Can Ethical Strategy be the Key to Unlocking Sustainable Success in Business?

Learn why ethics is a crucial factor in corporate strategy. Discover how ethical considerations shape successful strategic decisions. Join the conversation on the role of ethics in business today.

When leaders are faced with high-stakes strategic decisions, they must navigate a complex web of considerations – financial metrics, competitive landscape, market trends, organisational politics, and more. But there's one crucial factor that should never be overlooked in these critical moments: ethics. At the LGP, we've seen firsthand how prioritising ethical principles in corporate strategy benefits organizations in the short term and long run. Let's explore why ethics matter so much and how companies can embed an ethical mindset into their strategic DNA.

The Business Case for Ethics
Before diving into the "how", it's worth examining the "why." After all, in business, the bottom line often reigns supreme. So does emphasising ethics come at the expense of financial performance? Quite the contrary. A wealth of research shows that companies with a strong ethical foundation actually perform better over time.

For example, one landmark study found that firms on Fortune's "100 Best Companies to Work For" list, which heavily weighs integrity and trust, generated stock returns that were 3x higher than their peers. Another analysis showed that the most ethical companies outperformed the S&P 500 by over 300% over 5 years. Ethisphere annually names the "World's Most Ethical Companies" and has found they outperform a comparable index by 24% over the long term.

These results make sense when you consider the manifold advantages of an ethical approach:

  • Attracting top talent who want to work for a principled organisation
  • Strengthening employee engagement, loyalty, and productivity
  • Enhancing brand reputation customer trust and loyalty
  • Reducing risks of scandals, lawsuits, fines, and other costly missteps
  • Improving relationships with partners, suppliers, and other stakeholders
  • Contributing positively to local communities and society

An ethical orientation creates a virtuous cycle – it inspires people inside and outside the organisation, leading to better long-term outcomes. As strategists, recognizing this link between doing well and doing good is the first step to making ethics a strategic priority.

Integrating Ethics into Strategic Decisions
With the business case clear, how do organisations actually infuse ethics into their strategy and decision-making? It starts at the top, with leaders who exemplify and expect high ethical standards. But it shouldn't stop there – ethical principles need to be embedded into every facet of strategy development and execution. Here are some key ways to make that happen:

  1. Define your values and live them
    Every organization should have a clear set of core values that serve as an ethical north star. But simply writing them down isn't enough – they need to be continuously reinforced and put into practice. Leaders must visibly "walk the talk" through their actions.

For instance, Patagonia, an outdoor gear retailer known for its social and environmental activism, has an explicit mission statement to "use business to protect nature." This purpose informs every aspect of their strategy – from sustainable supply chains to political advocacy to donating 1% of sales to grassroots environmental groups. By aligning strategy to values, the "why" behind every decision gains an ethical dimension.

  1. Engage diverse perspectives
    Ethical dilemmas are rarely black and white. Reasonable people can disagree on the right course of action. That's why it's critical to engage a diversity of viewpoints when making strategic decisions with ethical implications.

A great example is the the Open Source Pharma Foundation (OSPF), which aims to create affordable new medicines through open collaboration. While a noble goal, "open sourcing" drug development raises thorny questions around intellectual property, safety, access, and more. To navigate this complex issue, OSPF conducts diverse stakeholder consultations – with everyone from patients to policymakers to scientists – to surface ethical considerations from all angles. Inclusive dialogue leads to more holistic, ethically grounded solutions.

  1. Assess ethical risks and opportunities
    Ethics should be a key lens applied when analyzing strategic risks and opportunities. Organizations need defined criteria and processes to systematically identify and address ethical issues during strategy formulation.

Take artificial intelligence (AI) as a case in point. The rapid rise of AI is unleashing massive opportunities but also serious ethical risks around bias, privacy, transparency, and job displacement. Responsible companies developing AI strategies will proactively evaluate these risks using frameworks like IEEE's Ethically Aligned Design. They will seize opportunities to use AI for social good. And they will implement policies, training, and oversight to uphold ethics even as technology advances.

1 Incentivize ethical behavior
People tend to optimize their performance around how they are measured and rewarded. So if you want ethics to be a priority, you need to actually incentivize ethical behaviour through goals, metrics, and compensation.

2 Empower employee voice
Even with the right policies and incentives, ethical issues will inevitably arise. Employees on the front lines are often the first to spot potential problems, so organizations need clear channels for them to speak up without fear of repercussions.

Psychologists have found that fostering a "speak up culture" is one of the best ways to preempt ethical failures. Practices like anonymous hotlines, whistleblower protections, and non-retaliation policies empower employee voice. Managers must be trained to solicit feedback, listen actively and address concerns. With open dialogue, ethical risks can be proactively surfaced and rectified before they become full-blown crises.

3 Partner with purpose
The adage "you are the company you keep" applies to organisations too. Strategic partnerships and alliances should be pursued with an eye to shared values and ethical alignment. Seek out opportunities for "ethical innovation" – novel solutions that generate both business and social value.

Consider the example of Thread, a B Corp that makes fabric from recycled plastic waste collected in low-income regions like Haiti. Thread partners with brands like Timberland and Reebok to build ethical supply chains that fight both poverty and pollution. By selecting partners based on purpose, Thread has created a differentiated, sustainability-focused business model. An ethical ecosystem multiplies impact.

4 Learn from mistakes
Of course, even the most well-intentioned companies will sometimes fall short of their ethical ideals. The key is to treat missteps as opportunities to learn, improve, and recommit to doing what's right.

A famous case study in ethical crisis management is Johnson & Johnson's response to the 1982 Tylenol tampering incidents, where seven people died from cyanide-laced capsules. Although not directly responsible, J&J immediately pulled 31 million bottles from shelves and developed new tamper-proof packaging. Their swift, decisive action to protect consumers over profits is still heralded as a gold-standard. Today, J&J proactively monitors for potential Tylenol crises with early warning systems. Ethical resilience requires a continuous improvement mindset.

The Road Ahead
As the business landscape grows more complex and interconnected, an ethical approach to strategy will only become more vital. Customers, employees, and society increasingly expect companies to stand for something larger than just profit. In an era of "ethical consumerism" and social media activism, there's nowhere for unethical conduct to hide. Strategists will need to get ahead of the rising ethical challenges posed by issues like climate change, automation, and globalisation. Purpose and profit must learn to pull in the same direction.

But businesses shouldn't just think defensively about ethics as a constraint – it's also an opportunity. By differentiating on ethics, organisations can carve out an enduring competitive advantage. Research shows that today's consumers will pay more for ethically made, sustainable products. Employees will work harder and stay longer when they believe in the mission. Investors will place a premium on responsible companies built for the long term.

So the strategists who will really thrive in the coming decades will be the ones who learn to deeply integrate ethics and economics. They will recognize that values and value creation can powerfully reinforce each other. They will elevate ethics from a side consideration to a central pillar of strategy. As guardians of organisational purpose, strategists have a higher calling to shape a more principled form of capitalism. It's not just the right thing to do – it's the smart thing to do.

Of course, this is a never-ending journey. With each new strategic decision comes a fresh chance to choose ethics over expediency. But the more companies walk this path, the more it becomes a self-reinforcing flywheel – where an ethical culture begets ethical conduct begets ethical culture. By reflecting carefully on each fork in the road, organizations can orient themselves towards true north and navigate confidently into an uncertain future.

At the LGP, we believe business can be a powerful force for good when ethics are embedded in strategy. We've seen this approach pay off for our clients, whether it's a manufacturer introducing a first-of-its-kind product recycling program or a tech platform taking a hard stand against hate speech. By courageously advocating for ethics at moments of strategic consequence, we help companies benefit all stakeholders and build enduring success. It's a responsibility and privilege we take seriously. Because in our view, ethics aren't just a nice-to-have. They're a must-have – the ultimate strategic advantage.

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