Alumni

Research Ties Ethics to Business Success

Companies can benefit from paying more than lip service to ethical practices, according to research by Valparaiso University business professor Michael McCuddy in his recent paper “Actions Speak Louder Than Words,” co-written with Valpo business professors Karl Reichardt and David Schroeder ’71.

In a paper honored by the International Journal of Business and Economics as the best ethics or business law paper in 2007, McCuddy offers empirical evidence that the presence of a written code of ethics and, more importantly, its effective implementation, does promote business success and a positive organizational reputation.

McCuddy, the Morgal Chair of Christian Business Ethics, and his colleagues surveyed thousands of accountants between 1994 and 2000 to determine the short- and long-term impact of both written ethics codes and the effective implementation of ethical practices.

In his analysis of the survey responses, McCuddy said the presence of a code of ethics and ethical effectiveness explained six to seven percent of the variance in organizational success.

“Given all of the other factors that can influence success, being able to explain that amount of variance in organizational success with two ethics variables is encouraging,” McCuddy said. “Since the margin between success and failure can be quite slim, ethics could be the solution to having the margin fall in the company’s favor.”

Moreover, ethical effectiveness was deemed a more important factor in a company’s short- and long-term success and reputation than merely having a code of ethics. When a code of ethics and ethical effectiveness were significant predictors of short- and long-term success, McCuddy said the correlation for ethical effectiveness was three to 10 times larger than the correlation for code of ethics. The disparity in company reputation was even greater, with the correlation for ethical effectiveness 13 to 26 times greater than for code of ethics.

“With respect to ethics explaining both short-term and long-term success, actions do speak louder than words,” McCuddy said. “Evidence is mounting that ethics does indeed make a difference, and over the long term, a company that is not ethical will suffer.”

Ethical effectiveness was measured by respondents rating how effective their employers were with respect to seven practices, including providing ethics training, conducting daily operations in a manner consistent with its ethical standards, consideration of ethical standards in making long-term decisions and rewarding ethical actions.

McCuddy said the accountants surveyed – members of the Institute of Management Accountants – were uniquely qualified by their ability to judge the success of their employer by evaluating factors such as profitability, productivity, sales volume, growth and asset utilization.

McCuddy and his colleagues have continued to collect the accountant surveys since 2000, and currently are analyzing data collected during and after the wave of business scandals that destroyed companies such as Enron and WorldCom earlier this decade.

“I expect that looking at the results from the pre-scandal era versus the time when these scandals were taking place and in the post-scandal era will give us some interesting results,” he said. “I would hope that ethical effectiveness in particular is even more important in today’s business environment.”

To make an ethics code more than window dressing, McCuddy said companies should take four actions. First, he said, they need to look inside themselves and balance self-interest with community interest.

“Businesses and leaders must have a clear sense of what their roles and values are, as well as their obligations to different communities and stakeholders,” McCuddy said.

Next, leaders throughout the organization have to become authentic role models to the rest of the workforce, putting into practice that balancing of self-interest and community interest.

“Once these authentic role models are in place, then companies must foster and reinforce an organizational culture that creates expectations of everyone doing what is fair, right and just,” he said.

The final step in bringing a code of ethics to life, McCuddy said, is making sure the organization’s rewards system is in alignment with its values and ethics.

“At Enron there was a very aggressive culture, with an attitude that ‘making the numbers’ was more important than anything else,” he said. “If you have to do unethical things to get the numbers that leaders are demanding, it undermines the ethics of an organization no matter how strong the code is on paper.”