Profitability or integrity? Why not both?

Businesses that are seen as ethical by their employees are more likely to have experienced revenue growth

Growth and profitability have been at the crux of the corporate agenda and defined the way businesses function. Companies have nevertheless encountered challenges while trying to achieve these goals, which have inevitably required them to sometimes ‘work around the way of the land’.

For instance, it is a common concern that in certain regions or sectors or business dealings, it is impossible to carry out tasks without greasing palms. This is because of archaic perceptions and practices that consider these practices indispensable to running day-to-day operations as well as ensuring sustainability in the long run. Earlier, this mind-set often overlooked unethical behaviour as long as the business was running smoothly and was in the companies’ favour. But today, such moral outlook is changing.

There have been significant regulatory pushes that have taken place globally with tighter provisions and controls to deter unethical practices and increase transparency. India ratified the United Nations Convention against Corruption (UNCAC) a few years ago, as it looked to reiterate its crusade to minimise corrupt practices. Recently, India also became a signatory of the Foreign Account Tax Compliance Act (FATCA)—the US Global tax law. FATCA is expected to enable cross border tax-related information sharing that will enable multi-jurisdictional inquiries into matters highlighted through these avenues. Cross-border collaborative enforcements are augmenting the liability of organisations, as these are now seldom constrained by geographic boundaries.

Corporates have been under intense scrutiny due to greater local enforcement of law during the past few years. For instance, the Companies Act 2013 has placed an increased onus on companies and established increased responsibility on stakeholders involved such as auditors, Independent Directors and the board. Recent judgements have inculcated enhanced consciousness among corporates on the practices followed by their operatives during business dealings.

A glance at some noteworthy cases highlights how individuals can now be held responsible, accountable and liable for their personal actions.

These instances show that companies operating in a global environment will need to take calculated steps to ensure that they do not end up burning their hands through unlawful business practices.

So the question remains—do companies have to choose, and pick one over the other? Can they afford to compromise integrity for profitability? Or do they maintain integrity, do the right thing and possibly bear the adverse effects on business?

There are a host of recent cases which demonstrate the ill-effects of failing integrity and its inevitable impact on the companies’ market performance and bottom-line. For example, consider a company, ‘A’ which was leading the India emerging story. The balance sheet saw skyrocketing profits, catching investors’ eyes and made it an attractive portfolio option. However, closer scrutiny by a prospective investor revealed some inconsistencies in payments, highlighting gaps. While the intent may not have been to defraud investors, cracks in compliance led to a fall out of the impending deal which would enable strengthening a viable business. This shows the need for a much needed introspection to be done in the Indian business ecosystem

Building a unified theory—integrity and profits A recent EY Fraud Investigation & Dispute Services survey identified a very impressionable finding—the results show that businesses that are seen as ethical by their employees are more likely to have experienced revenue growth.

The results also show that businesses that have experienced revenue growth in the last two years are more likely to have effective compliance policies and procedures in place. Compared with businesses that have experienced decreased revenue, respondents of companies that have experienced revenue growth are more likely to have policies in place, have penalties for misconduct, deliver training and support those reporting fraud or corruption. This clearly demonstrates that robust corporate governance is a key element in positively manoeuvring the company to a more sustainable business model.

Companies are yet to effectively grasp the potential that is presented by a confluence growth and integrity. While they may be under imminent pressure to attain a more prolific presence and higher revenue margins, sustainability would unquestionably depend on their ethical quotient. The attitude that they demonstrate toward compliance in spirit is what would ultimately boost their business; not only from a profitability standpoint but also as a key differentiating factor, setting them apart from the competition.

- By Arpinder Singh, Partner and National Leader, Partner, Fraud Investigation & Dispute Services, EY

The thoughts and opinions shared here are of the author.