Corporations that declare publicly that an ethics code is an important aspect of their management philosophy perform better in both financial and non-financial terms than corporations that do not state such commitments, according to a study by a DePaul University researcher.

Curtis C. Verschoor, the Ledger & Quill Research Professor at DePaul’s School of Accountancy in Chicago, analyzed a section of the annual reports of 500 of the largest U.S. public companies for his study. To reach his conclusions, he determined whether companies emphasized ethics in the section and then compared company performance rankings using information published by Fortune Magazine, Business Week and the Stern Stewart Performance 1000 report. He also looked at whether the companies were members of the Ethics Officer Association.

Verschoor will discuss his findings Feb. 18 during an Ethics Week presentation at Notre Dame University in South Bend, Ind., and March 26 at the Ninth Annual National Auditing Conference at the University of Essex in Colchester, England.

The portions of the 500 annual reports Verschoor analyzed for his study are called A Management's Responsibilities for the Financial Statements@ or A Management Report." These are sections in which companies may make voluntary disclosures about their internal controls to ensure proper financial reporting, effective compliance with laws and the efficient functioning of the organization.

Of the 500 companies studied, about 27 percent stated that a code of ethical conduct was part of their internal control system. "Since they are generally signed by top management and have been reviewed by auditors and attorneys, I consider these statements to be a public commitment to consider the interests of all of their stakeholders," Verschoor said. About half of this group had a more extensive or explicit commitment to ethical accountability.

About 25 percent of the annual reports studied had no management report. The management reports of the remaining 48 percent did not mention ethics codes.

Verschoor then compared the performance of companies that made an ethical commitment with those that did not using the Stern Stewart Performance 1000 report of Market Value Added (MVA). MVA is a recently created measure of the value a company has provided to its shareholders compared with the total amount of their investments.

Verschoor found that the average MVA of companies that made an internal control ethics code declaration was a significant $8.1 billion. That figure is 2.5 times larger than the MVA of companies that either did not mention a code of ethics or failed to include a management report. For the companies expressing a more extensive or explicit commitment to ethics, there was an even larger difference in MVA. The average MVA was $10.6 billion or almost three times the MVA of the companies that either had no ethics commitment or no management report.

The financial performance of companies stating a commitment to ethics also was significantly better than those that did not make this statement based on Business Week’s annual ranking of large companies. This ranking is based on eight more traditional aspects of financial performance including: total return for one and three years, sales growth for one and three years, profit growth for one and three years, net margin, and return on equity.

Using the Business Week data, the average rank of the companies that made a public ethics commitment was 13.8 percentiles higher than the rank of companies expressing no ethics emphasis. The average rank of companies with a more extensive or explicit ethics commitment, was 14.8 percentiles higher.

Verschoor also compared the groups of companies in terms of non-financial performance as reported by Fortune. Each year the magazine conducts an opinion survey of industry experts resulting in the "most admired" large companies. The Fortune survey covers eight key attributes of corporate reputation, of which five track concerns of stakeholders, either directly or indirectly. These attributes are: innovation; ability to attract, develop, and keep talented people; quality of management; quality of products or services; and community and environmental responsibility. The other three factors tracked are entirely financial: value as a long-term investment, financial soundness and use of corporate assets.

On a 10-point scale, the average reputation score of companies that made a public commitment to an ethics code or code of conduct was 4.7 percent higher than the companies that did not. Companies making a more extensive or explicit ethics commitment had average reputation scores that were 6.7 percent higher.

Another comparison of the companies brought some surprising results. Many companies have installed extensive ethical policies and procedures that include empowering a high-level oversight executive to perform the functions of an "ethics officer." These officers have formed the Ethics Officers Association (EOA). "It would be reasonable to conclude that EOA member companies are more likely to have more effective ethics programs than nonmembers, but apparently this does not result in superior corporate performance," Verschoor said. Only 29.3 percent of the studied companies that commit to ethical accountability are members of the EOA.

Furthermore, Verschoor found no significant difference in the performance of the companies that are EOA members from the performance of nonmembers.

Verschoor believes this shows that merely having a company ethics policy or even a membership in the EOA is not enough to help a company improve performance through the benefits of ethical practices. "Instead, the most plausible cause of superior performance is the ethical tone, set by top management and the board of directors, that permeates throughout all levels," he said.

"Based on interviews with representatives of a number of the high-performing companies, I believe the cause of superior performance relates to the nature of the values that have infused an organization over time. The resulting code of conduct merely reflects these values," Verschoor said.

This premise is also consistent with the results of a recent study by Arthur Andersen that found that an ethics program created to help guide behavior and reinforce company values is significantly more successful than one that employees believe was established strictly for compliance purposes, he said.

Verschoor concluded: "An emphasis on proper values deals with setting examples, interpreting ethical principles and structuring appropriate reward systems. Ethical culture spreads from clear and unequivocal goal setting at the top and openness throughout the organization. On the other hand, compliance has to do with rules, hierarchy and sanctions. Legalistic codes of conduct designed only to protect an organization from conflicts of interest or rogue managerial behaviors are unlikely to motivate loyal employee behavior and result in long-term retention of favorable relationships with suppliers, customers and other stakeholders."

Note to reporters: For an interview or to receive a copy of his paper, call Verschoor at DePaul at 312/362-6903 or e-mail him at cverscho@condor.depaul.edu