From the August 1996 issue of Entrepreneur

Embedded in any decision between what will soothe your soul and what will boost your profitability exists a moment in which many an ethics-conscious entrepreneur has dwelled. It's the space where, before your principles kick in, all the temptations of avarice beckon.

For Ralph Warner, co-founder and owner of Nolo Press in Berkeley, California, that moment occurred when, on the eve of shipping out his self-help law books, a major tax overhaul was announced, suddenly rendering the books' contents moot. Warner's decision: whether to feign ignorance and send the books out anyway, or scrap the books and start over, at great expense.

"In the short run, sure, it's cheaper to cut corners, to go against your principles," says Warner. "We're all human." And it's our nature to flirt with the prospect of compromising our principles. But then-if you're like Warner, at least-the moment passes and you muster up the strength to back off.

Warner's strength lies in his perspective: This type of decision, he realizes, is not a pain but a privilege of entrepreneurship. In the late '60s, when he worked as a legal aid attorney, Warner wasn't allowed the luxury of making decisions based on his principles. He had to turn away scores of middle-income people who weren't poor enough to qualify for federally funded legal services, yet who were unable to afford private attorneys. Grieved by having to deny a woman seeking a restraining order against her abusive husband, angered by the shortcomings of the legal system, Warner was finally incensed enough to start Nolo Press in 1971. "I saw, frankly, that [turning needy people away] was a crappy thing to do," he says. "And it occurred even to me, someone with no business background, that there must be a market here."

Even then, Warner was adept at mastering the relationship between principles and profits: Profits, clearly, were the means and principles the end. "I thought if you could actually put out a product that people wanted to buy and that could change things," he reasons, "that would be much more powerful than starting a nonprofit [organization] and just lecturing the world."

Choose Or Lose

Warner's mission sounds simple enough. While maintaining profitability year after year, he says, "I've been trying to build a life as well as a business, to do something that, in my own heart, I'm proud of doing."

"A lot of entrepreneurial businesses were started not because people wanted to make money but because they had a larger purpose in mind," says Alfred Marcus, a professor of strategic management at the University of Minnesota in Minneapolis and author of Business and Society: Strategy Ethics in the Global Economy (Irwin Press).

And yet, in reality, "doing the right thing is plenty complicated," says Ronald Berenbeim, senior research associate of The Conference Board in New York City, a business membership and research organization.

In fact, there's perhaps no business feat as tricky as attempting to combine principles and profits. This Solomonic quest has led many entrepreneurs down a road lined with alternating pockets of perfect accord and absolute incompatibility. "Entrepreneurs generate an interesting set of ethical expectations and questions because their businesses tend to be more dynamic and less bureaucratized [than big companies]," says Berenbeim. "In a small company, the standards depend almost entirely on the entrepreneur's personality, beliefs and sense of self. That exerts pressure to compromise principles [to reach] business objectives. But, by the same token, no one has more freedom to refuse to [compromise] than an entrepreneur."

Choosing to enter entrepreneurship through this narrow gate is a series of choices, the first being a personal one: to be principled as a human being, not just as an entrepreneur. "As if there's a difference," scoffs Dennis Bakke, co-founder and CEO of Applied Energy Services Corp. (AES), an electricity-generating company in Arlington, Virginia. "You're the same person at home, at church and at work, and you carry the same principles and biases to each of those places. My partner and I took the principles we already held and brought them into this sector of our lives as well. I think that's the whole idea."

As obvious as that may seem, our top academicians and business leaders have only recently grasped it. "In recent years, we've seen a growing belief by people-albeit still not a majority of people by any means-that there is that little bit of space for purely ethical decision-making, apart from simply risk avoidance," says Berenbeim. "Historically, [principles] have been a personal concern; the challenge was to find a space in business activity to discuss [them]. We felt we could compartmentalize our lives, but we're seeing that we increasingly can't. And we don't even want to."

Looking For Action

Social responsibility has become such a selling point, it's given more press to an industry that's been around since the '70s: social auditors. These professionals analyze a business, sniffing out areas of questionable ethics before the media-or the competition-can expose them. In an age when some companies spend 10 times more on environmental advertising than on environmental programs, the country's 15 social auditing firms "determine whether companies are really as good as they're claiming to be," says John Tepper Marlin, an economist and social auditor in New York City and a pioneer in the field.

It is typical of the '90s that there is so much talk about principles and profits and yet so little fruit. Is the latest surge of interest a do-good, or just a feel-good, movement? Fortunately and unfortunately, the hope may lie in the fact that this time around, there are tangible rewards for those who hold to their principles. The latest conventional wisdom, which questions whether we must choose between principles and profits at all, sprouts partly from our natural desire to have it all. Doing good, experts suggest, can be good for you, too.

"Ethical systems can't be copied or re-engineered. They are unique to a company and therefore add value, while the company's other advantages may ultimately erode," says Berenbeim.

"With so much competition, what separates one company from the next is its personal integrity," says Barbara Spyridon Pope, owner of The Pope Group, a human resources consulting firm in Bethesda, Maryland.

"Whether a company has Christian or environmental values, or whatever the strong values may be, that becomes an important part of its success," adds Marcus. "Strong values get people to cohere; they create momentum for moving forward; they create consistency and harmony among employees as to what the company is about."

In fact, there may be statistical as well as anecdotal evidence that principles boost your bottom line. Of the 13 most significant studies done to date on the correlation between social responsibility and financial performance, seven deemed the relationship positive, while only three found a negative effect, Marcus says.

But those pursuing higher principles solely for economic gain may get burned. One study Marcus analyzed found the relationship between social responsibility and subsequent financial performance "was positive but not statistically significant." Though this may disappoint those who want to have their principles and eat off them, too, it somehow seems like a sound conclusion. "From a theological point of view, it's kind of satisfying," says Marcus. "It suggests that it doesn't pay to be bad, but there's not necessarily an economic payoff to being good. You have to do it because of the intrinsic merit, not because of any payoff. If there was a payoff, [that would raise] questions of motives."

Indeed, the very idea of analyzing studies and then calculating risks and benefits before deciding whether to be principled or not smacks of suspect motives. "Economists are forever building models, but we have to understand what a human being is," says Marcus. "I think pleasure to most people is not material gratification. People have consciences and get pleasure out of doing what's right."

Containing Costs

It's when the hard-line choices arise, however, that small-business owners come to grips with what they're really made of. For each of us, there's that thin line of compromise we occasionally stumble across, when we recognize the gap between what we want to do and what we actually end up doing. "I've never seen the dichotomy over the long term between running a principled business and a profitable one," says Warner. "But I hope that if I did see the dichotomy, I'd still choose to run the principled business."

"It's possible an entrepreneur's moral choices may cost the company money," says social auditor Marlin. "If that weren't true, there would be nothing particularly wonderful about people who make moral choices. You do it because you feel it ought to be done that way. How it will affect the bottom line [is secondary]."

One effect principles could have on the bottom line is sparking additional regulation-something no small-business owner wants. According to a recent Coopers & Lybrand survey of the fastest-growing U.S. businesses, the number-one barrier to business growth continues to be legislative or regulatory pressures, mentioned by 53 percent of the respondents. At last year's White House Conference on Small Business, the increasing encumbrance of federal regulation and paperwork ranked second only to taxes among entrepreneurs' top concerns. And with Congress' recent passage of the Small Business Regulatory Enforcement Fairness Act, requiring federal agencies to weigh the impact their rules have on small business and attempt to reduce the burden, are entrepreneurs willing to rock the boat?

Though Bennie Thayer, president and CEO of the National Association for the Self Employed, has been fighting for regulatory relief for more than a decade, he isn't threatened by the prospect of a conflict between ethics and regulation. "I don't think small businesses are out to avoid conforming to regulations," says Thayer. "They're simply saying, 'Reduce the regulations on us, and then give us regulations we can understand and comply with.' Given that, the small-business owner wants to do the right thing."

Adding It Up

With an issue so nebulous it befuddles even trained statisticians, how can an entrepreneur possibly tackle the task of running a principled company? Even if you sincerely want to, it's difficult to figure out how to take the first step.

"Some believe a policy is not legitimate unless it's economic or quantifiable," says entrepreneur Bakke. "But I'm not going to give up on the important stuff just because it's something you can't get your calculator around. Anyone in business knows the world is dynamic, complex. And you can't have some formula that spits out an easy ratio for making decisions."

While his company has hundreds of strategies and economic goals, Bakke says, "the one thing that really pulls us together is our central, shared principles. We put those at the top of our list of priorities." To harness the slippery idea of an ethics policy, Bakke has devised four key principles for his company:

1. Integrity. Bakke considers the word not just a synonym for honesty, but representative of its Latin root, integra, which means "wholeness." "It's breaking down barriers between public and private life," he says. "You don't have a private life where you do whatever you want, and then act differently at work."

Bakke holds to this policy with simultaneous firmness and flexibility. "The idea that we're going to try to live with integrity does not change from day to day," he says, "but our interpretation of integrity can change because we constantly gain understanding."

2. Fairness. Bakke defines fairness as "justice" rather than "sameness." "You've probably heard the saying 'No one gets special treatment around here,' " he explains. "I believe it's the other way around: Everyone gets special treatment. That's a radical notion in a world used to organizational charts, human resources departments and other systems that treat all people the same."

3. Social responsibility. AES has planted trees in Guatemala and built schools in Pakistan, but Bakke's main definition of social responsibility revolves around being a good steward of his company's mission. "The most socially responsible thing a corporation can do is to do a superb job of meeting a need in society," he says.

4. Fun. Charging that workers have been "dehumanized," Bakke says he would "like to change that dramatically and make the workplace fun again, giving people control over their lives."

Key to Bakke's success with his four principles is acknowledging upfront that he's bound to miss the target. "We don't hold ourselves up as holier than thou," he says. "We can't live up to these principles all the time, yet we still think it's better to hold them up and try to live them out as best we can."

Passing Trend Or Future Reality?

The future of the profits-and-principles relationship remains, predictably, ambiguous. "I don't want to be cynical, but I don't think the world has changed much since the '80s," says Bakke. "Maybe there's more talk, more political correctness. [Principles are] the 'in' thing."

Perhaps people are simply getting savvier at building the veneer over their wicked hearts. Yet admitting he's seen some change over the past five years, Bakke permits himself guarded optimism. "I would love to prove [entrepreneurs] can do this and still survive economically," he says. "I hope thousands of other people believe the same. And that may be happening a little bit. But people have to change their whole set of principles across the board. It's not just a business thing."

The good news is, the line becomes a bit more distinct when you're defining it from the inside taking action than from the outside looking in. "The more you do it right, the more likely you are to keep doing it right," says Warner. "The next time you do [the right thing], it is much easier."

It is over the long term, Warner believes, that you start to reap the benefits. "In the legal reform community, a lot of the things we talked about 25 years ago are starting to come to pass," he says. "Most of us want our lives to amount to something. It's easy to be cynical, but at the end of the day, you'd like to say 'I did good work.' "

And what of profits? "It's not that easy to make money in this world, so if you're doing things for good reasons, I see nothing wrong with telling your customers that and having them respect you and buy more of your products," Warner says. "In a way, maybe it's easier to run a principled business now because consumers are more likely to reward you. The premium on running an honest business is higher because people are making their decisions that way. So maybe there's not such a big war here in the long run after all."

Contact Sources

AES Corp., 1001 N. 19th St., Arlington, VA 22209, (703) 522-0073;

The Conference Board, 845 Third Ave., New York, NY 10022-6601, (212) 339-0352;

John Tepper Marlin, 360 W. 22nd St., New York, NY 10011, (212) 669-7307;

National Association for the Self Employed, 1023 15th St. N.W., #1200, Washington, DC 20005-2600, (800) 232-NASE;

Nolo Press, 950 Parker St., Berkeley, CA 94710, (800) 955-4775;

The Pope Group, 5011 Wandot Ct., Bethesda, MD 20816, (301) 229-1748.