Well, an ethical business is one which does what is morally right under its on accord or maybe by following legislation. For example there are laws for how factories discard waste and by following these laws the business is doing what is morally right. However a clothing manufacturer such as Nike may chose to close its sweatshops in East Asia and build safer, cleaner factories in their place because they believe that it is the correct thing to do - They are not being forced to do this by law though. So, we can say that sometimes a firm is forced to be ethical, while at the same time it may chose to do so.
An ethical firm is also one which is socially responsible: That is, to take into account and look after all of the stakeholders in the community in which it operates by acting not in its own interest, but considering other groups of people who will be affected by the firm's actions. For example paying to use a waste collection service is socially responsible because it ensures that the residents living locally don't experience litter problems, smells and other dangers. And in addition the waste gets disposed of properly so that it does not cause contamination and damage to habitats.
Ethics v Profits Shareholders v Pressure Groups
Naturally there are some drawbacks to being an ethical firm. There is a trade-off between ethics and profits due to a simple fact: Being ethical costs the business in time and capital. We all know that M&S supply biodegradable shopping bags for your groceries. However they cost a great deal more than non-biodegradable bags which can be produced cheaply. As revenue - Total costs = profits it means that M&S makes less profit by introducing these more ethical bags. This is particularly a problem if the company is a Plc (Public Limited Company) because its shareholders are ultimately looking for more profit so that the value of their shares will increase. Furthermore most (but by no means not all) shareholders do not welcome this ethical step that M&S has taken so the directors have to justify why they introduced the costly new ethical measures.
The answer comes in the form of Brand Reputation. As consumers become more concerned about the environment and animal welfare more and more welcome these ethical changes made by M&S and this leads to M&S gaining a positive reputation in the media. Then, environmentally concerned consumers may even switch form other supermarkets such as Waitrose to M&S as it is viewed as an ethical brand. Therefore it is possible that sales increase to counter the effects of rising costs. So profit doesn't necessarily dip after all!
The decisions to turn ethical may have been influenced by pressure groups such as Friends of the Earth (and Greenpeace but everyone uses that as an example) who campaign and manipulate the media into publishing negative reports about a firm's unethical operations. They exposed Primark and Nike's use of sweatshops and the farmers who got paid minimal cash for laborious days harvesting and selling cocoa, fruits and cotton.
This could turn customers against your business so an ethical firm may unfortunately be acting ethically to "keep them happy" or maybe just to keep up with the competition. A firm that is left behind or exposed to be unethical may inherit a damaged reputation and subsequently lower sales if boycotting takes place.
Social Enterprises
I thought it was worth mentioning social enterprises or firms that operate and trade for social and charitable courses as opposed to profit. These not-for-profit organisations have cut profit out of the equation so there is no trade off at all. The Big Issue and Duncan Goose's One Water are two such businesses that put ethics first and act to help those less privileged than ourselves to build communities. Now isn't that lovely!
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