Earlier this year, Ethisphere published its fifth annual list of "World's Most Ethical Companies," and featured Starbucks (SBUX), American Express (AXP), General Electric (GE) and Target (TGT). These companies have the distinction of making the cut all five years Ethisphere has been ranking companies.
Also making a repeat showing is Best Buy (BBY), and 2011 is the third year in a row it has won the top honor.
So what makes these companies such ethical standouts, and why should this interest us as consumers and investors
For one, ethical businesses see the interrelationship between their own success and their efforts to better the community. That interrelationship not only bolsters good will and good relationships, but good business, too.
In movies, it's the ruthless executives with questionable morals that get ahead -- at least for a while. In reality, it turns out that ethical companies are the ones with a leg up on the competition. The public companies highlighted in Ethisphere's ranking together consistently outperform the S&P 500.
To see why this is the case, let's take a look at Ethisphere's methodology for choosing which companies make the cut.
Ethisphere works with an independent panel of government officials, professors, and attorneys to evaluate businesses in five core categories:
- Ethics and Compliance Program: the program's structure and oversight, training and communication, monitoring and auditing, and enforcement and discipline
- Reputation, Leadership, and Innovation: legal compliance, past litigation and ethical track record, reputation, and innovation leading to public well-being and stakeholder engagement
- Governance: the quality of the company systems to ensure strong corporate governance aligned with legal requirements
- Corporate Citizenship and Responsibility: performance in areas related to corporate social responsibility, including environmental stewardship, community involvement, employee well-being, and philanthropy
- Culture of Ethics: the company's widely held beliefs and norms as they relate to ethics, including the values and rules that guide employee behavior
Let's look at a few of the ways Starbucks, Target, and Best Buy stand out in these categories.
Be good to your employees: Starbucks has long been known for promoting the well-being of its employees, and famously offers health-care benefits to both full- and part-time employees despite the huge expense for doing so. Along the same lines, the business has pushed for meaningful health-care reform for all Americans, with the CEO visiting members of Congress to discuss unsustainable rises in the cost of insurance to individuals and businesses.
Strive for diversity: Target has earned particular recognition for its commitment to diversity, with the company getting to No. 44 on DiversityInc's "Companies for Diversity" ranking. Among other initiatives, its commitment to diversity is reflected in LGBT partner benefits, its diverse supplier relationships, and its sponsorship of multicultural events.
Don't keep secrets: Best Buy is a well-known innovator in the ethics field, with a focus on hyper-transparency. A few forward-looking companies, including DuPont (DD), Boeing (BA), and Cisco (CSCO), have published ethics reports within their organizations listing violations and actions taken to correct the issues. Best Buy has taken this a step further by publicizing this information externally through a blog. Kathleen Edmond, the chief ethics officer, promotes stakeholder engagement by encouraging the general public to comment on this information. Also leading the way in environmental sustainability, Best Buy recently started recycling electronics for free, even if the electronics were not purchased at one of its stores.
Consumers and investors would do well to pay close attention to the ethical conduct of the companies they support through their patronage and investments. Companies that invest in their ethics are investing in their stakeholders, including their employees, shareholders, consumers, and the broader community as they work to make a profit for themselves.
Jim Royal, Ph.D., does not own shares of any company mentioned here. The Motley Fool owns shares of Cisco Systems, Best Buy, and Starbucks, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Starbucks, writing covered calls on Best Buy, and writing a covered strangle position in American Express.