chains to prioritise diabetic patients. Amidst a surge in social media chatter, the company has also focused on communication, clarifying the drug's intended uses, educating stakeholders and ensuring informed and responsible usage. Similarly, Zomato , in the middle of a Delhi heat wave, urged consumers to avoid ordering meals between 12pm and 4pm. Despite the obvious risk of losing customers to other delivery apps, Zomato took this brave step, shaping consumer behaviour in order to protect a crucial set of stakeholders – its driver partners.

. Ethical Challenges and Controversies: Case Studies Nestlé was recently in the eye of the storm over its baby-food product, Cerelac. The issue with Cerelac centred on a clear discrepancy between home-country and host-country standards: while the product meets the legal limits for sugar content in India, the equivalent product sold in Europe has much lower levels of sugar. The controversy arose, in part, because there is a growing movement that regards sugar as toxic, and which seeks to add warning labels to products containing sugar. In this context, Nestlé may have been better served by ensuring uniform standards across countries and doing more to promote greater health awareness. Meanwhile, Johnson & Johnson has faced significant controversies over the years. In 1982, a batch of J&J’s over-the-counter medicine, Tylenol, was tampered with, resulting in 7 deaths. The company made a welcome decision to recall all existing stocks of the product, despite knowing that only certain batches were affected. This initially triggered a run on its stock. Soon enough, though, the stock price bounced back, thanks in part to J&J’s proactive stance on the issue. A more serious controversy broke out in the early 2000s when J&J faced allegations that it knew for decades about the potential carcinogenic effects of its talcum powder. J&J quickly ceased selling talcum powder in the US and Canada, though it continued to sell it elsewhere, prompting a furious debate over home country/ host country standards. Ultimately, though, it discontinued its global sales.

Today, not-for-profits are advocating for Nestlé to face prosecution in Switzerland for tarnishing the country’s image abroad. This is similar to concerns faced by the spice industry in India, where regulators have historically been less-than-stringent about the health risks associated with chemical contamination, particularly arising from Ethylene Oxide (EtO). New guidelines, published in May 2024, require exporters to take adequate measures to ensure the absence of EtO and its metabolites in spices and spice products throughout the supply chain. However, the standards for spices meant for the domestic market are markedly lower. This raises a crucial question: Why is food safety prioritised for exports but not for domestic citizens? With curry being a staple in most Indian households, the issue underscores the need for vigilance. Relying solely on government regulations is not enough – consumer awareness and accountability are essential to ensuring quality and safety for all.

. Building an Ethical Culture: Whistleblowers and Ethical Governance A crucial element of building a culture grounded in ethics is the treatment of whistleblowers. In particular, companies must refrain from viewing whistleblowers negatively or their motives as malicious. It is crucial to never attempt to uncover the identity of anonymous whistleblowers and to take all reported concerns seriously, whether from informal sources or media reports. Companies should establish a system that rewards whistleblowers for coming forward, creating an environment where speaking up is encouraged and seen as a mechanism for self-governance.

When a whistleblower raises a concern, even if a definitive conclusion is not possible, it is essential to acknowledge the issue and conduct a thorough investigation. This process does not mimic a court of law but aims to assess the reliability and validity of the information provided. Ultimately, listening to whistleblowers, having a whistleblower policy in place and conducting regular investigations contributes to building trust, integrity and ethical behaviour within the organisation.