Chapter 10

Ethical Leadership and

Corporate Governance
 Ethical Leadership
• The demonstration of normatively
appropriate conduct through personal
actions and interpersonal relationships
• The promotion of such conduct to
followers through
– two-way communication,
– reinforcement, and
– decision-making

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 Transformational Leadership (1)
• Developing a long term vision for the
company
• Key traits: inspirational motivation,
idealized influence, individualized
consideration and intellectual
stimulation
• Authentic transformational leadership
may be ethical

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 Transformational Leadership (2)

• Principles of Ethical Power

– Purpose
– Perspective
– Patience
– Persistence

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 Transactional Leadership
• Focus on operational and routine
activities within the firm
• It is argued that this is more a
managerial trait in which control is used
to protect the status quo of the firm
• Use of contingent rewards and
management by exception to manage
employees

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 Reconciling Ethical Values of
Leadership Styles
Transformational Transactional
– organic and – independent view of
interdependent view of external events
external events
– Moral altruistic motives – Mutual altruistic
are supported by the motives are supported
deontological by teleological
philosophical philosophical
frameworks frameworks
– Focus on social – Focus on individual
obligations obligations

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 Developing Trust, Commitment and
Effort
• Understand needs of stakeholders
• Identify and answer questions relating
to moral issues:

Source: LaRue Tone Hosmer, “Strategic Planning as If Ethics Mattered,” Strategic Management Journal
15 (1994): 29.
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 The Transformation from a Moral
Person to Ethical Leader
• Traits
– Integrity, honesty, trustworthiness
• Behaviors
– Do the right thing, concern for people,
being open, personal morality
• Decision Making
– Hold on to Values, objective/fair, concern
for society, follow ethical decision rules
• Leads to the Moral Manager
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 Moral Persons and Moral Managers
(1)
Unethical leader Ethical Leader
– Weak moral – The ultimate ethical
person and weak goal of any manager
moral manager – Ability to use
– Drive to reward grounded ethical
their own self- characteristics and
transfer them to
interests others within the
– Examples include organization
Jeff Skilling, Bernie through the
Ebbers, and characteristics of a
Dennis Kozlowski moral manager

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 Moral Persons and Moral Managers
(2)
Hypocritical Leader Inconsistent Leader
– Destroyed all three – Strong ethical traits,
behaviors and decision
of the critical traits making of a moral person,
of a moral person but is not able to transfer
– Says one thing those values to other
employees
about ethical values
– Inconsistent because of the
then acts unethically contradictory strength of
– Example is Martha the individual moral values
Stewart and weak characteristics of
a moral manager

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 Corporate Governance
• The systems that are used by firms to
control and direct their operations and
the operations of their representatives,
the employees.
• Provides a method in which the ethical
vision can be measured and validated

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 Board of Directors
• Represent the interests of the stockholders
• May be
– Inside Board Member
• Direct financial ties to the firm
– Outside Board Member
• No direct financial ties to the firm
• Agency theory: based on the belief that
managers are “agents” of the stockholders
because they should be making decisions
to benefit the stockholders
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 Core Ethical Values that Guide the
Behaviors of Board Members
• Honesty
• Integrity
• Loyalty
• Responsibility
• Fairness
• Citizenship
• NB: parallel the traits of ethical leaders

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 Types of Boards of Directors
• Passive Board
• Certifying Board
• Engaged Board
• Intervening Board
• Operating Board

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Duties of Outside Board Members
• Annual evaluation of CEO by outside
members only
• Outside members meet at least once per
year without CEO present
• Set qualifications for membership of
Board member and communicate to
shareholders
• Responsible for recruitment and
selection of new board members
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 Duties of Shareholders
• Active owners of the firm
• Avoid involvement in day to day
operations
• evaluate (annually) performance of the
Board
• Be informed when firm evaluates Board
members
• Common goal is to maintain ongoing
corporate status
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 Benefits of A Strong Board of
Directors
• A strong board has a positive impact on
the performance of the firm
• Good corporate governance supports
the financial requirements established
by the shareholders

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 CEO Compensation and Ethical
Reputation
• No direct relationship between CEO
compensation and the financial
performance of the firm
• In many cases the reverse is true with
poor performing firms having highly
paid CEOs
– Evidence from research by Stanwick and Stanwick, The
Financial Times and Finkelstein

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 Corporate Governance and
Stakeholders
• A varying set of requirements which may be
in conflict:
– Employees, suppliers and community want and
honest and transparent relationship with the
firm.
– Shareholders want the maximum return or their
investment
– Governments require legal and financial
compliance
– NGOs require respect for global human and
worker rights
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 Ethics and Strategic Planning
• Strategic Planning: the process in which
future courses of action are developed to
achieve the firm’s short and long-term goals
• Five questions to ask before making a final
decision
1. Why is this bothering me?
2. Is it my responsibility?
3. What is the ethical concern?
4. What do others think?
5. Am I being true to myself? (the Mirror Test)

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 More on the Mirror Test
• The decision maker’s ability to look in the
mirror after decisions have been made and
confirm that he/she made the right choice.
• It pulls together all the other questions and
ensures consistency with organizational and
personal values.
• Source: P. Drucker

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 The Ethical Cycle
• Stages of the Ethical Cycle
– Moral problem statement
– Problem analysis
– Options for actions
– Ethical judgment
– Reflection
– Morally acceptable action
– NB not always linear in nature: feedback
loops and iterations are often required in
practice
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 5

Figure 6.1: The Ethical Cycle

Source: I. van de Poel and L. Royakkers, “The Ethical Cycle,” Journal of Business
Ethics 71 (2007): 4–7.

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 Using Strategic Ethical Decisions to
Build Character
• The Ethical Cycle helps employees understand
who they are from an ethical perspective.
• A defining moment is when a decision maker
has a choice between two plausible and
acceptable strategic options.
– Who am I?
– Who are we?
– Who is the company?

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 The Link Between Strategic Planning
and Ethical Culture
• A decision tree process can be used
– Is the action legal and consistent with the
firm’s values? Yes: go on; no: stop
– Will the action maximize shareholder
value? Yes: carry on; No: stop or review
– Is it ethical?
• Yes: implement
• No: review
Source: Bagley

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 Figure 6.2: Ethical Decision Tree

Source: Constance E. Bagley, “The Ethical Leader’s Decision Tree,” Harvard Business Review 81 (2003): 3.

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 Figure 6.3: A Mapping of Ethical
Philosophies

Source: Christopher Robertson and William Crittenden, “Mapping Moral Philosophies: Strategic
Implications for Multinational Firms,” Strategic Management Journal 24 (2003): 389.

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 How to Address Ethical Crisis and
Disaster Recovery
• An ethical crisis occurs Internal/ Internal/
Normal Abnormal
when a event that was
not part of the normal
course of action takes
place and has an impact
on the firm.
External/ External/
• Crisis Typology Normal Abnormal
Dimensions
1. Whether issue is internal
or external
2. Frequency of the issues
classified as normal or
abnormal

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 Corporate Culture
• The shared values and beliefs of
employees within any given
organization
• Must have strong ethical focus to
ensure that unethical activities do not
take place in the workplace
• Based on norms and behavior patterns
(Schein)

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 Three Levels of Corporate Culture
• Artifacts
– Factors such as what is seen and heard
within a firm e.g. dress code or language
• Shared Values
– Based on what groups within the firm learn
about what is acceptable or not acceptable
• Basic Assumptions
– The agreed starting point for decision
making within the firm

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 How Managers Can Change a
Corporate Culture
• Two types of mechanisms in which
managers can change cultures
1. Primary Embedding Mechanisms
2. Secondary Articulation and
Reinforcement Mechanisms

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 How to Change Ethical Values
• Three stage model of change
– Stage 1 (unfreezing) – unfreezing of the
individuals existing beliefs
– Stage 2 (moving) - top management
needs to ensure that what is considered
acceptable and unacceptable is clear
– Stage 3 (refreezing) – top managers must
reinforce their commitment to support
strong ethical behavior
– NB adaptation of Lewin/Schein models
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Formalizing a Culture of Ethics
• Culture should include three basic
components
1. Define your philosophy and corporate
values in a mission statement
2. Develop guidelines for employees
3. Establish a formal channel for employees
to report violations

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 Evaluation of Corporate Culture
– Do employees understand the tone set by senior
management?
– Can you confirm that your organization’s culture
encourages ethical behavior at all levels?
– Can employees throughout your organization describe
the company’s code of ethics?
– Do employees at all levels of your organization ask
questions and express concerns?
– Do your employees believe that the mechanisms are in
place to allow them to voice opinions without fear of
retribution?
• Source: Deloitte and Touche
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 Creating a Climate of Integrity
• Suggestions:
1. Set an example through strong leadership
2. Set realistic goals
3. Provide training
4. Distinguish between compliance and
ethics
5. To be implemented at all levels of the
organization with senior management
taking the lead,

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 Ethics and Corporate Compliance
• These key elements are interlinked but require
active manipulation
• Five Step Process to embed positive ethics and
values
– Step 1 – Conduct risk/cultural assessment
– Step 2 – Review current compliance program
– Step 3 – Review ethical policies and procedures
– Step 4 - Review and revise the communication,
training, and implementation phases of program
– Step 5 – Develop an ongoing assessment of the
program
– Source: Deloitte Touche

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 The Challenge of Compliance
• Threats to Section 404 include:
– Lack of internal control system
– Lack of enterprise risk management program
– Inadequate non-routine etc. transaction controls
– Poor post-merger integration
– Poor IT controls environment
– Ineffective financial reporting, closure and
disclosure
– Poor accounting systems regime
– Lack of control over outsourcing
– Poor Board level risk and control understanding.

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 Corruption
• The conscious abuse of public roles and
resources for the private benefit for the
firm or individuals within.
– Petty corruption e.g. illegal incentives/bribes
to public officials to gain licenses etc.
– Grand Corruption e.g. ilegal
incentives/bribes to gain major
infrastructure, military equipment contracts
– Influence peddling: e.g. illegal political
campaign contributions
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 Transparency International
• One of many Global Civil Society
organisations aiming to reduce global
corruption
• Produces annual Corruption Perception
Index: the higher the score the lower
the level of corruption

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