Shell shock: CEO Jeroen van der Veer's bonus is a blight on Royal Dutch Shell's image
Does it pay to be ethical in your business? We’ll come to a definition in a minute, but a couple things suggest the question’s becoming more important.
First, this article on Ethical Corporation, arguing that even the seemingly rapacious and cold-blooded private equity (PE) industry is getting interested in all things cuddly. PE firm Doughty Hanson has now endorsed the Principles for Responsible Investment.
“We’re not doing it to earn brownie points,” the firm’s Guy Paisner told EC. “We are doing it for cold, commercial, opportunistic reasons. Firms that operate in a sustainable way significantly de-risk their business model and ultimately attract higher valuations in the capital markets.”
That justification holds true for many investors and businesses. If the latest boom and bust has taught us anything, it’s that we all need to play a reasonably long game.
PE firms were flipping investments within months in the middle of the decade — a decidedly unsustainable model.
It might be uncharitable to suggest their love of sustainability has been caused by their need to hold onto their own investments for longer as M&A markets languish.
But it’s fair to say firms that are serious about the business of investment banking can see the benefits of long-term risk management.
The other data point is the rejection by shareholders of Shell’s remuneration report. Shell has some other ethical worries, but the exec pay issue strikes to the heart of the public mood.
Can it be ethical for these people to earn so much money? The avowedly upright Co-operative Asset Management obviously thought not.
Which brings us to a definition of “ethical”. For some people it’s just a case of not breaking laws. Whether it’s on the environment, exec pay, working conditions or quality of products and services — so long as it’s legal, it’s ethical.
The problem here is that the last few years have shown us that the rules aren’t actually terribly good at securing good long-term outcomes; and the people who make the regulations aren’t very ethical and tend to be out of touch with business themselves.
So companies that offer excessive rewards for execs shouldn’t be surprised that they now have a problem on their hands despite being perfectly legal.
For many of you, ethical business is a moral imperative. That’s not just working within the law, it’s taking a paternal (yet not patronising) approach to employees, causing no long-term damage to your environment, supporting your community.
These ethical approaches are bedfellows to the more obvious value creators — like going the extra mile for customers and supporting innovation.
In value terms, the longer you can sustain earnings, the more your company should be worth on a net present value calculation (just ask those private equity guys).
But sometimes good ethical considerations yield immediate benefits, too. Just ask John Lewis Partnership. Most retailers (especially the most rapacious ones) would kill for their performance in the midst of a recession. Whichever way you cut it, then, ethics is now seriously good business.
