How do poor ethics and morals in business practices affect society? One need only mention certain corporate names like Enron or high-profile business professionals like Bernie Madoff to know has poor ethical practices affect society.

LOSS OF CONFIDENCE

One outcome of poor ethical and moral practices in business is a general loss of confidence and trust in businesses. Companies rely on their ability to maintain trust with stakeholders in order to maintain profitability over time. Retail companies like Wal Mart cannot afford to have much bad press about ethical scandals. Even the appearance of immoral corporate behavior can affect the bottom line.

A loss of trust can reduce customer loyalty and motivate customers to turn to competitors. The unethical practices likely to erode customer loyalty involve activities associated with corporate social responsibility (CSR). CSR includes investments in the local community, benevolent work, effective stakeholder relationships, and responsible management of the environment. A breach in CSR expectations can quickly reduce customer loyalty.

Another important area of confidence is with investors. Unethical accounting practices may be easier to hide by companies and may be more prevalent than the obvious violations of CSR expectations. Customers will never know if ethical accounting practices are followed in a company. Chances are, many customers do not care. However, investors do care. The past two decades witnessed case after case of unethical corporate accounting practices. The temptation to post nonexistent profits in order to increase company equity and stock prices proved to be too much for many companies like Enron and HealthSouth.

More recently, the bailout of large banks was largely an attempt to prevent the unethical banking practices from closing large banks over leveraged in real estate. Though unpopular it was probably fitting that Congress attempted to clean up the mess it helped to create years earlier with housing legislation that promoted unethical lending.  

LOSS OF RESOURCES

A second effect of poor ethical and moral practices on the part of businesses is the loss of resources. The phony profits and inflated stock prices collapse over night leaving the shareholders to absorb the losses. Corporate frauds cost employees their jobs as well as jobs in other industries affected by the collapse of the scam. In some cases, as in the bailout of the banks the loss of resources was tax dollars.

NEW REGULATIONS

A third effect of poor ethical and moral practices in business is the introduction of new regulations that apply to all companies. The Sarbanes-Oxley Act (SOX) of 2002 is an example of accounting legislation enacted in response to accounting scandals in companies like Enron, Tyco, and Adelphia. SOX imposed strict accounting requirements on all publically held companies and made executives personally responsible for public accounting records.

CONCLUSION

Unethical behavior may be easy and seem to offer benefits in the short run. However, a long-term picture will see that unethical behavior will eventually cost the company profits, customers, investors, and credibility.