Introduction
The ethical behaviour within a company portrays its organizational culture. Ethics entails systematization, protection, and recommendation of concepts of wrong and right conduct. Therefore, ethics refers to the moral principles, which people use in governing their behaviours (Cragg, 2004). The contemporary organizations in the United Kingdom ought to establish ethical practices at both functional level and organizational level to improve on their performance. The concept of ethics occupies a major place in the management of any company in the U.K. since the organizational performance is essentially enhanced through the ethical leadership (Van de Velde, Vermeir, & Corten, 2005). Numerous values determine the exact nature as well as corporate culture of the companies. The moral principles that direct the way an organization behaves are collectively termed as business ethics. The incorporation of ethical dimensional values reflects the organizations’ adoption of ethical approaches. The presence of ethical values within organizations brings about ethical standards that influence personal choice and ultimately facilitate the companies’ realization of desired actions. In particular, the sharing of ethical standards and values among the members within the organizations results in organizational success as well as the realization of high financial performances. For this reason, the research paper centres on the effect of business ethics on the financial performance of companies in the United Kingdom.
Rationale for study
Various stakeholders including the suppliers and investors, among others have for a long period been concerned in the relationship between a corporation’s commitment to business ethics and its financial performance (Choi & Jung, 2008). A strong ethical culture within the organization yields high returns. Amine, Chakor, & Alaoui, (2012) suggest that establishing an ethical climate within the company has positive effects on the performance growth as it is an intangible resource. Nevertheless, within numerous contemporary organizations, there have been numerous morally imperfect individuals who have presented ethical risks, and this has made such organizations financially vulnerable. Fombrun & Foss (2004) indicate that the wave of scandals, which have inundated business, has had extensive consequences such as the financial consequences. In fact, the corporate misconducts have for quite some time harmed companies as well as their stakeholders (Harris, & Bromiley, 2007). The corporate scandals that have been experienced in the contemporary corporations in the United Kingdom have affected their financial performances. Persons (2013) claims that after major accounting scandals, business ethics has turned out to be highly important to corporations. For this reason, this study investigates the concept of business ethics in contemporary organizations in the United Kingdom. Specifically, the study assists in the understanding the effect that business ethics has on the companies’ financial performance.
Research questions
The study investigates two research questions:
- Does the application of business ethics in companies in the United Kingdom affect their financial performances?
- What are the organizational costs incurred by the companies in the United Kingdom that fail to apply business ethics and what are the solutions to the unethical problems that such companies experience?
The effect of application of business ethics on companies’ financial performance
All the accountants in the United Kingdom ought to be directed by professional code of conduct since the profession rests greatly on the need to demonstrate stewardship and accountability. A variety of governments and organizations throughout the world have developed remedies and regulations for enhanced ethics among their accounting profession in their effort of preventing fraudulent accounting (Brass Island, 2011). The fundamental ethics, as well as guidelines relevant to the accountants, include objectivity, integrity, confidentiality, professional competence, independence, technical standards, and professional behaviour (Atkinson, 2004). All these principles assist companies in their performances especially in their financial performances as they guide the accounting professionals in their day to day operations. The principle of objectivity requires all the professional accountants to be intellectually honest, fair, and free from conflicts. In their day to day activities, the professional accountants are exposed to working conditions that involve the likelihood of pressures. For this reason, they should hold on to the principle of objectivity. With regards to the principle of integrity, the accounting professionals should be honest at all the times as well as have strong moral principles as suggested by McWilliams & Siegel (2010). In particular, the accountants must be honest and straightforward in business and professional relationships.
In addition, all the professional accountants must respect the confidentiality of information they acquire in the course of their professional. They are required not to disclose or use confidential information without specific and proper authority. Professional competence is the other principle that professional accountants should possess. In agreeing to offer their professional services, they should be competent enough. Therefore, they should desist from agreeing to execute professional services that they are not proficient to perform unless they obtain competent assistance and advice. With regards to the principle of independence, the professional accountants ought to maintain an independent attitude at all times when fulfilling their duties (McMurrian & Matulich, 2011). The principle of technical standards requires the professional accountants to execute their services in accordance with applicable technical as well as professional standards. Lastly, the principle of professional behaviour requires accountants to function in a way, which is consistent with the good repute of the accounting profession.
Financial reporting is among the most imperative functions that a company should be careful with at all the times (Enderle, 2004). The common sense and research findings strongly suggest that ethical corporations in the long-run outperform unethical organizations financially. Orlitzky, Schmidt, & Rynes (2003) assert that an increasing amount of studies has altered the theoretical debate from selecting between financial performance and ethical performance to selecting ethical performance due to its contributions to the financial performance. The above-described accounting principles assist the company in the United Kingdom in their efforts towards achieving a higher code of ethical behaviour that will eventually improve their financial performance. Business ethics help companies in building their reputations as well as earn the support and loyalty of their stakeholders. In fact, the application of the accounting principles assists the companies in the United Kingdom in creating accurate and honest financial statements that offer the basis for accurate and honest tax reporting. Therefore, the companies fill tax returns, which genuinely reflect their business activities hence this help in saving money on penalties, legal fees, and interest. Moreover, the accurate financial reporting contributed by business ethics gives the stakeholders a clear picture of what is going on within the companies hence this offer a better basis for making decisions than when using false data. With the help of business ethics, the companies in the United Kingdom build their customer relationships and reputations through earning the trust of customers that use their services and products (Bauer, Otten, & Rad, 2006). In fact, companies that act with integrity give their clients creditable stories to tell.
The application of business ethics creates a strong ethical identity within the companies. Berrone, Surroca, & Tribó, (2007) claim that firms, which have a robust ethical identity, realize a greater level of stakeholder satisfaction that in turn influences the financial performance of the firm positively. The use of ethical principles of integrity, confidentiality, professional competence, objectivity, among others help companies maintain high levels of stakeholder satisfaction, and as a result, this influences their financial results positively. The lack of professional and personal ethics in the companies leads to negative financial results (Hitt & Collins, 2007). In addition, the questionable business practices as well as risky loans put numerous insurance and banking firms in the United Kingdom in unstable positions. A company that ensures ethical behaviour improves the financial performance (Kim, 2010). The companies, which announce large returns as a result of fraudulent accounting practices ultimately suffer negatively in their financial performances. On the other hand, ethical business practices assist the companies avoid negative financial results and legal problems that occur once the authorities discover the unethical behaviours (Clegg, Kornberger, & Rhodes, 2007). What’s more, business ethics assist the companies in providing reliable returns on investment since they continue concentrating on operating efficiently and effectively devoid of distractions of negative public perception and bad press.
According to Collins (2009), organizations with a robust ethical culture attract high-quality customers, investors, suppliers, and employees besides retaining their loyalty. In fact, employees desire to work at organizations that treat them with fairness, respect, and dignity. The companies that establish higher standards for the ethical business conduct attract employees and retain their loyalty (Somers, 2001). In addition, the employees become happy and serve the customers perfectly, and thus, this leads to a higher satisfaction of customers. The companies having higher customer satisfaction levels generate higher levels of repeat business, customer loyalty, and additional market shares. The clients might refuse to deal with a company, which makes them feel afraid and suspicious. The companies that maintain good relationships with the other companies and government authorities and contribute to the community become more successful in the end (Verschoor, 2004). Such companies do not get distracted by the uncalled for lawsuits as well as other distractions that disrupt them from producing quality services and products, which allow positive financial results.
Organizational costs that companies in the United Kingdom incur from unethical behaviours and possible solutions to the unethical problems
There are various costs that companies incur as a result of unethical behaviours. The costs can happen because of two occurrences. Some costs happen when someone treats such companies unethically for instance, when one sells counterfeit products to them. On the other hand, a number of costs take place when a worker treats someone unethically hence this leads to employee turnover, lost customers, and lawsuits. There are much unethical behaviour that are interconnected for instance, when a worker steals from the company as a result of being treated unfairly by the manager. The organizational costs that result from unethical behaviours include the recruitment and turnover costs, reputation costs, monitoring costs, theft, and legal costs.
With regards to recruitment and turnover costs, companies that fail to apply business ethics incur higher costs when recruiting employees, investors, suppliers, and customers. What’s more, such companies must offer some premium to counterbalance their ethical deficiencies. Since employees, investors, suppliers, and customers prefer doing business with ethical organizations, and such companies experience losses in the long-run.
The companies with good reputations attract customers and employees whereas those with bad reputations repel customers and employees. When the accusations and lawsuits of unethical behaviour come out in the media, the companies’ reputations can essentially be severely damaged. According to Mangold & Miles (2007) and Cravens & Oliver (2006), the word-of-mouth by an organization’s workers is a crucial information source to the external constituents. Therefore, the workers that undergo an abusive or unethical manager can create reputation costs to the company. The past and current workers who are frustrated by the unethical culture in the companies express their negative views about such companies on the social media. The expression of views sabotages the reputation of the companies as asserted by (Harris & Ogbonna, 2009). All these affect the financial performance of the companies.
In addition, the unethical companies incur monitoring costs. Such companies incur these costs when they do business with or make use of unethical people. Lack of trust among the companies and the unethical individuals such a company is involved with results in extra monitoring costs (Cameron, 2004). The additional costs result due to the increased supervision as well as new layers of regulations and rules that they aim at preventing the unethical behaviours.
Theft is the other organizational cost that the companies in the United Kingdom incur as a result of engaging in unethical behaviours. The workers such companies can essentially steal time, products, or money. The other sources of theft in the companies are the competitors. For instance, (Berman, 2008) claims that in every year, the United States businesses lose 200 billion dollars in revenue as a result of counterfeit products.
The most easily quantifiable costs that are related with the unethical behaviour in any company are lawsuits. Most companies that engage in unethical business practices are charged in the courts of law hence this result in legal costs. The legal costs affect the financial performances of the companies that are charged negatively. The managers in the contemporary corporations ought to a find solution to the unethical problems that as already-described affect the financial performance of their companies negatively. The managers need to implement organization systems approach in the companies to develop a culture of integrity and accountability (Kayes, Stirling, & Nielsen, 2007). What the managers ought to do is to put in place organizational systems that will assist in tapping into workers’ moral essence to get better performance within the organizations. Under the organizational systems approach, the managers should include excellent practices in determining ethical decision making, ethics of job applicants, and ethical leadership as Elango et al. (2010) suggest. In addition, the managers should include ethics and diversity training, ethical work goals as well as performance appraisals, and ethics officers and training (Trevino & Brown, 2004).
During job orientation, the managers should expose the new workers to their codes of ethics as well as codes of conduct. The codes offer more comprehensive information regarding confidentiality, utilization of corporate assets, and conflict of interests (Verschoor, 2004). The codes of ethics ought to fit on a business card and be inspirational as they help in reminding the staff that the organization will treat all the stakeholders with utmost dignity and respect (Schwartz, Dunfee, & Kline, 2005). In addition, there should be an ethical decision-making framework within the organization that will offer a common language for both understanding and talking about the moral aspects of business challenges (Lutz, 2004). Finally, the companies should provide ethics training workshops where employees will learn about the way ethics impacts their work activities as well as organizational performance. The managers should be at the forefront in introducing ethics training in the companies since about half of all the observed unethical behaviours are reported to them as claimed by the Ethics Resource Center (2007). According to Valentine & Fleischman (2004), the employees employed within the organizations where there are formalized ethics training have greater job satisfaction.
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