Small but powerful

In recent years companies have become increasingly aware of the need to develop ethical working practices, as consumers and wider society have demanded higher standards of behaviour from the providers of goods and services.

The impact of technology, especially social media, has raised the bar in the expectations of ethical practices – especially for companies that are clearly identifiable through their brands. As such, larger corporates have been under the microscope for some time, but small and medium-sized enterprises (SMEs) are increasingly facing the same scrutiny.

Being close to their communities means they, too, can feel the sharp end of a consumer backlash if they are not acting ethically, but they stand to gain if they are recognised as being good citizens in their community. But where to start making the adjustments towards becoming a more ethical SME?

Bottom up or top down?

There’s only one answer to that question when it comes to ethics: It starts at the top.

“Good governance and strong ethics don’t just happen, and business leaders must decide what their company stands for and the type of company it wants to be,” says Alister Esam, chief executive of eShare, which provides governance software.

In recent years, more companies have put ethics at the heart of their strategic thinking, says Martin Day, managing director for corporate and professional qualifications at the London Institute of Banking & Finance. “Leaders should understand that their business values must align with doing the right thing for their customers, staff, and the wider environment in which they operate,” he says.

“Lead from the front with a values-based approach,” argues Andrew Wilson, director of Corporate Citizenship, a global consultancy specialising in sustainability and corporate responsibility. “Show people how you expect them to behave by living those behaviours yourself.”

Creating a strong set of values must be at the top of the agenda. Those values underpin ethical behaviour and provide a benchmark against which all staff can judge their actions. It’s especially vital that middle managers live the values, says Kevin Murray, author of a new book, People With Purpose. “Managers either enable or kill the values you want lived in the organisation,” he says.

“Employees, no matter how keen, will not be able to live and breathe your ethical values if your managers don’t.” He points to YouGov research, which shows that many employees don’t believe their managers care about the purpose of their organisation. “It’s here that culture breaks down and employees become cynical about the company’s values,” Murray adds. “Too often, leaders describe values without sufficient explanation to give them meaning – and that cannot truly drive culture.”

More than just talk

However, it’s not enough to talk the talk. Truly ethical companies walk the walk. One of them is English Tea Shop, a £22 million-turnover company that sources its organic tea from small-scale growers. The company seeks to build long-term, close, and mutually beneficial relationships with them, says chief executive Suranga Herath. The firm pays higher than the Fairtrade minimum prices to growers and promotes sustainable sourcing.

Herath says English Tea Shop’s ethics were inspired by Harvard Business School professor Michael Porter’s concept of creating shared value (CSV). “This has given the farmers the stability and knowledge to enhance quality, yield, and return on their crop. CSV can be applied to any sector – particularly when consumers are increasingly discerning about a business’s integrity.”

Developing a diverse organisation is a must as it demonstrates that the company wants to engage with the whole community and fertilises the firm with a wider range of ideas. Diversity means creating a team with unique skills, backgrounds, and reasons for wanting to make a difference, says Patrick Nash, chief executive of Connect Assist, a social business which provides specialist helplines for UK charities.

“We look for diversity in the way we recruit,” says Nash. “We employ many military veterans, people with life-limiting health conditions, and people who have had lengthy periods of unemployment. By accommodating those with mobility or healthcare needs, and encouraging people to fit work around their lifestyle, you can tap into a workforce with different skills and wider experience.”

Developing processes for all stakeholders is not just a challenge for corporates – smaller firms should do it, too.

“Becoming an ethical company that integrates social, environmental, and ethical challenges at the core of its business model and strategy is an opportunity for small and medium-sized companies to strengthen their relations with stakeholders and thus their economic and financial performance,” argues André Sobczak, academic dean and co-holder of the chair of corporate social responsibility at France’s Audencia Business School.

Matthew Wallis, a lecturer in strategic management at Nottingham Business School, warns that companies that engage in process improvement shouldn’t neglect the stakeholder dimension. “Firms are not only more ethical, but can reduce costs and improve functionality when all staff, customers, suppliers, communities, and beyond have their process knowledge accounted for,” he says.

The gift of giving

Promoting good causes around the world shows that a company has taken its responsibility for passing on the world in as good or better shape than it found it. For example, furniture company Happy + Co set up a co-venture farm in Cambodia, where many of the company’s products are manufactured. For every item of furniture sold, the company donates 10% to the farm. This enables local people to produce their own fruit and vegetables.

Personal Group, an employee benefits provider, hands its staff £100 a year to donate to their chosen charity. But helping good causes is not just about money. In addition to the monetary donation, 32 employees have travelled to support the Memusi Foundation charitable trust in Kenya by building schools and teacher accommodation.

“Employee happiness isn’t just good for morale – it’s good for business,” says Personal Group’s chief executive Mark Scanlon.

Improving competitiveness can come from an ethical culture, and there’s no need to be ashamed about grabbing extra advantage over competitors by behaving in a better way. “Leaders who pay attention to culture achieve superior results,” says Murray. “[Their organisations] attract the talent that enables them to keep generating growth and value.”

Murray points out that a company’s values can bond customers to a brand. “So make sure there is consistency between your internal culture and external expectations.” When a company embeds values positively in a brand, it differentiates it from competitors – and wins new customers.

Using due diligence to audit ethics is an area in which finance can play a key role. Accountants know how to use due diligence in financial applications and can use those skills to audit their firm’s adherence to ethical standards. For example, firms should make sure through staff communication and training that everyone is aware of the company’s commitment to cracking down on bribery, corruption, and money laundering.

Firms should ensure they have good due diligence in place for assessing suppliers, clients, and partners, says Michelle Wright, chief executive of Cause4, a social enterprise and B-status corporation that uses business power to tackle social and environmental problems. “For those wanting to go the extra mile, it can be worth having a clear ethics policy in place included as part of staff handbooks. And make template legal documents available online,” she says. “The directors are responsible for the ethics of a business, and ignorance of the laws or compromising partnerships is no defence.”