A company’s brand is one of its most valuable assets, and it needs to be protected accordingly. An expanding global marketplace, coupled with ever popular technologies such as video-sharing websites and social networking, bring daily threats to corporate brands everywhere. The best companies are investing in their ethics programs to help protect against these threats and strengthen their valuable brands.

The Rise of Intangible Assets

The way in which corporations conduct business has changed dramatically in recent decades. The industrial complex, traditionally based on hard assets, has evolved. Three decades ago, according to a report published by Thomson Reuters and Interbrand, 95 percent of the average corporation’s value was composed of tangible assets. Today, 75 percent of the average corporation’s value is now intangible.

Accordingly, the most valuable asset for most corporations is their good name, or their brand and reputation. According to a recent report published jointly by the World Economic Forum and Fleishman-Hillard, three-fifths of CEOs surveyed believe that corporate brand and reputation represents over 40 percent of a company’s market capitalization.

This value is an organization’s Brand Reputational Value, and strong Brand Reputational Value equates to greater profits.

Brand Reputational Value

From an external perspective, a company’s Brand Reputational Value breaks down into a series of four areas: Expectations; perceptions; business relationships; and unique intellectual property assets.

Improved quality in each one of these areas will ultimately provide greater financial value to an organization. For example, a company with a reputation for quality and safety will be able to charge more for the same product because customers will know that they are buying a lasting, reliable item. Customer perceptions of quality products, and positive experiences with products or services, add a price premium over the cost of provision.

Well-honed business processes such as relationships with suppliers and customers, trained personnel, unique and proprietary manufacturing, and distribution or service delivery techniques generate profit over cost of provision because product and service provisions become lower. The customer market will pay to access intellectual property assets that were acquired or generated by employees. And finally, Imbedded market awareness lowers customer acquisition costs.

Likewise, a strong Brand Reputational Value has many positive influences on internal stakeholders, such as all employees, managers and directors. Companies with strong brands are able to retain employees for a longer period of time, on average. These employees often represent and encourage the brands themselves—think Southwest Airlines or Starbucks.

In fact, one study suggests that 80 percent of Millennials—or workers roughly between the ages of 18 and 30—will leave a company if they believe the company has a weak brand, or one that is not associated with ethics.

Strong brands, in turn, is a self perpetuating process as employees begin to be “brand ambassadors” for the company.

Introduction to Ethical Business Value Metric

The value that an ethics program brings to a company’s Brand Reputational Value is a company’s Ethical Business Value Metric (EBVM). EBVM is the ethical underpinning of a business operation and generally, as a ratio, contributes between 20 and 65 percent of the overall Brand Reputational Value of an enterprise. EBVM will vary widely depending on specific industries and companies. In simple terms, what it calculates to is what business ethics is worth to a business.

After comparing Ethisphere’s research on EQ—or Ethics Quotient—ratings of companies with Interbrand’s 2009 list of most valuable brands, one finds a high correlation between ethical companies and companies with the most valuable brands.

In fact, 73 percent of Interbrand’s 2009 Best Brands list are owned by companies with consistently strong EQ scores. Moreover, 30 of Interbrand’s 2009 Best 100 Brands made it to the Ethisphere’s the World’s Most Ethical Companies 2009 list. This number could have been higher if not for Interbrand’s focus on global consumer brands (Interbrand does not consider companies that generate less than 30 percent of revenues outside of their countries of origin, private companies and predominantly B&B companies). If adjusted for these limitations (i.e. exclude those WME sectors and companies that do not meet the Interbrand’s criteria), the correlation is 67 percent.

Strong Ethics Improves EBVM

Companies can improve and retain high EBVM scores by implementing best practices in ethics and compliance. One key aspect of growing and protecting the EBVM of an organization is having a culture of trust and transparency.

For instance, if a business cannot trust a supplier, then the cost of distrust as evidenced by greater legal and financial protections, auditing, testing, and so forth raises the cost of doing business. Similar concepts hold true between employees and management.

As a result, research by the Ethisphere Institute shows that businesses with stronger ethical business cultures demonstratively outperform the overall market in the longer term. For instance, if one were to analyze the year over year growth of the 2009 World’s Most Ethical Companies, they would find as a whole, those companies have outperformed the S&P 500 during the same period (for a graph representation, go to www.ethisphere.com/wme2009).

Unethical Behavior Leads to Decreased EBVM

In 2009’s business climate, there are four factors that can quickly diminish—or even destroy—a company’s Ethical Business Value Metric:

1. Internet/Social Media

Bad News Travels Fast … And Today, For Long Periods of Time

An ethical or compliance failure, even if an isolated event and apparently minor, is at risk of being broadly and quickly broadcasted. A few years ago, many experts cautioned the “24 hour news cycle” as a reason to have a top notch PR response to crisis. Today, with social media disseminating information and allowing the public to consume information even quicker, companies need to be on their toes more than ever.

If your company is unfortunate enough to have an ethics violation caught on camera, you can assume it will be broadcast around the world within days. Even if there’s no embarrassing video, customer perceptions of a brand – whether based on accurate information or not – spread quickly among friends on social networking.

For example, last year, two KFC employees were videotaped taking a bubble bath in a sink at the store they worked at. The news was picked up by traditional news media and, even worse for the company’s brand, the video was disseminated around video sharing websites and other social media. On YouTube alone, variations of the video have been watched by over one million users worldwide. The number is ten times that when taking into account other video sharing sites, blogs and links to news stories. This event was, of course, very embarrassing to KFC and detrimental to the company’s brand. Many responses in the forums of these sites, whether true or just a spur of the moment thought, say the user “will never eat at KFC again.”

Even more important, this event did not occur at a restaurant owned by KFC, but at a franchise.

Another example is when Yahoo! Employees in Taiwan were photographed accepting lap dances from scantily clad women at a corporate event. Photographs and video quickly spread around the Internet. Although the company did its best to remove the content, it’s impossible to do so.

2. Subcontracting/Outsourcing

True or False? In June 2009 Continental Airlines stranded passengers on a small plane overnight for six hours outside Minneapolis when they could have allowed the passengers off the plane and let into the terminal.

False. The perpetrator in this case was actually an independent partner called ExpressJet, a contractor for Continental. ExpressJet licenses the Continental name and flies shorter, regional flights. Unfortunately for Continental, while ExpressJet was called out in many stories, Continental was named in the headlines and in short television blurbs and absorbed the majority of the Brand Reputational Value loss. Continental also came into regulatory concerns: The Transportation Department conducted a review of both ExpressJet and Continental Airlines.

What this case highlights perfectly is that when a customer, partner or contractor is found to violate ethical standards, they don’t receive as much Brand Reputational Value damage as the customer, or hiring company.

Of course another very highly reported example occurred two years ago when Mattel made daily headlines for some of its products allegedly containing unhealthy levels of lead made in China. It wasn’t Mattel, nor Mattel’s direct contractors, but a number of sub-contractors in China that were causing the problem. Of course, Mattel took the heat for that issue.

3. Regulatory

Both as a result of the new administration, as well as high profile white collar crimes, litigation over ethics and compliance violations has increased, and will continue to increase. Both the new Obama administration as well as other governments across the world are ratcheting up investigations and enforcement.

At a Senate confirmation hearing, Mary Schapiro, the head of the SEC, testified, “I will move aggressively to reinvigorate enforcement at the SEC. With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors, and break the law.”

The SEC certainly has been living up to its claims. From the end of 2008, until 2009, the SEC has brought charges against several billion dollar fraud schemes. These include the alleged billion dollar Ponzi schemes of Bernie Madoff and Tom Petters, and Allen Stanford’s alleged billion dollar CD fraud.

The SEC has also recently established its own division dedicated to FCPA enforcement—traditionally the domain of the Department of Justice—and considering various new whistleblower reward programs.

The SEC isn’t alone. The DOJ has also been very active in the past few years. As every corporate board room knows, Siemens was fined over $1 billion by the DOJ for accusations of ramping bribery around the world. Pfizer was ordered to pay over $2 billion by the DOJ for its unethical marketing practices.

4. Employees

According to ethics hotline company The Network, employees are more inclined to commit fraud during tough economic times. The company reported that fraud-related whistleblower complaints consisted of 21 percent of overall complaints for the first quarter of 2009. This was up from 14 percent during the same quarter in 2007.

Furthermore, with the weakened employee-employee social contract and recent Qui Tam rulings, employees have more incentive than ever to become whistleblowers. Even if the employee breaching ethical conduct is not senior management, companies can become involved in costly, brand damaging lawsuits.

For example, this summer the federal government joined sixteen U.S. states in a high profile lawsuit against pharmaceutical company Wyeth. Two whistleblowers, former employees of the company, alerted regulators that Wyeth was overcharging various states for Medicare. The issue didn’t just affect the brand of Wyeth, it also complicated the pending acquisition of Wyeth by Pfizer.

The DOJ also joined a whistleblower lawsuit against SAIC and two officials from the Naval Oceanographic Major Shared Resource Center in Mississippi in July after a former employee of the latter organization filed a suit under the False Claims act, alleging the two organizations were conspiring to steer bids towards SAIC.

Invest in Ethics Insurance to Build and Protect Strong Brand Value

The cost of a compliance or ethics failure goes well beyond legal fees, court judgments, fines and penalties. The cost spills over into leadership distraction and turnover, required change to systemic profit model and heighted scrutiny moving forward. In fact, in real terms, the total failure cost is six to ten times higher than those factors, and larger incidents are reflected in a diminished Brand Reputational Value metric, sometimes—by Ethisphere’s estimates—of 30 percent or more. It can take companies up to five to ten years to recover significant losses from Brand Reputational Value. In some cases, particularly if handled improperly by the company’s senior leadership, it can take several decades, if the company recovers at all.

The most unusual part about all this is that when it comes to hard assets—such as plants and factories—companies have typically spent 12.5 to 15 percent of the value of such assets annually in protecting, maintaining and insuring them. With the rapid economic shift to intangible assets, not all companies have maintained a similar asset protection focus.

Good business ethics bring strong ROI and greater profit

Every leader needs to look in a mirror and ask, “How is my company making its ethics investment? How do I know it is paying off? How much does my company’s Ethical Business Value Metric contribute to overall enterprise value? Am I taking the right steps to grow and protect it?”

To help those leaders, we have compiled the top five ethics investment techniques that companies can use to ensure that they are making ethics work for their enterprise.

Companies must treat their Ethical Brand Reputational Value as any other asset. The same model that applies to managing real property and equipment applies to managing your Ethical Reputational Brand Value.

Invest. Maintain. Insure.

Invest in the 3-5 Areas that will be Most Profitable. There are at least 9 major ways that ethics can impact a business—Markets and Customers; Strategy; Product/Service Design, Brand and Quality Control; Intellectual Property/Knowledge Management; Leadership; Workforce; Sub-COGS Expenses; Risk Management; Procurement. Determine which 3-5 areas provide the greatest business potential or risk for you organization. Will it be using an ethical culture to attract and retain superior employee talent? Will it be emphasizing lower risk and higher product safety in order to be able to sell your product or service at a higher price? Not all “Profit Points” will apply to a business – but the typical business can find several profit points through ethics on average where it can materially impact operations in a positive financial manner.

Invest for the Long Term. Driving ethics into business for profitable gain is not a quarterly or one-year plan. Management needs to have a five year plan at a minimum and be anticipatory of demographic and economic trends which may change during that time and impact it. Just like investing in a new industrial manufacturing facility, it can take up to five years for ethical investments to materially pay off.

Maintain a Flat Communications Structure. It’s important that information is sent to a sufficiently high level of the organization immediately in order to protect a company’s EBVM. One way to ensure this is to have a consistent line of contact between an ethics officer and senior management. If you don’t have a flat communication structure for allowing easy escalation of concerns, then build one. It is very important that an employee feels that his or her concerns are being adequately and thoughtfully addressed at a high level as thereby it is less likely that they would leak or bring the problem publicly outside of the company instead.

Insure Against Individual Idiocy and the Ill-Educated. More than any other time, the improper actions of a single employee, a single remote office, a single agent representing the company can significantly damage a company’s EBVM. Smart companies recognize and focus on the individual: who are we hiring as an employee and have we done enough checking and testing?; are we making sure that our communications around expected behavior are reaching EVERY individual?; have we done sufficient background checking on outsiders who will be representing our brands… such as franchisees, foreign agents, joint venture partners and distributors?

Insure Against Outside Institutional Incompetence. It’s important to apply the same expectations regarding your company’s compliance, ethics and control standards to your vendors and partners. Note that not only should there be due diligence on entering into a relationship, but also ongoing to verify (at least for the top 10 percent of your supply chain) that these compliance and ethics controls are there and working. This should be done on a risk basis, however (in other words, your highest volume suppliers are not necessarily the ones you need to worry about most – but rather it is where your highest risk might be for a major compliance and ethics breakdown that could negatively impact your organization.

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The Long Reputational Tail of an Ethics and Compliance Failure

Many companies that have strong ethics and compliance programs in place today experienced the long-term damage that a crisis relating to ethics and compliance can bring. For example:

Union Carbide/Dow Chemical Company:

1984: 42 tons of toxic gas are spilled in the city of Bhopal, India by a Union Carbide Plant. An estimated 25,000 people have died as a result of the spill since that time. The event has become known as the Bhopal disaster.

1989:Union Carbide Pays $470 Million to Settle Allegations with the Indian Government, but doesn’t accept guilt.

2001: Dow Chemical Company Purchases Union Carbide for over $10 billion.

2004: A member of prankster group “Yes Men” poses as a Dow Chemical Company representative and announces live on the BBC that Dow accepts responsibility and will remediate the situation.

2009: Various international media, including the BBC, continue to report on the tragedy that occurred 25 years ago.

Nike:

1993: Various NGOs accuse Nike of hiring vendors that allegedly employ child labor in Southeast Asia.

1998: Phil Knight, CEO of Nike, says in an interview: “The Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse.”*

2001: Nike releases its first corporate social responsibility report in which the company says it “blew it” in dealing with child labor.

2009: Though Nike implements many best practice compliance and ethics tools (Nike was named to Ethisphere’s World’s Most Ethical Companies list) including in the area of supply chain ethics and compliance, there are still lingering consumer perceptions of the company related to issues reported in the early 1990’s.

An ethics violation doesn’t have to last forever. If a company handles an issue correctly—such as by following the steps listed above—long lasting damage can be avoided early on and the company and the communities in which it operates can be improved. For example:

Ford:

2000: Reports announce that flaw in Firestone Tire model included with Ford Explorer SUVs leads to drivers overcorrecting and SUV rolling over.

2002: Ford adds independent rear suspension to Ford Explorer models as a result of the issue. For the next seven years Ford continues to improve on Explorer model and communicate changes and improvements from the earlier version.

2009: Ford stands as one of the strongest American car manufacturers. While the Firestone/Explorer controversy is still referenced in various research papers, it has little impact on the company’s overall brand value to the average consumer.

Bausch & Lomb:

2006: Three New Jersey residents allegedly contract fungal infections from using ReNu with MoistureLoc contact lenses. The complaints are brought to the Center for Disease Control. The CDC investigates.

2006: One month later Bausch & Lomb cancels all ReNu with MoistureLoc shipments and recalls the product from store shelves immediately. Bausch & Lomb continues to monitor the status of its ReNu product line.

2009: Bausch & Lomb’s brand value remains largely unaffected by the possible contamination.

*source: Hitting the Wall: Nike and International Labor Practices