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Ethical Framework Builds a Solid Company: Opinion

Forked Road
Photo: Jacobs Stock Photography | Getty Images
Forked Road

The modern company has a split personality: Its conscience is partly internal and partly external. And that could affect the reputation, and longevity, of your business.

The internal conscience, as exercised by directors in fulfilling their fiduciary duties to stockholders, is incomplete because it ignores the businesses’ other stakeholders, including society and the environment. The external conscience, as exercised by legislatures and courts in regulating harmful corporate behavior, is inefficient because it only addresses such behavior after damage to society and the environment has occurred.

Operating your business today with this split conscience invites disaster because if it acts unconscionably, the world hears about it instantly. We’re doing business in a glass house. Bloggers and websites such as Twitter and Avaaz.org have rapidly become a company’s default external conscience. If you rely on the harsh conscience of public approbation, you risk destroying the goodwill of your business if it fails to act in good conscience. Wal-mart, for example, damaged its reputation and caused its shareholders to suffer billions of dollars of lost stock value with recent allegations that it paid millions in bribes to Mexican officials to speed its rollout of stores in Mexico.

Curiously, the Founding Fathers never answered the fundamental philosophical questions: What should be the rights and moral responsibilities of companies? Should they have a conscience? As representatives of We the People, these are precisely the questions that Occupy Wall Street is challenging us to answer.

You will have a competitive advantage if you design your business or start-up to have an internal social and environmental conscience that transcends and includes the limited mercantile conscience provided by the fiduciary duties of directors to stockholders. To succeed in an economic system that understands the limits of its natural resources and recognizes the need to protect the environment you must anticipate the consequences of your company’s actions like never before. You need an ethical framework to help your company make the tough choices. A robust internal conscience that considers people, planet and profit will help your company make the right choices.

Happily, however, you can design your company to have a sophisticated conscience that will help you make the tough decisions. Thirty-one states now have constituency statutes, which expressly authorize the board of directors to consider the interests of the company’s other stakeholders — employees, vendors, communities, society and the environment — in addition to shareholders. Seven states allow businesses to voluntarily opt into a new corporate form, the benefit corporation, which requires such for-profit corporations, including Patagonia, to operate in a manner that provides a material positive impact on society and the environment.

In addition, many conventional companies now recognize that the fiduciary duties of management to stockholders are only a subset of a code of conduct and a system of values that extends to all stakeholders. In the early 2000s, a movement called conscious capitalism emerged to evolve a more enlightened form of capitalism. At the core of this movement is the recognition that a company is not the traditional duality of company and stockholders—but rather a complex, interdependent ecosystem comprising the business and all of its stakeholders. Companies that follow the tenets of conscious capitalism, such as Whole Foods Market, have made the value systems by which they conduct their business with all their stakeholders the core driver of their conscience.

You can endow your business with a sophisticated internal probity to help you preserve and protect the enterprise value that you have worked so hard to create.

John Montgomery is the author of Great from the Start: How Conscious Corporations Attract Success(2012). He is the founder of Montgomery & Hansen, LLP, a Silicon Valley based corporate law firm as well as Startworks, a technology incubator.

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

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