Doctor Jieun Ryu, teaching associate at Warwick Business School and lecturer at the University of Northampton, studies the question of whether it is it really possible for a firm to achieve both ethicality and profitability at the same time?
Are ethics and profitability mutually exclusive? by Jieun Ryu. With acknowledgements to Warwick CORE Insights.
The conventional view states that business ethics is an oxymoron – ethical and business behaviours must be conflicting as economic profitability is more important than ethicality in business. Although some will argue that creating profit can make the world a better place, recent incidents do not seem to support this idea. In March 2018, Amazon became the second most valuable U.S. company after Apple, as the value of their stock rose. Moreover, Forbes listed Jeff Bezos, the CEO of Amazon, as the wealthiest in the world, in May 2018.
As a matter of fact, Amazon contributed to society by creating more than 200,000 jobs in the US and over 27,000 jobs in the UK. However, unsafe working conditions and poor treatment of the workers in their UK warehouses have been constantly reported throughout the years. In November 2016, it was revealed that Amazon delivery drivers work illegal hours to deliver all the assigned parcels and receive less than the minimum wage of £7.20. Moreover, Amazon’s constant surveillance on warehouse workers’ location and their movements by means of a wristband have been criticized for the pressure created, as workers reportedly do not take a break even to go to the toilet to meet performance targets. Amazon, like many other financially successful corporations such as KPMG, United Airlines, and Barclays, has shown us that profitability has not always resulted in ethics, and that incorporating ethics into management is challenging.
Therefore, one important question which arises is the following. Why is it hard for big corporations to achieve a balance between ethics and profits?
The most well-known reason why owners and/or managers make unethical decisions, especially when they face fierce competition, is because they believe that their unethical decisions and practices pay off, particularly in a competitive market. In their 2004 paper Managing to be ethical, Trevino and Brown identify a further five common myths about implementing business ethics:
- It’s easy to be ethical but ethical decision making is a complex, multi stage process.
- Unethical behaviour in business is simply the result of “bad apples” but most people are followers when it comes to ethics.
- Ethics can be managed through formal ethics codes and programmes but formal systems do not guarantee effective management.
- Ethical leadership is mostly about leader integrity but developing a reputation for ethical leadership requires more than strong personal character.
- People are less ethical than they used to be but ethical behaviour it nothing new, although there may be more opportunities to be so.
An underlying assumption here is that corporations are established mainly for economic purposes that include maximizing profit rather than providing social goods. Nevertheless, there are many successful cases achieving both ethicality and profitability in business, by drawing on the concept of “Blended Value Proposition”.
Blended value proposition: Economic and social values are non-separable
In 2000, Jed Emerson introduced the term “Blended Value Proposition” using the concept of a “double bottom line” and a “triple bottom line”. A double bottom line emphasizes that a corporation must pursue and deliver not only economic value, but also social value. In the case of “triple bottom line”, environmental value is added to the “double bottom line”.
Unlike a traditional view which considered economic and social values as separable, the blended value proposition provides a framework that enables an organisation simultaneously to create economic, social, and environmental values. Indeed, there are many different forms of business which look for a double/triple bottom line across profit and non-profit sectors, such as corporate philanthropy, social investment, social enterprise, and non-governmental organisations.
Among others, social enterprises are one example of entities which aim to achieve double/triple objectives through their business activities. Given that social enterprises are a recent organisational form, there is no international consensus on the definition of social enterprise. However, many scholars and practitioners agree that a social enterprise is a hybrid organisation which pursues dual objectives at the same time – financial and social objectives.
These blended objectives can be achieved through various activities depending on an organisation’s characteristics and business model. As Michael J. Alter observed: “Social objectives aimed at mission accomplishment (social value creation) vary widely depending on the organisation’s mission and sector and financial objectives focused on financial sustainability (economic value creation) vary according to funding needs and business model.”
Ethics and Profitability: The Big Issue
The Big Issue, founded in London in 1991, is one of the most successful social enterprises in the UK. Having started as a magazine, now the Big Issue Group runs four organisations which differ according to their main objectives and activities, namely The Big Issue magazine, Big Issue Invest, The Big Issue Foundation, and Big Issue Shop. The Big Issue aims to “dismantle poverty through creating opportunity”. It creates job opportunities for homeless and long-term unemployed people to “earn a legitimate income” by selling the magazine. The vendors buy copies for £1.25 from the Big Issue and sell them for £2.50.
The Big Issue makes profits by selling the magazine to the vendors, and the vendors as micro-entrepreneurs develop sales and financial skills which can help them in their search for employment. Moreover, The Big Issue provides various forms of support for the vendors, including temporary or permanent housing, healthcare, education and training, financial counselling, and the possibility of connecting with family.
This social enterprise model has been very successful at national and international levels. According to The Big Issue magazine, over 92,000 vendors earned £115 million during last 27 years. Currently, there are around 15,000 vendors across the country, and they earned £5.5 million last year. As a result, The Big Issue’s figures show over 900 positive outcomes for vendors were achieved in 2017, including rehousing, accessing health and addiction treatment services, education, employment, and financial support, and personal sales goals.
As this business model is easily replicable to other countries, the magazine is also produced in eight more countries – Australia, Ireland, South Korea, South Africa, Japan, Namibia, Kenya, Malawi and Taiwan.
While the Big Issue is an example of a successful social enterprise which pursues a double bottom line, a US private certification – “B-corporation” provides social enterprise standards, focusing more on how an organisation can integrate ethical standards of transparency, accountability, and performance into management.
B-corporation: Ben and Jerry’s
A B-corporation is a private certification awarded to for-profit or non-profit organisations which meet the minimum standards of four impact areas – 1) Governance; 2) Workers; 3) Community; and 4) Environment. A B-corporation encourages companies “not just to be the best in the world, but to be the best for the world”, as the certification assessment tool provides a clear guideline on how social and environment objectives can be embedded in the management and business activities.
This movement has been very successful across the world – in 2018, there are 2,544 certified B-corporations in more than 50 countries and one of the most successful examples of B-corporations is a global ice cream company, Ben and Jerry’s. According to the mission statement of Ben and Jerry’s, they have product, economic, and social missions.
Their product and economic missions aim at achieving sustainable financial growth by producing and selling high-quality ice cream, implying that Ben and Jerry’s pursues economic profitability. At the same time, they pursue positive ethical and social values by using locally sourced dairy, cage free eggs, and fair-trade products as well as by providing various supplemental benefits for the welfare of workers and monitoring the pollution levels of their factories.
Ethics and Profitability: Yes, we can
To conclude, from the examples of social enterprise and B-corporation, it is clear that ethicality and profitability in business can be achieved at the same time and that they are not mutually exclusive.
Unlike conventional corporations, social enterprises and B-corps incorporate ethical and social standards into their governance and economic activities in order to achieve their social objectives. This form of governance motivates their employees as they can receive better health, social and educational supports, as well as opportunities to be a shareholder of their company.
Moreover, an ethical company can acquire a positive public image which can also motivate their employees. Some would argue that providing greater financial benefits can motivate employees more. However, research also shows that people tend to perceive a firm’s image negatively, even when a profit-seeking firm creates positive social values aside from economic values.
- Link up with Prof. Ryu via LinkedIn
- Read a related article: Social contribution and profit – are companies facing a trade off?
- Visit the Warwick Business School website
- Visit the Council on Business & Society website.
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