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Updated Oct 23, 2023

A Culture of Ethical Behavior Is Essential to Business Success

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Sean Peek, Business Ownership Insider and Senior Analyst

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Business ethics isn’t always exalted in every workplace, but it’s critically important when it comes to providing customers with quality service, adhering to regulatory compliance standards, and avoiding steep fines and lawsuits. Establishing an ethical culture starts with company leadership and involves ongoing emphasis that ethical standards are respected. 

Although this can be a lot of work, it can also positively impact the bottom line, protect a company’s brand and result in higher customer satisfaction. This guide breaks down the importance of business ethics and how to establish an ethical culture in your company.

What is ethical behavior?

A person who demonstrates ethical behavior demonstrates a strong moral code and a consistent set of values. Ethics can be rooted in belief or the pursuit of making the world better. Those who exemplify ethical behavior do the right thing regardless of whether they get credit for it. This sort of behavior is not limited to the workplace; it can be present in every facet of life.

In a business setting, ethical behavior applies to any employee, team lead or supervisor. They should display behavior that is honest and fair in their relationships with co-workers and their clients. Displaying good ethical behavior can boost company morale and client relations. It’s easier for a business to retain employees when they work for a company that they believe in. Employees want to work for companies that treat everyone and their clients fairly and have good and ethical business practices.

A high ethical standard extends to customers as well. A reputation for positive ethical behavior entices more potential clients, customers and partners to work with you. It also builds customer loyalty over time, creating a customer base that is likely to refer your business to others.

Key TakeawayKey takeaway

Ethical behavior means your team operates according to fair and transparent standards, not just complying with legal rules or regulatory requirements, but going above and beyond to ensure decisions are applied through an ethical lens.

Why is ethical behavior important?

To understand why ethical behavior is important, it might be helpful to know how unethical behavior affects a company. Think about a business that hires only family or one that gives inappropriate incentives, for example. While these actions might not be illegal, they can definitely have negative effects on the morale and success of a company, especially if their dirty laundry is aired publicly.

Then, of course, there are the more serious consequences of highly unethical behavior. Businesses that violate ethics and engage in illegal activities can be subject to costly fines and lawsuits. For example, international bank HSBC was subject to a decade-long enforcement action costing it $1.92 billion after the federal government determined the institution violated money-laundering laws and sanctions rules. 

On the flip side, a leader who personifies ethical behavior will be fair in all situations. In turn, employees will trust that their leadership team is working toward the greater good of the entire company. By being ethical, leaders can foster an environment that rewards and encourages good attitudes.

What are examples of ethical behavior?

Ethical behavior includes honesty, integrity, fairness and a variety of other positive traits. Those who have others’ interests in mind when they make decisions are displaying ethical behavior. Here are other common examples of ethical behavior:

Respect for others

No matter the relationship between two people and what they agree or disagree upon, people within an organization should always respect each other. This includes managers and subordinates, peers and clients. When there is a base level of respect established, people take criticism less personally, are able to communicate more openly, and can see and value the other person’s perspective.

Open communication

All successful businesses communicate effectively. When the lines of communication are open and employees are willing to have conversations with one another, misunderstandings can be avoided. Having constant conversations and reminders makes it less likely an employee will break a rule or have a low-quality output.

Responsibility

Mistakes and misunderstandings are bound to happen in any work setting. But when they do, employees need to take accountability for their actions. They need to take responsibility for what happened and be proactive in fixing it. When there is a standard of accountability at an organization, its people hold themselves and their peers to a standard of responsibility.

TipTip

The best way to instill a culture of ethics among your employees is to lead by example and maintain a clear zero-tolerance policy on specific unethical behaviors, such as lying, cheating, stealing and fraud.

What is a code of ethics?

In the workplace, there might be a standard for ethics set throughout the company. Many organizations create a code of ethics, which might include generic guidelines for ethical behavior about doing the right thing or remaining fair. It could also mention specific protocol within the business. 

For example, a code of ethics at a doctor’s office might include putting the patient first and remaining understanding in tough situations. At a college, a code of ethics could include being honest and unbiased when grading and being a catalyst for diverse perspectives in the classroom.

Businesses should create and display their code of ethics publicly. The company’s vision, values and mission should be clearly stated and visible to both employees and clients so that the company can be held to those standards. A code of ethics builds trust and credibility in an organization and creates a culture of open and honest communication. If an ethical tone is set at the top and followed by management, everyone who works there will hold themselves and each other to those standards.

What does the research into business ethics say?

Research into ethics and business performance has shown the two are linked in some important ways. In fact, data collected by Ethisphere, an organization that tracks the ethical conduct of the world’s largest companies, found that the businesses listed on its 2022 list of most ethical companies outperformed an index of similar large cap companies by 24.6 percent overall.

Certain studies have revealed some of the reasons why the companies on Ethisphere’s ethics index may have outperformed other less-ethically-focused businesses.

In one such study, led by Kaifeng Jiang, a professor at the Ohio State University Fisher College of Business, researchers examined the intersection between the quality of service a business offers and its adherence to ethical mores by looking into conditions at nearly 200 movie theaters. The findings reveal that quality service and an ethical business plan are essential to long-term business success. 

“Both high-quality service and low unethical behaviors are important to predicting business unit performance,” said Jiang. “This is especially so when the market is very competitive, because then the customers have a lot of options and could … switch to another product or service provider.”

In the study, researchers determined that a higher quality of service positively impacted business operations when ethical adherence was also high. Conversely, when unethical behavior was commonplace, the quality of service had a much-diminished impact on the success of business operations.

The researchers also determined that businesses could take certain steps to rectify ethical lapses that impacted performance. These steps included creating a climate based on service quality and ethical behavior that guides employees without direct supervision, taking corrective actions before unethical behaviors occur by periodically measuring employees’ perceptions of the company’s ethical climate, and emphasizing the importance of service quality and ethical behaviors as they relate to competition in the marketplace.

Key TakeawayKey takeaway

Ethical behavior positively impacts a business’s financial performance. If you’re concerned your company culture isn’t rooted in ethical behavior, consider taking corrective action to reduce and prevent further unethical activities by employees.

Don’t make ethics an afterthought in your company culture

Ethics may seem like an intangible, but there is a clear connection to overall performance. From retaining employees to ensuring brand loyalty to avoiding lawsuits and fines, a strong code of ethics is key to continued success. Bake ethics into your company by establishing a code of ethics and reinforcing its principles with your team regularly. It may just be the cornerstone of your success.

Source interviews were conducted for a previous version of this article. Tejas Vemparala also contributed to this article.

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Sean Peek, Business Ownership Insider and Senior Analyst
Sean Peek is the co-founder of a self-funded small business that employs more than a dozen team members. His years of hands-on entrepreneurial experience in bootstrapping, operations management, process automation and leadership have strengthened his knowledge of the B2B world and the most pressing issues facing business owners today. Peek uses his expertise to guide fellow small business owners and aspiring entrepreneurs in the areas of marketing, finance and software technology. Peek excels at developing customer bases and fostering long-term client relationships, using lean principles to drive efficiency and cost-saving, and identifying growth areas. He has demonstrated his business savvy through collaborations with Forbes, Inc., Entrepreneur and the U.S. Chamber of Commerce.
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