How Ethics Can Boost the Bottom Line

Using Honesty, Fairness, and Openness to Make Money, Invigorate Brands, and Feel Awesome

By Tricia Brick | Illustrations By Joel Holland

Christian “Chris” F. Martin IV rose to be CEO of C.F. Martin & Co. at a critical juncture for the venerable guitar manufacturer. Demand for acoustic instruments was down—sales trumped by those of electric guitars for the first time ever. A strike had lowered morale. Several recent acquisitions had not worked out well, and the company was saddled with excessive debt. The future of the 153-year-old firm was in jeopardy.

Martin (BSBA’78) had joined the family business after studying at Questrom, where he was powerfully influenced by a course that explored the fundamental role of corporate ethics in organizational behavior. “The professors were trying to convince us that something needed to change in American manufacturing, and that we needed to move away from a hierarchical, top-down structure,” he recalls.

After taking the helm in 1986, Martin quickly put the principles he learned into practice. He signaled his commitment to open communication and transparency, inviting employees to share their views and hiring consultants to help guide him in developing best practices. One of his early moves was to start taking colleagues from all grades on Outward Bound courses to inspire them with adventurous outdoor education programs—and show he was available for their questions. He instituted a profit-sharing initiative that has given millions to the company’s employees, who now number 600 at its Pennsylvania headquarters, according to PennLive.

Over the years, Martin has also turned to his colleagues to help him build an ethical framework for Martin & Co., which now has a mission statement that emphasizes diversity, fairness, and honesty, as well as innovation, craftsmanship, and managing risk. “It’s not enough to send the memo or the email,” he says. “You have to say, ‘We’re changing the way we do business, and here’s why—and what do you think about it?’ And you really have to draw this out of people, so that they will tell you: ‘If you do that, the consequences in my department are going to be this.’ It’s hard stuff, and a lot of companies don’t want to take the time.”

And because the brand is closely linked with the fine woods—the tonewoods—used to craft its instruments, sustainable forestry is a natural area of focus for the company’s ethical framework. As part of its commitment, the firm recently partnered with Central American Timber to build a low-energy kiln for a Guatemalan community organization dedicated to sustainable forestry practices. “Our primary raw material is rare exotic timbers,” Martin says. “We have to be judicious about our resources, and we support the people who source them. This is the long game. We’ve been doing this for a long time, and I want us to be doing this for many years to come.”

He is adamant that all of the changes he’s instituted be viewed not as beneficence, but as strategic investment. “I am focused on profit,” he says. “I’m a successful entrepreneurial capitalist, and profit is the fuel that allows us to buy better equipment, to buy our raw materials. But I have to frame it in terms of what it can do for the company going forward.”

In 1982, the company produced just 3,153 instruments, according to Walter Carter’s history of the firm, The Martin Book. Today, the company says it’s setting sales records—a report in LVB.com had 2014 revenues at $100 million.

The hard work that Martin began his tenure with, of improving open communication and transparency, is essential for building an ethical corporate culture, says Kabrina Krebel Chang (CAS’92), a clinical associate professor of law and ethics in the Markets, Public Policy & Law Department at Questrom. She describes a cascading effect in which the well-being of a stakeholder group, such as a firm’s employees, flows outward to serve the brand. “If you can make your employees feel invested, valued, respected, and trusted, they also feel proud of the business and want to do the right thing by the business—and that motivation spills out into the community,” she says.

Chang gives the example of Starbucks. In 2008, former CEO Howard Schultz returned to a company that was struggling. He later told Harvard Business Review that the company needed to worry less about share prices and more about core values. One bold move saw all stores closed for three hours for staff training, despite the obvious hit on profits. “We built Starbucks not through traditional marketing or advertising but through the experience,” said Schultz. “And that experience can come to life only if people are proud, if they respect and trust the green apron and the people they are representing.” In October 2015, Starbucks reported record results—Q4 revenues jumped 18 percent.

Stakeholders Not Stockholders

Cars rigged to cheat emissions limits. Salmonella-tainted peanut butter. Drug company profiteering. The risks of unethical corporate behavior extend beyond the devastating damage a scandal can bring to a firm’s reputation, to threaten people’s lives, the environment, and the economy. In a December 2015 op-ed in the New York Times, former Secretary of Labor Robert Reich argued that the ethical lapses of the largest corporations are endangering the continuing success of the global market: “The real threat to capitalism is no longer communism or fascism but a steady undermining of the trust modern economies need for growth and stability.”

“I wish all of our courses on this subject could be retitled to ‘Leadership Decision-Making,’” says Laura Pincus Hartman, director of Questrom’s Susilo Institute for Ethics in the Global Economy and a clinical professor of business ethics & values. “Ethics is about decision making, and making decisions that are aligned with our values. It is a fundamental part of business strategy. It is the umbrella, determining how you make every decision. Every firm that is successful and wants to be sustainable builds this in, through its mission and statement of values.”

Hartman is at the vanguard of a movement of business leaders that seeks nothing less than alleviating global poverty by rethinking the way we understand corporate ethics. At food giant Danone, top managers and directors have salaries pegged to social targets such as workplace safety and environmental factors; South Africa-based Econet Wireless partners with Danish energy company Vestas to bring wind-based power to small communities in southern Africa. Yet the ethical transformation Hartman champions is not about trading modern capitalism for Robin Hood philanthropy. “Rather than think of a firm that is only focused on the good of its stockholders, what we need to do is think about a larger group of stakeholders,” Hartman says. “By considering those interests, a business will make more money— and better serve its stockholders.”

Stakeholder theory can be applied to corporate strategy in a myriad of ways, and certainly most firms with a serious mission and statement of values consider stakeholders in one sense or another. Stockholders, clients, potential customers, employees, suppliers, the media, members of the community in which a firm operates, governments, nonprofit organizations, and even other companies are all prospective stakeholders. But business ethics have generally been viewed through a firm-centered lens, in which corporations and their employees and representatives make decisions for the best interests of the firm and its shareholders—with profit first and foremost.

In a decentered ethical frame of reference, on the other hand, business leaders view their firms as part of a network of stakeholders who are dependent on and influenced by one another.

Profit isn’t secondary, emphasizes Hartman, but the path to boosting the bottom line is different. The viewpoints and voices of a broad range of stakeholders are brought into every stratum of corporate culture, from inviting diverse perspectives into everyday decision-making to long-term strategic planning that considers the repercussions of decisions on groups far from the corporate boardroom. When People for the Ethical Treatment of Animals (PETA) hit The North Face and Patagonia with accusations of animal cruelty in the sourcing of the down commonly used in winter jackets, the two companies met with the nonprofit to figure out a response. Both investigated their supply chains and made changes, updating sourcing standards and making them public.

Those in favor of the decentered model say it helps decision-makers take a global view, encourages creative thinking, supports transparency and open communication, and provides tools to assess and mitigate risk. Hartman believes it may also hold the key to replacing corporate charitable giving with a more sustainable, effective, and mutually beneficial philanthropy, as corporations build strategic partnerships with the communities in which they operate—bringing stability and economic independence as they cultivate prosperous new markets.

“It’s a broader, more progressive perspective, and it’s also a more strategic perspective,” Hartman says. “If we listen to the community and the media and our competitors—if we invite them to the table and really listen to them—then we’re going to make more money, and then our stockholders are going to be happy.”

Some may worry that corporate values (profit, legal standards) and societal ideals (honesty, a commitment to do no harm) could sometimes come into conflict in practice. An ethical firm treats its employees fairly. But values that are in the employees’ best interests, such as fair compensation or family-friendly policies, may seem to clash with the best interests of the stockholders, the maximizing of profits.

“Those policies actually lead to a more committed, loyal, and sustained workforce with less attrition and lower training costs,” says Hartman. “Those elements are all in support of profits and stockholder interests. So, in the long run, interests are aligned.”

In a study published in the Strategic Management Journal in December 2014, researchers at New York University and the University of Pennsylvania tested the profitability of stakeholder theory. In a 15-year analysis of 26 gold mines, they found “existence of a direct positive and economically substantive relationship between stakeholder support and financial market valuation.” Companies were also more likely to complete projects on time and on budget.

Within this framework, acting for social good need not be antithetical to wealth creation; indeed, Hartman argues that a solid ethical foundation is crucial to a business’ success and sustainability over the long term.

Making Defensible Decisions

While family-friendly policies might seem like an easy win, other decisions will be more complex—and fraught. Moving factories and other job sites outside of the United States may boost profits, but these actions have repercussions not only on the laid-off workers, but on their families and the communities in which they work. Countering the conflicts of interest that can lead to unethical behavior requires the expansion of one’s point of view. “Two people can have different perspectives on a set of facts, and different perspectives on a decision to be made,” Chang says. “This doesn’t mean that one is right and one is wrong. The true value comes when you are able to talk about a decision knowing that these different perspectives exist. You don’t make a narrow decision in a vacuum, without looking at all of the potential consequences. It’s a more holistic analysis, and it puts you in a better position to make a smarter move—a more well reasoned, more easily defensible decision.”

Even the strongest mission statement and most principled leadership are not alone sufficient to ensure an ethical corporate culture. Indeed, the shift to a decentered ethical model reflects recent scholarship on how our minds work.

A growing body of research in the field of behavioral economics has found that context affects our ability to judge whether our actions have slipped out of alignment with our values. These cognitive biases call into question our concept of ourselves as rational—and ethical—decision-makers.

For example, in study after study, subjects overestimate their ability to act ethically under adverse circumstances. “If you ask me today if I would ever cheat, I would say no,” Hartman says. “But the fact is that at some time in the future, I might be in a situation where there are influences on me that might get me to compromise my values. And these experiments are showing that in circumstances when we are under pressure, we might not act the way we thought we would—simply because we are human.”

That pressure can be explicit, as in a supervisor using the threat of demotion or another punishment to coerce a subordinate into an unethical action. Often, however, the pressure is subtler. Misapplied incentives, says Chang, can lead people to do things that we don’t want them to do. If commissions or promotions are based solely on dollars brought in, for example, is it surprising that immediate sales will take priority over long-term customer satisfaction? Training alone is not sufficient to counteract these “ethical blind spots;” not even the most experienced leaders are immune. One recent study, published in the December 2015 issue of the Strategic Management Journal, found a correlation between CEO compensation and the quality of a firm’s products: the higher the proportion of stock options in CEO pay packages, the more likely a firm was to have product recalls.

Another blind spot arises from the fact that we tend to make decisions using only the information in front of us—using the facts that we see, rather than the facts that we need. “A better approach,” says Chang, “is to look at what you have and then ask, ‘What else do I need to make this decision—not only to cover all of my bases but to consider all of the potential impacts?’”

Diverse voices may push us outside of our comfort zone, but they also open the door to new ideas, providing the raw materials for true innovation. “One of the tools that we don’t often utilize in our toolbox is something called ethical imagination,” Hartman says. “So you work at VW, and you’ve just found out about this technology that seems to have been designed to get around emissions testing, and you are being pressured to do something that is in conflict with your values. What do you do? Your first response may be, ‘Well, I have no choice.’ But of course you have a choice. You could quit, you could go to the Feds, you could go to the media.”

In a corporate culture that incentivizes unethical behavior, we may need to step outside that culture in order to see clearly, Hartman says. Not enough people “take a moment to stop and breathe—and we don’t share our problem with others. Go ask your mentor; go ask your mom. Take the time, and something will come to you as an alternative.”

Cultivating ethical imagination requires openness and creativity. As part of a business ethics course at Questrom, second-year MBA students have the opportunity to learn basic improvisational skills from an expert in theater arts. In the classic improv exercise “Yes, and...,” scene partners take turns building on one another’s ideas. No idea gets killed and everyone is forced to listen to the person before them. By learning to respond “Yes, and...” business leaders push themselves to look outside of their own fixed world views to consider, and then creatively build upon, another perspective.

The Triple Bottom Line

As the strands of the web of stakeholders extend outward, astute strategists will see opportunities for innovations that can benefit those groups, as well as the firm itself. In an environment open to new ideas, these initiatives—like the Martin & Co. kiln in Guatemala—can emerge organically from a well-defined corporate mission.

Hartman says we should stop using the term “corporate social responsibility.” She teaches instead the importance of an intelligent corporate social strategy. “I’m not talking about putting my hand in my pocket, pulling out cash, and supporting something,” she says. “But if a corporation has a strategic interest in contributing to a social objective, that should be encouraged.”

In creating a successful social strategy, Hartman quotes three essential steps outlined by Michael E. Porter and Mark R. Kramer in the 2006 Harvard Business Review article, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”: First, identify your mission. Second, identify your company’s particular skill set. Finally, link that skill set with a specific set of problems you are equipped to solve—and from which you can gain the best competitive benefit.

Hartman tested this approach in vivo. Twenty years after Chris Martin introduced profit sharing at his family company, Hartman joined her brother Mark Pincus’ firm, the social gaming company Zynga, as director of external partnerships for the firm’s philanthropic arm, Zynga.org. In the wake of Zynga’s tremendous success with games like Words With Friends and FarmVille, Pincus wanted to develop a social strategy for the company.

Hartman and her colleagues at Zynga.org began by looking at the parent company’s mission: “Connecting the world through games.” Zynga’s skill set—its area of expertise—is social games. Its social strategy, then, began with games. If you were playing FarmVille on Facebook in January 2010, you might have seen a pop-up asking if you’d like to help those affected by the earthquake in Haiti: instead of leveling up or buying a new seed for a dollar, players could send their dollar to the World Food Programme.

In directing the Zynga.org strategy, Hartman selected nonprofit partners that worked internationally and would be able to account for every dollar contributed. By sharing the information with those who chose to donate, Zynga.org connected donors to recipients, thus supporting the parent company’s values. “Our mission was to connect the world,” she says, “and so we were working on a global level and creating real connections through reporting and transparency.”

The strategic benefits for the parent company were numerous, Hartman found. Game players were often willing to spend more (or buy more) if they knew their money was supporting a good cause. Following up with information about how the donated money was being spent kept users in contact with Zynga. Players shared their good deeds on social media, and encouraged others to do the same. And the opportunity to do good fostered a general feeling of goodwill toward the gaming company, strengthening the brand.

Since 2009, the nonprofit has raised nearly $22 million for global disaster relief, education, and health, demonstrating that a well-thought-out ethical strategy can lift all boats, with each component of the triple bottom line—social, environmental, and financial well-being—supporting the prosperity of the others.

Questrom's Susilo Institute for Ethics in the Global Economy will host its inaugural annual symposium in Surabaya, Indonesia, on May 28, 2016.