Why Should Small Business Owners Think About Ethics?

An investor approached retirement planner Josh Markowitz with an opportunity. The investor was not wearing business attire and had requested the late-morning meeting be held in a cigar bar. Markowitz felt obliged to ask for more details on the investment strategy.

The investor told Markowitz that if he invested $250,000 for two years, he'd get a return of 15 percent each year.

The investor explained that he lends money to distressed companies at 20 percent interest. Under their agreement, if the debtor company couldn't pay the money back within six months, the lender could buy stock in the company at a 40 percent discount. The investor's strategy was to then dump the shares on the market as quickly as possible.

As predatory as the scheme sounded, it wasn't illegal—yet. When Markowitz asked him about the risks in the business model, the investor replied, "our biggest concern is regulatory."

Nearly 98 percent of U.S. businesses are small—very small—with fewer than 20 employees. And between paying overhead, complying with laws, ironing out tax issues, and actually running the business, entrepreneurs have their hands full. Tough decisions come every day.

Are you handling things ethically within your business?

When faced with an ethical decision, Aileron, a nonprofit for small business owners, said entrepreneurs should ask themselves two questions:

• When cash is short, do you abuse vendors or do you hold off paying some of your employees?
• Do you save a few bucks and cheat on environmental or workplace compliance?

If you answered "yes" to either question, you may be heading down an ethical slippery slope.

So, why should busy small business owners worry about ethics?

Because whether you are a software startup or have a taco truck, ethics failures can hurt the bottom line, writes Shanté Roddy, CEO of Intuitive Risk Management International.

"Ethically treating employees, good relationships with the public, and correct information shared with stakeholders are all responsibilities of the top leadership and have a direct impact on the overall growth of the company," Roddy writes.

Business owners have to sweat the small decisions, because, as Aileron puts it, "business ethics issues always start small."

Juliette Gust is the founder of Ethics Suite, a platform for employees in the restaurant and hospitality industries to report employer misconduct without getting into trouble. She gives an example: A restaurateur receives a request from a local business owner who would like to hold an event at her restaurant. The business owner's policies don't allow alcohol at company events, so asks the restaurateur to hide the evening's liquor sales by counting them as food items.

"If…I say 'sure, no problem,' then my team knows I am willing to make an unethical decision to benefit my income," Gust says.

Having seen that unethical behavior, employees might be more likely to act unethically themselves, she says, and that could threaten the reputation and profitability of the business as a whole.

Gust referred to the "broken window syndrome," the theory that crime is more likely to occur on a street where there are broken windows, because they're a sign that discipline and the rule of law are more tenuous. Former New York Mayor Rudy Giuliani's implementation of the theory in the 1990s was controversial, but the common-sense analogy for business is clear.

The “trickle down” of ethical decisions

Tracy Miller, a lecturer at MBA@Dayton, the online MBA program from Dayton University, underlines that tone trickles down.

A company's ethical strategy "is driven from the top," Miller says. "And so it has to be believed by your leaders. Your top management has to believe that this is important enough in the workplace to invest resources in it. Those companies that are successful have found the right formula for making sure their words and behaviors are aligned."

The right decision won't always be the one that earns you the most money, but it may provide other benefits. For example, if a sole proprietor of a content business hires subcontractors, he may pay them the day rate that they ask for, even if it costs him a bit more. He's making less than the maximum he could make for a particular project, but he recognizes that there are less tangible—but equally valuable—benefits to being seen as a fair employer.

First, he knows he's not driving down market rates in his own, very competitive industry. Second, his product is only as good as the people producing it. So it's important for him to know that the next time it calls the subcontractor, they'll pick up the phone.

When profit is the only motivator, says Miller, a company is priming itself for a fall.

"You can talk about companies that had all the words right and then their behaviors were different," she said. "And so they turned a blind eye. They didn't hold employees accountable for these business practices because the employees were creating profits and the profits were more important to the company than the ethics."

Miller likes to cite Enron as an example, which sought protection from its many creditors in 2001, under allegations of corporate fraud.

Small businesses don't operate on Enron's scale, but their ethical guidelines are no different. "An ethical business not only abides by laws and right relevant rules," writes Reddy, "it also operates honestly, competes fairly, provides a reasonable environment for its employees, and creates partnerships with customers, vendors, and investors."

Looking at a small business as a network of stakeholders makes it easier to grasp how, with one unethical decision, a small business can alienate clients, burn bridges with subcontractors, destroy lives, ruin its reputation, and even wind up in legal trouble.

Going back the real-world example of the retirement planner Markowitz, he knew he could have made money for his clients by investing in a predatory lending scheme, while technically doing nothing wrong. However, the long-term risk did not merit the short-term reward, so he said "no" to the opportunity.

According to MBA@Dayton's Miller, businesses should make ethics part of their culture and value system. This means investing resources in training to protect the long-term reputation of a company. That way, when faced with a decision that may bend the rules, employees know not to make it or to seek additional guidance. In the end, ethics trump the bottom line.