Ethical leadership in business

Ethical leadership is characterized by five principles; an ethical leader respects others, serves others, shows justice, manifests honesty and builds community (Northouse, 2013). High profile leadership failures such as the Enron and Worldcom scandals of the last decade and the more recent financial industry crisis have wreaked widespread havoc on the lives of countless individuals, raising a number of questions regarding the seemingly widespread lack of ethics in modern business culture. Meanwhile, our increasingly interconnected economic, political and social systems demand that truly ethical leaders make decisions that incorporate stakeholder needs and perspectives from beyond the boundaries of a single organization, constituency or group. The challenge to ethical leaders in modern business lay in balancing economic and noneconomic responsibilities. For instance, the virtues of justice and service demand that an ethical leader ensure that decisions ‘do no harm’ to the broader community in which they operate, a noneconomic goal that may be directly at odds with the economic goal of maximizing value for primary stakeholders such as shareholders and employees.

At the organizational level, a commitment to broader ethical behavior is often framed as corporate social performance. Some work suggests that organizations balance service to stakeholders (both economic and noneconomic) differently across the lifecycle (Jawahar & McLaughlin, 2001). Mature organizations respond proactively to external stakeholders (i.e., corporate social performance is most high), while organizations in start-up mode, in growth stage, or in decline/transition demonstrate diminished social performance.

Organizational factors that impact individual ethical behavior are of particular interest to this discussion. Individual ethical behavior is mediated by both internal (e.g., values, beliefs) and external factors (e.g., peer influence, career level) (Ford & Richardson, 1994). In the case of Enron, Ken Lay blames the fraudulent behavior of his subordinates on external factors–the lack of clear ethical standards within the organization. Enron management assumed that ethics ‘just happened’ (Ferrell & Ferrell, 2010). Ford and Richardson (1994) suggest that a corporate code of conduct, especially one enforced with rewards and sanctions, increases individual ethical decision-making. In contrast to the increase of corporate social performance in mature organizations, individual ethical behavior decreases as an organization grows in size (Ford & Richardson, 1994). In addition, ethical organizational culture mediates individual ethical behavior. These two factors have significant implications for how ethical leaders manage business growth. These factors underscore the responsibility of leaders to engage in ethical practices, articulate expectations regarding ethical behavior, and implement rewards and sanctions for compliance (or lack thereof) to an ethical code of conduct.

Some argue that our corporate capitalist system is fundamentally incapable of balancing the demand to ‘do well’ (generate value for shareholders) and to ‘do good’ (behave ethically toward the society in which the business operates). Others suggest that individual behavior strategies, such as increased ethical behavior at the middle management level in large organizations may serve to redress the imbalances created between pursuit of profit and achievement of public goals (Doane, 2005). It remains to be seen whether a sustainable future characterized by widespread improvement in standards of living, health, education and opportunity is possible in a late capital society. I propose that, to this end, true ethical leadership in business requires acknowledgement of broader obligations; the imperatives of respect, service, justice, honesty and community apply not only to a leader’s subordinates and primary stakeholders, but also to community and society.

Doane, D. (2005). Beyond corporate social responsibility: minnows, mammoths and markets. Futures, 37(2-3), 215-229. doi:10.1016/j.futures.2004.03.028

Ferrell, O. C., & Ferrell, L. (2010). The Responsibility and Accountability of CEOs: The Last Interview with Ken Lay. Journal of Business Ethics, 100(2), 209-219. doi:10.1007/s10551-010-0675-y

Ford, R. C., & Richardson, W. D. (1994). Ethical decision making: A review of the empirical literature. Journal of Business Ethics, 13(3), 205-221. doi:10.1007/BF02074820

Jawahar, I., & McLaughlin, G. (2001). Toward a Descriptive Stakeholder Theory: An Organizational Life Cycle Approach. Academy of Management Review, 26(3), 397-414. Retrieved from http://www.jstor.org/stable/10.2307/259184

Northouse, P. G. (2013). Leadership: Theory and Practice (6th ed.). Thousand Oaks, CA: Sage Publications.