6 Reasons Ethical Businesses Make for Better Investments
American corporate history is full of accounts of ethical failures. For example, in December 2001, energy-to-paper conglomerate Enron was outed for systemic accounting fraud. Enron reported revenues of $101 billion in 2001, but after it came to light that the numbers were largely fabricated — the company lost some $79 billion — it collapsed and declared bankruptcy.
Another example is WorldCom, which met a similar fate in 2002. At its peak, the telecom company employed 60,000 people in 65 countries and claimed $107 billion in assets. However, just one month before filing for Chapter 11 the company disclosed that it had misrepresented about $3.8 billion in expenses. Already cracking under a $41 billion debt burden, WorldCom declared bankruptcy and was later folded into Verizon.
With a few notable exceptions — such as the Sarbanes-Oxley Act in 2002, which mandated, among other things, that top management certify the accuracy of the reported financial information and made penalties for fraudulent reporting more painful — fraud is insufficiently addressed by regulators and sometimes even the market. Instead of the company collapsing or executives being fired or going to jail, usually fraud just pushes the company to issue an apology and to engage in brand building exercises.
However, one happy byproduct of this system has been new standards for not just legal and regulatory compliance but also for ethical compliance. For example, when Google (NASDAQ:GOOG)(NASDAQ:GOOGL) acquired DeepMind, an artificial intelligence startup, it agreed to a demand to sett up a board of ethics to make sure the technology is not abused. So far there aren’t too many laws governing artificial intelligence.
Google is just one example of many. More and more, companies are adopting elaborate codes of conduct, building self-reporting or self-policing mechanisms, hiring chief ethics or compliance officers, and taking up sustainability initiatives. These initiatives are designed to change the image of corporate America as a pack of conniving, resource guzzling firms.