On her way to work every day, Christia Gibbons stops at Starbucks for an iced Venti: a four-shot, eight-pump, non-fat latte. She makes a point of buying a $1.95 bottle of Ethos water “to help the world.” A portion of the sale goes to help bring clean water to children in developing countries, explains Gibbons, 53, a real estate writer.

More and more, consumers are demanding that corporations “do the right thing.” As McKinsey & Company and other researchers point out, ethically produced products, environmental stewardship, social responsibility and treatment of employees are becoming much bigger issues to consumers. In turn, companies that “get it” are using ethical leadership and corporate social responsibility to drive market share, profit, and brand recognition.

SURVEY FINDS PROFIT OPPORTUNITY IN ETHICS
At its core, corporate social responsibility is defined as a company’s obligation to be sensitive to needs of all of the stakeholders in its business operations. In practice, corporate social responsibility means enterprises should make decisions based not only on short-term financial/economic factors, but also on the social and environmental consequences of their activities. Years ago, the idea of corporate social responsibility conjured up the images of ponytailed tree huggers. Now, corporate social responsibility wears a suit.

What’s changed? Simply put, it’s much more profitable than ever before, and consumers are demanding it. Whether gaining market share through luring customers to switch from competitors, or convincing consumers to pay a higher price for ethically-based products, companies like Starbucks and Cisco are outperforming their peers by a wide margin.

Earlier this year, McKinsey & Company, the highly respected global consulting firm, conducted a research study of more than 4,000 global CEOs and other executives. The results of the study made it clear that ethical leadership and emphasis on corporate social responsibility can be a strong driver for enhancing profits. For example, 40 percent of executives labeled the demand for more ethical products to be “only or mostly an opportunity.” An equal amount of executives (39 percent) called such demand a “balance between risk and opportunity.” Only one in five executives viewed such demand to be “only or mostly risk with limited opportunity” (see Fig. 1).

Ethical leadership and corporate social responsibility requires a continuing commitment to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community, and society as a whole. Companies who “get it” and implement such programs and goals often find a surprise result: enhanced profits and long-term sustainability.

ETHICAL LEADERSHIP AND PROFIT STARTS AT TOP
Recent research studies indicate that it is the CEO’s or chairperson’s role to drive the ethical agenda.

Every CEO’s ”number one” responsibility is setting the ethical tone at the top, says Chuck Ames, a former McKinsey partner and veteran board member. He has served as CEO of many large corporations, including Reliance Electric and Uniroyal Goodrich. Currently, Ames is a director of Lexmark and Vice Chairman of Clayton, Dubilier & Rice, one of the oldest private equity investment firms in the world.

When hired at Reliance, he insisted on meeting and talking to all 18,000 employees. It took him six months.

“In order to make ethical leadership work, management at the top has to constantly work at it and constantly remind employees,” Ames says.

There are no gray areas, Ames believes. His mantra is to”be ethical, be fair to employees and be fair to competitors and customers.”

“You can’t be influenced by the consequences,” Ames says. “If the consequences are unfavorable, you still have to make the right decision. It’s when you have to give up something that the acid test comes. That’s when you’ve really got to be ethical. You say, ‘I’m willing to take a beating or the loss in order to maintain my ethical standards.’ “

ETHICAL LEADERSHIP MAY ENHANCE YOUR BRAND AND PROFITABILITY
When Enron’s ethics manual was auctioned off on eBay a few years ago, professor Marianne Jennings plucked it up for a few dozen dollars. When it arrived, it was still in the original wrapper. “It had never been opened,” says Jennings, a leading expert on business ethics and faculty director of the W.P. Carey School of Business, Arizona State University. If someone had bothered to read it and the company had instituted a program of ethical leadership, Enron might still be in business. Executives at the downfallen firm forgot the classic business principles that create long-term sustainability, Jennings says.

At a minimum, ethical leadership can minimize risk, Jennings says. Compliance with the law is not enough. The deeper questions are whether a company’s actions have any negative consequences and what their long-term commitment is to their community, she adds.

“If they are going to be around for a long time, companies have to be stakeholders,” Jennings says. “They can’t run roughshod over customers and over the community because they are community residents with everyone who lives there. They still have to look at really difficult issues such as pricing, value and reputation.”

Painting pretty pictures is not enough. Many executives and companies present sterling faces to the public while they fail to follow ethical leadership principles in the back room, companies like Fannie Mae and Tyco under previous leadership and CEO’s like WorldCom’s Bernie Ebbers and Adelphia’s John Rigas.

ETHICS BORN OUT OF ADVERSITY
Sometimes it takes protests, negative publicity or even fl at-out disaster to get a corporation to embrace ethical leadership. For example, Dell is lauded for its aggressive computer recycling campaign, which has become the gold standard in the industry. However, many people do not know that for many years Dell was the laggard in recycling, and the target of constant protest and criticism.

Another example is Starbucks. When it became a target for nationwide protests by the human rights group Global Exchange, the company embraced Fair Trade Certified Coffee in 2000. Now Starbucks is the largest purchaser of Fair Trade Certified Coffee in the world, a fact that is proudly trumpeted on their website.

While Dell and Starbucks were able to use ethically-based programs to turn around negative perceptions within a short period of time, Dow Chemical has spent decades trying to make up for the wrongs of subsidiary Union Carbide after the tragic cyanide gas leak in Bhopal in 1984. The decision to forgo American safety standards in favor of India’s weaker ones has had a long-term negative impact on the company, Jennings says.

“This will always haunt them,” she says. “It’s multigenerational. It could have been avoided with one question: Would the CEO or employees want their families living near the plant?”

“Ethics is a great deal of introspection. Companies and individuals need to take a hard look at what they do every day,” she says. As a result of the Bhopal disaster, Dow Chemical has invested heavily in ethical leadership and corporate social responsibility.

This includes setting up a dedicated website (www.dowethics.com) with extensive detail about environment issues, chemicals and Dow’s corporate citizenship activities. After years of blistering headlines and citizen protests, Newmont, a global mining corporation, made a commitment to meet the United Nation’s Millennium goals to reduce world poverty and educate children.

A few years ago, only four to five percent of girls attended schools in Cajamarca near its Yanacocha gold mine in Peru. Today, 40 percent are receiving an education because of Newmont’s contributions. Another company whose ethics were born out of adversity is Qwest Communications Corporation.

When it was revealed in 2002 that Qwest’s former chief executive officer and other executives orchestrated an alleged massive financial fraud involving billions of dollars, financial forecasters predicted its doom.

Qwest, after being under governmental investigation, on the verge of bankruptcy and despised by many of its customers, is back stronger than ever after embracing ethical leadership and corporate social responsibility initiatives. In less than two years, customer satisfaction is up. Profits have increased. Share price is up 136 percent.

Turnaround wizard and CEO Richard “Dick” Notebaert, brought in to clean up Qwest, ordered a massive overhaul of the company’s ethics program. All middle managers now are trained in ethical basics and decision-making. Employees can now call a hotline to report suspected unethical behavior and know the company will take the issues raised seriously.

Notebaert also opened his office door and his email to employees as a way of displaying ethical leadership by example. “We’ve received thousands of emails. He answers them all,” says Dave Heller,Qwest’s Chief Ethics and Compliance Officer.

“We didn’t just slap the name ethics in our titles. We had a leadership team that absolutely lived the culture of ethical compliance and integrity. We really focused on ethics and compliance. They go hand in glove.” It paid off.

“It’s absolutely part of the financial success,” says Heller, pointing to Qwest’s motto of “Spirit of Service” and its renewed focus on customers. “It’s very clear to us that customers care about the integrity of who they are dealing with,” and that enhanced profi ts are the result of Qwest’s ethical leadership.

As a leader, that not only means encouraging positive behavior, but it can also be about doling out punishment when an employee crosses the line.

Nice guys don’t always finish last, according to Ames. Unethical employees must be “publicly hanged” in order to make a statement to the rest of the workforce.

That’s what State Mortgage President Roy Meshel does if he finds out one of his loan officers is committing fraud. He calls a companywide meeting in the middle of the day to announce the individual’s termination.

“I know this opens us up to liability and lawsuits but we are willing to take that risk,” he says. “I want people to know we don’t tolerate it. We want our name out there as a 100 percent ethical business.”

For Meshel, ethics is a business tool. During a housing downturn, he refuses to lay off employees. He promotes diversity in hiring and provides training in personal and professional skills for employees. In turn, he gains loyal, high-quality workers.“Ethics equals profits,” Meshel says.

His profit statement is proof. For the past three years, State Mortgage has ranked in the top 10 Mortgage Bankers by Ranking Arizona Magazine and as a top 25 Mortgage Banker & Broker in the Phoenix Business Journal. It has also been named one of the “Best Places to Work” three years in a row.

SOCIALLY RESPONSIBLE INVESTING BECOMING A FORCE
At one time, the idea of socially responsible investing was about punishing companies such as Newmont Mining, Phillips Morris/Altria and Smith & Wesson through withholding capital. The movement had little effect on the behavior of corporations. Since then, it’s shifted 180 degrees. Now the main driving force behind social investing is about investing in model companies. It is impacting how companies act in the marketplace. Shareholder resolutions are growing by leaps and bounds. Social investing is at an all-time high.

According to the Social Investment Forum, nearly one out of every $10 under professional management in the U.S. is actively directed towards socially responsible investments. Socially responsible investment assets grew four percent faster than the entire universe of managed assets in the United States from 1995 to 2005.

“Social investing gives people a place to put their money that is less in conflict with what they do with their life every day,” says Julie Fox Gorte, Vice President and Chief Social Investment Strategist of Calvert, the nation’s largest family of socially responsible mutual funds.

But people want a good return on their money. Many of the world’s most highly regarded corporations from an ethical leadership perspective actually outperform relevant benchmarks. Gorte, a self-described “bunny hugger” who drives out of her way to fi ll up at a BP gas station, tracks hundreds of companies that have comprehensive ethical practices.

Her research has found that many leaders in corporate social responsibility are outperforming others in their industry, including Bank of America, Nordstrom, AutoLiv, Well Care Group, MEMC Electronic Materials, State Street, Cisco, Nike and Goldman Sachs. With evidence now showing how ethical leadership can drive profits and brand perception, more and more companies are re-examining their leadership values and ethics programs.

MAPPING ETHICAL LEADERSHIP BACK TO MARKET AND CUSTOMER PROFIT
For an ethical leadership or corporate citizenship initiative to be effective, it must account for and be integrated with true factors that drive a company’s business performance and profit. Policymakers must determine where money is made and in which markets it is made. Also, what are the critical differentiators vs. competitors that need to be protected?

According to Ethisphere Council, any organization’s activities can be segmented into nine functional areas or “Profit Points.” Within each Profit Point are variable subcomponents of various drivers that impact the bottom line. One of these Profit Points is “Markets and Customers.”

Applying an ethical leadership model that complements what is most important within “Markets and Customers” will contribute to the organization’s profit and long-term competitive sustainability or advantage, the Council points out.

Profits can grow or decline with profit statement items that can each be managed, measured and impacted by markets and customers. Within the Markets and Customers Profit Point the key profit drivers are:

• ATTRACT/DEFECT–the ability to attract customers away from competitors, as well as prevent your own customers from defecting
• MARKET ENTRY–the ability to enter new markets (geographic; economic strata)
• BRAND EXTENSION–the ability to offer new products and services to the same customer
• PRICE STRENGTH–the ability to command superior pricing
• CUSTOMER LOYALTY–the extent to which the customer is loyal and identifies him/herself with a corporation’s products and services.

LURING CUSTOMERS FROM COMPETITORS
Angie Berger heads to Whole Foods Market twice a week to fill her cloth shopping bag with organic produce, importedcheeses and tofu drenched in sesame sauce. She has no qualms about paying premium prices for the products. Quality is high. Store employees appear to be happy.

“I feel like I’m paying what it’s worth,” says Berger, 31, as she picks through the locally grown produce. “If prices were lower, companies would force farmers to produce products more cheaply and they would have to cut organic standards.”

A number of Whole Foods shoppers and employees state outright that they refuse to shop at Wal-Mart because of perceived low wages, below-standard benefits for employees and poor environmental practices. They would rather pay $4.99 a pound for tomatoes than pay $1.99 a pound at Wal-Mart.

That fact is not lost on Wal-Mart. Earlier this year, walmartwatch.com, a watchdog Web group, leaked a McKinsey & Company report that said up to eight percent of shoppers had stopped patronizing the chain because of its poor reputation.

Under assault from nongovernmental organizations, employee unions and citizens, Wal-Mart CEO Lee Scott stood up and announced it was going green. Wal-Mart’s new aim is to become a “good steward for the environment” with a target ultimately of using only renewable energy sources and producing zero waste, said Scott. Scott told employees that the company was coming to realize that many of the issues where it had been on the defensive in the past represented “opportunities not problems.”

IMPACT ON NEW MARKET ENTRY AND BRAND CHOICES
When an organization has a reputation for ethical leadership, it can more easily move into new markets, including new territories, economic stratum and industries (see Fig. 2). A positive reputation assists in getting local grants and tax breaks, attracting employees more quickly to get up and running and gaining customers faster. Ethical leadership can also drive consumers to choose one brand over another, according to recent research.

“There clearly is a growing movement for consumers to use attributes associated with social responsibility or sustainable development in making brand choices,” says Bruce Hutton, Professor of Marketing in the Daniels College of Business, University of Denver. Daniels College recently was named among the top three business schools graduating MBA’s with “high ethical standards.” With many of today’s products and services similar in quality, consumers look for distinguishing features, Hutton says.

He points to a number of studies showing that after price and quality, how a company acts (with regards to community and environment) is a growing attribute in consumers’ distinguishing between brands. In fact, this attribute ranks in the top fi ve considered by consumers.

A company can work to increase brand appreciation and market demand, which is a combination of pure economic demand combined with consumer and public interest in the brand’s presence in the community.

A company also should work to minimize the market resistance, including consumer and government opposition, that can prevent it from entering a market.

Imagine this dichotomy in action recently when the front page of The Wall Street Journal featured the Mayor of Boston attempting to woo Target Corporation to open a store in the city, while holding Wal-Mart at bay.

“Wal-Mart does not suit the clientèle we have in the city of Boston,” Mayor Thomas Menino was quoted in explaining his opposition. “They don’t pay wages that are sufficient. Their benefit structure is poor. I don’t need employers like that in our city.”

However, Menino described rival Target Corp. in much more positive terms: “It’s a different image they have in how they market their product and the appearance of their stores,” he said. “That’s a lot to do with it, the image of the store.”

PRICING
Until recent years, pricing was one of the most understudied and under appreciated components of organizational profitability. However, with the advance of technology that can recommend and track pricing performance, pricing has become a more dynamic force used by corporations, evolving from rote and art to a science.

Ethical leadership can be a material contributor to the ability of an organization to command a premium price for its products or services. It is directly tied to brand perception by the purchaser of the product. Conversely, it is tied as well to perceived inconvenience or harm the consumer feels may result from purchasing a product or service from an unethical corporation.

Price is the key profit driver. Price Quality is a factor that reflects a company’s ability to maintain or even raise product pricing without losing sales. The higher the Price Quality, the better a product price is protected.

A good example is customers’ perceptions of Wal-Mart vs. Whole Foods. Because of negative impressions of Wal-Mart, some are willing to pay premium prices at Whole Foods rather than buy similar, lower cost items at Wal-Mart (see Fig. 3).

A company can attempt to increase prices by increasing product quality, coming up with unique and innovative products and securing high customer loyalty. Even companies without unique products can have a high Price Quality Factor with high product quality and customer loyalty.

To maintain high prices, ethical leadership comes into play. An ethical company cares about its customers and its reputation. It does not cut corners on safety and testing, does not make misleading or exaggerated advertising statements, and takes pride in what it does. And customers are paying more for products and/or services from companies that “get it.”

BRAND EXTENSION
The ability to expand a brand and motivate an existing customer to purchase an additional product is one of the most significant profit drivers for any organization.

After gaining brand trust, the next step in many companies’ profit models is the addition of more products and services to the same customer. This gives a company great flexibility to extend the brand to related products or services.

Sears has long been known for the quality of its appliances; they seem to last forever. So Sears was able to extend that brand into warranty services well beyond their own appliances. It sells home warranties that cover many items. This has turned into an extremely important profit center. In many environments, from retail locations to professional services, there are not many incremental variable or fixed costs associated with brand extension.

Thereby, the majority of the incremental gross margin dollars drop to the bottom line. Some offsetting costs can be the cost of financing incremental inventory, space to store or display goods, service delivery costs, and additional marketing materials and promotion to make customers aware of the product or service.

CUSTOMER LOYALTY AND CUSTOMER IDENTIFICATION
The Holy Grail for many corporations is repeatability, otherwise known as customer loyalty. Earning a customer is one of the most difficult endeavors a company faces.

Once a customer is gained, companies need to convince them to come back for the same product as well as try new ones. At the same time, the loss of a customer due to displeasure has a double negative impact. An unhappy customer tells nine other people about it, and likely more, according to experts. A satisfied customer tells only a handful.

In many industries the cost of acquisition can be as high as eight or more times the expected operating profit from the customer. Customer loyalty is crucial. How can ethical leadership impact customer loyalty? This is a no-brainer: people come back to a company they respect. Essentially, buyers become ambassadors for a brand with a positive reputation and ethical leadership. The broad definition of ethical leadership is quality, transparency and corporate social responsibility. These all contribute to the willingness of a customer to return and buy.

WHAT’S NEXT?
For some companies the evolution towards ethical leadership started with compliance, perhaps due to an ethical breakdown or high-profile failure. Other companies’ programs, not needing that kick-start, first emphasized compliance and have evolved into ethical leadership. In some industries, particularly consumer-focused ones, it is already clear which companies are breaking away from the pack in terms of applying ethical leadership to generate profit. In other industries it is less clear; the mantle of leadership remains available.

Some corporations have taken it to the next level and have begun to focus their efforts on overall corporate social responsibility. It requires more than “charity programs.” A best practices socially responsible company does the following:

• Cares about its employees and works to have a positive, happy workforce.
• Values its customers and quality of products (does everything the “right way”).
• Engages in community enhancement projects to give back and build/improve its reputation.

From compliance to ethical leadership to customer service, this process is an evolution for many industries and individual companies. In the opinion of experts, this is a trend which is now a reality and here to stay. In the words of Ames, “If you do the right thing and have a halfway decent business plan, you will succeed.”