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June 16, 2008

Principled Companies Praised
    by Anne Moore Odell

Ethisphere Magazine publishes its second annual list of the World's Most Ethical Companies. -- After examining 10,000 global companies, a panel of judges at the Ethisphere Institute selected 93 companies as the World's Most Ethical Companies. Ethisphere Institute is a think tank that studies business ethics and corporate responsibility. This is the second year Ethisphere Magazine has published the list and the reasoning behind their selections, and the first year that Forbes is a partner.

"We consider business ethics to be a aggregate of many aspects, including both sustainability and governance," said Robert Leffel, associate director, Ethisphere Institute. "In our view, ethics is more than sustainable 'green' operations or solid governance systems. It's also social responsibility and commitments, innovation that contributes to public well being and greater good, strong leadership and tone from the top, internal culture of ethics, internal ethics and compliance systems and programs, good legal and regulatory track record of integrity."

The Ethics Quotient that forms the basis of World's Most Ethical Company rating comprehensively looks at companies, evaluating them on seven categories: corporate citizenship and responsibility, corporate governance, innovation that contributes to public well being, industry leadership, executive leadership, integrity track record and reputation, and internal systems and ethics.

A committee of Ethisphere researchers and editors, attorneys, government officials, professors, and business leaders undertook a multi-step evaluation process of the companies to narrow the long list down. This year, researchers also had information from the companies themselves in response to a questionnaire developed by the Ethisphere Institute.

Professor John W. Dienhart is the Frank Shrontz Chair for Business Ethics at the Albers School of Business and Economics, Seattle University. He was on the committee that chose the World's Most Ethical Companies. Dienhart explained how he looks for an ethical culture within a company.

"An ethical culture is defined by having two things, "explained Dienhart. "First, fair processes to determine how the good things, such as promotions and raises, and the bad things, such as letters of reprimand or travel to very unpleasant places, are distributed. Having fair processes does not mean instituting a democracy. It simply means having objective standards that are transparently met by the organization. The more voice those affected by the decision have in setting the standards, the better. These voices need to be taken seriously, but they are not votes as in a democracy. The manager still needs to make a decision and be accountable for it."

Dienhart continued, "Second, is important that people are treated decently and with compassion. This does not mean being 'nice.' The business environment can be fast paced and gruff people are often very effective. The important point is that managers and employees respect for the dignity of those with whom they work and interact

Both public and private companies are found in the World's Most Ethical Companies. Some of the 53 companies that appeared on the list for the second time include Duke Energy, Deere & Co, General Electric, Google, and McDonald's. Other companies found on the list include HSBC, Dole Food, Aveda Corp., American Express, and BMW.

Professor Dienhart points to Costco and Expeditors as two examples of companies that act ethically. "Costco and Expeditors are two examples of companies that meet these criteria. Does this mean these companies are perfect? Of course not. But they get it right much more often than not. We need to remember that these companies are made up of tens of thousands of people. What is significant about Costco and Expeditors is the amount of consistency they have regarding fair processes and dignified treatment amongst employees and other stakeholders," said Dienhart.

Ethisphere also notes that companies aren't perfect. The larger the company, the more exposure to lawsuits and the more places for there to be unethical behaviors.

"We don't automatically disqualify companies that may have had some ethics or compliance issues in the past," said Leffel. "We take into account the seriousness and the nature of those issues, their character (i.e. systemic or isolated one off event), and how the company handled the issue. Quite importantly we now look into the efforts of companies in the aftermath of the problem, e.g. what action they took to make sure that it won't happen again. Nobody is a saint, but some are making serious and visible efforts while others are not trying hard enough."

Ethisphere research shows a growing trend towards greater transparency and disclosure, with more information being made available by companies, including the growing number corporate citizenship reports. Companies are realizing that corporate citizenship and responsibility are more that just philanthropy. More companies are also focusing on positive ongoing engagement with local communities and other key stakeholders, greater efforts in the area of supply chain integrity, and increased focus on sustainability.

Leffel told, "Another trend is greater understanding of correlation between ethical practices and profit/shareholder value among senior executives, which results in stronger leadership and tone from the top, which in turn positively impacts culture and internal systems for ethics and compliance, and makes ethics institutionalized within the company."

Significant changes to the 2008 process of selection for the World's Most Ethical Companies from last year's methodology were made. Last year, the list was criticized for focusing heavily on larger and predominantly public companies. However, this year Ethisphere opened and publicized the nomination process, allowing more global companies to apply, and, as a result, received many more nominations, many of them coming from smaller companies that might have otherwise escape their attention.

Ethisphere also developed a 70-question survey that was sent to thousands of potential candidates. Ethisphere furthermore created a process for data verification and audit, and encouraged companies to provide us with evidence and supporting materials.

"If you look at our methodology and criteria, and examine the type of questions we ask, "you will no doubt appreciate the depth and thoroughness of the process," said Leffel. "However, we see it as an evolving process and we always look to improve, therefore we welcome any feedback. Third party information is extensively used and will be used more as we are creating partnerships and alliances with other respectable organizations in specific areas, e.g. governance, sustainability, environment, supply chain, etc."

Ethisphere charted the stock performance of the publicly traded award winners from 2007, and notes that the World's Most Ethical companies consistently and significantly outperform S&P500, by more than double over the period of last five years. Explained Leffel, "This a proof positive that being ethical (in a full sense of it) is actually profitable and adds significantly to the shareholder value."

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