Most investment decisions are based on the concept of risk; as the risk increases there needs to be a corresponding increase in the potential returns to justify the investment. It would not be a rational decision to invest in an extremely risky venture unless there is the possibility of an extraordinarily large return.
Risk assessments are generally based on economic factors, such as customer preferences, competing products, interest rates, unemployment levels, and the direction of the stock market. Clearly these external forces have an impact on risk and the possibility that a business venture will succeed.
Rather than focusing on external forces, however, investors would be better advised to base their investment decisions on character. Character matters; the success of any business venture is primarily determined by the character of the people involved. The impact of character and how it affects economic success can be demonstrated by examining the character of individual leaders, the character of organizations, and the character of a society.
At the individual level, leaders who have high moral character can be trusted; they are great transformational leaders who inspire confidence, they treat people with respect, and they motivate followers with an inspired vision. There is no substitute for high moral character in a leader. Positive character attributes are consistently selected as the most cherished virtues of a friend, a spouse, a coworker, a supervisor, a politician, or a neighbor. When asked to rank the most important attributes of any of these people, the highest ranks consistently go to such traits as honesty, integrity, trustworthiness, or loyalty. Companies that are led by leaders who have high moral character have a significant competitive advantage and are much more likely to succeed because they inspire excellence and trust in their followers.
At the organizational level, ethical business practices create the same competitive advantage. Companies that engage in deceptive advertising lose repeat customers. Companies that have unfair human resource practices lose employees due to high absenteeism and turnover. When employees are treated unfairly, they respond with grievances, strikes, and work stoppages that waste time and reduce productivity. The most productive labor forces are the ones where employees are highly trained, they work well together, they resolve problems, they look for innovative ways to perform their work, and they are willing to go out of their way when necessary to benefit the company. Effective companies provide useful products and services and make certain that they are fair with the public. Investors ought to invest in companies that have ethical practices since they have the greatest probability of achieving above average returns and long-term profits.
At the national level, business ventures depend on the character of the people and the policies of the society. Investors ought to rely more the character of the people than economic indicators when deciding where to invest their money. The quality of life in any society depends on the character of its people, its institutions, and its policies. Effective societies have people who take care of themselves and serve the common good. No amount of public assistance will overcome an idle society. Poverty cannot be eliminated by increasing the minimum wage or providing government housing. Even free healthcare does little to improve the health of people who abuse alcohol and drugs and who refuse to exercise or eat well.
Natural disasters have no regard for character—ethical behavior doesn’t prevent floods or hurricanes; but character certainly impacts how people respond after a disaster. While some communities work together after a disaster to clear the debris and rebuild their lives, other communities struggle for years and never fully recover in spite of substantial outside assistance.
The economic health of a country is closely tied to the character of its people. When fraud and embezzlement are tolerated, economic transactions are hampered by a lack of trust. Economic systems eventually collapse when people are more concerned about getting their share of undeserved rewards rather than eliminating fraudulent situations. Gambling tends to perpetuate the myth of getting something for nothing. As gambling increases the quality of live generally decreases since gambling simply redistributes money, at a cost, without contributing useful products or services.
The world has seen some remarkable illustrations of the benefits of high moral character. In 1965, when Singapore became an independent nation, it was described as a filthy Asian city. Under the leadership of Lee Kuan Yew it became the financial hub of the Asian-Pacific rim. During the three decades of his leadership, Prime Minister Yew was committed to eliminating fraud and establishing fair government policies. Many international companies have established divisions in Singapore because the character of the people and the government make them feel safe.
More recently, Indonesia has made significant economic and political progress under the leadership of SusiloBambangYudhoyono, (SBY), a devout Muslim who is committed to eliminating fraud and favoritism in government. Although widespread corruption still exists, SBY has made significant inroads in reducing political corruption and religious hatred. As a result, the economy of Indonesia grew 6.5% in 2011 and religious conflicts have diminished; it is moving in the right direction.
Economic conditions will always have an impact on risk; but character is a much more important consideration when making investment decisions. People of high moral character have a significant competitive advantage when it comes to leading a company, building a society, or achieving long-term returns. $