Business Ethics: Are they Important?
Leading business schools and management experts have stressed the importance of business ethics in the management. They have stressed the risks associated with blatant ethical failures such as large legal judgments, prison terms, anti-trust litigation, fines, lost sales, lost good will, etc. They have also stressed the moral need for organizations to do what is right for moral purposes alone. While these reasons are all legitimate they miss the biggest reason why business ethics are important: organizational performance.
Business ethics as a field of management has been stuck in “neutral” or “external failure mode” for decades. In this mode business ethics seeks to address only the blatant issues at hand, especially those which are associated with high external failure costs. The reality is this is only the tip of the failure cost iceberg. The largest failure cost component in business ethics is actually the internal failure costs, or the failures that go on routinely within the organization every day, which go largely unnoticed and unmanaged.
The leading causes of many organizational problems -customer dissatisfaction, employee turnover, ineffective quality improvement and training efforts, failed mergers and technology projects, weak innovation, and failed product development – all have been linked as much to failures in the operating culture as all other factors combined.
Operating culture can be attributable to over half of all documented Quality Costs (Costs of Poor Quality). If Quality Costs for world class organizations run between 10 and 15% of total sales revenue, the associated operating culture/ethics component in the best world class companies is costing companies billions annually. If the average organization is running Quality Costs of 20-25%, the associated operating culture/ethics component is so significant it may pose an extraordinary opportunity for improvement or an imperative for mere survival.
Most quality improvement projects deal with visible processes such as discrete operations. It is entirely possible to address the processes but still have major unresolved issues, especially people issues. If people do not want to cooperate and work together, or if tensions are high, process improvement becomes increasingly difficult. These people issues often are the result of recurring “mini ethics failures” that need to be prevented.
There is a human tendency in management to seek single (special) causes for failure when multiple, systematic (common) causes are at work. In such instances blaming failure on “poor leadership,” “poor employee execution,” or “market externalities,” may be convenient politically and identify scapegoats but in reality they rarely fix, change, or improve anything. A major (common) root cause of sub optimum performance in organizations can consistently be traced to patterns of business ethics failures within the operating cultures. The ability of organizations to manage ethics at this micro level is a process capability that yields significant economic returns. This is what Ethics Quality is all about.
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