(Originally published in Washington CEO)

Ethical decisions don't always make for good business, but ethics are still key for the market system to work. Over the last year this column has explored what it means to be a "good" business - not just good in the sense of being financially successful, but also good in the sense of reflecting correct values and exhibiting ethical behavior.

        We have considered this full-bodied goodness across a wide range of issues, from employment practices to investment strategies. What we have not focused on, however, is the more fundamental questions of why companies should even bother trying to be good.
        When asked this question, many in business respond with the oft-heard slogan “Good ethics is good business.” Over the long haul, they claim ethical business practices redound to the bottom line. This premise is often embellished by reference to various pieces of anecdotal evidence.

“If all ethical behavior leads to business success,
we are no longer talking ethics, we are talking strategy.”

The “good” effect
        For example, we may be told that fair treatment of employees results in a more productive workforce and reduces costly turnover. When a company is known for keeping its promises, it earns the trust of its suppliers and its transaction costs are minimized.
        Moreover, trust breeds a good reputation, and a good reputation leads to more customers. Careful stewardship of the environment and active participation in civic ventures can brand a company as a “good corporate citizen.” A good image, in turn, helps sell products and smoothes out interactions with government agencies. In short, the argument goes, when one takes the long view, ethical behavior pays off in dollars.
        In many instances, this is undoubtedly true. Often, ethical behavior does pay off. I am skeptical, however, that this explanation alone is adequate to explain why most companies do behave ethically or why they should.
        For one thing, we should expect “good” companies to stick to their values, even when it costs them to do so. And, in many instances, it does. A number of studies have concluded that by engaging in deceptive business practices a business can often gain an advantage over its more ethical counterparts.
        It turns out that the cost of imposing justice on unethical practices is just too high. For most companies that have been wronged, it proves more efficient to absorb the wrongdoing as a cost of doing business and pass it along to customers. Market power often turns out to be a more important determinant of future business dealings than reputation. To put it succinctly, as an empirical matter, it often pays to cheat.

Veering from market forces
        And this is not just about cheating. Sometimes ethical behavior simply diverges from market forces. This should not be surprising. The “invisible hand” never promised to point toward righteousness; it only promised an efficient distribution of goods and services.
        Consider the following example. Suppose you decide to manufacture blue jeans. Like your competitors, you conclude that the jeans can be produced most efficiently overseas. The labor market in your country of choice would allow you to secure the workers you need by offering 20 cents an hour.
        Unfortunately, 20 cents an hour is far below a livable wage. If you elect to pay a higher wage (say, 50 cents an hour) and your competitors don’t follow suit, your costs will be higher, your margins will be reduced, and your ability to compete will be impaired. It is simply unlikely that any greater sense of employee loyalty or satisfaction will offset labor costs that are 150 percent higher than your competition’s.
        Moreover, reliance on economic vindication in the long run is often misplaced. With the rapid movement of capital and the near instantaneous availability of market information, the game is increasingly a short-term one. Even if, over the long term, the tables are turned, as the saying goes, “In the long term we will all be dead.” The one who gains the short-term advantage is often the only one around in the long term.

Holding the system together
The good-ethics-equals-good-business formula fails as an explanation for ethical behavior for other reasons as well. Choosing ethical behavior for the purpose of enhancing the bottom line often proves ineffective. As Wayne Alderman, the noted steel industrialist, once said, “If you treat people with love, dignity, and respect in the workplace, they will be more productive and generally your profits will soar. But if you treat people with love, dignity, and respect so that you will get these results, they will see through you in an instant.”
        The formula is also philosophically unsatisfying: If all ethical behavior leads to business success, we are no longer talking ethics, we are talking strategy. Ethics requires a willingness to act contrary to one’s interest for the sake of some higher value.
        What, then, is the answer? Why do so many companies, in fact, choose to behave ethically even in situations where they could make more money by doing otherwise? The answer turns out to be remarkably simple: In this very cynical age, most business folks will tell you that they do it just because it is right.
        And we should not lose sight of how remarkable this is. In a market system that claims to evaluate every choice in terms of dollars, it is ironic that the trust that holds the whole system together turns out to be built upon a widespread, persistent insistence on doing the right thing even when it makes no financial sense to do so.
        In an odd way, it turns out that “good ethics” is good for business, just not always good for profits.

Jeff Van Duzer is the dean of the School of Business and Economics at Seattle Pacific University and associate professor of business law and ethics.