Why it is difficult to make businesses more ethical
Moral bankruptcy is not new among Indian corporates. Several high-profile cases have left us utterly disenchanted with our ability to ensure that corporate India behaves responsibly. Unsurprisingly, the system that is supposed to serve as a check aids businesses in their unethical overtures.
Research has shown that fighting unethical conduct in businesses is not easy (Treviño & Brown, 2004). Defining business ethics has proven to be a futile exercise both in courts and legislatures. Inherent subjectivity makes codifying ethical behaviour in businesses challenging. Unethical behaviour has several underlying reasons. The two most important factors among these are the lack of credible monitoring systems to keep a check on managerial opportunism and, second, the absence of general awareness about and belief in the value of ethical behaviour.
Regulators have attempted to fight the paucity in credible monitoring systems. The Uday Kotak committee on corporate governance, which was set up by Sebi, focused on ensuring the autonomy of independent directors and auditors, creating checks and balances for and mandating disclosures of related party transactions, and protecting whistle-blowers against victimization. The recommendations addressed a number of pending issues, causing Sebi to consider a wider consultative process with stakeholders. After the completion of these deliberations, Sebi amended the Listing Regulations in May 2018, partially accepting the recommendations of the Uday Kotak committee.
It is, however, imperative to ask whether we have done enough. So far, the government’s approach to induce responsible corporate citizenship has focused on codifying best practices through laws and regulations. But unethical business practices have persisted despite legislative reforms. Significantly, government intervention has almost completely ignored the second causal factor: the lack of belief that ethical behaviour makes business sense. Therefore, we can undoubtedly do more.
Businesses serve various stakeholders. Most important of these are investors, clients and the economy. The government must use the power of investors and customers to bring a change in those who manage businesses. The present dispensation has astutely chosen behavioural change as a strategy to achieve various socio-economic goals. Be it financial inclusion, cleanliness, or a reduction in undeserved subsidies, this government has shown that change can happen at the grass roots. Similarly, to make Indian businesses ethical, the government must lay the foundation of a mass movement that accepts nothing but ethical businesses.
There is a ‘doing-good’ element in the demand for ethical business. This can be used to nudge investors and consumers to force corporate India to change. Investors should be made aware that ethical business practices can reduce the monitoring costs incurred by them to keep a check on the management (He & Ho, 2011). Investors should also be told that an ethical business satisfies all stakeholders, including customers, regulators, suppliers, and employees. This is a competitive advantage worth chasing (Berrone, Surroca, & Tribó, 2007). Additionally, ethical businesses enjoy longevity and are better value generators (López, Garcia, & Rodriguez, 2007). This, more than anything, should be motivation enough for investors to demand ethical behaviour from their organizations.
Consumers need more information on whether suppliers are following ethical business practices. Unsurprisingly, research has documented that socially responsible businesses are the consumers’ favourite and many businesses use their ethics-related credentials to attain greater market shares (Mohr, Webb, & Harris, 2001). Social media has been effectively used by companies to market their mandatory CSR spendings to attract consumers.
The government should provide relevant and credible information to consumers. A matrix should be developed to rank businesses on the parameter of ethical conduct. Once available, the rankings will influence consumers’ decision-making by providing them information on their suppliers’ socially responsible behaviour. We will succeed if investors and customers start demanding ethics as a prerequisite. Ethical conduct will then become as important as the bottom line, stock returns and consumer satisfaction scores.
However, creating ethical organizations will require more effort. Ethical culture percolates to the lower levels of management not only through explicit communication within the organization but also through top management upholding these values in all situations. Another important step to achieve an ethical organization would be to revamp the incentive systems to indicate that ethical behaviour is amply rewarded. Such a multi-pronged approach might make ethics central to an organization’s culture.
Ethical conduct in business is a complex and context-specific issue. But this should not stop us from embarking on a journey towards making ethical decisions a natural phenomenon. The government should not only keep up the efforts to codify best practices but should also use its might to nudge investors and consumers to do good by demanding ethical business conduct.