Companies are discovering the value of ethics.

• Author: Bowie, Norman E.

Most discussion of business ethics focuses on ethics as a constraint on profit. From this view, ethics and profit are related inversely: the more ethical a business is, the less profitable it is; the more profitable, the less ethical. Certainly, there are times when doing the morally correct thing will reduce profits. Not using an "agent" to provide bribes when doing business abroad is one example. Nonetheless, the traditional characterization of an inverse relationship between ethics and profits is only part of the story at best. A more balanced view points out that there frequently is a positive relation between ethics and profits; normally, ethics enhances the bottom line, rather than diminishing it.

The best news is that the conventional cynical view about business ethics provides a money-making opportunity and can be the source of a competitive advantage. Other things being equal, a firm known for its high ethical standards can have an above-average profit. An auto repair shop known for its honesty is a busy and prosperous one.

Ethical behavior contributes to the bottom line by reducing the cost of business transactions, establishing trust among stakeholders, increasing the likelihood of successful teamwork, and preserving the social capital necessary for doing business.

First, an ethical firm reduces the cost of business transactions. For instance, most economic exchanges have a period of time between the payment for a good or service and delivery, or, conversely, a period of time between the delivery of a good or service and payment for it. This time gap can stand in the way of a profitable transaction. Perhaps the supplier will not deliver or the vendor will fail to pay. A small supplier is offered a large contract by a major manufacturer. Although one might think that the small supplier would be overjoyed by such an arrangement, it should be cautious. It can be held hostage by the much larger manufacturer, which can delay payment for the product or demand other concessions.

Recently, a number of large firms in the U.S. unilaterally announced an increase in the time that they would settle their accounts. Obviously, this fact makes future suppliers more reluctant to do business with these firms. The major manufacturer with a reputation for prompt payment will get the small supplier to provide the quality product. The major manufacturer that lacks a reputation for prompt payment will not.

Yet another illustration concerns the acceptability of checks as a means of payment. A seafood shop in Ocean City, Md., had the following notice posted on the wall: "We will not accept checks and here is why." Below the notice was a row of cheeks stamped "Insufficient funds." That seafood shop no longer would do business with those who wanted to pay by check.

There are vast regional differences in the acceptability of checks as a means of payment. In the Upper Midwest, they are accepted routinely. In most grocery stores and in some other businesses, the customer even may make the check out for an amount larger than the purchase and thus get both the purchase and some cash. On the East Coast, checks are not accepted routinely as a means of payment. Instead, credit cards are. Since most credit card sales represent additional costs, merchants in the Upper Midwest have lower costs of doing business than those merchants in other parts of the country.

Employee and customer theft is a major problem for business, as are shirking on the job and a declining work ethic. A culture of drug abuse exacerbates the problem. Business incurs great costs in dealing with these issues. Elaborate security systems are put into place. Employees are asked to submit to "honesty tests" and expensive drug screening.

Yet, businesspeople, along with most everyone else...