CHAPTER 11
Ethical Leadership
SUMMARY
This chapter demonstrates the importance of leadership in creating an ethical culture. We first provide a
definition of ethical leadership and explore its relationship to ethical decision making. Next,
requirements of ethical leadership are provided, followed by how ethical leadership benefits the
company. The relationship between ethical leadership and organizational culture is examined, as well as
ways ethical leaders can manage conflict. Managing conflict appropriately identifies potential issues
and reinforces a firm’s ethical climate. An important part of leadership is the implementation of
employee-centered leadership. Employee-centered leadership recognizes that while not everyone will
be a manager, every employee can and should practice leadership skills to support ethical decision
making. An essential component of employee-centered leadership is communication. Without
communication all attempts at maintaining an ethical culture fail. We describe common ethical
leadership styles proven effective in building an ethical corporate culture. Finally, we conclude with a
model to address ethical issues and misconduct disasters. Leaders can use this model to guide the firm’s
ethical culture, detect ethical risk areas before they become problematic, and develop methods of
recovery if an unethical decision or disaster occurs.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
This Ethical Dilemma focuses on communication conflict management, as well as training and
developing staff to be able to complete the goals of the firm. Stacy was hired because of her strong skill
set and quality of education. Once Stacy was hired, she received little guidance and training and was set
up for failure. By being given a heavy workload and scrutinized by one of the partners, Doug, Stacy
became dissatisfied with the treatment and unreasonable expectations toward employees at Dewey,
Cheatum, and Howe. Stacy is unsure how to present the firm in a positive and favorable manner.
There are several leadership problems occurring at Dewey, Cheatum, and Howe. First, management is
not training and developing staff to successfully complete their work. Stacy was not informed about the
company’s policy against working off the clock. Also, since her supervisor knew she was working off
the clock, the supervisor should have informed Stacy of the firm’s policy. Second, Doug reprimands
Stacy without trying to improve the situation or her skill set so that she is able to successfully handle
similar situations in the future. He displays a competing style of conflict management, and his
interactions with Stacy are hostile and his expectations unrealistic. Third, after the partners received the
psychologist’s report, instead of collaborating with employees and attempting to improve the situation,
they instructed staff to falsely display the firm in a positive and favorable manner with new hires. For
these reasons, there is little hope that the problems at the firm will improve. In fact, the partners are all
but guaranteeing that new hires will soon be in the same situation as Stacy, if not worse.
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63 Chapter 11: Ethical Leadership
LECTURE OUTLINE
I. Defining Ethical Leadership
A. Leadership is the ability or authority to guide and direct others toward a goal.
B. Ethical leadership creates an ethical culture.
1. If top leaders fail to express desired ethical behaviors and goals, a corporate culture
evolves on its own to reflect the values and norms of the company.
C. Leadership has a significant impact on ethical decision making because leaders have the
power to motivate others and enforce the organization’s norms, policies, and viewpoints.
1. Ethical leadership has a positive relationship with the organizational citizenship of
employees and a negative relationship with deviance, or misconduct.
2. All responsible employees must engage in ethical decision making and exhibit ethical
leadership characteristics.
D. Many CEOs articulate the firm’s core values but fail to exhibit ethical leadership.
1. Normative myopia occurs when managers overlook or stifle the importance of core
values in their business decisions.
a. This can lead to ethical blindness, or the propensity to rationalize an unethical
action or turn a blind eye to it.
b. Top managerial support for core values is therefore crucial to the acceptance and
implementation of core values within the organization.
2. A leader must have followers’ respect and also provide a standard of conduct.
3. Failure to demonstrate effective leadership qualities at the top creates the perspective
that managers either do not care about the company’s ethics program or they feel they
are above ethics and compliance requirements.
II. Requirements for Ethical Leadership
A. Ethical leadership skills develop through years of training, experience, and learning other
best practices of leadership.
1. Leadership qualities differ for each situation. Ethical leaders
a. Must model organizational values
b. Place what is best for the organization over their own interests
c. Train and develop employees throughout their careers
d. Establish reporting mechanisms
e. Understand employee values and perceptions
f. Recognize the limits of organizational rules and values
B. Ethical leaders never operate in a silo of decision making.
1. The strength of ethical leaders involves recognizing their own weaknesses and relying
on others to help them.
2. Ethical leaders encourage employees to reach their full potential and emphasize their
role as helping to create value for key stakeholders.important co-creators of value.
C. Ethical leadership is based on holistic thinking that embraces the complex and challenging
issues companies face on a daily basis.
D. Strong ethical leaders are those passionate about the organization and who act in the
organization’s best interests.
E. Ethical leadership is highly unlikely without a strong personal character.
F. Ethical leaders do not wait for ethical problems to arise.
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1. They anticipate, plan, and act proactively to avoid potential crises.identify potential
risks, emerging risks, and develop plans and processes to deal with them.
G. Ethical leaders must model the organization’s values.
1. If leaders do not actively serve as role models for the organization’s core values, then
those values become nothing more than lip service.
III. Benefits of Ethical Leadership
A. Ethical leadership has a direct impact on the corporate culture of the firm.
1. Ethical leaders communicate and monitor an organization’s values, ensuring that
employees are familiar with the company’s purpose and beliefs.
2. A firm is only as good as its employees, so instilling employees with a strong sense of
integrity is crucial to creating an ethical organization.
B. Ethical leadership can also lead to higher employee satisfaction and employee commitment.
C. Ethical leadership is a foundational requirement for impacting the long-term market
valuation of the firm.
1. There is a positive association between the ethical commitment of employees and a
firm’s valuation on the stock market.
2. Corporate social responsibility also impacts investors’ decisions. It is negatively related
to long-term ethical risks, and investors view risk as a factor when deciding whether to
invest in a firm.
3. Through the creation of favorable relationships with employees, customers, investors,
and regulators, ethical leaders create significant competitive advantages and value for
their companies.
IV. Ethical Leadership and Organizational Culture
A. Ethical leaders generally adopt one of two approaches to leadership:
1. A compliance-based approach emphasizes obedience to rules and regulations and sets
processes in place to ensure compliance.
a. Such an approach deters illegal conduct and stresses a culture of avoidance.
2. An integrity-based approach views ethics as an opportunity to implement core values.
a. Leaders who adopt an integrity-based approach take responsibility for the firm’s
ethical culture and hold employees accountable for practicing ethical behaviors and
core practices.
b. This type of approach not only empowers employees but helps them integrate
ethical values and principles espoused by the firm.
c. Finally, it helps firms understand when questionable practices are occurring and
where possible new ethical issues are arising.
B. Another way to classify leader types includes the following categories: the unethical leader,
the apathetic leader, and the ethical leader.
1. The unethical leader is usually egocentric and often does whatever it takes to achieve
the organization’s objectives and his/her own.
a. One type of unethical leader is the psychopathic leader, or corporate psychopath,
characterized as having superficial charm, no conscience, grandiose self-worth,
little or no empathy, and enjoyment in flouting the rules.
65 Chapter 11: Ethical Leadership
2. Apathetic leaders are not necessarily unethical, but they care little for ethics within the
company. This leader views ethics as relative and optional in a business context.
3. Ethical leaders include ethics at every operational level and stage of the decision
making process.
a. Ethical leaders must model the ethical values they promote.
b. Ethical leadership is a requirement for building a culture where ethical decisions
occur daily.
V. Managing Ethical Conflicts
A. Ethical business conflicts occur when there are two or more positions on an ethical
decision.
1. One benefit of ethical conflict is that it helps pinpoint ethical issues.
B. Ethical conflict issues will not be brought to management’s attention without effective
mechanisms for transparent communication.
C. Employees themselves should be trained to handle conflict situations.
1. Training employees to recognize and resolve conflict can prevent employees from
being the victims of questionable conduct such as bullying.
2. Employees can choose to approach the conflict issue in one of five ways: ignore the
issue, confront the other person, report the conflict to management, use a hotline, or
engage in external whistle-blowing.
D. Conflict Management Styles
1. Conflict management is categorized into five styles: competing, avoiding, accommodating,
collaborating, and compromising.
a. These styles are based on two dimensions:
i) Assertiveness is acting in one’s own best interests.
ii) Cooperativeness means working toward the best interests of the other person.
2. Competing conflict style of management: Leaders with a competing conflict management
style are highly assertive and not very cooperative.
a. Competing leaders believe in winning at any cost and measure success by how much the
other side loses.
b. They are usually not considered ethical because their conflict style makes them abusive
and less likely to consider the concerns of employees or other stakeholders.
3. Avoiding style of conflict management: Leaders with this approach are not effective because
they avoid conflict at any costs—even if it leads to misconduct.
a. They are uncooperative and non-assertive.
4. Accommodating style of conflict management: Leaders who adopt this style are highly
cooperative but non-assertive.
a. Individuals with this approach to conflict give in to the other side even if it means
sacrificing their own interests and values.
b. Sacrificing the company’s principles and values to accommodate the other side is a
serious breach of an ethical leader’s responsibility.
5. Compromising style of conflict management: Leaders who adopt this management style are
in between the assertiveness and cooperativeness dimensions.
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a. They believe the best approach to resolving conflicts is for each side to give something
up in order to gain something of value.
6. Collaborating style of conflict management: Leaders who adopt a collaborating style are
cooperative and assertive.
a. Rather than immediately compromising, collaborative leaders collaborate with others to
find a creative way to obtain a beneficial solution.
b. They seek a win-win solution that best meets the needs of all stakeholders.
7. Effective leaders can use different styles depending upon the situation.
8. Ethical leaders should also have the ability to identify the conflict management styles of
others.
9. Ethical leaders must know which style of conflict management to apply to a particular issue.
a. The ethical leader engages in ethical decision making to determine when to be
assertive, when to compromise, and when to accommodate or avoid.
VI. Ethical Leaders Empower Employees
A. Ethical leaders within an organization cannot make every ethical decision by themselves.
1. Many of the day-to-day decisions will not be made by management, but by employees.
B. Employee empowerment is an essential component of a values-based organizational
culture.
1. A values-based culture encourages employees to express concerns, bring up ethical
issues, and take a proactive approach toward resolving conflicts.
C. Ethical leadership training for both managers and employees is helpful.
1. Training for employees should include:
a. Ethical decision making
b. Teamwork
c. Conflict resolution skills
D. Employee empowerment is important in creating employee-centered ethical leadership.
1. Employees can contribute to the firm’s ethical culture by reporting questionable
activities, providing suggestions to improve the firm’s culture, and modeling the firm’s
values to new employees.
VII. Ethical Leadership Communication
A. The way an ethical leader communicates to employees has just as much impact on the
firm’s ethical culture.
B. Transparency and reporting are two major dimensions of ethical communication.
1. Ethical leaders create transparency by developing a culture where ethics is frequently
discussed.
2. Reporting is a two-way process in which the communicator communicates with
superiors and subordinates.
C. Reporting can be a formal or informal process.
1. How a leader communicates provides employees with a clear idea of company roles
and expectations.
a. Communication about ethics topics demonstrates that the leader cares enough
about the ethical culture and employee participation to communicate goals and
values among employees.
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b. Secondly, it increases employee morale.
c. Also, it shows employees they can bring up issues without fears of retaliation
d. Ethical communication creates leader-follower relationships that can lead to
mutually beneficial relationships between the firm and its employees.
D. Ethical Leadership Communication Skills
1. Ethical communication skills do not come easily. However, with proper training an
individual can learn how to effectively and ethically communicate with other
stakeholders.
2. Organizational communication is separated into four categories:
a. Interpersonal communication
b. Small group communication
c. Nonverbal communication
d. Listening
3. Interpersonal communication is the most well-known form of communication and
occurs when two or more people interact with one another.
a. It provides an intimate opportunity for the ethical leader to coach employees when
potential ethical issues arise.
b. It is often difficult for an employee to communicate to a superior due to differences
in power status.
i) An ethical leader must work to reassure employees by balancing the
interests of all relevant stakeholders.
c. Collaboration and assessing the issue are good approaches to ethical interpersonal
communication.
4. Small group communication is growing in organizations and is becoming increasingly
important to ethical decision making.
a. Today many organizational decisions are made in teams, and these decisions
impact the ethical success of the firm.
b. Small groups can increase collaboration and generate a variety of different
perspectives and opinions on a particular issue.
c. Engaging in repetitive or routine decision making can cause small groups to
overlook certain ethical issues.
d. Groupthink occurs when one or more group members feel pressured to conform to the
group’s decision even if they personally disagree.
e. Group polarization refers to the fact that a group is more likely to move toward a more
extreme position than the group members might have done individually.
f. However, if members are encouraged to speak up and create checks and balances in the
team, then they are better able to hold other members accountable.
i) The diversity of opinions and discussions can result in better decisions.
ii) To ensure that group members are empowered to contribute, everyone should be
familiar with the firm’s ethical values and principles, trained in ethical
communication techniques and how to listen to other members’ input, attempt to
understand each other’s point of view, show a willingness to seek common
ground, explore different options, and commit to finding the most ethical
solution.
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5. Nonverbal communication is communication expressed through actions, body language,
expressions, or other forms of communication not written or oral.
a. Paralanguage is the way we talk, such as volume, inflection, tone, and rhythm.
b. A person’s nonverbal cues are deemed more reliable than what he or she states verbally.
6. Listening involves paying attention to both verbal and nonverbal behavior
a. Listening is just as important as speaking.
b. If one of the parties to a dialogue does not listen, communication becomes ineffective.
c. Ethical leaders developing good listening skills tend to establish credibility and
trustworthiness with employees.
VIII. Leader-Follower Relationships in Communication
A. Leader-follower congruence occurs when leaders and followers share the same vision, ethical
expectations, and objectives for the company.
B. The leader-exchange theory claims that leaders form unique relationships with followers through
social interactions.
C. It is therefore important for ethical leaders to frequently communicate and interact with
employees.
D. Power Differences and Workplace Politics
1. It is important for ethical leaders to attempt to reduce the differences between managers and
employees when ethical communication is involved.
a. Some managers occupying positions of authority might have the tendency to view
information from employees as unimportant, but this is a serious mistake.
b. Ethical leaders mitigate power differences through frequent communication with
workers.
2. Workplace politics is another detriment to workplace communication.
a. Organizational politics is often perceived as trying to achieve one’s own ends even if it
means harming others in the organization.
b. In a highly politicized environment, employees are encouraged to compete rather than
collaborate to win the leader’s favor.
3. Having good political skills, on the other hand, can be used to promote organizational goals
and help rather than hinder employees.
a. Ethical leaders with good political skills can navigate difficult situations, reduce
uncertainty, and advocate for positive change.
E. Feedback
1. Feedback is important both for employees and for managers.
a. This can occur through informal methods like a simple conversation or through more
formal systems such as employee performance evaluations.
b. While most companies understand the need for leader-to-follower feedback, not as
many recognize the need for organizational leaders to get feedback from their
employees.
c. Employee feedback can be generated in many different ways, including interviews,
anonymous surveys, ethical audits, and websites.
2. It is important to provide both positive and negative feedback so employees can
identify areas they need to change and work toward improving them.
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IX. Leadership Styles and Ethical Decisions
A. Leadership styles influence many aspects of organizational behavior, including employees’
acceptance of and adherence to organizational norms and values.
B. Emotional intelligence occurs when leaders possess the ability to manage themselves and
their relationships with others effectively.
C. Six leadership styles that are based on emotional intelligence have been identified by
Daniel Goleman:
1. The coercive leader demands instantaneous obedience and focuses on achievement, initiative, and
self-control. Although this style can be very effective during times of crisis or during a turnaround, it
otherwise creates a negative climate for organizational performance.
2. The authoritative leader—considered to be one of the most effective styles—inspires employees to
follow a vision, facilitates change, and creates a strongly positive performance climate.
3. The affiliative leader values people, their emotions, and their needs and relies on friendship and trust to
promote flexibility, innovation, and risk taking.
4. The democratic leader relies on participation and teamwork to reach collaborative decisions. This style
focuses on communication and creates a positive climate for achieving results.
5. The pacesetting leader can create a negative climate because of the high standards that he or she sets.
This style works best for attaining quick results from highly motivated individuals who value
achievement and take the initiative.
6. The coaching leader builds a positive climate by developing skills to foster long-term success,
delegating responsibility, and skillfully issuing challenging assignments.
D. Transactional leaders attempt to create employee satisfaction through negotiating, or
“bartering,” for desired behaviors or levels of performance.
1. Transactional leaders focus on ensuring required conduct and procedures are
implemented.
E. Transformational leaders strive to raise employees’ level of commitment and foster trust
and motivation.
1. Transformational leaders communicate a sense of mission, stimulate new ways of
thinking, and enhance as well as generate new learning experiences.
F. Authentic leaders are passionate about the company, live out corporate values daily in
their behavior in the workplace, and form long-term relationships with employees and
other stakeholders.
X. The RADAR Model
A. When ethical misconduct or issues arise, the leader should have plans in place to answer
stakeholder concerns and recover from misconduct. We adopt the acronym RADAR to
describe an ethical leader’s duty to
1. recognize ethical issues
2. avoid misconduct whenever possible
3. detect ethical risk areas
4. answer stakeholder concerns when an ethical issue comes to light
5. recover from a misconduct disaster by improving upon weaknesses in the ethics
program.
Chapter 11: Ethical Leadership 70
B. Ethical leaders must determine what issues the firm is most likely to face so controls can be
implemented to limit the opportunity for misconduct.
C. Ethical leaders should develop policies and procedures for detecting and avoiding
misconduct.
D. Ethical leaders should engage in ethics continuity planning.
1. Ethics continuity planning involves the identification of risk areas and the development
of a response plan to deal with major issues.
E. Discovery involves proactively uncovering ethical risk areas that could lead to misconduct.
1. Many managers are reluctant to engage in this process because they fear doing so will
uncover questionable conduct that could put the firm in an unfavorable light.
2. However, ignoring risk areas makes it much harder to resolve ethical issues when they
do occur.
F. Answering involves responding to the discovery of an ethical dilemma through
communication both internally and externally.
G. Recovery occurs when a firm begins to rebuild its reputation. It involves a four step
process:
1. Take corrective action
2. Compensate stakeholders harmed by the misconduct
3. Express regret for the misconduct
4. Reinforce the firm’s reputation with positive messages
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will argue
for the opposing view. The purpose is to get students to realize that there are no easy answers to many
of these issues. This debate asks students to choose whether the CFO should be the key leader to deal
with ethical risks. Those arguing that the CFO should be the key leader could argue that many ethical
risks relate to the financial area, and since the Sarbanes-Oxley Act requires the CFO to abide by a code
of ethics, then the CFO should be the key leader in managing risk. Those arguing that companywide
ethical risk management is the best approach to manage financial and operational risks could argue that
CFOs may not define ethical risks the right way. Also, because more shareholder value is lost through
strategic and ethical risks, the entire senior leadership team should self-assess their divisions of the
business and report their top risks.
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
The instructor may want to discuss where the line is between loyalty to the company and loyalty to the
staff you manage. How is David to reconcile the difference between Stan saying the decision has been
made to move toward automation, Jane’s accounting analysis that demonstrates no improvement in
efficiency by moving to automation, and the community’s need to keep their people employed?
Ask the students what they would do in Jane’s position. Jane has already run an accounting analysis on
automating the plant and determined that automation will not increase overall efficiency of the plant.
Now Stan has instructed Jane to modify her assumptions to make automating the plant look efficient.
Stan wants these modified figures to demonstrate to the townspeople that the decision is necessary.
71 Chapter 11: Ethical Leadership
Stan is trying to encourage David and Jane to follow his instructions by offering large year-end
bonuses. Is this ethical? Given David’s past behavior and management style, do students believe this
will persuade David to support the move toward automation? Is there a way that David and/or Jane
could convince Stan to try this move toward automation at another plant? What would motivate Stan to
change his support to automate David’s plant and instead have Jane find a plant that supports moving
toward automation to increase efficiency?