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Business and economy resources: Sample feature essay
Ethical Businesses
by Richard Thomson
Introduction
Businesses have always been expected to adhere to general, though ill-defined, standards of good conduct. But the idea that companies should follow principals which might benefit society while not directly improving their bottom line only began gaining ground in any significant way in the 1980s. There is no hard-and-fast definition of an ethical business. It does not simply mean more rigorous standards of honesty and probity, although that is usually implied. Some ethical businesses make a point of caring for the environment, others of not using child labour from the developing world, or paying more attention to the welfare of their workers. Iceland Foods, the second-largest frozen food company in Britain, refuses to use genetically modified foods (and has
asked hundreds of suppliers to follow suit); the UK grocery chains Tesco and Sainsbury's refuse to buy goods from countries that they consider to have politically unacceptable regimes.
The first ethical businesses
Among the earliest and best-known ethical businesses in the UK was Anita Roddick's Body Shop which uses only natural ingredients in its products and claims to help developing world communities and environments in the way it buys its supplies. Care for the environment has become a major policy of many ethical businesses. Another important policy is the promotion of the social responsible business. Ben & Jerry's, the US ice cream company, makes a point of buying its cream from family farms in Vermont which might otherwise have had to close down. It also contributes 7.5% of profits each year to charitable and social causes, the
highest percentage of any company in America. Every year it carries out a 'social audit' to measure how responsible it has been. The impetus to introduce such ideas into business grew out of increasing environmental awareness and a greater understanding of working conditions in the developing world. The replacement of state-run companies by private business also encouraged a growing demand from consumers for higher standards in business. The idea that business had obligations not only to their shareholders but to workers, customers, and wider society became well established by the mid-1980s.
Good ethics = good business?
For many companies, some degree of ethical behaviour is clearly good for business, since there is plenty of evidence that customers like it. Two-thirds of British consumers, for instance, say that they actively consider the ethical stance of a company when buying its goods. On the other hand, it is also clear that price is still the overriding consideration in most consumers' minds, and 'ethical goods' still tend to be somewhat more expensive than their ordinary rivals. The question hanging over the whole issue, therefore, is whether a business can behave ethically and still make an acceptable profit. Clearly, in some cases the answer is yes. Body Shop could never have expanded to its present size otherwise. But it is no coincidence that the most stringently ethical businesses tend to be controlled by individuals who are willing to accept a lower profit if necessary to follow their personal beliefs. Once outside shareholders are involved, a more single-minded focus on profits almost always follows. Even Body Shop appears to have trouble reconciling ethics and profits. It is constantly accused of dropping its standards for business reasons. The founders of Ben & Jerry's explicitly state in their book Ben & Jerry's Double Dip that when push comes to shove, their first priority is to preserve the business. Ethical policies, by implication, are ultimately expendable. Most businesses take a pragmatic approach, adopting ethical standards when they can do so without compromising profits. Macdonald's, for instance, gave up polystyrene boxes for its hamburgers in favour of more environmentally friendly packaging without adding to its
costs. For each company, the issues are different, with varying costs and degrees of complexity in implementing ethical policies. Yet it is a mark of how far ethical business ideas have come that the argument is no longer over whether to adopt them. (Two-thirds of all companies in the Financial Times Stock Exchange list, for instance, have accepted the need to report on their impact on the environment each year.) The only argument is over how to adopt such policies without hurting profitability.
Ethical investments
A growing force nudging business towards a broader view of its role are the ethical investment funds. They buy shares only in
companies that meet their particular criteria of ethical behaviour. With more than 30 funds in Britain and £1.5 billion under management – double the amount in 1994 – this becoming a significant part of the investment industry. Few funds, however, share exactly the same ethical standards. Friends Provident Stewardship Trust, the oldest and biggest ethical fund, does not invest in companies involved in arms or tobacco, and takes some interest in the environment. It does, however, invest in meat companies, which some other funds avoid, and does not put as high a priority on the environment as some rivals. Some funds avoid businesses
connected with intensive farming while others care more about health and safety issues. Since there are few companies as rigorously ethical as Body Shop, the funds usually screen businesses to find the best in any given industry sector, according to their particular criteria. They may even discuss with company managements how to improve their ethical performance in certain areas. It is interesting that ethical fund returns are broadly comparable to those of ordinary investment funds, which may perhaps reflect a closer understanding of the companies in which they decide to invest than most ordinary fund managers have. According to one survey, more than 70% of Britons think their pension fund should have an ethical investment policy, which suggests that the ethical fund industry has a bright future ahead of it.
Managing ethical businesses
Laudable as many of the aims of the ethical movement are, it can be a minefield for business managers. It is not simply a problem of maintaining profits while implementing ethical policies. There is the problem of maintaining standards once they have been introduced. As the persistent criticism of Body Shop shows, heightened expectations among the public can easily lead to bad publicity if a company is deemed to have slipped up. Moreover, blindly imposing liberal Western values on countries in the developing world may be well intentioned but can be destructive. Eliminating child labour takes no account of the economic effect on the children's families, for example. And monitoring ethical standards can be a nightmare. The 'rugmark' scheme in Britain to designate rugs that were not made by child labour was only a partial success because of the difficulty of monitoring and controlling how the rugs were made. So, although businesses have broadly accepted that they have a broader role in society than simply making profits for their shareholders, there are major practical problems in achieving it. The era of truly ethical businesses is still a long way in the future.
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