Three Ways Companies Are Getting Ethics Wrong

Making business decisions that are both ethically and strategically sound has always been incredibly tricky. Leaders are called upon to act in a manner that is consistent with their personal values, builds solidarity and trust among diverse stakeholders, enhances their company’s reputation, and prevents scandals, while also being mindful of the bottom line.

This leadership challenge is getting ever more complex. Investors are measuring companies against environmental, social, and corporate governance (ESG) indexes. Employees are demanding extensive diversity, equity, and inclusion (DEI) commitments. And customers want to buy brands that are tied to strong corporate social performance (CSP).

As counterintuitive as it might seem in the burgeoning ethical complexity of ESG, DEI, and CSP, a few companies have found that when it comes to ethics, simpler is better. They meet the demands listed above by rejecting the notion that ethics are necessarily complex. They refuse to abdicate their ethical responsibilities; they craft value propositions that do not lean on social value initiatives to obscure or distract from how the company creates financial value; and they are transparent about how they do business with all stakeholders.

Don’t Outsource Ethics

It isn’t surprising that today’s complex ethical demands have spawned equally complex products and services from companies such as Ethisphere and RobecoSAM, and major consultancies like Deloitte. It is also easy to see why well-meaning leaders looking at the myriad variables behind ESG, DEI, and CSP calculations would throw up their hands and call in a consultant. But outsourced solutions to ethics don’t build employee solidarity or earn customer goodwill. Nor do they prevent scandals or help leaders sleep at night.

For example, Starbucks has been a longtime client of Ethisphere, but this partnership has not protected the company from ethical scandals. In 2018, Starbucks outlets nationwide were forced to shut down for a day of sensitivity training — an event whose design was also outsourced — after a store manager in Philadelphia called police to remove two Black men who were waiting for a colleague to arrive before placing their orders. Then, it seems that the sensitivity training Starbucks paid for had unexpected consequences: A year later, a barista in Arizona asked a group of police officers to leave the store after a customer complained of not feeling safe. Scandals continue to this day; for instance, the company’s claim of “ethically sourced” cocoa has been undermined by evidence of child slave labor being used in its supply chain.

Ethics need to be proprietary because they must be rooted in the DNA of the company. Patagonia is an organization that has led the way on ethics by building a unique and authentic value proposition rooted in its history. The company makes money selling durable, long-lasting clothing, which is sourced and made through transparent, humane processes built on robust environmental and animal welfare principles. Patagonia’s recent announcement of “making the Earth our only shareholder” sets an impossibly high standard for most companies to meet, but “classic” Patagonia was a perfectly acceptable model of business ethics done right.

Outsourcing ethics is built on the belief that there exists a consultancy that has, if not all, at least most of the answers required to make corporate ethical pursuits easier. This just isn’t the case. The experts don’t know much more about ethics than the rest of us, and it is unlikely that they will be able to foresee the source of the next corporate scandal in companies trying their best to do the right thing. Business leaders need to encounter and wrestle with a diverse plurality of moral vocabularies as they figure out the right ethical posture for their companies. This task is path dependent, and nobody can do the work for you.

Skip the Checklists

Authentically ethical companies avoid cheap and easy ways to score quick ESG, DEI, and CSP points using tools such as ethics checklists and algorithms that calculate “objective” rankings. Checklists offer a tempting alternative to management teams that would prefer to avoid difficult ethical conversations.

Remember that before its historic collapse, Enron was considered a paradigm of ethical business. In fact, the strategy textbook I used at the time called out Enron’s exhaustive code of conduct as a model for other companies to follow. But how was the company making money? Senior Enron executives couldn’t (or wouldn’t) explain it, and when challenged, they were known to bully questioners into doubting their own intellectual capacity.

The third-party frameworks and metrics that have sprung up around ESG, DEI, and CSP are reminiscent of Enron’s code. Companies that focus too intently on them can get so caught up in the minutiae that they lose sight of the big picture. Ethical companies craft and adhere to a clear, concise, nontechnical, multifaceted value proposition that instills ethics so deep into their DNA that doing the right thing eventually becomes instinctual.

Look at Natura’s value proposition, as stated in its 2021 annual report: “To nurture beauty and relationships for a better way of living and doing business. We will dare to innovate to promote positive economic, social, and environmental impact — and become the best beauty company for the world.” This worldview has led Andrea Álvares, Natura’s chief brand, innovation, international, and sustainability officer, to counsel, “Be genuine. … This can’t be about discourse or communication, gimmicks, or campaigns. This has to be about the heart and soul of the business. So if you can’t translate, if you’re not yet operating at the level that you want, don’t talk about it.”

Optimally, ethical companies can explain how they make money so clearly that their least sophisticated stakeholder can understand it. A company is ethical so long as those it engages in an economic exchange have full clarity on how it makes money and are happy to offer their support. Both the simplicity and the subjectivity built into this standard for ethics are deliberate, even though it invites controversy.

Chick-fil-A may have the most famously polarizing value proposition: “To glorify God by being a faithful steward of all that is entrusted to us and to have a positive influence on all who come in contact with Chick-fil-A.” It has also led to decisions that are in opposition to the values of some people, myself among them. So while I wouldn’t do business with the company, I would nonetheless argue that Chick-fil-A is doing ethics right, in that it has articulated an authentic moral stance and sticks to it. Remember, the goal of ethics is not to be all things to all people but to be true to a set of values.

Forget the Bold Vision

The third way companies are getting ethics wrong is by proclaiming ambitious visions for enacting future social change without being transparent about what they are doing today. The move toward making ethics overly complex and adopting an outsourced ethical strategy, like Deloitte’s proprietary Social Impact Measurement Model (SIMM), allows companies to hide from the truth. SIMM forecasts the incremental impact of corporate investments on 75 measures. It’s rooted in a “go big or go home” mindset that doesn’t best serve the development of a more ethical future.

Uber, for example, made “creating greater equity” one of its priorities, stating that “increasing diversity, equity, and inclusion is at the core of the company’s strategy.” But in July 2022, a major leak of internal documents revealed that the company had deliberately broken laws and expressed the view internally that violence against its drivers guarantees its success.

In 2021, Pepsi’s CEO announced “a strategic, end-to-end transformation of our business” that would “put sustainability and human capital at the center of how we will create growth and value.” It’s not clear how selling sugary drinks and salty, high-carb snacks serves a higher moral purpose. If a company’s current value proposition is problematic, it’s hard to take its promises seriously.

In fact, many younger people don’t buy into bold promises for the future from companies that are profiting off of bad behavior today. Only 44% of millennials, the generational cohort that will make up three-quarters of the workforce by the end of the decade, believe that businesses make a positive social impact, according to Deloitte’s 2022 Gen Z and Millennial Survey. That’s a drop of 3 percentage points from a year earlier.

Transparency regarding current sources of profitability is the most important piece of the ethics puzzle. It must come first — before the bold promises — if leaders and companies are to avoid the taint of hypocrisy or insincerity.

Target has taken this lesson on board. Its leaders have continuously set near-term and incremental goals aimed at improving the company’s ethical posture, and it has consistently met them. These goals range from permanently raising its starting minimum wage in 2020 to launching a net-zero packaging waste initiative in 2022.

Target is also making big ESG commitments with a 20-year implementation timeline, but these bets are tempered and bolstered by incremental achievements today. The aspirational message shared by Target’s CEO is grounded in the here and now: “In our daily work, we’re building connections with the people and the communities we serve. Every good decision strengthens those bonds and helps create a brand we can be proud of every day.”

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Ethical companies don’t outsource their thinking, rely on checklists, or make big promises for the future that aren’t backed up with action today. They explain how they make money in a clear manner that allows stakeholders to feel good about doing business with them. The path to ethics is really as simple as crafting and living by a clear value proposition, but in the age of algorithms and industries selling DEI/CSP/ESG checklists, it is certainly not the path of least resistance.