Impact of corporate ethical policies on consumer trust and brand loyalty

Introduction

Corporate ethics in today’s world is a strategic imperative rather than an imposition of moral principles on commerce. Companies, brands, and people that are perceived to be ethical are valued by customers and consumers and tend to enjoy higher trust and loyalty from them.

Let us take the most recent example of a brand, a persona, and a company that is facing loss of reputation as it appears to have compromised on some points. Baba Ramdev had competing MNCs fighting its products and brands with their backs against the wall, but today his company is locked in a grim battle to save its image and business. It can be argued that Patanjali has not done anything that is grossly unethical but in business, and our integrated world ethics encompasses more than just corruption. It includes integrity, trust, and transparency in every sphere.

“What you say is what you do.” – Trust is the bedrock of morality.

An advertisement, a statement, or an act that is seen as unethical may not be immoral but may lack integrity and may deviate from the standards of behavior the company has set for itself.

Before we go any further, let us look at the basic principles of business ethics and core elements to understand its implications completely.

Definition and principles of ethics?

Simply put, “Business ethics can be defined as universally accepted standards of what is morally right or wrong conduct in business.”

The 7 business ethics principles are:

1. Accountability
2. Care and respect
3. Honesty
4. Healthy competition
5. Loyalty and respect for commitment
6. Information sharing
7. Respect for the rule of law.

The three Cs of business ethics are “compliance,” “consequences,” and “contributions.”

1. Compliance involves adhering to laws, regulations, and ethical standards.
2. Consequences refer to the outcomes of ethical decisions, both positive and negative.
3. Contributions refer to how a company enriches employees, people, and communities by complying with the requirements of ethical and environmental practices.

The core elements and 7 principles reinforce developing trust by consistently conducting business ethically. Many organizations have included ethics as a foundational strategic pillar to drive accountability from all stakeholders. One of the Fortune 50 companies I worked for many years had a code of conduct or “guiding principles” for the management to follow based on the 7 principles.

The trust model of leadership

The day of joining this company, during the onboarding we were given training on “the trust model of leadership.” It had a triangulation of sincerity, reliability, and dependability. Trust is like a bank we were told that requires constant deposits for the balances to remain high. It applied equally to individuals, interpersonal relationships, customer relationships or business partners, associate relationships, or consumer perception.

Opportunities for ethical brands

There exist various opportunities for brands that are ethical in nature, including:

• Higher trust and corporate image: Trust remains the foundation of building core loyal customers and brand value in the eyes of the existing and prospective customers or consumers. Brands that are perceived to be following ethical standards of quality, manufacturing, and conduct in the marketplace enjoy a unique position as they transcend their functional value to deliver emotional value to the consumer. It develops a deep connection between the consumer and the brand, resulting in strong preference and repeat purchases, providing stable revenues and higher premiums as a reward. Over time, such customers become a core loyal group of customers that are not easy to convert to competing brands. The trust in the brand becomes so strong that the consumer is willing to pay a brand premium and ignore price offers from competition. This provides an opportunity for companies to develop a relationship with the consumer to drive consistent revenue or growth and a healthier bottom-line. Let us take examples from the real world.

ITC, a company that was essentially known to sell cigarettes, is now an FMCG giant competing with Unilever, P&G, and the likes of them effectively both in terms of revenue and profitability. It has an array of brands in the food space, such as the Aashirvaad range, Yippee instant noodles, Sunfeast and Bounce, etc., to name a few. Another one of such examples is Adani Wilmar, a company that has risen in the last 20 years or so on the back of its successful launch of their flagship brand Fortune that has led them to become almost at par with the other food giants in size and reputation. It is a classic example of how company image benefits from product or brand image. Tata Group, Wipro, and Infosys are some names that enjoy similar trust and loyalty.

• Competitive advantage with customers: Yes, brand image rubs off on corporate image and vice versa. It is a complementary relationship. The companies cited in examples above now have the advantage of a loyal customer base and the opportunity to expand their product portfolio and offerings and benefit from the lifetime value of their customer base. Customers also tend to believe in their commitment to sustainability and the environment and hence prefer to source their requirements through them, as these companies are seen as following safer and universally accepted supply chain and operational practices.?
• Happier executives and employees: Since the guidelines are clear and the code of behavior is established, it becomes easy for both the leaders of the company and the employees to make decisions. There is no ambiguity, hence employees are happier as they do not have to take the onus or accountability for anything that is not acceptable or non-compliant. This leads to higher employee engagement and happiness index.
• Attracts investors: Needless to say, a company with sound policies of corporate governance attracts more investors, both private and public. A company with a good track record for corporate governance enjoys a much better image and hence is able to derive value in the form of investor interest. The investor is more comfortable putting money in a company with a clean and reliable image and hence not only invests but endorses the company by word of mouth, creating a multiplier effect to the benefit of compliant companies. They trust the company’s integrity to provide accurate information and follow unbiased methods in managing the investors capital, especially the minority shareholders.

Challenges of being an ethical company

Making a commitment to be ethical has its cons as well that are not easy to overcome. Ethical principles and the real world are at variance and create contradictions and dilemmas that must be managed by the key management personnel of a company, such as speed vs. process and commercial profits vs. cost of compliance.

Internal Challenges

First and foremost, the challenges that are internal are:

• Getting all the stakeholders of the company aligned with the policy.
• Ensuring ethical behaviour across the organization to remain compliant
• Invest resources to drive the policies and implement them through governance, training, education, and rewards or penalties.

It takes a lot to make this commitment and live by it, especially if we take it in the Indian context, where in many situations unethical behaviours are “considered” normal as such practices are rampant.

External challenges

Externally, there are numerous situations where practicing ethical ways of working crosses paths with what is seen as normal. Let me cite a couple of examples from my personal experience in this context.

• Cost aspect: In global MNCs, guiding principles or codes of conduct are given due importance; hence, it is absolutely necessary to abide by these guidelines. In the company I worked for, there were warehouses of food products across the country. The local food department functionaries were required to pick samples of the products, like any other food company, to test on quality and specs as committed on the brand labels. It was absolutely normal for many local companies to manage these tests or even avoid sampling by gratifying the food inspectors. Food samples were picked by the inspectors from the warehouses hoping for a similar response from the company, but it was the contrary. The company got the product samples from the same batch tested at a government-accredited laboratory. The company challenged the results to check if they were manipulated and sent the samples to their central laboratory in Mysore, where invariably the products passed the tests.

In a few cases, the company had to resort to legal recourse to establish that the company was compliant, and that meant investing time and resources, but that helped us set the rules of the game where our company was involved. I am sure most MNC’s have the same approach, and now large Indian corporations also have realized the long-term benefit of being ethical. Key takeaway from the examples mentioned above is that following ethical policies is not about doing the balancing act or a trade-off between commercial and ethical practices but an unambiguous commitment to ethical policies despite the commercial costs. It is non-negotiable when it comes to the conduct of business. The company in the above examples was able to set the right expectations but willingly paid the price for setting the rules of engagement.

• Slowed down decision-making process: To remain ethical, it becomes important to establish the fact that we adhere to these principles, and that results in more documentation and collective and collaborative decision-making slowing down the process in the bargain. Especially on matters where there are financial impacts on the business and require handling ambiguities such as economic benefit vs. ethical commitments.
• Limit profit maximization: Running a business ethically does require investments and incurring costs upfront, reducing the ability to maximize profits in the short run, but eventually the rewards are far greater and sustained over the lifetime of the company. In fact, over time, if the company is non-compliant from the ESG angle, it runs the risk of going out of business, as no reputed customer or large investor would like to back the company. With the rapid economic growth that the Indian market is witnessing today, corporate governance with sound ethical policies has become mandatory for all corporations or companies, big or small, that aspire to raise capital from the public or private investors.

Independent directors (IDs) and business ethics

In order to implement corporate governance policies appropriately, the government, through Section 149(4) of the Companies Act, 2013, and under SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, mandated the appointment of IDs on the company’s Board of Directors. IDs in the time to come may become the moral compass of the company and keeper of its ethical policies. They help companies maintain a transparent working environment in the corporate regime. They are expected to have impartial judgement for the proper functioning of the company. They typically lead the board committees, such as the CSR committee, nomination committee, remuneration committee, and audit committee, to ensure the company’s commitments are duly met and they remain compliant on all these aspects. In a nutshell, ID’s help companies to build their reputation and trust from a stakeholders and shareholders point of view that can be leveraged to recruit customers and investors in their fold.

Conclusion

It is evident, with the changing landscape of a financially and technologically interconnected world of business, that the economies and corporate performance run huge risks of losing to unethical and illegal business practices. Corporate governance based on ethical values is a strategic imperative in today’s world. Many Indian businesses today are getting listed or aspire to list on Wall Street (NASDAQ), NYSE, and EU stock exchanges to raise capital. Locally, there are many startups and midsize businesses that are in line to go public to raise capital.

It is therefore necessary for companies to build their businesses around ethical values and promote a culture of fairness and transparency that generates lifetime value for the company and its brands or products, overall, for the business and the community at large.

?References

1. https://dobetter.esade.edu/en/ethical-brands-customer-loyalty
2. https://medium.com/@aeark0011/the-impact-of-business-ethics-on-brand-reputation-and-customer-loyalty-28bc4d557624#:~:text=Ethical%20practices%20often%20include%20fair,reputation%20that%20can%20withstand%20challenges.
3. https://www.dominionprint.com/advantages-and-disadvantages-of-business-ethics-in-the-real-world/

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