How Do You Demonstrate the Value of Ethics?

When Andy Powell was appointed Chief Ethics and Compliance Officer at the multinational manufacturing company Flex 18 months ago, he was presented with a challenging task: generate a positive, values-based ethics culture across the company’s 100+ facilities that employ more than 160,000 people over five continents. And the initiative had to work with Flex’s bottom line.

“I looked at the situation and realized there’s no way we can be the policeman,” Powell said via videoconference. “We can’t be in 30 different countries at 100 different sites, constantly monitoring what people are doing, which some companies do. Large banks, financial institutions, rather heavily regulated companies — they do have hundreds, if not thousands, of people in compliance roles, looking over peoples’ shoulders and checking what they’re doing. But we didn’t want to do that. We can’t do that. We operate on razor-thin margins.”

Just over a year ago, Powell developed a data reporting program across the company’s 50 largest sites by revenue. From this data, he and his team created an ethics scorecard by which they could benchmark progress. While he says it is too early to declare victory, Powell contends the intervention has already realized important returns for the company’s workforce and its shareholders.

Flex designs and manufactures a range of common products and associated services, including medical and industrial equipment, telecom devices and consumer electronics. The margins on which it operates are indeed narrow. In 2020, the company grossed $24 billion but netted $88 million.

But at the same time, this effort marks a gradual shift in corporate outlook. Flex’s initiative is one instance of a growing trend among business leaders who look to drive both shareholder and stakeholder value.

Looking to Demonstrate the Value of Ethics, Flex Implemented a Scorecard Program Across 50 Sites

Flex shifted its business strategy in early 2019 when it hired Revathi Advaithi as CEO. Under her leadership, Powell says, the company exchanged its value-based outlook to a values-based alternative. It implemented an ethics reporting platform and began tracking a variety of metrics, like employee misconduct, sexual harassment and various forms of fraud, among other things. These actions might not qualify as whistleblower reporting, but reporting and eliminating them nonetheless makes business sites safer and more honest for its members.

Once enough data accumulated, Powell was able to get back to site leaders to present results and identify problem areas.

“Some of the site leaders were like, ‘Wow, I never knew this was going on,’” he said. “Others were like, ‘This is bullshit.’ You know, ‘I don’t trust this data. It’s outdated. It isn’t correct.’ It wasn’t smooth sailing. But we are starting to see some positive changes.”

Powell and his team have recently begun to compare misconduct and unethical behavior across regions and sectors. They created an ethics “scorecard” based on the data. With this benchmarking, they then identified hot spots of problem areas. In some instances, Powell says, they narrowed down spikes of misconduct to specific sections of production lines and associated environments. He thinks that a good deal of wrongdoing on the part of workers was a product of lapses in site management.

“We found all kinds of conditions that were associated with higher rates of ethical lapses,” Powell said. “In one case, the air conditioning wasn’t working. In another, the cafeteria services weren’t very good. With all these signals coming in, we are able to figure out some interesting contributing factors.”

To Powell, this is the point of the system.

“At the end of the day, compliance professionals will tell you that you’re never going to change human nature,” Powell continued. “You’re always going to have a certain ambient level of misconduct if the company is big enough. There’s a jail in every town. Okay, I get that. But wouldn’t it be nice to have less of that and change things for the better?”

A Shift from Shareholder to Stakeholder Value

Flex didn’t always maintain hotline availability, conduct employee surveys and track its ethics culture.

“Under prior leadership, we were much more mercenary,” Powell said. “We’d go after all types of business. We weren’t picky so long as there was a decent margin involved. We’re much more values-driven now.”

Many business leaders have typically viewed investments in ethics cultures as something that is nice to have, but not necessary for delivering shareholder value. Powell, however, believes that is changing. He says that his team has found a positive correlation between a site’s ethical compliance and its output.

These dynamics that pit value against ethics mirror the ongoing debate surrounding a corporation’s purpose.

Economist and Nobel laureate Milton Friedman immortalized the view that a corporation is beholden exclusively to its shareholders in his 1970 essay published in the New York Times, “The Social Responsibility of Business Is to Increase Its Profits.” Via this simple dogma, Friedman argued that a business’s leaders are the employees of its owners. Their sole responsibility, therefore, is to carry out their owners’ or shareholders’ mandate. This mandate can be to run a hospital or a university. But more often than not, it is to generate profit.

Still, Business Roundtable, the prominent D.C. lobbying group composed of CEOs of many large American companies (including Advaithi of Flex), for years has published an annual statement of purpose of the corporation. And for years, it echoed Friedman’s theory of shareholder primacy. But in 2019, it broke with this tradition and shifted its stated focus from shareholders to stakeholders. “While each of our individual companies serves its own corporate purpose,” the statement reads, “we share a fundamental commitment to all of our stakeholders.”

Now, more than 50 years after its publication, some have declared Friedman’s shareholder doctrine to be dead. Others are more skeptical. Commenting on Business Roundtable’s corporation purpose statement update, Harvard Business School historian Nancy Koehn told the New York Times, “They’re responding to something in the zeitgeist … It’s an open question whether any of these companies will change the way they do business.”

The Relationship Between Ethics and Profits

Experts have debated the (shareholder) value of ethics for years. While many statements (like those of Business Roundtable) and surveys support this view, the topic is fundamentally difficult to quantify.

Ethisphere, a for-profit corporate ethics evaluator, publishes an annual index, The World’s Most Ethical Companies (WME), and claims the companies in it experience an “ethics premium,” or higher revenue than their competitors. For 2021, the company reported, “Ethisphere’s 2021 Ethics Index, the collection of publicly-traded companies recognized as recipients of this year’s World’s Most Ethical Companies designation, outperformed a comparable index of large cap companies by 7.1 percentage points over the past five calendar years.”

Ethisphere also privately compiles ethics data from participating companies. Flex joined the group’s Business Ethics Leadership Alliance this year and plans to compare its ethics program with other members going forward.

Companies opt-in to consultation with Ethisphere. Many have debated to what extent these companies do outperform their non-Ethisphere-recognized competitors and whether the WME is a useful tool compared to others, like the Dow Jones Sustainability Index.

For Powell at Flex, however, this debate is just window dressing. The company’s ethics program is still in its early days, and it’s unclear to what extent it will work in the long term. But at the same time, he views actions taken to increase shareholder and stakeholder value as one in the same. And he believes the scorecard is working.

“A big part of the challenge traditionally for compliance teams is to prove the value that they’re adding to the enterprise,” he said. “But with the data we’re collecting now, we can benchmark where we are and show that there is a direct correlation between having a strong ethical culture and financial and stock price performance. It’s right there in the data. There’s no real debate.”