It seems like an obvious thing to say "be ethical, be honest" and yet there are so many people and so many companies out there that are not. Some make money, some don't. But in the long run, there is no other way to run a sustainable business without these qualities.

 

While a simple comparison between the returns of the FTSE KLD social index ETF with those of the S&P 1500 over 1, 3 and 5 years shows a small advantage to the socially responsible group, the jury is still out on who ultimately wins. There are academic studies that both support this theory and some that show no difference in returns.

Regardless of who wins, there's no doubt in my mind that there is one major pre-requisite to being in business and that is being honest, transparent and ethical (socially responsible is just a part of these qualities).

Instead of engaging in over analyzing why people and companies behave unethically, a much better question is "why would anyone invest in companies or people who behave unethically?".

A few stories to illustrate

I know this small business owner who operates in the service industry. He hires service providers to deliver services to a third party, the third party pays him, he pays the service providers the bulk of the earnings and takes out a small percentage, for coordinating the team and assuming all liabilities for the services rendered. His percentage goes down as his team grows.

It just happened that over a short few months last year his team started to flock to a competitor who offered slightly higher rates. His business suffered. But he remained honest and insisted on paying his team fairly and timely as always while his competitor had to make up for the higher wages by delaying payment and "accidentally" misplacing people's paychecks.

So what happened? The honest small business owner soon saw his business flourish again as his competitor started to lose people due to dishonest and unethical behavior.

Moral of the story: honesty pays, dishonesty is not sustainable.

A personal story

I recently hired a team of contractors for a small project of mine. The candidates who seemed the best had done work in advance of being awarded the project. They had updates and demos for me even before I agreed to hire them. Their turnaround time was impressive, sometimes answering my concerns within a few hours. So I hired them, expecting nothing short of great results. I was promised a new update the next Monday.

So a few days went by and on Tuesday I decided to check on the status of the job. The contractor said the team was on holidays for a few days but that the next day, there would be updates. Another day went by and this time I was told that the team was actually busy working on another project, but that within a day or two they'd be taking on my job. They had lied to me. Of course, the next two days went by and the team was "getting started very soon now".

Had they told me upfront that they were busy, I might have taken my project to someone else or I might have chosen to go with them anyway. But now, not only I'll never hire them again, I won't let anyone I know hire them either. That's worse than losing one single job -- they lost a customer, possibly a repeat customer, and who knows how many more customers they've now lost.

Conclusion

These are just simple illustrations of why I believe that being ethical in the long run is the only way of operating. As such, I don't hire or invest in businesses that can't or won't operate in the most ethical way possible.

No investor should. Do your homework before investing (or hiring).

Disclosures: No interest in the above mentioned securities.


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