A Startup’s Guide to Business Ethics and Social Responsibility

Everyone remembers learning about ethics and morals in school — they’re the building blocks of humanity. Yet “ethical” is one of those terms that’s defined and interpreted in so many colors and flavors that it can be difficult to pin down exactly what it means, especially when used in the context of business practice where financial gain has a tendency to convolute values and a company’s moral compass. As Enron, Bernie Madoff, and the Lehman Brothers have shown, it’s a slippery slope. 

Business ethics are not something you need to start worrying about when your company reaches a certain size; they need to be sewn into the fabric of your startup from the get-go. 

As such, ethical values are the building blocks of any startup. They can be critical in determining how a company deals with certain situations and how it handles internal and external issues. Values help business leaders stay aware of temptations and prevent lapses as the business grows. 

We’ll stop here and spare you from a philosophical lecture that might take you back to the Business Ethics 101 course you took freshman year — you get the point, it’s important. Instead, we’ll discuss the difference between business ethics and social responsibility, how to apply these practices to your startup, unique examples of companies that have done it best, and ways you can give back when you’re just getting off the ground. 

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Business Ethics vs. Social Responsibility

Vivek Wadhwa, Distinguished Fellow & Adjunct Professor at Carnegie Mellon University Silicon Valley, said it well: “The lessons (in business ethics) are the same for startup tech businesses as they are for investment banks and for third-world economies.”

While business ethics and social responsibility go hand-in-hand, there’s often confusion about the distinction between the two, especially because there are no widely accepted definitions for both terms. Corporate social responsibility (often referred to as CSR), in particular, is used in many different ways by many different groups. 

For the purposes of this guide, here’s what you need to know when deciding how you’ll integrate socially responsible practices into your startup. 

Business ethics is the very broad field of study concerning ethical decision-making in commercial contexts. In short, it’s concerned with not just the social obligations of a business, but also the obligations to its employees, customers, suppliers, and competitors. Business ethics is most commonly discussed in the following areas:

  • Fraud and manipulation
  • Sustainability
  • Diversity and inclusion
  • Exploitation
  • Donations and contributions

Social responsibility, while under the umbrella of business ethics, focuses more narrowly on a company’s social obligations. Social responsibility is about the extent to which companies owe something to “society at large” or feel the duty to give back — i.e. to those who are not directly involved with the business.

Why Do Business Ethics and Social Responsibility Matter for Startups?

Now more than ever, how your business conducts itself, ethically speaking, can change the trajectory of success. Here are four reasons why it’s important.

1. Recruiting Top Talent

Business success is largely dependent on the ability to attract top talent, but finding good employees means more than just offering a competitive salary. This is especially true when you consider the generation of talent that will soon dominate the professional world — Millennials.

millennial considering social responsibility

A Bentley University study found that a whopping 86 percent of Millennials consider it a priority to work for a business that conducts itself ethically and responsibly. In fact, most Millennials would be willing to take a considerable pay cut to work for such a business.

2. Employee Engagement

When you include your employees in larger processes and vision planning, such as designing and implementing a socially responsible program for your company, they’ll feel like they’re part of something bigger and more important than their day to day, and therefore they’ll be more engaged.

3. Competitive Edge 

When it comes to business ethics and social responsibility, another factor to consider is the compounding nature of competition. As more businesses adopt and invest in ethical practices, those that do not will look worse by comparison. 

4. It Can Build or Break a Brand

Adopting ethical business practices and implementing social responsibility are good ways to help build your brand, especially when you’re just starting out. While, you should never implement these practices solely for marketing purposes — more on this in the “What to Avoid” chapter — doing so can help create co-branding and marketing opportunities.

On the flip side, scandals or breaches in ethics can be hard to shake and can directly impact your hiring and revenue pipeline, and therefore your company’s ability to succeed. These days, a company’s history, public messages, and current staff are all publicly available information, and all it takes is a quick Google search for a prospective employee to find it. For this reason alone, company ethics are more important than they’ve ever been.  

How Startups Can Implement Business Ethics

Putting a strong ethical framework in place is key to making sure your startup doesn’t find itself in hot water down the road. 

Of course, that’s easier said than done. Here are nine tangible ways startup leaders can instill an ethical framework for their company from the ground up, and why it’s essential to do this earlier than later.

diagram of an ethical framework

1. Define your core values early on.

Your core values are the heart and soul of your business, informing things like hiring practices, business operations, company culture, and business strategy. 

By filtering every business decision you make through your core values, you’ll create symbiosis between your strategic vision, people, and processes. 

2. Integrate ethics into your hiring process. 

One way to focus on business ethics early on is to integrate it into your hiring process. By being selective about who gets to join your company, you can save time, money, and conflict over tough choices later on.

In the interview process, ask questions that elicit a candidate’s decision-making tendencies. 

3. Create a culture of openness and welcome dissent. 

Having different points of view and internal constructive critics are a startup leader’s best friends. Too often, founders are blinded by their own enthusiasm for their creative vision and surround themselves with “yes-man” employees who don’t challenge their practices. 

When this happens, founders can quickly fall out of touch with reality and lose their ethical bearings. Creating a culture of openness is a good way to establish internal checks and balances.  

4. Lead by example.

As we all know, actions speak louder than words. Similarly, leadership behaviors demonstrate company culture. Practicing what you preach can help your team identify optimal behavior habits. 

5. Craft something everyone can own. 

Defining core values is not enough. It’s critical that startups craft values that everyone can own. Not only can this help attract good employees early on but it encourages your team to really own and practice the company values on a daily basis.

6. Learn from immediate peers or distant models

Many founders make the mistake in thinking that the unique quality of their business means that their leadership values are also unique. In doing so, they fail to grow. 

In fact, successful icons like Steve Jobs and Michal Dell patterned themselves after other brilliant founders. 

7. Know your limits and recognize your own fallibility as a leader 

While it can be difficult to imagine the day you’re succeeded as the leader of your startup, if you have plans for large growth in the future, it’s important to prepare for the day when you’ll no longer be the lone day-to-day internal boss and primary external ambassador. 

Know your limits and when it’s time to pass the torch. 

8. Remember that institutional character is fragile 

Egomaniacal moves, personal grandiosity, greed, and deception create impressions that are hard to erase. Once you cross that line it can be nearly impossible to regain good standing in the public eye. 

9. Establish an independent board

Because venture capital firms often demand a majority of board seats as a condition for their investments, conflicts inevitably arise. In many cases, the board serves the needs of VCs and management, rather than those of the company itself. 

This can mean a loss of independent and objective voices that alert startup founders to ethical red flags. Establishing an independent board means that members have an obligation to act in the interest of the company.

Proof That Business Ethics Can Set a Company Apart

Sticking to your values isn’t always easy, but it can be the difference in setting you apart from your competition. Not to mention, companies with a strong sense of purpose and values often achieve the greatest success. 

Example 1:

Take Costco, for example. Wall Street analysts have long chastised Costco’s CEO, Jim Sinegal, for paying high wages and keeping employees around long-term, because this results in higher benefits costs. 

But Sinegal stands by his belief that keeping good employees is strategic for Costco’s long-term success and growth, and this works out in the company’s favor. Costco’s per-employee sales are considerably higher than those of competitors like Wal-Mart and Target. Not to mention, customer service at the stores is phenomenal and fast and Costco continues to expand, both in number of warehouses and in products and services for business and consumer customers. 

Example 2:

Another stellar example of business ethics in practice is Ultimate Software. For the past four years, Ultimate Software has been awarded the #1 spot on Fortune’s Best Workplaces in Technology list. 

Ultimate Software is another shining star of a company that puts their employees first. They continue to offer 100 percent healthcare coverage for their employees and their dependents. The company also gives its employees an all-expenses paid vacation every two years.

Example 3: 

Maybe you’re a startup that doesn’t have the luxury of offering salary incentives or covering healthcare benefits, but maybe you can focus your efforts where your supply chain comes from or the overall working conditions of your employees. 

Outerwear clothing company, Patagonia, is a leading example of a business that follows ethical sourcing and manufacturing.

Since 1994, they’ve used used organically grown cotton instead of pesticide-heavy cotton crops for all of their products. Patagonia also altered its entire supply chain to ensure environmentally friendly, safe working conditions.

Earlier this year, Patagonia won the United Nations Champion of the Earth award, a top environmental honor, for its entrepreneurial vision and thorough policies that place sustainability at the center of their business.

How to Prioritize Social Responsibility

Because one of the biggest challenges startups face is simply getting off the ground, carving out the resources to give back can seem like a daunting prospect or even a luxury reserved for larger corporations. But that doesn’t have to be the case.

However, before you start putting together plans for how your startup will integrate social responsibility into its core values, you need to learn how to prioritize it. Even startups that have access to the right assets can find the prioritization of social responsibility a challenge. 

clipboard with questions to help startups prioritize social responsibility

Answering these questions will give startups a sense of the social issue(s) you want to invest in and how your team can make unique contributions.

  1. In what ways does your business impact — both positively and negatively — its employees, the environment, the local community, society, customers, and suppliers?
  2. What are your business’ core strengths?
  3. What are the pressing needs in the major communities where your business operates? And how do they intersect with your business strengths?
  4. Are competitors practicing responsible business? If so, how can you differentiate yourself?
  5. What resources are available to execute socially responsible strategies, from manpower to product to funding?

Startup Social Responsibility: How to Give Back When You’re Getting Off the Ground

Startups often experience the temptation with social responsibility to single-handedly change the world. Not only is this unrealistic, but it can take away from the ways you can actually make a significant contribution.

For startups that don’t have a corporate-sized budget or even the resources to allocate towards social responsibility, oftentimes the most valuable and accessible role you can play is that of the facilitator. 

In other words, you can make a big impact by simply using the operational skills, communication, and organizational savvy that you would in your daily business conduct to connect charities, people, or organizations that are already doing good with those you want to help. 

Here are eight ways you can give back while on a startup budget.

1. Cultivate a culture committed to social change 

Social responsibility can be as simple as looking internally. As startups have multiplied and flourished, so have stories of “startup culture,” in which people have flexible hours, healthy catered lunches, permission to bring their dogs to work, and a wide variety of perks that fall outside traditional workspace norms. 

Sure, this has become a bit of a stereotype, but what this does is cultivate a strong culture where empathy and awareness of social impacts are top of mind. This can be a powerful tool for building a commitment to other aspects of social responsibility later on down the line.

2. Look at what people need (on a small scale)

Sometimes, just figuring out where to even get started can feel overwhelming, especially when there are endless ways to get involved in social responsibility. 

Like we said, it’s impossible to single-handedly change the world. Instead look for ways to make your community a better place or look for what your community needs on a small scale. Then you can start to build momentum and create more long-term plans. 

3. Start small and ask for help 

Social responsibility doesn’t need to be jaw dropping in scope. In fact, a little can go a long way. Maybe you want to put together a charity event to raise money for a local organization. This is a great opportunity to lean on the larger community.

Get a local venue to donate its space for an event, a local restaurant to contribute food, local musicians to provide entertainment, and people from your business to help with logistics. All that takes is time.

4. Lay the groundwork for a sustainable supply chain

These days, more and more customers are asking questions like: Where does this product come from? What environmental burden results from the manufacturing of this product? Under what working conditions was this product developed? 

If you’re a product-oriented startup, knowing the ins and outs of your manufacturing process, understanding the business practices of partners and suppliers, and deciding how to influence them is extremely important for startups who want to be socially responsible.

5. Get your board of directors on board

Your board and investors might seem like unlikely allies in building socially responsible initiatives. After all, the individuals holding the purse strings want to understand the business impacts and it’s their job to be laser-focused on returns. 

However, if you can make a clear case for how giving back benefits your bottom line, you might just get their blessing — and maybe even a budget.

6. Sustaining enthusiasm among employees

This is critical to ensuring the longevity of any socially responsible initiative.

When initiating social responsibility programs, give your employees a voice by involving them in the decision-making process. You might even try creating an internal team to spearhead efforts and choose a cause that everyone can get behind. Contributing to something your employees are passionate about goes back to the larger benefit of driving engagement and success. 

7. Give volunteered time off (VTO)

Being socially responsible doesn’t have to cost money. Instead, you can offer up time.

Just like paid time off, the idea here is to give employees paid days off to provide volunteer services. Ideally, the organization that the employee is volunteering for is their choice or you might decide to collectively choose an organization and take a company-wide VTO day. 

8. Discuss volunteer opportunities as a team 

This can be as simple as creating an office Slack channel dedicated to informing other employees about volunteer opportunities in your community. Maybe there are people on your team who’d be interested in attending a weekend beach clean up or a drive to raise food and clothing donations for the homeless. 

Start the discussion around these kinds of opportunities or put someone in charge of running the channel and sending out invites. 

Proof Social Responsibility Can Set a Startup Apart

social responsibility statistics

Example 1:

Edelman’s Goodpurpose study found that more than half of consumers said that if price and quality were equal, a brand’s social purpose would be the most important factor when they’re purchasing something. 

Pressure from purpose-driven consumers and shifting societal norms is forcing companies to consider the social and environmental dimensions of their products and operations as core business decisions.

Example 2:

Nielsen’s Global Corporate Sustainability Report found that 66 percent of global consumers are willing to pay more for sustainable brands. It also found that Millennials were the most likely demographic to vote with their wallets — 73 percent of global Millennials are willing to pay extra for sustainable offerings.

Example 3:

A 2017 Cone Communications study about CSR found that companies must now share not only what they stand for, but what they stand up for. Some key takeaways from the study revealed:

  • 63 percent of American consumers were looking to businesses to take the lead on social and environmental change.
  • 78 percent of people wanted companies to address social justice issues.
  • 76 percent of those surveyed said they would decline to do business with a company if it held views and supported issues that conflicted with their beliefs.
Businesses who practice social responsibility

What to Avoid When Creating a Socially Responsible Business Model

If done correctly, social responsibility is a great way to set your startup apart from the masses and practice good business ethics. Unfortunately, there are a lot of companies that have abused CSR initiatives for their own gain, and while there are still positive outcomes, they’re not always genuine. 

Simply put, if you can’t be authentic about social initiatives, don’t engage in them.

One of the best ways to avoid this ethical dilemma is to weave social responsibility initiatives into your core values. Core values will always be the north star that guides your startup. 

Here are five things you should avoid at all costs when creating a socially responsible business model. 

1. Using CSR to accrue “moral credits”

A study of Fortune 500 companies found that firms that engage in socially responsible behavior towards their stakeholders are subsequently more likely to engage in socially irresponsible behavior towards their same stakeholders at a later juncture.

While the majority of companies don’t set out to behave irresponsibly, it does happen. Don’t be that company that establishes a CSR agenda in an effort to accrue moral credits to keep the spotlight away from irresponsible behavior later on down the line. 

2. Using company initiatives to hide or avoid a controversy

Similarly, if your company finds itself in a controversy, don’t deflect to socially responsible programs in an effort to brush any wrongdoings or bad publicity under the rug. 

3. Charitable efforts that aren’t related to your core business focus or ethical standards  

Instead of blindly sending money to a completely unrelated organization, find a nonprofit that your startup believes in or a project in your community that aligns with your core values.

4. Using CSR opportunities solely for marketing purposes

Early on in the guide, we talked about social responsibility as a way to help build your brand when getting off the ground. While co-branding and marketing opportunities can be perks of establishing a CSR program, you should never engage in initiatives for the sole purpose of marketing. 

More often than not, this will backfire for your business. Instead of employing a one-time act, adopt long-term practices.

5. Don’t make decisions about social responsibility behind closed doors

Making these types of decisions behind closed doors will leave people (especially your employees) wondering if there are strings attached to these initiatives and if donations are actually going where you say they are.

Instead, engage your employees, so they feel like they have a voice and be transparent with the public about your efforts.

The bottom line: once you start compromising your values for short-term gains, there is no turning back, and in today’s climate, a company’s ethics and how a business executes social responsibility matter more than they did a few decades ago. 

Not only do workers place more emphasis on the values of their employers, but if you want your startup to remain competitive and capable of attracting top talent, startup directors and officers should spend time defining, perfecting and promoting your company’s ethical behavior early on.

Of course, social responsibility is just once consideration for startups. To learn more about how to cover your bases, Embroker has you covered with their Startup Program, including everything from how to choose the right insurance policy to staying up-to-date on trends in the VC ecosystem.