THE BLOG

The Business Cost of Ignoring Ethics... and Missing Ethics as a Strategic Opportunity

22/04/2014 13:33 | Updated 22 June 2014

Too often ethics in business is viewed as exclusively a moral or philosophical endeavor. It is also frequently considered separate from the core economic and organizational factors underlying business analysis. In fact, failing to integrate ethics into business decisions can lead to catastrophic business results.

Today's business decisions and models are immensely complex, and no business or leader can be perfect. But three current examples of ethics-light business decisions illustrate the potential for costly outcomes when ethics is knowingly disregarded. Respectfully, the question for the companies at the time of the various decision points might have been how these business stories could end well while underestimating the importance of ethics. Conversely, ethics can be a strategic opportunity without ignoring profit and other business goals. Difficult and unappealing as it is, let's again respectfully set aside for a moment (just a moment) the cost to human life and morality of this "decision-making" to look at the potential business cost consequences.

A dramatic example is the now defunct British tabloid newspaper News of the World (part of News International). Defunct is generally not a strategic aim or a celebrated outcome. Whoever wrote the business case for phone hacking likely didn't consider adequately the cost of ignoring ethics: shutting down amidst global consternation. Worse, the unseemly trial has shown few signs of ethics lessons learned. Claims that key players were not aware of a well-oiled machine with tentacles into a deceased teenager's and royal family members' cell phones and the British police are irrelevant. Many leaders should have been aware of the extensive and long-term hacking. The cost of ignoring ethics was destroying any positive pursuit of exciting stories, breaking news, and readership...and the related profits.

A federal Louisiana jury quantified its conclusion that pharmaceutical giants Eli Lilly (US) and Takeda (Japan) knowingly failed to disclose evidence of their diabetes drug Actos' potential link to bladder cancer: $9 billion in damages. The New York Times reported that there was potentially more than 40% increased chance of bladder cancer. It looks like ignoring ethics led to a short-term conclusion to proceed with releasing the drug and quickly reap a profit. Indeed, the two companies broke a record - but not sales or number of innovative drugs brought to market. Rather, according to Andrew Ward's Financial Times commentary, they topped the previous $3 billion pharma industry fine. Again, not a goal most shareholders, employees, boards, or the public generally set.

Failing to disclose known potential risk to human life generally does not end well. The companies argue there is no proof of a link. But as a business model, whether or not iron clad proof is ever identified, it is hard to argue in favor of lack of transparency when even a potential for danger exists. And it's not about the size of the judgment or whether it is reduced or overturned on appeal. It's not even about the tone of the reputational hit such as plaintiff's lawyer Mark Lanier's description of a "cesspool of rotten behavior." Ward's Financial Times piece explains a key contextual element: "pharma executives worry that a souring of public opinion towards the industry will make it harder for them to defend premium prices as health budgets are strained across the developed world." Which is more likely to sour reputation that in turn undermines pricing models - hiding data (even if the danger remains uncertain) or proactive transparency about potential risk?

The decision-making behind GM's deadly failed ignitions offers a third recent example of known failure to disclose or remedy misconduct, in this case over many years. The full history and actual cost to GM also remain unclear. Recent reports estimate a charge of $1.3 billion during the first quarter of 2014 (primarily for the cost of recalls and free loaners to affected customers according to Forbes). The "new" GM may be able to duck in large part the legal liability because the unethical decision-making began in "old" (pre-bankruptcy) GM. But the ethics of the business decisions will collide with cost when the company ultimately decides whether and how to take the moral high road whatever the courts and governmental investigations conclude.

It is impossible at this stage to know who at GM actually knew, decided, and did what and when. And again, no one is perfect. But so far ethics is hard to find in the reputable media's excavation of e-mail trails and discussions on the issue going back into the early 2000s. On the other hand, the potential cost numbers are frequently cited.

Ethics is inseparable from successful business decision-making. It is not a stand-alone class in business school or an extra credit option to consider after the decision is made. It can be competitively important for all, not just for business leaders and corporate boards who prioritize their moral compass. Nor is the point that ethics is without financial cost and organizational effort. The point is that without incurring the cost of ethics, the overall cost to the business can be much higher. And these cases have not yet unraveled the myriad other potential costs: impact on recruiting and retention, customer response, increasing pressure on shareholders for ethical investing, and failed trust over time to name a few.

The flip side of the cost of ignoring ethics is that ethics offers a strategic opportunity for business and leaders. The positive stories also attract increasing and long-standing attention, and they don't dismiss the importance of profits.

The oft-cited 1982 scare involving contaminated Tylenol tablets showed Johnson & Johnson immediately ordering 31 million bottles removed from store shelves and replacing the recalled tablets free for customers. According to The New York Times, the estimated cost to the company was approximately $100 million. Only two months later, the company introduced tamper-proof packaging, and CEO James Burke made detailed public disclosure. Only a year later, the market share rebounded from a low of 7% to 30% (closing in on the prior 37%). Since then, the company has been a premier example of profitable ethical management, from business school case studies to shareholder commentary.

Companies like Whole Foods rightly and ethically cite as a core value "[creating] wealth through profits and growth" - but amidst an array of ethically and socially responsible values that contribute to their overall business success. Marks & Spencer and Unilever thoroughly integrate ethics into their business models as well. And even some of the companies with past ethics challenges are working to progress their worldwide ethics infrastructure. Again, no business is perfect. But whatever the past, forward-looking strategic ethics can change the course of costs.

The potential cost of ethics merits further reflection, both negatively and positively. And we still haven't even broached the human or moral consequences of the business outcome.