Article: The most profitable long-term investment: Business ethics

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The most profitable long-term investment: Business ethics

Unethical practices have become the norm for conducting business in India and there is a need for businesses to take charge
The most profitable long-term investment: Business ethics
 

Behavioural scientists have demonstrated the power of mob mentality in driving norms in a society through the monkey-banana-waterspray experiment

 

Unethical practices have become the norm for conducting business in India and there is a great need for businesses to take charge and invest in social transformation

News came out this morning that in the last four years, not a single private business organisation in India has participated in the UN’s global initiative against corruption. This conspicuous absence of Indian companies in this UN initiative has led many global economists to comment that it is not possible to establish business in India without indulging in bribery and corruption. Only two companies from India feature in the list of 145 companies in the World’s Most Ethical Companies list by Ethisphere ® Institute, leading many analysts and economic thinkers to raise questions on whether it is viable for any business entity in India to sustain without getting its hands dirty.

So what is about the economic conditions in India that makes it a place for corruption and unethical practices to thrive?

The legacy of deprivation

India has a rich history that spans across centuries of cultures, rulers, and economic evolution. But beyond that, the country’s history was also unfortunately written in blood and strife. For centuries, the nation has witnessed many attacks on its economy and people and many a story has been told about the plunder of its rich heritage and natural resources. The people of the country were left in great poverty and misery after the 200 year old British rule 65 years back. The following six decades were marked with economic betterment of subsequent generations, but still a significant majority of the people in India continue to remain poor. Economists comment that this legacy of deprivation comes with many evils, and corruption is an unfortunate inevitability.

The monkey-banana-waterspray effect

Behavioural scientists have demonstrated the power of mob mentality in driving norms in a society through the monkey-banana-waterspray experiment. During the experiment, the whole group of monkeys was penalised with a shower of cold water spray every time any monkey tried to reach a bunch of bananas kept at a height. After the group realised it, they’d collectively stop any monkey who’d try to reach the bananas. While the monkeys in the first group were replaced one by one, the mob effect of pulling down any monkey when they tried to reach for the bananas became a norm. The experiment demonstrated that the final group had no monkey from the original group, but the norm remained. Most agree that the unfortunate endemic of corruption has become a social norm and hence, unethical practices are common and widespread in the Indian economy.

Legislative weaknesses

Most argue that Indian legislative processes are old and do not hold true relevance in today’s economic, social, and political environment. The process of legislative reforms in India is slow and hence, most of the laws followed in the country have not changed in decades. The penalty for bribery in India is a meagre 1 year jail sentence or minimal fines. Criminal scientists have proven that crimes that attract lower penalties are more pervasive and widespread in a society. Since corruption attracts low penalties, the endemic has spread deep and wide in the economic DNA of the nation.

Standards of business management

An article written by a People Matters columnist last week outlines the incidence of the Cobrapost sting among leading banking institutions, and questions the state of banking ethics in India. The writer quotes from a research study by Deloitte that states three primary reasons for the increasing incidence of frauds in India—lack of oversight by line and senior managers, business pressures to meet targets, and difficult business scenarios. Perhaps it is about time the business leaders of the nation took notice and took concerted steps toward eradicating unethical practices.

The prolific business writer and CEO of the service company, The Energy Project, Tony Schwartz in a recent article, speaks about the concept of “conscious capitalism” where he argues that ethical companies demonstrate better financial results than others. An analysis by economist Raj Sisodia among 28 companies that he identified as the most conscious revealed that 18 of them outperformed the S&P 500 index by a factor of 10.5 over the years 1996-2011.

The economist, Curtis C. Verschoor published a paper in Journal of Business & Economics Research, which established that 26.8 percent of the 500 largest U.S. public corporations who commit ethical behaviour to their stakeholders enjoyed higher financial results than others. Perhaps it is no surprise that an independent research by the risk assessment firm Corpedia reveals that companies that are deemed ethical outperformed the S&P 500 by more than 370 percent in the last five years. At the product level, a Wall Street Journal publication about a control group experiment by two researchers Remi Trudel and June Cotte reveals that consumers are prepared to pay a higher premium for products that they were told to be made of high ethical standards. Conversely, the control group experiment also revealed that if consumers had to buy products that were deemed unethical, they were only willing to pay if offered steep discounts. The experiments provide food for thought on how conducting business in socially conscious way impacts the bottomline.

It is no secret that corruption brings along the evils of power politics, low profitability, and long-term degradation of economic viability of a market. There are many instances written in business and economic journals where good products and exemplar business corporations have been pushed out of viable markets owing the evils of corruption. While there is no easy solution to the widespread and deep-rooted culture of corruption, economists agree that business corporations in India need to invest in business ethics as an economic imperative.

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