in practice focus on ETHICS: Non financial Considerations in Project Selection
Corporate ethics codes are often faulted for being “window dressing,” for having little or no effect on actual behavior. Financial ethics expert John Dobson says day-to-day behavior in the workplace “acculturates” employees, teaching them that the behavior they see is rational and acceptable in that environment. The good news is that professional ethics codes, such as those developed for chartered financial analysts, corporate treasury professionals, and certified financial planners, actually provide sound guidelines for behavior. These codes, notes Dobson, are based on economically rational concepts such as integrity and trustworthiness, which guide the decision maker in attempting to increase shareholder wealth. Financial executives insist that there should be no separation between an individual’s personal ethics and his or her business ethics. “It’s a jungle out there” and “Business is business” should not be excuses for engaging in unethical behavior.
How do ethics codes apply to project selection and capital budgeting? For most companies, ethical considerations are primarily concerned with the reduction of potential risks associated with a project. For example, Gateway Computers clearly outlines in its corporate code of ethics the increased regulatory and procurement laws with which an employee must be familiar so as to sell to the government. The company points out that knowingly submitting a false claim or statement to a governmental agency could subject Gateway and its employees to significant monetary civil damages, penalties, and even criminal sanctions.
Another way to incorporate nonfinancial considerations into capital project evaluation is to take into account the likely effect of decisions on nonshareholder parties or stakeholders: employees, customers, the local community, and suppliers. Chipotle Mexican Grill’s “Food with Integrity” mission is one example. Chipotle’s philosophy is that the company “can always do better in terms of the food we buy. And when we say better, we mean better in every sense of the word—better tasting, coming from better sources, better for the environment, better for the animals, and better for the farmers who raise the animals and grow the produce.”a
In support of their mission, Chipotle sources meat from animals that are raised humanely, fed a vegetarian diet, and never given antibiotics or hormones. The company favors locally grown produce, organically grown beans, and dairy products made from milk from cows raised in pastures and free of growth hormones. Chipotle’s efforts have been rewarded, as sales increased by nearly 50 percent from 2007 to 2009 and by nearly 80 percent from 2009 to 2012. Investors have also profited, as shares that sold for $44 at the company’s 2006 initial public offering were priced at over $400 in mid-2013.
What are the potential risks to a company of unethical behaviors by employees? What are potential risks to the public and to stakeholders?