Can an ethical culture prevent anti-competitive behaviour?

June 24, 2014

GoodCorporation asked the newly formed Competition and Markets Authority to lead our May Business Ethics Debate at the House of Lords on the subject of ethical culture and competition.

The discussion began with some of the opposing arguments.

  • It costs time and money to instil an ethical approach if you don’t already have one.
  • Businesses can lose out on profits if an ethical approach is inconsistent with immediate profit maximisation.
  • Businesses need to compete to stay ahead. It is often argued that an ethical culture is the competitive equivalent of tying one hand behind your back.
  • It’s not always clear what an ethical approach to a given situation would be – people, institutions, lawyers and governments will all have different answers to the same question.
  • All firms exploit consumer traits and biases in some way – how does a business determine what is ethical and what is not? Where do you draw the line between (for example) fulfilling demand for easily available food and encouraging obesity?
  • In other markets, such as financial services, the key to success is information advantage – how does a business define the ethical ‘limit’ to using that advantage.
  • There can be a significant ‘first mover disadvantage’ for firms seeking to introduce an ethical culture where the rest of the market doesn’t have it.
  • And if firms can see competitors doing better through unethical activity and cheating to get ahead, without sanction or consequence, the inclination is to follow – leading to a race to the bottom.

However, although these arguments may seem compelling, they do not stack up as a justification for avoiding business ethics, they merely show why an ethical culture can be hard to implement.

Over the medium to long term, an ethical culture gives a competitive advantage: the only way, in fact, of sustaining position in the market, which is ultimately good for profit.

Unethical conduct on the other hand, has a significant cost: fines from regulatory and enforcement action, reputational damage and loss of trust. Sectors as well as individual companies can be damaged by the rogue activities of the few.

Culture plays a vital role in corporate decision-making. A rules-based culture cannot always guide behaviour as it is unlikely to cover every possible situation. However, a strong ethical culture can ensure that the right decisions are made, giving employees a clear idea of what is expected when they face a situation where there are no company rules. This can be essential, though difficult to apply when moving into new markets where norms of behaviour can be very different.

So how can a business create the right culture?

The following are essential:

  • Strong leadership and modelling of the right behaviour
  • Board-level involvement
  • Communication and training: how individuals conduct themselves personally has an impact on company reputation
  • Appropriate sales incentives
  • Treating customers and competitors fairly

What are the challenges?

  • Establishing a single culture that can work in a diverse organisation and across boundaries
  • Ensuring that there is sufficient governance and interaction with operational entities such that the culture is universally embraced
  • Delayed reaction – some businesses don’t react until problems emerge in their own or a competitor organisation
  • Doing the right thing may result in a short-term loss of profits
  • Refraining from an activity which could help meet targets but is wrong can be hard and requires a strong sense of responsibility
  • Transparency may lead to a loss of business

What are the advantages?

  • A strong set of values can meld an organisation together
  • Positive core values can act as a real differentiator in a highly competitive market
  • Builds brand reputation, customer loyalty and consumer trust
  • Provides reassurance that staff will know what to do in difficult situations
  • Reduces the likelihood of being ‘caught out’ and any ensuing reputational damage
  • Good for long term business development

In summary

There was overall a clear consensus around the proposition that it is “good business to be ethical”. However, establishing this isn’t easy, there are likely to be internal challenges, variations according to different market contexts and different corporate maturity profiles.

It is more important to adopt principles than very specific rules; the aim is to embed the right culture. Leadership from the top is required, but staff members must also be properly held to account.

Training programmes are necessary but not sufficient on their own, audit activity post-training is required to assess progress and create space for discussion in grey areas

Expectations from customers, public authorities, and society as a whole are rising; the best organisations will not simply “fall in line”, they would seek to get ahead.

The link between good business behaviour and competition is clear. Organisations that demonstrate strong antitrust processes see these as a core part of their wider ethical approach to doing business.

Posted June 2014