The term ‘ethics’ comes from the ancient Greek éthos, and refers to the character of persons. The word evolved later and began to refer to a human being’s way of acting in terms of good behavior.
This has allowed us to establish today’s ethics which refers not to a person’s thought but to their behavior, concluding that we are what we do and not what we say. Ethics is not something whereby we can “do” whatever we understand and want to do in all the areas of our lives in a given moment, rather it obliges us to act correctly.
Ethics in our times has taken up new dimensions of responsibility. Hans Jonas en su obra The Principle of Responsibility maintains that ethics until now has been applied to the evaluation of an action with immediate impact, having to do with the here and now. Today it has been extended beyond the immediate actions of a person since much of what is done brings future consequences.
On that basis, in these times ethics has become profitable for companies because there is a need for it in business and financial systems. Because behaving correctly creates a good reputation for companies with respect to their clients and/or suppliers, thus being able to engender their loyalty.
Corporate Excellence and the Reputation Institute define business reputation as “the set of perceptions of the company by the diverse interest groups related to it, internally as well as externally, as the result of behavior carried out by the company over time and its capacity to distribute value to the mentioned groups.”
This we can define reputational risk as an event which could provoke the loss of the positive perceptions of the company and potential damage to the financial capital and/or market share related to a company’s reputation. The greatest challenge presented by this kind of risk is the difficulty to repair or mend its reputation, especially when they are widely disseminated cases because by social networks of the XXI Century, which often serve as accomplices in the massively distributed negative impact.
There is a hand-in-hand connection between reputational risk and ethics, where we see actions which cause corporate scandals daily, damaging companies with the consequent deterioration of the trust of clients, suppliers and/or investors, the engines driving the capitalistic economic system of our times.
We should emphasize that companies anywhere in the world, regardless of size, have come to the realization that unethical practices can have a major impact on their negative reputation. This can be catastrophic, in some cases, even driving companies with great economic solvency into bankruptcy.
For those reasons, legislation related to the Prevention of Asset Laundering often require compliance programs and having an ethical code to be observed by employees, partners and the management agencies of the company.
There are also tools and guidelines for risk, such as the standard ISO 31000 over the value of risk management for organizations presenting all the kinds of reputational risk which exist, namely:
Management risks depend on the general administration of the organization in the exercise of their power.
Contextual (legal) risks caused by regulatory or legislative changes affecting a given sector.
Natural risks determined by the natural environment, characterized by the difficulty of being foreseen in advance.
Operational risks are intrinsic risks which can be carried out in the company’s productive processes.
Fully understanding the kinds of risks listed above provides the tools need by companies to avoid or minimize reputational risks, highlighting the importance of awareness and management of risks in order to adopt the necessary measures to foresee that a determined perilous situation may arise. In like manner, the ISO 31000 standard highlights the importance of having the capacity for resolution of a crisis, because applying the right focus in the event of a reputational risk situation can result in minimizing risks, if any at all are produced.
In short, the correct application of ethical values in a company creates trust by clients, suppliers and investors, becoming sustainable over time.
By Iris Villafaña and Heiddy Moronta