Unethical corporate practices, once they become known to the public, shrink profits and smear reputations, just ask Wal-Mart or Wall Street.  Unethical corporate practices perceived only by the employees shrink profit as well.  Profits are not visibly lost through lost sales; profits are lost through lack of employee engagement.

Multitudes of business research points to employee engagement as a key factor in productivity and client relations.  Likewise, multitudes of research show that employee engagement is influenced by the overall purpose of the organization, trust and confidence in senior leaders and amount of recognition employees receive.  However, there are few studies in how company ethics affects employee engagement.  One longitudinal study that focuses on ethics in business is the bi-annual National Business Ethics Survey (NBES) produced by the Ethics Resource Center , an 87 year-old non-profit focused on ethical standards in public and private institutions.  Continual components of the study rely on employee and managements’ perception of each group’s commitment to open and honest communication, positive ethical role modeling and accountability. Its 2009 survey focused on the relationship between ethics and employee engagement.  To quantify the overall theme of the 2009 survey, NBES asked the following questions: does ethical culture play a part in employee engagement; does management’s commitment to ethics impact employee engagement; does management misconduct undermine engagement; and, do engaged employees respond differently to observations of misconduct?

Employees may first be attracted to a company because of the public opinion of the ethics of the company, but employee engagement is directly related to the everyday ethics of top management and direct supervisor ethics.  The NBES found that top management ethical culture has a 73% correlation with employee engagement; direct supervisors’ behavior is only 4 points behind management at 69%, greatly surpassing employee engagement due to the advertised ethical standards of a company.

As ethical conduct positively reinforces employee engagement, unethical conduct from top management and direct supervisors negatively, rather than negligibly, affects engagement.  85% of employees who had not witnessed unethical conduct ranked as highly engaged compared to 61% rate of high engagement from employees who had witnessed unethical management conduct.  Another way to view the numbers is that unethical management results in a 24% loss in employee engagement.

Lower employee engagement also affects horizontal relations within a company.  18% of disengaged employees feel pressure to compromise company ethical standards whereas only 6% of engaged employees feel the same.  In other words, disengaged employees feel 3 times the pressure to violate ethics than their engaged counterparts do.

Engaged employees are better at monitoring the ethical behavior of their colleagues as well as the company.  67% of engaged employees reported misconduct versus only 57% of other colleagues.  This suggests that HR and compliance professionals can work together to increase employee engagement, which, in turn, will decrease violations of the ethics standards.

Milton Friedman’s often-quoted corporate ethical culture  statement, “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engage in open an free competition without deception or fraud”, is taken to mean that corporations have a no-holds barred behavior concerning employees and greater society and only an ethical behavior requirement towards treatment of profits, shareholders and economic systems.  Maybe we should re-interpret this quote to mean that the social responsibility towards profits denotes a social responsibility toward visible corporate ethics inside the walls of the company.