OMM 640 Business Ethics and Social Responsibility

OOM 640 WEEK 4 ASSIGNMENT 1

Ethical Leadership

Read the

An improved measure of ethical leadership

 article by Yukl, Mahsud, Hassan, & Prussia (2013), as well as Chapter 7 of Gonzalez-Padron (2015). Complete the Checklist: Ethical Leadership Questionnaire, then answer these following questions from the text:

· Describe the behaviors that are most important for you to feel trust in the ethical leadership of a supervisor, manager, or company executive?

· Describe  any descriptors in the list that are difficult to observe?

· Analyze how ethical leadership can be measured in an  organization?

· Evaluate how personal experience with a leader (e.g., work assignments, disciplinary actions) skew your assessment of his or her ethical leadership? Cite an example based on personal experience.

Your response must be a mimimum of 300 words.

Guided Response: Review several of your classmates’ posts and respond to at least two of your peers by 11:59 p.m. on Day 7 of the week. You are encouraged to post your required replies early during the week to promote more meaningful interactive discourse in the discussion.  For your response, put yourself in to position of an organizational leader, using the list of behaviors described by your classmate, explain how leadership can emulate these behaviors.

Yours responses must be a minimum of 150 words.

WEEK 4 ASSIGNMENT 2

Recognizing and Identifying Ethical Leadership Failures

Prior to beginning your discussion, read

Understanding (and preventing) ethical leadership failures (Links to an external site.)Links to an external site.

. After reading the article, give an example of one or more leadership failures that you are familiar with. You may use an organization, group, or political figure for your discussion.  Describe the failure(s) in detail. Analyze how the failure(s) could have been mitigated.

Your response must be a minimum of 300 words.

Guided Response: Review several of your classmates’ posts and respond to at least two of your peers by 11:59 p.m. on Day 7 of the week. You are encouraged to post your required replies early during the week to promote more meaningful interactive discourse in the discussion. When responding to your classmate, give an additional solution that could help to mitigate the failure that your classmate has described.

Your response must be a minimum of 150 words

Journal of Leadership &
Organizational Studies
20(1) 38 –48
© Baker College 2013
Reprints and permission:
sagepub.com/journalsPermissions.nav
DOI: 10.1177/1548051811429352
http://jlo.sagepub.com

Introduction

Repeated scandals involving corporate and public sector
leaders over the past decade have increased interest in
studying ethical leadership (e.g., Brown & Treviño, 2006;
Sims & Brinkmann, 2003). Ethical values and behavior are
an important aspect of several currently prominent theories
in the leadership literature, including servant leadership
(e.g., Avolio & Gardner, 2005; Liden, Wayne, Zhao, &
Henderson, 2008; Russell & Stone, 2002; Smith, Montagno,
& Kuzmenko, 2004), spiritual leadership (Frey, Hannah,
Noel, & Walumbwa, 2011; Fry, 2003), and authentic leader-
ship (Gardner, Avolio, Luthans, May, & Walumbwa, 2005).
Research on ethical leadership lagged behind other subjects
for most of the past half century (Cuilla, 1998), but in the
past decade, interest in studying the antecedents, outcomes,
and processes of ethical leadership has been growing steadily.

Ethical leadership has been described in a variety of
ways. Kanungo (2001) noted that ethical leaders engage in
acts and behaviors that benefit others, and at the same time,
they refrain from behaviors that can cause any harm to others.
Brown, Treviño, and Harrison (2005) suggested that the
combination of integrity, ethical standards, and fair treat-
ment of employees are the cornerstones of ethical leadership.
Treviño and Brown (2004) proposed that ethical leadership,
in its true sense, promotes ethical conduct by practicing as
well as managing ethics and holding everyone account-
able for it. Khuntia and Suar (2004) suggested that ethical

leaders incorporate moral principles in their beliefs, values,
and behaviors.

The construct domain of ethical leadership is broad, and
several different types of values may be relevant including
altruism, compassion, honesty, fairness, and justice. Ethical
leadership is also indicated by behaviors reflecting these
values. Examples include being very supportive and helpful
when someone has a problem, being fair when distributing
rewards and benefits, being open and honest when commu-
nicating to people, making sacrifices to benefit others, talk-
ing about the importance of values, setting clear ethical
standards for the work, keeping actions consistent with
espoused values, and holding people accountable for ethical
and unethical actions.

It is obvious that ethical leadership behavior overlaps to
some extent with relations-oriented behavior constructs in
the leadership literature, such as providing supportive or
considerate leadership, empowering leadership, developing

429352 JL
O20110.1177/1548051811429352Yukl et al.Journal of Leadership
& Organizational Studies
© Baker College 2013

Reprints and permission: http://www.
sagepub.com/journalsPermissions.nav

1University at Albany, State University of New York, Albany, NY, USA
2Seattle University, Seattle, WA, USA
3Ohio State University, Columbus, OH, USA

Corresponding Author:
Rubina Mahsud, Management Department, Albers School of Business
and Economics, Seattle University, 901, 12th Avenue, Seattle,
WA 98122-1090, USA
Email: mahsudru@seattleu.edu

An Improved Measure of Ethical Leadership

Gary Yukl1, Rubina Mahsud2, Shahidul Hassan3,
and Gregory E. Prussia2

Abstract

The appropriate way to define and measure ethical leadership has been a source of conceptual confusion in the leadership
literature. Different measures have been developed, but they all have limitations. Some questionnaires are missing key
indicators of ethical leadership, or they include behaviors that do not seem directly relevant. In this study, the authors
assess the validity of a new questionnaire for measuring essential aspects of ethical leadership independently of other
types of leader behavior. The research also examines how ethical leadership is related to leader–member exchange and
work unit performance. Although the primary purpose of these analyses is to assess criterion-related validity for the new
questionnaire, the results help answer important questions about the benefits of ethical leadership. The authors found that
ethical leadership makes a small but significant contribution to the explanation of leader–member exchange and managerial
effectiveness.

Keywords

ethical leadership, leadership behavior, leadership effectiveness

http://crossmark.crossref.org/dialog/?doi=10.1177%2F1548051811429352&domain=pdf&date_stamp=2011-12-11

Yukl et al. 39

subordinate skills and self-confidence, and representing sub-
ordinate interests (Yukl, 2010). A few questionnaires have
been developed in recent years to measure aspects of ethical
leadership, but they differ in important ways and they all
have limitations. The question of how to define and measure
ethical leadership has not been resolved, and there is sub-
stantial conceptual confusion about this construct. The
purpose of our research was to identify the most essential
qualities to include in a measure of ethical leadership and to
develop a measure that minimizes confounding with other
constructs. We begin by reviewing earlier measures of ethi-
cal leadership and research on the consequences of ethical
leadership. We then describe the development of an
improved measure of ethical leadership called the Ethical
Leadership Questionnaire (ELQ) and provide validation
evidence for it.

Review of Research on
Measures of Ethical Leadership
Three instruments designed to directly measure ethical lead-
ership include the Ethical Leadership Survey (Brown et al.,
2005), the Perceived Leader Integrity Scale (Craig
& Gustafson, 1998), and the Ethical Leadership Work
Questionnaire (De Hoogh & Den Hartog, 2008). Two other
instruments were designed to measure types of leadership
that include some ethical values and behaviors: the Authentic
Leadership Questionnaire (Walumbwa, Avolio, Gardner,
Wernsing, & Peterson, 2008) and the Servant Leadership
Questionnaire (Barbuto & Wheeler, 2006). Each instrument
will be described and the limitations identified.

Ethical Leadership Survey
Treviño, Brown, and Hartman (2003) asked people to describe
characteristics of ethical leaders, and the descriptors
included honesty, fair treatment, communication of ethical
values, role modeling of ethical behaviors, rewarding ethical
behavior, and holding subordinates accountable for unethi-
cal conduct. Their investigation showed that ethical leader-
ship is not only about traits such as integrity and honesty
but also about efforts to make subordinates accountable for
behaving ethically. Similar results were found in a second
study, and based on these findings and earlier literature,
Brown et al. (2005) developed a new questionnaire to mea-
sure these characteristics called the Ethical Leadership Scale
(ELS). The ELS has 10 items, each with a 5-point Likert-
type response format (1 = strongly disagree, 5 = strongly
agree). The validation research found support for the ELS,
and a leader’s overall score on the ELS predicted outcomes
such as perceived effectiveness of leaders, employees’ sat-
isfaction with job, employees’ willingness for putting extra
effort into their work, and reporting problems. However,
one limitation is that some relevant aspects of ethical

leadership (e.g., honest communication, behavior consistent
with espoused values, fair allocation of assignments and
rewards) were not explicitly included. Another limitation is
that two of the items (i.e., listens to what employees have
to say, has the best interests of employees in mind) were
rated more representative of consideration than of ethical
leadership. Finally, the test for discriminant validity with
honesty was flawed because (unlike the ELS items) honesty
was only measured with two negatively worded items; it is
likely that positively worded items would load primarily on
the ethical leadership factor.

Perceived Leader Integrity Scale
Craig and Gustafson (1998) reviewed literature on ethical
aspects of leadership and developed a questionnaire to mea-
sure integrity called the Perceived Leader Integrity Scale
(PLIS). The objective in selecting items was to measure
ethical aspects of behavior that can be observed by a lead-
er’s subordinates. The PLIS has 31 items describing several
types of unethical and abusive behavior (e.g., is vindictive,
would lie to me, would blame me for his/her mistakes,
would steal from the organization, would take credit for my
ideas, gives special favors to “pet” employees). The four
response choices indicate how accurately the items describe
the supervisor (1 = not at all, 2 = somewhat, 3 = very much,
4 = exactly). Favorable validation evidence was obtained in
their initial study and a follow-up study (Parry & Proctor-
Thompson, 2002). However, one major limitation of the
PLIS is the lack of positively worded items. The absence of
unethical behavior does not necessarily imply a high level
of ethical behavior. Another limitation is the use of vague
conditional wording (“would steal”) for many items, which
involves an inference about possible behavior rather than
wording that describes actual observed behavior. Finally, a
questionnaire that only has negatively worded items is less
likely to be answered by respondents who worry that it may
have adverse consequences for themselves or their bosses.

Ethical Leadership Work Questionnaire
De Hoogh and Den Hartog (2008) conducted a study of
Dutch managers using interviews and questionnaires. The
researchers developed a preliminary questionnaire to mea-
sure ethical leadership, and it was used in a study of ethical
leadership in top management teams. The factor analysis
found that morality and fairness was distinct from power-
sharing behavior and also from negatively worded despotic
behaviors (e.g., punitive, vengeful, and tyrannical). Some
limitations of the early questionnaire include the use of
items with multiple components and vague wording and
mixing of positive and negatively worded items in a way
that can confuse respondents and complicate data analyses
(Rorer, 1965; Schriesheim & Eisenbach, 1995).

40 Journal of Leadership & Organizational Studies 20(1)

Follow-up research (Kalshoven, Den Hartog, & De Hoogh,
2011) was conducted with a revised and extended question-
naire called the Ethical Leadership Work Questionnaire
(ELW). The questionnaire had 38 items, and each item
had a 7-point anchored Likert-type response format (1 =
strongly disagree, 7 = strongly agree). The ELW has seven
subscales: fairness, integrity, ethical guidance, people ori-
entation, power sharing, role clarification, and concern for
sustainability. The three subscales that seem most relevant
for ethical leadership are fairness (e.g., my leader has clear
favorites among subordinates), integrity (5 items; e.g., my
leader keeps his/her promises), and ethical guidance (e.g.,
my leader clearly explains integrity-related codes of con-
duct). The subscales for role clarification, power sharing,
and people orientation are similar to leadership behaviors
that have been studied for decades. Role clarification is a
core task behavior, and the other two subscales are rela-
tions behaviors. These behaviors are not inherently ethical,
and they can be used for unethical purposes. The subscale
for sustainability involves social issues, and it is only one
of many social issues that leaders may elect to endorse and
support (e.g., democracy, free speech, global health, free
enterprise, animal rights, world peace). The definition and
measurement of ethical leadership should not be compli-
cated by debates about which social issues deserve to be
included in the definition.

Authentic Leadership Questionnaire
The Authentic Leadership Questionnaire was developed
to measure the core qualities of authentic leadership
(Walumbwa et al., 2008). The Authentic Leadership
Questionnaire includes four scales (self-awareness, rela-
tional transparency, internalized moral perspective, and bal-
anced processing), each with four items that describe leader
behavior and have a frequency response format. Walumbwa
et al. (2008) found some overlap between measures of
authentic leadership and ethical leadership. Two subscales
appear especially relevant for ethical leadership. An inter-
nalized moral perspective means that leader behavior is
guided by internal moral standards and personal values (e.g.,
makes decisions that are based on core beliefs, expresses
beliefs that are consistent with actions). Relational transpar-
ency means that the leader reveals values and beliefs accu-
rately (e.g., says exactly what he/she means, admits mistakes
openly). However, the other two components of authentic
leadership do not appear to describe essential aspects of
ethical leadership. Self- awareness appears similar to trait
and skills included in emotional maturity and emotional
intelligence. A leader can be self-aware without also being
honest, caring, or open with others, and a leader can be caring
and open without having a full understanding of unconscious
reasons for his or her core beliefs and values. Balanced pro-
cessing refers to objectivity and pragmatic openness to

relevant information and ideas when making decisions. This
quality involves personality traits and cognitive skills that
can facilitate problem solving but do not necessarily result
in decisions that are ethical. Moreover, the flexibility
implied by being highly receptive to new information and
ideas seems inconsistent with some aspects of ethical lead-
ership, such as communicating values in a strong, persua-
sive way and insisting on their application in the work
involved.

Servant Leadership Questionnaires
Barbuto and Wheeler (2006) developed a questionnaire to
measure servant leadership, and it includes five subscales:
altruism, organizational stewardship, persuasive mapping,
wisdom, and emotional healing. Each scale has four to five
items that have a 4-point Likert-type response format (1 =
strongly disagree, 2 = somewhat agree, 3 = somewhat dis-
agree, 4 = strongly disagree). The subscale for altruism
involves behaviors that reflect altruistic values and is very
relevant for ethical leadership (e.g., puts my best interests
ahead of his/her own, does everything he/she can to serve
me, sacrifices his/her own interests to meet my needs,
goes above and beyond the call of duty to meet my needs).
Organizational stewardship involves social responsibility
values and the belief that the organization should contribute
to society (e.g., believes that it needs to play a moral role in
society, encourages me to have a community spirit in the
workplace, is preparing the organization to make a positive
difference in the future). Not all scholars will agree that
ethical leadership should be defined so broadly as to include
advocacy of corporate social responsibility objectives. The
remaining three servant leadership scales do not seem very
relevant for ethical leadership. “Persuasive mapping” is an
interpersonal skill involving ability to influence people, and
“wisdom” involves situational awareness and social intel-
ligence. Both these skills can be used for either ethical or
unethical purposes. “Emotional healing” is a very special-
ized and probably somewhat rare interpersonal skill that
could be useful for some leaders but is not essential for
ethical leadership.

Overview
In summary, the prior theory and research on ethical leader-
ship has created substantial conceptual confusion about the
scope of the ethical leadership construct domain and the
appropriate way to measure it. The topics that appear most
relevant for a specific focus on ethical leadership include
(a) honesty and integrity (including consistency of actions
with espoused values), (b) behavior intended to communi-
cate or enforce ethical standards, (c) fairness in decisions
and the distribution of rewards (no favoritism or use of
rewards to motivate improper behavior), and (d) behavior

Yukl et al. 41

that shows kindness, compassion, and concern for the needs
and feelings of others (rather than attempts to manipulate,
abuse, and exploit others for personal gain). Except for
some supportive behaviors, these qualities appear distinct
from the types of behavior included in most prior research
on effective leadership.

Consequences of Ethical Leadership
Previous research has investigated how ethical leadership is
related to a variety of outcomes, including deviant behavior
(Mayer, Aquino, Greenbaum, & Kuenzi, 2012; Mayer,
Kuenzi, Greenbaum, Bardes, & Salvador, 2009), task perfor-
mance (Walumbwa et al., 2011), voice behavior (Walumbwa
& Schaubroeck, 2009), and organizational citizenship behav-
ior (Mayer et al., 2009). Our validation research involves
two specific indicators of leadership influence that are well
established in the organizational behavior literature, namely,
leader–member exchange (LMX) and overall effectiveness.

Leader–Member Exchange
LMX quality depends on the degree of emotional support
and exchange of valued resources between a leader and a
subordinate (Liden, Sparrowe, & Wayne, 1997; Sparrowe &
Liden, 1997). A high-quality exchange relation has benefi-
cial effects for both the leader and the subordinate (Erdogan,
Liden, & Kraimer, 2006; Wayne, Shore, Bommer, & Tetrick,
2002). A high-quality exchange relationship is more likely
to occur for a leader who is honest, trustworthy, fair, and
genuinely concerned about the well-being of followers
(Erdogan et al., 2006; Wayne et al., 2002).

Several studies have examined how leaders can influence
LMX. In one study, transformational behavior influenced
LMX, which then mediated the effects of leader behavior
on employee performance (Wang, Law, Hackett, Wang, &
Chen, 2005). Another study (Yukl, O’Donnell, & Taber,
2009) examined the effects of several specific behaviors,
including relations-oriented and change-oriented compo-
nents of transformational leadership. LMX was related to
four specific relations-oriented behaviors (supporting, rec-
ognizing, consulting, delegating) and leading by example
(which can be viewed as an indicator of integrity).

Research on the implications of ethical leadership for
LMX is still sparse. One recent study found a strong posi-
tive association between ethical leadership and LMX
(Walumbwa et al., 2011), and LMX partially mediated the
effects of ethical leadership on ratings of subordinate per-
formance by the leader. Another study by Mahsud, Yukl,
and Prussia (2010) found that a six-item measure of ethical
leadership had both direct and indirect effects on LMX, and
the indirect effects were partially mediated by relations-
oriented behavior.

Managerial Effectiveness

Leadership effectiveness is a multidimensional construct,
but an important aspect is the manager’s influence on work
unit performance. Ethical leadership that increases follower
loyalty and trust may result in more follower effort, and one
survey study found a relationship between ethical leadership
and employee effort (Piccolo, Greenbaum, Den Hartog, &
Folger, 2010). However, there are several reasons why an
improvement in unit performance may not occur. Member
motivation is not the only determinant of work unit perfor-
mance, and leaders can influence the determinants in several
ways (Yukl, 2009). Three broad categories of leadership
behavior relevant for influencing performance include task-
oriented behaviors (e.g., clear roles, challenging goals,
coordination, efficient use of resources), relations-oriented
behaviors (e.g., empowering, coaching, praise and recogni-
tion), and change-oriented behaviors (strategy formation,
enhancing collective learning). The relevance of specific
aspects of these behavior metacategories depends on the
situation. The change-oriented behaviors are usually more
important for executives, whereas the task-oriented behav-
iors are usually more important for lower level leaders.
Several studies (see Judge & Piccolo, 2004) found positive
association between composite scores of transforma-
tional leadership and measures of effectiveness, and the
composite scores usually include a mix of relations-oriented
and change-oriented behaviors. As yet no study has exam-
ined the extent to which ethical leadership can enhance
work unit performance independently of relevant leader-
ship behaviors.

A leader’s influence on work unit performance also
depends on how he or she balances competing objectives
(Quinn, 1988; Yukl, 2010). In some situations ethical lead-
ership may have negative effects on work unit performance,
and sometimes unethical leadership has positive effects, if
only for a limited time. For example, some decisions made
to reduce costs and increase profits may not be viewed as
ethical leadership by employees. In recent years, many
leaders of companies and public sector organizations have
been trying to cut costs by reducing employee rights and
benefits or by outsourcing many jobs. Sometimes the pro-
cess involves a lack of honest communication, failure to
honor commitments, and unfair treatment for different
groups of employees. Other leaders try to improve unit per-
formance with practices that are clearly unethical. Examples
from past scandals include the following: selling products
known to be defective, charging customers for unnecessary
auto repairs or parts not actually provided, inflating reports
of income from agreements for future delivery of services,
denying a weakness that make a product dangerous, and fal-
sifying information on applications for loans or mortgages.
If ethical leaders (“whistle-blowers”) dare to challenge

42 Journal of Leadership & Organizational Studies 20(1)

these practices, they are likely to be punished or dismissed
by the organization. The influence of unethical practices on
unit performance depends in part on the time frame used to
assess effects. Unethical practices may boost performance
indicators in the short term but are likely to have negative
effects that will only become apparent over a longer period
of time. All these complexities make it difficult to deter-
mine how ethical or unethical leadership will influence unit
performance.

Empirical studies on the consequences of ethical and
unethical leadership for work groups or organizations are
still limited. Several studies have found a positive linkage
between ethical leadership and perceived leader effective-
ness (Brown et al., 2005; De Hoogh & Den Hartog, 1998;
Kalshoven et al., 2011). Most studies only examined relation-
ships for a composite measure of ethical leadership rather
than assessing how each ethical component is independently
related to the criterion variables. However, Kalshoven et al.
(2011) reported results for component scales. In the multiple
regression analysis, leader ratings of subordinate performance
were predicted by only two of the seven ELW subscales,
namely, fairness and power sharing. As noted earlier, fair-
ness is a relevant component of ethical leadership, but
power sharing is a leadership behavior that has been studied
for more than half a century and is not necessarily ethical
(it can be used in a very manipulative way). Subordinate
ratings of leader effectiveness were predicted by two essen-
tial aspects of ethical leadership (integrity and ethical guid-
ance) and by two leader behaviors (role clarification and
people orientation) that are not necessarily ethical. Role clar-
ification is a task-oriented behavior, and people orientation
is a relations-oriented behavior similar to consideration.

Summary
No previous study has investigated how ethical leadership
is related to LMX and overall leader effectiveness while
simultaneously controlling for a comprehensive measure of
task, relations, and change behaviors. In survey studies, it
is important to include other relevant behaviors and identify
their separate and joint effects on unit performance.

Research Objectives
The primary objective of the current study was to assess the
validity of a new questionnaire for measuring ethical lead-
ership. Discriminant validity is demonstrated when subor-
dinates can rate the ethical leadership of their immediate
boss independently from their ratings of how much the boss
uses leadership behaviors that do not directly involve ethi-
cal issues. Evidence of criterion-related validity is provided
by showing that ethical leadership can explain additional
variance in indicators of the leader’s influence on the quality

of relationships with subordinates and on unit performance.
There are credible explanations and some prior evidence
to support the proposition that an ethical leader will elicit
more trust and have more favorable exchange relationships
with subordinates. However, the implications of ethical
leadership for work unit performance are much less certain.
Examining these relationships is only an exploratory aspect
of the research, and the study was not designed to formally
test any specific hypotheses about them.

Method
Sample and Data Collection Procedures

The sample for this study were 192 graduate students, 147 of
whom were enrolled in the MBA program of a private uni-
versity in the northwestern part of the United States and
45 respondents were enrolled in the Master of Public
Administration program of a large public university in the
Midwestern part of the United States. The students had full-
time jobs during the day, and they rated their immediate
supervisor. Almost half of the respondents were between 25
and 30 years old, and the average amount of time respon-
dents had worked for their current organization was 2 to 4
years. The average work experience ranged from 7 to 10
years. The gender composition of the respondent sample was
49% males, and 44% of the supervisors rated by respondents
were females. More than half of the respondents (55%) held
professional/technical jobs, 26% held first-level manage-
ment positions (team leader, supervisor, and section head),
14% held middle-management positions, and only 3% were
upper level executives. The respondents represented diverse
organizations; 51% of them worked for medium to large
corporations, 32% worked for government or nonprofit orga-
nizations, and 14% worked for small businesses. The organi-
zations were from a large variety of industries (e.g., aerospace,
technology, pharmaceutical, media, consulting, retail, soft-
ware, telecommunications, banking, government, and non-
profit). This student sample is unique in the sense that they
attended only one or two classes per week and kept their
full-time job as prime responsibility. Being entry- to mid-
level managers their education was mostly funded by their
employers.

Data were collected in two time periods to reduce biases
that typically manifest when same source data are used to
assess both the predictor and criteria measures (Podsakoff,
MacKenzie, Lee, & Podsakoff, 2003). In the first wave of
data collection, respondents completed the ELQ and a
behavior description questionnaire. Two weeks after the
first wave of data collection, respondents completed another
questionnaire about the quality of their exchange relation
with their supervisors as well as the overall managerial
effectiveness of their boss and unit performance.

Yukl et al. 43

Measures

The ELQ was measured with 15 items, and each item has a
6-point Likert-style format (the ELQ is shown in the appen-
dix). The items describe several different aspects of ethical
leadership, including honesty, integrity, fairness, altruism,
consistency of behaviors with espoused values, communi-
cation of ethical values, and providing ethical guidance. To
maintain some continuity with the earlier research, when-
ever possible we tried to adapt items from earlier scales on
ethical leadership, including the ELS (Brown et al., 2005),
the PLIS (Craig & Gustafson, 1998), and the morality and
fairness scale developed by De Hoogh et al. (2008). However,
we did not include any items that appear to be confounded
with task and relations-oriented behaviors (e.g., clarifying
roles and responsibilities, empowering and developing sub-
ordinates) or with items in the LMX-7 scale (e.g., trust the
leader to defend your interests).

Leader task, relations, and change-oriented behaviors
were measured with 33 items from the Managerial Practices
Survey (MPS) developed by Yukl and colleagues (Kim &
Yukl, 1995; Yukl, Gordon, & Taber, 2002). All items have
the same 5-point response format with an anchor for each
choice indicating how much the behavior described by the
item is used by the focal manager (1 = Not at all, 5 = To a
very great extent) and with a “Don’t Know or Not Applicable”
option. Relations-oriented behaviors (supporting, recogniz-
ing, developing, consulting, and delegating) were measured
with 13 MPS items (α = .95). Task-oriented behaviors (clari-
fying roles, short-term planning, and monitoring operations)
were measured with 10 MPS items (α =.86). Change-oriented
behaviors (envisioning change and encouraging innovative
thinking) were measured with 10 MPS items (α = .92).

LMX was measured with the LMX-7 instrument devel-
oped by Scandura and Graen (1984; see also Graen &
Uhl-Bien, 1995). Each item had five anchored response
choices with unique anchors that are appropriate for the
item. The wording for the response choices in a few items
was slightly changed to reduce ambiguity. Sample items
included (a) how well does your boss understand and appre-
ciate your talents and potential, (b) how much confidence
does your boss have in your ability to do the work, (c) how
willing are you to do extra work to help your boss deal with
a difficult problem, and (d) how would you describe the
relationship between you and your boss? Internal reliability
consistency for this scale was high (α = .91).

Overall leader effectiveness was measured with four
items (α =.74). The first two items asked subordinates to rate
the overall effectiveness of their manager in carrying out his
or her job responsibilities (1 = The least effective manager I
have known and 9 = The most effective manager I have
known) and in terms of his or her overall effectiveness as a
manager (1 = Ineffective and 9 = Very effective). Each
item had a 9-point anchored scale (1 = The least effective

manager and 9 = The most effective manager). The other
two items asked subordinates to assess their manager’s work
unit performance relative to past performance (1 = Increased
a lot and 7 = Decreased a lot) and comparing it with similar
work units (1 = Much better and 7 = Much worse). These
two items were recoded such that higher values reflected
greater effectiveness. To equalize the influence of items with
different score ranges and variances, the scores for each item
were standardized before computing a composite score on
overall leader effectiveness.

Results
Factor Analyses

Exploratory and confirmatory factor analyses were used to
assess discriminant validity for the ELQ. The exploratory
factor analysis using principle components and oblique
rotation resulted in four distinct factors corresponding to
task, relations, and change behaviors and ethical leadership.
The factor loadings for the ELQ are shown in Table 1 and
demonstrate a clear distinction among the items. Only three
ELQ items had cross-loadings on the MPS relations-
oriented factor that exceeded .30, and none of those load-
ings reached .40.

Confirmatory factor analysis for the proposed four-factor
model (see Table 2, Model 1) showed adequate fit given the
number of indicators per construct. We then compared the
four-factor model with three possible alternative models:
(a) a model with a single underlying construct suggesting
common method variance (Podsakoff et al. 2003), (b) a
two-factor model with MPS items in one factor and ethical

Table 1. Factor Loadings for ELQ Items

ELQ Item
Ethical

Leadership
Relations
Behaviors

Change
Behaviors

Task
Behaviors

1 .82 .22 .10 .01
2 .65 .15 .10 .16
3 .83 .18 .05 .07
4 .81 .20 .11 .10
5 .75 .26 .17 .19
6 .72 .23 .14 .08
7 .72 .21 .17 .25
8 .83 .18 .12 .11
9 .68 .36 .24 .19
10 .72 .15 .21 .07
11 .65 .25 .27 .18
12 .80 .13 .03 .07
13 .71 .35 .15 .15
14 .70 .34 .13 .09
15 .71 .08 .14 .10

Note: ELQ = Ethical Leadership Questionnaire. Factor loadings on ELQ
items are shown in bold. Three items that had cross-loadings on the MPS
relations oriented factor also are shown in bold.

44 Journal of Leadership & Organizational Studies 20(1)

Table 2. Fit Indices for Alternative Measurement Models

Models χ2 df NNFI CFI IFI RMSEA Δχ2 Δdf

1. Baseline four-factor model 1804.29* 1,074 .97 .97 .97 .06
2. Single-factor model 6148.52* 1,080 .79 .80 .80 .16 4344.23* 6
3. Two-factor model 3220.33* 1,079 .91 .91 .91 .11 1416.04* 5

4. Three-factor model 4398.68* 1,079 .86 .87 .87 .14 2594.39* 5

NOTE: NNFI = nonnormed fit index; CFI = comparative fit index; IFI = incremental fit index; RMSEA = root mean square error of approximation. The
two-factor model differentiated Managerial Practices Survey items from Ethical Leadership Questionnaire items; the three-factor model differentiated
among Change, Task, Relations, and Ethical Leadership Questionnaire items.
*p < .05.

leadership items in the other, and (c) a three-factor model
with ethical leadership loading on relations behavior and
separate factors for task and change behaviors. The fit indi-
ces for the proposed four-factor model (see Table 2) were
better than for any of the rival models.

Correlations and Regression Analyses
Table 3 presents means, standard deviations, correlations,
and internal reliability estimates (i.e., Cronbach’s alpha) for
all six measures included in the study. Although composite
scores for all measures were slightly negatively skewed,
the differences between the average scores and the scale
midpoints were not very large. Furthermore, the standard
deviations for all of the measures were relatively high,
indicating adequate variability in the data sufficient for
further analysis.

Two hierarchical multiple regression analyses were con-
ducted to assess the effect of ethical leadership on LMX and
overall leader effectiveness. Table 4 summarizes results of
the regression analysis for LMX. In the first step, relations
and task-oriented leader behaviors were found to be signifi-
cant predictors of LMX, and they accounted for 52% of the
criterion variance (F = 60.63, p < .05). In the second step, after controlling for the effects of the three leader behaviors, ethical leadership was a significant predictor of LMX (β = .38, p < .05), and it explained an additional 7% criterion variance (F = 61.40, p < .05).

Table 3. Means, Standard Deviations, and Correlation Coefficients of Measures

Measures Mean SD 1 2 3 4 5 6

1. Task-Oriented Behaviors 3.18 0.70 (.86)
2. Relations-Oriented Behaviors 3.09 0.86 .46 (.95)
3. Change-Oriented Behaviors 3.55 0.96 .51 .67 (.92)
4. Ethical Leadership 4.68 1.05 .38 .60 .52 (.96)
5. Leader–Member Exchange 3.90 0.83 .47 .72 .53 .66 (.91)

6. Overall Leader Effectiveness 6.43 1.71 .55 .62 .59 .67 .80 (.74)

NOTE: All correlations are significant at p < .05 or better.

Table 4. Hierarchical Regression Analysis on Leader–Member
Exchange

Step 1 Step 2

Measures β t β t

Task Behaviors .20 3.15* .15 2.62*
Relations Behaviors .57 7.81** .40 5.50**
Change Behaviors .06 0.82 .01 0.13
Ethical Leadership .36 5.55**
R2 .52 .59
F 69.07** 61.40**

NOTE: β is standardized regression coefficient; N = 198.
*p < .05. **p< .01.

Table 5 summarizes results of the hierarchical regres-
sion analysis for overall leader effectiveness. In the first
step of the regression analysis, the three leader behaviors
together accounted for 46% variance in leader effective-
ness. In the second step, after controlling for the effects of
the three types of leader behaviors, ethical leadership was
found to be a significant predictor of leader effectiveness
(β = .39, p < .05), and it explained an additional 10% vari- ance in leader effectiveness (F = 41.55, p<.05). The regres- sion analyses provided evidence for the criterion-related validity of the ELQ.

Yukl et al. 45

Table 5. Hierarchical Regression Analysis on Overall Leader
Effectiveness

Step 1 Step 2
Measures β t β t

Task Behaviors .28 3.65** .21 2.97**
Relations
Behaviors

.30 3.51** .10 1.13

Change
Behaviors

.24 2.66* .20 2.45*

Ethical
Leadership

.39 4.98**

R2 .46 .56
F 39.92** 41.55**

NOTE: β is standardized regression coefficient; N = 198.
*p < .05. **p < .01.

Discussion

Researchers are paying increasing attention to the impor-
tance of ethical leadership in both private and public sector
organizations. However, progress in this research is impeded
by problems in the questionnaires used to measure ethical
leadership. One limitation of the earlier measures is overlap
with other leadership constructs such as supportive and
empowering leadership, which are known to be related to
LMX. When a correlation is found between a confounded
measure of ethical leadership and LMX, it is difficult to
interpret the results. Another limitation in earlier studies was
the use of an ethical leadership measure that did not include
some relevant aspects of ethical leadership. The relationship
between ethical leadership and outcomes such as LMX and
unit performance may be underestimated by an incomplete
measure of ethical leadership.

Based on previous theory and research, we developed
and assessed a new ELQ designed to provide a more useful
and valid measure. The ELQ is comprehensive with regard
to the most important elements of ethical leadership, includ-
ing integrity, honesty, fairness, communication of ethical
values, consistency of behavior with espoused values, ethi-
cal guidance, and altruism. At the same time, with only 15
items and one composite score, the ELQ is parsimonious
and easy to administer.

Our study showed that the ELQ has high reliability as
well as discriminant and criterion-related validity. The fac-
tor analyses confirmed that the items in the ELQ are distinct
from task- and change-oriented leader behaviors, and there
is minimal overlap with relations-oriented leader behaviors
such as supportive and empowering leadership.

As in a few earlier studies that used different measures,
we found that ethical leadership is significantly related to
LMX and leader effectiveness. Unlike the earlier studies,
our study minimized any confounding between ethical

leadership and other relevant predictors such as support-
ive leadership. After controlling for the effects of task-
oriented, relations-oriented, and change-oriented leader
behaviors, the ELQ explained additional variance in both
LMX and overall leader effectiveness. Similar to Zhu,
May, and Avolio (2004), our finding that ethical leader-
ship is related to an effectiveness measure that includes
unit work performance provides evidence that being ethi-
cal is not only commendable but also effective.

Limitations and Future Research
There are four particular limitations of the current study.
First, like any survey study, the results reflect correlations
rather than causation. A strong test of causality requires a
research design with experimental manipulation of indepen-
dent variables. It is difficult to manipulate ethical leadership
in a field setting, but a scenario study could be used for a
laboratory experiment on some research questions about
ethical leadership.

A second limitation of this research is the possibility of
same-source bias. To reduce such bias, we separated the col-
lection of the independent and dependent variables of our
study by approximately 2 weeks (Neubert, Carlson, Kacmar,
Roberts, & Chonko, 2009), and we used different response
formats for the predictor and criterion measures (Podsakoff
et al., 2003). Furthermore, confirmatory factor analysis
results suggested that our data were better explained by the
proposed four-factor model than by a common factor or
plausible alternative models. Finally, Doty and Glick (1998)
and Spector (2006) have concluded that problems caused by
common method variance are overstated and seldom serious
enough to invalidate research findings based on the type of
methods used. Just the same, future investigations should
conduct longitudinal research using independent measures
of the predictors and outcome variables derived from differ-
ent sources to further limit potential problems associated
with common method variance.

The third limitation of our study was the assessment of
leader attributes from the perspective of a single subordi-
nate. The ratings of leader ethical behaviors may be biased
by a subordinate’s general evaluation of the leader, but the
alternative of using leader self-ratings of ethical behav-
iors entails an even greater likelihood of biased responses.
Having multiple subordinates rate each leader’s ethical con-
duct could provide a more accurate assessment of ethical
behavior. Future research should ask leaders to provide
behavior self-assessments and then check for agreement
with the ratings of leader behaviors made by subordinates,
peers, and bosses. The study can be nested within a multi-
source feedback intervention that includes other relevant
behaviors and competencies.

A final limitation is that we did not include other common
measures of leadership (e.g., transformational leadership).

46 Journal of Leadership & Organizational Studies 20(1)

However, most leader behaviors captured by these other
measures are included in the MPS. Nonetheless, future
research should include alternative measures of leader
behaviors to further examine the discriminant, incremental,
and predictive validity of the ELQ.

Another future study that would be worthwhile is to com-
pare different ethical leadership scales with regard to their con-
tent validity and accuracy in predicting different criterion
variables. It would also be useful to assess how consistent the
ELQ fits conceptions of ethical leadership in different cultures,
and for different types of leaders in both the private and public
sector. Finally, dilemmas involving competing values and the
needs of different stakeholders deserve more attention in future
theory, research, and applications. Ethical leadership is more
than a list of best practices; it also involves the way ethical
dilemmas are resolved and what is done when all the available
options have negative consequences. We should avoid the
temptation to oversimplify the meaning of ethical leadership
by equating it to the composite score on a short questionnaire.

Conclusions
To be effective, leaders should demonstrate ethical leader
behaviors in addition to task-, relations-, and change-oriented
leader behaviors. The ELQ measure developed in this
study has several advantages over earlier versions. It
includes the key types of ethical behaviors, it is not con-
founded by other leader behaviors, and it is short and easy
to use. The ELQ can be used along with other measures of
behavior and skills in feedback workshops for leaders, and
it can be adapted for use as a self-monitoring instrument.

Appendix
Ethical Leadership Questionnaire (ELQ)

Instructions: This questionnaire is designed to study the
relevance of ethics to effective leadership. The term “unit”
refers to the team, department, division, or company for
which your boss is the formal leader, and the term “mem-
bers” refers to the people in the unit who report directly to
your boss. Please indicate how well each of the following
statements describes your current boss by selecting one of
the following response choices. Write the number of the
choice on the line provided. Leave the item blank if you do
not know the answer.

1. Strongly Disagree
2. Moderately Disagree
3. Slightly Disagree
4. Slightly Agree
5. Moderately Agree
6. Strongly Agree

My boss:

1. _ Shows a strong concern for ethical and moral
values.

2. _ Communicates clear ethical standards for
members.

3. _ Sets an example of ethical behavior in his/her
decisions and actions.

4. _Is honest and can be trusted to tell the truth.
5. _ Keeps his/her actions consistent with his/her

stated values (“walks the talk”).
6. _ Is fair and unbiased when assigning tasks to

members.
7. _ Can be trusted to carry out promises and com-

mitments.
8. _ Insists on doing what is fair and ethical even

when it is not easy.
9. _ Acknowledges mistakes and takes responsibility

for them.
10. _ Regards honesty and integrity as important per-

sonal values.
11. _ Sets an example of dedication and self-sacrifice

for the organization.
12. _ Opposes the use of unethical practices to increase

performance.
13. _ Is fair and objective when evaluating member

performance and providing rewards.
14. _ Puts the needs of others above his/her own self-

interest.
15. _ Holds members accountable for using ethical

practices in their work.

Copyright © by Yukl (2010).

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to
the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research,
authorship, and/or publication of this article.

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Bios

Gary Yukl received a PhD in Industrial-Organizational
Psychology from the University of California at Berkeley. He is

currently a Professor of Management at UAlbany, and his research
interests include leadership, influence processes, and management
development. He has published many journal articles and is the
author or coauthor of several books, including Leadership in
Organizations, 7th edition (Prentice-Hall, 2010). He has received
several awards for his research and is a fellow of the American
Psychological Association, the American Psychological Society,
the Society for Industrial-Organizational Psychology, and the
Academy of Management. His leadership development programs
are used in many organizations.

Rubina Mahsud, Assistant Professor, PhD, New York State
University at Albany, MPH, New York State University at Albany,
Masters in Social Sciences, University of Birmingham (UK),
M.D., Jinnah Medical College (Pak). Her areas of expertise are
Strategy, strategic leadership, and Corporate Social Responsibility,
Global Business Integrated. She joined Albers in 2007 where she
teaches MBA’s capstone courses on competitive strategy and
senior synthesis classes on Business Policy and Strategy. Prior to
Albers Business School, she held a visiting position at the Tobin
College of Business Administration at St. John’s University, New
York. Dr. Mahsud published on determinants of firm performance,
flexible leadership, ethical leadership, and corporate social
responsibility topics in journals including JLOS, JMP, The
Independent Review, and Consulting Psychology Journal.

Shahidul Hassan currently serves as an assistant professor of
Public Management at the John Glenn School of Public Affairs at
The Ohio State University. He received his PhD in Public
Administration and Policy from the Rockefeller College of Public
Affairs at the University at Albany. His research focuses on the role
of leadership and management practices on motivation, commit-
ment and performance of employees in public and non-profit orga-
nizations. Dr. Hassan’s research has appeared in journals such as
International Public Management Journal and Public Management
Review. He is a member of the Academy of Management and
Public Management Research Association and serves on the
Editorial Board for the International Public Management Journal.

Gregory E. Prussia teaches in the Management Department and
holds the O’Brien Chair in the Albers School of Business and
Economics at Seattle University. He has a BA in Economics and
an MBA from California State University, Chico, and a PhD in
Human Resource Management from Arizona State University. His
publications appear in several journals including Academy of
Management Journal, Academy of Management Review, Journal
of Applied Psychology, and Personnel Psychology. He is a mem-
ber of the Academy of Management, the American Psychological
Association, and the Decision Sciences Institute, and serves on the
Editorial Board for the Academy of Management Journal.

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Understanding (and Preventing) Ethical Leadership Failures

January 15, 2014

13 Comments

By Linda Fisher Thornton

Understanding What Causes Ethical Leadership Failures

Ethical leadership failures can be caused by different types of problems that may compound. Some of these problems are individual and others may be embedded in the organizational culture.

In 7 Lenses, I describe the kind of proactive

ethical leadership

that builds ethical cultures. The book is a road map for how to lead ethically in a complex world. While 7 Lenses is written from a positive perspective to help leaders avoid ethical problems and create ethical cultures, I often get asked “What causes ethical failures? What goes wrong?”

So this week I am exploring that question from two perspectives – that of what individual leaders do (or don’t do) and common organizational problems.

Individual and Organizational Causes

Here is a starter list of some of the factors that can lead to ethical failure. The list includes things that individual leaders do (or don’t do), and things that organizations do (or don’t do) to set a positive example and support

ethical thinking

and behavior.

These factors are connected, and it is often difficult to isolate just one of them when something goes wrong. See if you recognize any of these happening in your organization.

Individual
Ignoring  Boundaries (Ignoring Ethics Codes And Organizational Values That Forbid An Action)
Failing to Use Self-Control (“I Will Do This Even Though It’s Not Allowed”)
Entitlement View (“I Definitely Deserve This Even Though It’s Not Allowed”)
Prominent Personal Values (“I Think This Is Really Fine To Do Even Though It’s Not Allowed”)
Crowd Following (“Everybody Else is Doing It, So It Must Be Fine”)
Lack of Moral Compass (“Nobody Specifically Said That I Can’t Do It, So It Must Be Fine If I Do It”)
Organizational
Lack of Clarity (“What Does Ethical Mean Around Here?”)
No Ethical Leadership and Behavior Standards (“There Are No Rules About This”)
Oversimplified Rules (“Just Do the Right Thing”)
Lack of Positive Role Models (“Who Is Doing It the Right Way?”)
No Training or Coaching (“How Will I Learn It?”)
No Accountability, No Enforcement (“Nothing Bad Happens If I Do It, Even Though It’s Not Allowed”)
No Performance Integration (“We Say We Want Ethics, But We Reward and Promote Based on Sales and Output”)
When Problems Happen, Scapegoats Are Quickly Fired (Instead of Learning From Mistakes and Fixing the Culture)

Compounding Factors

Keep in mind that ethical failures may or may not be due to just one of these factors, but several that compound to create a ripple effect. Here are a few examples where the problem is worsened due to a combination of factors.

There are no ethical leadership standards and no positive role models (no way to be sure what to do)

A leader has an entitlement view and there is a lack of clarity about what ethical leadership means in the organization (it is easier to justify entitlement, when ethical expectations are unclear).

A leader lacks a moral compass and the organization lacks ethical leadership standards (the leader may act based on personal

ethics

, which may be slanted toward self-gain).

A leader has trouble with ethical boundaries and there is no accountability for ethical behavior in the organization (It increases the chances of ethical problems when both the leader and the organization lack clear ethical boundaries).

Problems within the ethical culture clearly make it harder for individual leaders to stay on an ethical path.

Preventing  (or Identifying and Correcting) These Problems in Your Organization

Now imagine what can happen when you have 3 or more of these factors (and perhaps others not named here) happening at the same time. Each additional factor can make it easier for problems to develop. Our goal as leaders is to prevent the problems that lead to a failure of ethical leadership. To do that we need to start talking about the dynamics that cause ethical problems and how to keep them from happening in our organizations.  How do we start the conversation? Talk candidly with leaders at all levels about issues named above that may have become a problem in your organization. For a detailed conversation guide, see

Leading the Conversation About Ethical Leadership

. For an understanding of how to manage ethical performance in the organization see 

Managing Ethical Leadership as a Performance System

.

Feel free to name additional factors that you have observed that can lead to ethical failure in your comments. 

For more, see Linda’s book 

7 Lenses 

and the 21 Question Assessment: 

How Current is My Message About Ethics?

2014  Bronze Axiom Business Book Award Winner 

About 7 Lenses

 
 
Info@LeadinginContext.com  @leadingincontxt  @7Lenses

© 2014 Leading in Context LLC 

 

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leading ethically in a complex world

About Linda Fisher Thornton
Linda Fisher Thornton is Founder and CEO of Leading in Context, and author of the award-winning book 7 Lenses. She teaches as Adjunct Assoc. Prof. for University of Richmond SPCS. She is leading a movement to help leaders and organizations Unleash the Positive Power of Ethical Leadership.

13 Responses to Understanding (and Preventing) Ethical Leadership Failures

1. ramakrishnan6002 says:

   February 20, 2017 at 7:53 pm

   Reblogged this on Gr8fullsoul.

2. Pingback: Preventing Ethical Leadership Failures | Leaderonomics.com

3. Linda Fisher Thornton says:

   February 21, 2014 at 1:37 pm

   Robyn, Yes, I’m seeing widely different interpretations of what ethical responsibility includes in the US, although globally there is a strong movement toward taking responsibility. What specific differences are you seeing?

4. robyn robynns says:

   February 21, 2014 at 11:28 am

   From what I’ve seen, and I’m very curious how scewed my viewpoint may be; but it seems as though the issue of ethics is radically different (if not almost missing) with the current entrepeneurships/start ups vs European companies, multi-nationals and American companies. I would be hard pressed to begin to equate ethics the same across the board. Suddenly back in America I’m finding the pov’s radically different, thus ethics widely divergent.

5. Linda Fisher Thornton says:

   February 21, 2014 at 9:15 am

   That’s a great question, Michelle. I think the weighting or the possible negative impact will depend on the context. For example, if one leader is not a good role model, but the organization has clear expectations and performance integration around ethics, that is not as bad as having a leader who is unethical in an organization that has no ethics infrastructure or performance integration. The negative impact of the leader in the second example could be much greater.

6. Michelle says:

   February 20, 2014 at 10:16 pm

   Great insights. When I think about my persona experience with organizations, the area that seems to be the largest stumbling block that I have experience is “No Performance Integration”. It is my belief that if we could fix that one, many of the other areas would improve. Do you believe that any of them are more heavily weighted than the others?

7. Pingback: HR reMixCarnival of HR – Polar Vortex Edition – HR reMix

11. Pingback: Understanding (and Preventing) Ethical Leadersh…

12. Pingback: 5 for Leadership (1/18/14) | Gary Runn5 for Leadership (1/18/14) – Gary Runn

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Linda Fisher Thornton

450th Post: Leaders, Why You Need Disequilibrium (Part 1)

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7 Ethical Leadership

Fuse/Thinsktock

Learning Outcomes

After reading this chapter, you should be able to do the following:

• Assess the global challenges of ethical leadership and explain the importance of ethical leadership in a
business organization.

• Analyze the characteristics of an ethical leader.

• Describe individual strategies to demonstrate ethical leadership in an organization.

ped82162_07_c07_203-226.indd 203 4/23/15 8:43 AM

Introduction

Introduction

Alcoa Learns an Ethics Program Needs Ethical Leadership

Alcoa, the global leader in lightweight metals engineering and manufacturing, considers itself
a values-driven company. The company’s website states, “Our commitment to be open, hon-
est and accountable, and to make decisions with the highest ethical standards, has guided the
company and our employees since 1888” (Alcoa Inc., 2014, para. 1). In 1985, Charles W. Parry,
chairman and chief executive officer (CEO) of Alcoa at the time, spoke of the importance of
ethics in business. He stated, “Ethics is not something businessmen must violate in order to
make a profit; it is something they must implement in order to prevent chaos” (p. 632). Parry
indicated that all groups, managers, executives, shareholders, and workers should hold each
other accountable for employing ethical practices.

In 2008, Alcoa’s director of ethics and compliance described a focus on providing ethical lead-
ership training of plant superintendents and supervisors, “because they set the example for
the greatest number of employees” (Napsha, 2008, para. 8). They provided intensive ethics
and compliance training to all management level employees in 44 countries, focusing on anti-
corruption and gift policies. Their program took local laws into consideration, but instilled
the company values regardless of location. Alcoa recognized that ethical challenges evolve as
business becomes more complex and global, with rapid changes.

Despite its award-winning ethics and compliance program, Alcoa managers in Australia
engaged in a bribery scheme to increase sales dating back to 1989. They set up an inter-
mediary in Bahrain to secure business while making payments to the royal Bahraini family.
According to investigations by the U.K. and U.S. justice departments, Alcoa Australia entered
a scheme where a consultant set up several shell companies that invoiced the Bahraini alu-
minum company at inflated rates to fund kickbacks to the royal family (Miller, Grossman,
Searcey, & Lublin, 2014). Through the consultant, tens of millions of dollars in bribes to senior
Bahraini government officials exchanged hands over 20 years. In 2014, Alcoa and the com-
pany it controls, Alcoa World Alumina LLC, pleaded guilty to violating the Foreign Corrupt
Practices Act and agreed to pay $384 million in fines.

The Alcoa scandal highlights the difference between management and leadership in an ethi-
cal business. Management relates to coping with complexity through processes of planning,
goal setting, organizing, staffing, budgeting, and auditing. Leadership relates to the ability to
inspire and motivate people to achieve goals (Kotter, 1990). As employees tackle more gray
areas of conduct, it is important that leadership sets the example of good ethical behavior.
Even though the Alcoa corporate office expressed concern of possible impropriety of the pay-
ment arrangement in Bahrain, managers of Alcoa Australia described the Bahraini business
as “one of our most important ‘blue ribbon’ alumina accounts” (Miller et al., 2014, p. B1). The
management of Alcoa Australia lacked ethical leadership.

The role of an ethical leader is to encourage behavior that aligns with the purpose, vision, and
values of the organization; Chapter 1 focused on the roles that managers and supervisors play
in promoting ethical conduct within an organization. Freeman and Steward (2006) describe
ethical leaders as “first and foremost members of their own organizations and stakeholder
groups” that “see their constituents as not just followers, but rather as stakeholders striv-
ing to achieve that same common purpose, vision, and values” (p. 3). Therefore, an ethical
leader in a global business interacts with stakeholders locally and globally. Employees will

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Section 7.1 Importance of Ethical Leaders

not embrace ethical standards if only the executives at headquarters care about corporate
conduct and legal compliance (LRN, 2007). Managers in every location need to become ethi-
cal leaders who are capable of modeling responsible conduct, encouraging ethical and lawful
conduct, and dealing with reports of violations and unethical conduct.

This chapter explores ethical leadership within an organization and the importance of becom-
ing an ethical leader. It includes a discussion of the many benefits for organizations to develop
ethical leaders, including increasing employee performance and reducing ethical lapses. This
is followed by an analysis of ethical leaders’ common traits and characteristics that foster
employee trust. Examples of good and poor ethical leadership provide a basis for comparison.
The chapter concludes with steps for becoming an ethical leader in an organization.

7.1 Importance of Ethical Leaders
Leaders play a critical role in creating the ethical culture of the organization because their
actions determine what constitutes ethical behavior in the workplace. Employees perceive the
ethical culture of an organization through experiences with their superiors. Therefore, some
scholars describe ethical leadership in terms of behaviors. For example, according to Lu and
Guy (2014), “Ethical leadership refers to the quality of guidance and role modeling provided
by the worker’s superior” (p. 10). Brown, Treviño, and Harrison (2005) define ethical leader-
ship as “the demonstration of normatively appropriate conduct through personal actions and
interpersonal relationships, and the promotion of such conduct to followers through two-way
communication, reinforcement, and decision-making” (p. 200).

Leadership behaviors are, in essence, the foundation of a company’s culture. Chapter 1
highlighted the importance of an organization’s ethical culture as a means of encouraging
appropriate employee and supplier behaviors. An organization establishes an ethical culture
when executive leadership takes the following actions, which are reinforced by managers and
supervisors:

• Communicate ethics as a priority;
• Set a good example of ethical conduct;
• Keep commitments;
• Provide information about what is going on; and
• Support following organizational standards (Ethics Resource Center, 2013, p. 19).

This section explores the leadership styles of an ethical leader and benefits that come from
developing ethical leaders within the organization.

Ethical Leadership Styles

There are many types of leadership styles, such as transactional leadership, servant leader-
ship, authentic leadership, and transformational leadership (Maak & Pless, 2006; Yukl, Mah-
sud, Hassan, & Prussia, 2013). Transactional leaders attempt to influence others by offering
monetary or recognition rewards for achieving outcomes. Transactional approaches are task-
oriented, focusing on clear expectations and rewards. On the other hand, it has been found
that transactional leadership fails when leaders are not able to deliver promised rewards
(Bass, 1985). In addition, employees may take shortcuts to receive compensation. Therefore,

ped82162_07_c07_203-226.indd 205 4/23/15 8:43 AM

Section 7.1 Importance of Ethical Leaders

a transactional leadership style is more often associated with compliance that maximizes out-
comes rather than modeling ethical behaviors (Groves & LaRocca, 2011).

Servant, authentic, and transformational leadership styles have a moral component and focus
on employee development (Beck, 2014). Servant leaders consider first whether other peo-
ple’s needs are being met. Greenleaf (1970) describes a servant leader:

It begins with the natural feeling one wants to serve, to serve first. Then con-
scious choice brings one to aspire to lead. That person is sharply different
from one who is leader first. . . . The difference manifests itself in the care
taken by the servant-first to make sure that other people’s highest priority
needs are being served. The best test, and difficult to administer, is this: Do
those served grow as persons? Do they, while being served, become healthier,
wiser, freer, more autonomous, more likely themselves to become servants?
And, what is the effect on the least privileged in society? Will they benefit or
at least not be further deprived? (p. 13)

Studies show that servant leaders exhibit characteristics of trust, empowerment, vision,
altruism, intrinsic motivation, commitment, and service (Parris & Peachey, 2013).

Authentic leaders know their strengths and weaknesses and remain true to themselves
without wavering. Avilio and Gardner (2005) describe authentic leadership in moral terms:

. . . authentic leaders are anchored by their own deep sense of self; they know
where they stand on important issues, values and beliefs. With that base
they stay their course and convey to others, often-times through actions,
not just words, what they represent in terms of principles, values and ethics.
(pp. 329–330)

Therefore, authentic leaders act consistently with their values and beliefs when addressing
difficult moral issues. Employees are more likely to adopt ethical behaviors of a leader who
is perceived as genuine, thereby making authentic leadership an important component of an
ethical organization (Verbos, Gerard, Forshey, Harding, & Miller, 2007).

Transformational leaders motivate others by appealing to morale and inspiring them to
achieve greater outcomes. Transformational approaches are relation-oriented, focusing on
collaboration to meet organizational goals. These types of leaders serve as role models who
employees trust, develop shared visions and team spirit, stimulate innovation and creativ-
ity by encouraging open dialogue, and act as coaches who foster personal development tai-
lored to the individual needs of each employee (Bass & Avolio, 1993). A transformational
leadership style establishes clear ethical principles and guidelines that employees can use as
a benchmark for recognizing values conflicts and realigning behavior.

Servant, authentic, and transformational leadership styles differ from transactional leader-
ship in that they strive to empower employees to take an active role in meeting organizational
goals and following organizational ethical principles (Kark, Shamir, & Chen, 2003). Transac-
tional leadership seeks to influence employee behavior rather than empower them. Employee
empowerment involves the belief that they have the ability to affect their work roles and
work context (Spreitzer, 1995). Employees empowered to contribute to the development of

ped82162_07_c07_203-226.indd 206 4/23/15 8:43 AM

Section 7.1 Importance of Ethical Leaders

organizational ethics codes and policies are more likely to make decisions that align with
these principles. Nike and Adidas AG maintained ethical labor standards at apparel factories
in emerging countries by empowering supply chain managers to evaluate the labor practices
of contract manufacturers and develop creative solutions to bring them up to the industry
ethical standard (Arnold & Hartman, 2003). Empowered employees recognize their personal
responsibility for individual decisions and hold their peers accountable for making ethical
decisions (Parboteeah et al., 2010). Leadership styles that empower employees can foster an
ethical culture within the organization.

Benefits of Ethical Leadership

The general expectation within organizations is that those at the executive level, such as the
CEO, chief financial officer (CFO), and board of directors, are primarily responsible for estab-
lishing and enforcing ethical behavior. However, studies have shown that employees do not
differentiate between the ethical leadership of executive leaders and frontline supervisors
(Treviño, Weaver, Gibson, & Toffler, 1999). Individuals in leadership and management posi-
tions must have close working relationships with their direct reports in order to be ethical
role models, which has prompted many organizations to consider developing all supervisors
or group leaders as ethical leaders (Treviño, Weaver, & Reynolds, 2006; Walumbwa, Morri-
son, & Christensen, 2012). See Business Best: Prudential Financial Develops Ethical Leaders for
an example of one company’s approach to encouraging ethical leadership across the ranks.

Business Best: Prudential Financial Develops
Ethical Leaders

Prudential Financial, Inc. is a leader in the global financial services market with more than
50,000 employees worldwide and operations in 38 countries and territories. The company
consistently receives international recognition for its commitment to diversity and establish-
ing a supportive workplace. Fortune magazine ranks Prudential Financial third on the 2014
World’s Most Admired Companies list within the life and health insurance category. In the
United States, 14 organizations have honored Prudential Financial for providing an inclusive
environment for women, families, veterans, unrepresented populations, and employees with
disabilities. International recognition for best employer includes awards in Poland, Brazil,
Ireland, Mexico, Taiwan, and Korea.

Lee Ausburger, Prudential Financial’s senior vice president and chief ethics and compliance
officer in the law, compliance, and business ethics unit, is responsible for global ethics and
compliance. He described the department’s role as “developing, encouraging, and enforcing
a high ethical environment across the company” (Jaeger, 2013, p. 63). Each business unit
has an assigned ethics officer who reports directly to the unit’s senior management in an
effort to safeguard the integrity and accountability of ethical leadership within all depart-
ments of the company. Ausburger explained that “In this way, Prudential has somebody sit-
ting at the elbow of every senior leader in our company ensuring that the integrity message
and ethics accountability is real and vital and is front and center in their department and
everything they do” (Jaeger, 2013, p. 63). At Prudential, staff located in local offices address

(continued)

ped82162_07_c07_203-226.indd 207 4/23/15 8:43 AM

Section 7.1 Importance of Ethical Leaders

Employees have higher job performance when they feel that their supervisors and company
executives pay serious attention to ethics. Ethical leadership with comprehensive ethical pro-
grams (tools and training) can minimize ethical and legal dilemmas for all employees. When
employees are encouraged to report problems, they experience improved psychological well-
being because they feel free to express discomfort about any misconduct they might witness.
This, in turn, contributes to their commitment to the organization.

Employees are more likely to commit to an organization when they perceive that top man-
agement and their immediate supervisor are trustworthy, fair, and honest. Organizational
commitment involves an emotional attachment between employees and their employers

country-specific regulatory issues. The company-wide focus is on anti-bribery, anticorrup-
tion, and personal securities trading regulations.

In a presentation at an Ethics & Compliance Officers Association conference, Augsburger
(2012) outlined six ways that managers play an important role as ethical leaders in the
organization:

• Establish and maintain tone at the top;
• Sustain corporate integrity;
• Make ethics locally relevant;
• Enhance managerial commitment to and understanding of company standards;
• Maintain consistency of messaging; and
• Provide tools and support to model ethical behaviors and address reported

concerns.
The company encourages managers and supervisors to engage in ethical leadership by pro-
viding a formal ethics support structure that holds managers accountable for the ethics and
compliance of subordinates, provides ongoing manager training and support, and conducts
annual ethical leadership assessments. Managers receive special training in ethical leader-
ship, which includes talking points for use with their employees and other communication
tools. Evaluation of ethical leadership includes a manager’s self-assessment, manager’s
assessment of employees, and employee opinion surveys of the ethical culture of the organi-
zation. Performance evaluations of managers and supervisors include how well they demon-
strate a strong moral compass by exhibiting the following four behaviors:

• Stands up for what is right even when it is unpopular;
• Shows unwavering commitment to high ethical standards and integrity through

words and actions;
• Acts in the best interest of shareholders, customers, and the company; and
• Takes personal accountability and expects the same from others.

Questions to Consider

1. How does Prudential Financial’s ethics and compliance approach address the
challenges of developing ethical leaders in a global business?

2. What more should Prudential consider to monitor the effectiveness of ethical
leadership across the company?

3. How might the investments in developing ethical leaders alleviate the reputational
damage from ethical lapses that escalate to public or regulatory scrutiny?

Business Best: Prudential Financial Develops
Ethical Leaders (continued)

ped82162_07_c07_203-226.indd 208 4/23/15 8:43 AM

Section 7.2 Characteristics of Ethical Leaders

that “influences whether they will remain or leave the organization, whether they accept
the organization’s values and goals, and how much effort they put forth on the job” (Philipp
& Lopez, 2013, p. 305). Organizational commitment increases when employees feel valued
and secure in employment. Ethical leadership can alleviate financial or job loss anxieties that
would otherwise erode an employee’s attachment to the organization. For example, research
has indicated that ethical leadership increases employee pay satisfaction and organizational
commitment, even when the relationship with the organization is short-term and for eco-
nomic reasons (Philipp and Lopez, 2013; Ruiz-Palomino, Sáez-Martínez, & Martínez-Cañas,
2013). Organizational commitment, in turn, leads to enhanced employee performance and
innovation. In a study of Chinese workers, Yidong and Xinxin (2013) found that employee
perceptions of ethical leadership increase innovative work behavior consisting of the “gen-
eration, promotion, and application of new ideas intended in the work role, group or organi-
zation, which aims at improving organizational performance” (p. 443).

Ethical leadership provides advantages within and outside the organization. Benefits of eth-
ical leadership include a pervasive ethical culture, fewer instances of ethical misconduct,
and greater employee psychological well-being, job commitment, and performance. An ethi-
cal culture with strong ethical leadership provides shareholder and community confidence
in the company. Therefore, ethical leadership is at the core of building trust and confidence
in business (Seidman, 2004).

7.2 Characteristics of Ethical Leaders
What makes an ethical leader? Research has found that ethical leaders typically possess four
general attributes relating to traits, behaviors, decisions, and encouragement (Resick, Hanges,
Dickson, & Mitchelson, 2006; Treviño & Brown, 2004):

1. An ethical leader must exhibit a strong moral character and integrity.
2. He or she is altruistic and demonstrates respect for others.
3. The decisions of ethical leaders demonstrate a collective motivation that promotes

team or organizational interests over self-serving interests.
4. Ethical leaders encourage ethical conduct in the organization through motivational

incentives and consider integrity in compensation and promotion decisions (Johnson,
Fleischman, Valentine, & Walker, 2012).

It is important to take into account whether employees perceive a manager as a moral person
and as a moral manager. A moral person refers to an individual of honest and trustworthy
character, who makes ethical decisions consistently and fairly. A moral manager is one who
inspires ethical behaviors in others by setting standards, holding others accountable, serving
as a good example, and establishing rewards to encourage ethical conduct. An ethical leader
is strong in both dimensions, whereas an unethical manager is weak in both dimensions.

Employees tend to assess the ethical stance of their leaders through a skewed lens. People
tend to hold beliefs about others based on experiences, which may influence their judgment
of leaders (Messick & Bazerman, 1996). Workers’ perceptions of ethical leadership within
their organization depend on feelings of supervisor effectiveness, trust, and satisfaction with
the supervisor (Brown et al., 2005). Employees tend to equate ethical leadership with
political skill, or “combining social perceptiveness or astuteness with the capacity to adjust

ped82162_07_c07_203-226.indd 209 4/23/15 8:43 AM

Section 7.2 Characteristics of Ethical Leaders

one’s behavior to different and changing situational demands” (Ferris et al., 2002, p. 111).
Similar to ethical leadership, political skill depends on social relationships, and stresses social
awareness, interactions, and influence. However, leaders with political skill have the ability to
inflate an employee’s perception of their manager’s ethicality and may cause them to accept
deviant behaviors (Harvey, Harris, Kacmar, Buckless, & Pescosolido, 2014). See Checklist: Eth-
ical Leadership Questionnaire to assess whether a manager, supervisor, or team leader has the
characteristics of an ethical leader.

Checklist: Ethical Leadership Questionnaire

Instructions: This questionnaire highlights the relevance of ethics to effective leadership. The
term unit refers to the team, department, division, or company for which your boss is the for-
mal leader, and the term members refers to the people in the unit who report directly to your
boss. Please indicate how well each of the following statements describes your current boss
by selecting one of the following response choices.

1. Strongly Disagree
2. Moderately Disagree
3. Slightly Disagree
4. Slightly Agree
5. Moderately Agree
6. Strongly Agree

__ Shows a strong concern for ethical and moral values.
__ Communicates clear ethical standards for members.
__ Sets an example of ethical behavior in his/her decisions and actions.
__ Is honest and can be trusted to tell the truth.
__ Keeps his/her actions consistent with his/her stated values (“walks the talk”).
__ Is fair and unbiased when assigning tasks to members.
__ Can be trusted to carry out promises and commitments.
__ Insists on doing what is fair and ethical even when it is not easy.
__ Acknowledges mistakes and takes responsibility for them.
__ Regards honesty and integrity as important personal values.
__ Sets an example of dedication and self-sacrifice for the organization.
__ Opposes the use of unethical practices to increase performance.
__ Is fair and objective when evaluating member performance and providing rewards.
__ Puts the needs of others above his/her self-interest.
__ Holds members accountable for using ethical practices in their work.

Source: Yukl, G., Mahsud, R., Hassan, S., & Prussia, G.E. (2013). An improved measure of ethical leadership.
Journal of Leadership & Organizational Studies, 20(1), 38–48. Reprinted with permission from Sage
Publications, Inc.

Questions to Consider

1. Which behaviors are the most important for you to trust the ethical leadership of a
supervisor, manager, or company executive?

2. Are there any descriptors in the list that are difficult to observe? How can a company
measure the ethical leadership within the organization?

3. How does personal experience with a leader (e.g., work assignments, disciplinary
actions) skew your assessment of his or her ethical leadership? Cite an example
based on personal experience.

ped82162_07_c07_203-226.indd 210 4/23/15 8:43 AM

Section 7.2 Characteristics of Ethical Leaders

Freeman and Steward (2006) describe characteristics of an ethical leader based on scholarly
business research and interviews with executives. This section examines each of the charac-
teristics of ethical leaders in detail. Examples of good and poor ethical leadership highlight
the importance of ethical leaders in maintaining an ethical culture.

Personify Organizational Values

“Can you walk the talk and talk the walk?” This phrase refers to an important characteristic
of ethical leaders—leading by example. Freeman and Steward (2006) have stressed that “it
is important for leaders to tell a compelling and morally rich story, but ethical leaders must
also embody and live the story” (p. 3). The CEO’s reputation for ethical behavior sets the tone
for the entire organization. When an executive acts as though he or she is exempt from the
organization’s ethics, it sends a message that unethical conduct is appropriate (Steinberg,
2010). Treviño and Brown (2004) term those managers that espouse workplace ethics but
have a weak reputation for personal moral character as hypocritical leaders. Managers who
exhibit unfair and dishonest behavior create job insecurity among employees who recognize
inconsistency between the organization’s procedures and leadership behavior (Loi, Lam,
& Chan, 2012). They may question the validity of company information and future career
opportunities.

When a CEO has a reputation for unethical conduct, the board of directors is likely to remove
the individual from office. American Apparel founder and former CEO Dov Charney’s use of
company funds for family travel and repeated allegations of sexual harassment caused the
board to encourage his resignation in lieu of being fired (Kapner, 2014). Hewlett-Packard
CEO Mark Hurd resigned in 2010 upon accusations of violating the company’s sexual harass-
ment policy and submitting fraudulent expense reports (Worthen & Lublin, 2010). Best Buy
Co., Inc. CEO Brian Dunn resigned in 2012 for violating company policy by having an inap-
propriate relationship with a female employee. That same year, Lockheed Martin Corporation
President and Chief Operating Officer Christopher Kubasik resigned upon disclosing a close
personal relationship with a subordinate in violation of the defense contractor’s ethics code
(“Dov Charney joins troubled exec club,” 2014).

In contrast, Anita Roddick, founder of The Body Shop International PLC, is an example of a
leader who trusted that business could be run ethically in line with her environmental and
social values (Hartman & Beck-Dudley, 1999). As a leader, she walked the talk as she champi-
oned fair trade, human rights, and environmental conservation. Roddick stated:

I believe that one of the most effective means of communication is storytell-
ing. . . . stories about products and stories about the organization. Stories
about how and where we find ingredients bring meaning to our essentially
meaningless products, while stories about the company bind and preserve our
history and our sense of common purpose. (Maak & Pless, 2006, pp. 79–80)

The founder’s ethical foundation permeates The Body Shop’s culture. The company’s head
of corporate responsibility has stressed, “The Body Shop’s integrity is based on what we do,
rather than what we say. We ask ourselves what we can do that’s different, and we will dem-
onstrate our campaigns to our employees and customers” (Persaud, 2003, p. 37). Leadership
by example is an important characteristic for an ethical leader.

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Section 7.2 Characteristics of Ethical Leaders

Focus on Organizational Success

Ethical leaders demonstrate a collective motivation to promote team or organizational
interests over self-serving interests. Spreier, Fontaine, and Malloy (2006) examined the
effect of self-serving biases and stated, “If you believe too many executives think, ‘It’s
all about me,’ you’re right. Research shows that an ethos celebrating individual achieve-
ment has been replacing other motivations, such as the drive to empower people, that
are essential for successful leadership” (p. 72). A focus on personal ego and success can
detract from achieving the goals of the organization. Leaders who exhibit narcissist traits
that promote self-glorification and self-gratification are more likely to engage in unethical
behavior (Hoffman et al., 2013). If misconduct occurs in an organization with a weak ethi-
cal culture, it may remain undetected and escalate into an ethical crisis. On the other hand,
subordinates and peers in an organization with a strong ethical culture are less likely to
perceive a narcissist leader as ethical.

There are numerous examples in which a leader placed personal gain and prestige over orga-
nizational performance. Tyco International’s former CEO Dennis Kozlowski’s use of company
funds for a $6,000 shower curtain, $15,000 umbrella stand, and $2 million birthday party
for his wife demonstrates an entitlement bias where leaders tend to give themselves a much
larger share (Prentice, 2012). In 2005, Kozlowski began an eight and a half year prison sen-
tence for grand larceny and conspiracy, falsifying business records, and violating business
law. Weston Smith (2013), former CFO of HealthSouth Corporation and convicted for fraud,
relayed how CEO Richard Scrushy “loved being in the spotlight at all times. . . . formed a band
that traveled in style on one of the company’s jets, and went so far as to tour in Australia fol-
lowing a ribbon-cutting at a new HealthSouth hospital” (p. 908). Scrushy later denied inflat-
ing earnings and asset values at HealthSouth of almost $2.7 billion.

A leader’s definition of success may be an indicator of whether he or she intends to employ
an ethical approach. Gentile (2010a) encourages broad, organizational goals in defining an
individual’s professional purpose rather than focusing on personal career advancement.
Max De Pree, founder of office furniture company Herman Miller, Inc., promoted workforce
participation and ethical leadership for the good of the organization. He said, “Ethics and
leadership intersect in the common good. Leaders should subsume their needs to those
of their followers and they must learn how to make a commitment to the common good.
Finally, leaders should know how to bear, rather than inflict, pain” (Murphy & Enderle,
1995, p. 123).

Roddick created The Body Shop as a values-based company with a social mission. In her
obituary, Tony Juniper, director of Friends of the Earth, wrote, “Anita did more than run a
successful ethical business: she was a pioneer of the whole concept of ethical and green
consumerism. There are quite a few business people today who claim green credentials,
but none came anywhere near Anita in terms of commitment and credibility’’ (Lyall, 2007).
Jack Welch and Jeff Immelt, former and current CEOs of General Electric (GE), respectively,
promote ethical leadership by connecting performance with integrity, stating at managerial
meetings, “No cutting of corners for commercial considerations will be tolerated. Integrity
must never be compromised to make the number” (Heineman, 2008, p. 31). GE defines the
role of business as high performance with high integrity.

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Section 7.2 Characteristics of Ethical Leaders

Find the Best People

Ethical leaders view finding and developing the best people as a moral imperative to care
for their workforce (Freeman & Steward, 2006). Recruiting the best people involves taking
ethics and character into account during the selection process. Recall the example of Zappos
from Chapter 1. The company seeks employees who not only meet the technical requirements
of the job but also demonstrate a strong moral character. During the interview process, the
human resource department assesses the alignment of each candidate’s personal values with
the company’s corporate values (Hsieh, 2010). The Body Shop’s director of human resources,
Caroline Waters, explained how the company’s corporate social responsibility (CSR) priori-
ties extend to its workforce. Training of new employees focuses on the values and core prin-
ciples found in the company’s mission statement. As the company expands internationally,
the responsibility of embodying The Body Shop’s ethical values rests on the local employees
and their leaders.

The selection and termination of employees reflects the culture of the organization. The hir-
ing and firing processes by the former CEO of Salomon Brothers, John Gutfreund, is one indi-
cator of a lack of ethical leadership that led to the bond trading scandal of the 1990s. Accord-
ing to Sims and Brinkmann (2002), Gutfreund selected “ambitious, aggressive young people
and gave them the chance to create new departments, new products and enjoy success they
could not achieve at other firms” (p. 334). The hiring policy stressed success without consid-
eration of ethical values. Dismissals of employees at Salomon Brothers were for vague and
ambiguous reasons that created uncertainty on how to succeed at the company. Employees
became more likely to engage in unethical conduct to survive in an aggressive and competi-
tive company culture (Sims & Brinkmann, 2002).

In an interview shortly after his 2006 conviction for fraud, Ken Lay, CEO of Enron, expressed
concern that the young, aggressive, highly educated employees the company attracted were
bending rules and inventing new rules related to energy trading and distribution (Ferrell &
Ferrell, 2011). Enron used an annual “rank and yank” performance review process in which
the employees at the bottom 10% to 15% of the company faced losing their jobs. This pro-
cess contributed to employee unwillingness to speak up about the inappropriate accounting
entries that ultimately led to Enron’s collapse (Beenen & Pinto, 2009).

Ethical leaders base compensation and promotion decisions on employee integrity, thereby
rewarding ethical conduct. Consider a situation in which a coworker is lying to customers in
order to make sales. An ethical leader would oppose the use of such practices to increase per-
formance and refrain from rewarding the perpetrator with a bonus or recognition for exceed-
ing sales quotas. If this did not occur, other employees would lose trust in their leader. They
expect an ethical leader to hold everyone accountable for using ethical practices in their work.

The challenge for management is to measure ethical conduct. Performance evaluations can be
subjective, and managers may not know that an employee was bending the rules. Some lead-
ers seek input from peers, subordinates, and customers in evaluating employees. Others, like
those at Prudential Financial, include self-assessments of ethical conduct. The goal is to make
integrity a recognized part of employee evaluation to create a dialogue on expected ethical
conduct.

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Section 7.2 Characteristics of Ethical Leaders

Create Conversations About Ethics

Ethical leaders encourage deeper conversations about ethics, values, stakeholder principles,
and societal expectations. When leaders talk about ethics and values, workers hold each
other responsible and accountable for whether they are actually living the values. At The
Body Shop, employees regularly debate whether packaging or product formulas are within
the company’s mission for social and environmental welfare. The managers describe conver-
sations about ethical values as “almost second nature—it’s what we do, but we also challenge
each other on it” (Sinclair & Agyeman, 2005, p. 8). Conversations about ethics highlight alter-
natives and reinforce an ethical culture that instills pride in company employees. Research
suggests that providing a platform for individuals to talk with colleagues about ethics can
lead to decisions that are more ethical (Treviño, den Nieuwenboer, & Kish-Gephart, 2014).

Ethics placards on the wall or laminated values cards in wallets do not replace a two-way
conversation about expectations for ethical conduct in the workplace. Recall the Enron scan-
dal involving fraudulent accounting practices and an elaborate cover-up scheme detailed in
Chapter 1. The company’s stated core values were respect, integrity, communication, and
excellence. Quotes such as the following appeared on telephone notepads distributed within
Enron to highlight the core values of communication, even though bringing bad news to man-
agement was discouraged through their informal culture:

“We do not err because truth is difficult to see. It is visible at a glance. We err
because this is more comfortable.” Alexander Solzhenitsyn

Despite these messages distributed through formal channels, it was the informal culture of
the company that dictated employee behavior. As whistle-blower Sherron Watkins stated, “At
Enron, we had a firm culture in place that emphasized making earnings targets no matter
what, and I don’t think any one person could have changed that culture” (Beenen & Pinto,
2009, p. 279).

James Burke, former CEO of Johnson & Johnson, is an example of an ethical leader willing to
talk about ethics throughout the organization. During the 1980s, Burke made the decision
to recall all Tylenol products at great financial cost upon learning of cyanide-laced Tylenol
capsules in the Chicago area. The strong ethical culture of Johnson & Johnson derives from
Burke’s ethical leadership early in his tenure as CEO, when he held a series of challenge meet-
ings. Held at branches around the world, the meetings provided a platform for managers to
debate the company’s long-standing credo and its values (Freeman & Steward, 2006). To pre-
vent senior executives from becoming hypocritical leaders, Burke stipulated that they “either
subscribe to the credo or remove it from the wall” (Treviño & Brown, 2004, p. 75). Johnson
& Johnson administers a Global Credo Survey every two years to ask employees if the behav-
iors of their coworkers and managers represent company values. In 2012, the focus of the
company’s newly introduced leadership and development program was on conversations—
”frequent and meaningful, formal and informal, conversations that fuel a culture of high per-
formance” (Johnson & Johnson, 2014, para. 8).

Create Mechanisms of Dissent

Employees look for encouragement from leadership to voice concerns when conduct con-
flicts with ethical standards. To avoid ethical traps of obedience to authority, groupthink, and

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Section 7.2 Characteristics of Ethical Leaders

conformity biases, employees must be able to object without fear of retaliation if an internal
process or business decision is wrong (Freeman & Steward, 2006). Ethical leaders strive for
an organizational culture where employees are comfortable pushing back. One approach is to
ask a coworker or subordinate to act as a devil’s advocate who scrutinizes decisions.

GE provides various channels through which employees can voice their concerns. An
organization-wide ombudsperson/employee advocate system offers employees more
than 600 neutral staff members to ask questions of and report violations to. Anonymous
reporting mechanisms through e-mail and phone are also available. Employees contribute
to an annual integrity review of the company’s ethics infrastructure to uncover any risky
business practices. In each department, a process termed work-outs encourages construc-
tive critiques of business policy and direction. GE’s former Vice President and General
Counsel Ben Heineman remarked:

My experience over many years was that these channels were rarely misused
and did not create a climate of fear and backbiting. Reporting employees
knew from long-standing company experience that their concerns would be
handled independently, reviewed professionally, and decided fairly based
on facts, not internal politics. Cheap shots wouldn’t work. (Heineman, 2008,
p. 94)

Understand the Values of Others

To encourage ethical behaviors in an organization, leaders must understand that each indi-
vidual approaches a situation from his or her own unique ethical perspective, and that these
differing viewpoints sometimes contribute to organizational conflict or cause employees to
disobey directives. Freeman and Steward (2006) proposed that “Ethical leaders can under-
stand why different people make different choices, but still have a strong grasp on what they
would do and why” (p. 6). Understanding the values of coworkers or employees allows an
ethical leader to express recognition of these values and evaluate how employees’ values
align with organizational values.

Feelings of moral reproach occur when employees perceive that their leader judges their
values as morally unequal. Stouten, van Dijke, Mayer, De Cremer, and Euwema (2013) found
that employees who sense moral reproach from a leader are more likely to engage in deviant
behavior. Leaders who come across as morally judgmental make employees feel as though
they are not trusted to do the right thing. Ethical leaders should discuss expected ethical stan-
dards with employees and create a dialogue regarding how employees feel about the applica-
tion of these behaviors in their daily work.

GE recognizes that ethical leadership requires respect for people and local norms. Employ-
ees do not respond well to dictates of what to do; rather, they need to understand why ethi-
cal standards exist and why they are important to the company. Heineman (2008) proposes
that companies address cultural differences when local practices conflict with the company’s
global norms. He recommends designing “programs that don’t heap scorn on local culture
(and, by implication, on our employees, their families, and their friends), but rather explain
why those practices are unacceptable in a global company” (p. 84). A characteristic of ethical
leaders is demonstrating respect for others.

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Section 7.2 Characteristics of Ethical Leaders

Make Difficult Decisions

Ethical leaders do not avoid difficult decisions even when the potential courses of action are
inconsistent with personal or organizational values. A leader who ignores the ethical consid-
erations of a decision and focuses only on meeting organizational goals may come up with
a simpler, more straightforward solution to a dilemma. However, the decision may not be
ethically sound. Ethical leaders are courageous enough to demand consideration of all the
ethical dimensions of a decision, regardless of the associated difficulties (Treviño, Brown, &
Hartman, 2003). For example, Ecolab’s management will turn down a customer sale if the
terms are not within acceptable practices (See Chapter Case: Ecolab: Encouraging Ethical
Leadership in Global Sales). As scholars Nonaka and Takeuchi (2011) stated, “Wise lead-
ers make decisions only after they figure out what is good for the organization and society”
(p. 64).

Employing ethical leadership does not mean ignoring business goals, but it does require
moral imagination. In Chapter 6, moral imagination is defined as the “ability to imaginatively
discern various possibilities for acting within a given situation and to envision the potential
help and harm that are likely to result from a given action” (Johnson, 1993, p. 202). Moral
imagination allows a leader to solve moral dilemmas in new ways without compromising
integrity. A manager exhibits ethical leadership in resolving employee conflicts by consid-
ering all factors, ensuring due process, and viewing employees as part of their community
(Moberg, 2003). Leadership and imagination enable decision makers to overcome challenges
in making business processes comply with societal expectations for fairness, safety, and envi-
ronmental consciousness.

Multinational companies must make difficult decisions when local practices and global stan-
dards conflict. For example, GE managers have been faced with determining how to sell ultra-
sound equipment in India and China, where the use of such technology to perform abortions
of female fetuses is against the law. As illegal use of ultrasound equipment continues, GE
sponsors an education program for customers, puts warning labels on the products, sells
equipment only to certified physicians, and provides sales data to enforcement agencies
(Heineman, 2008). In another situation, GE declined to allow the Chinese government to
search employees’ computers at its office in China for ties to an illegal religious organization.
The local managers were able to convince officials that allowing such access violates the
company’s human rights policies (Heineman, 2008). In both examples, GE leaders showed
moral imagination in addressing challenges without sacrificing company values.

Know the Limits of Values

Ethical leaders recognize that certain values have limits and that two values may conflict with
one another. According to Freeman and Steward (2006), “ethical leaders have an acute sense
of the limits of the values they live and are prepared with solid reasons to defend their chosen
course of action” (p. 7). Being able to keep ethical values in the forefront along with organiza-
tional values of innovation, profitability, and viability is an important characteristic of ethical
leaders. General Motors (GM) provides an example of the consequences of choosing profits
over customer safety when failing to replace a fatally flawed ignition switch in Chevy Cobalts

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Section 7.3 Becoming an Ethical Leader

due to cost, estimated by some reports as less than $1 (Nelson, 2014). The decision not to
correct a known hazard of the automobiles cost lives, creates financial burdens, and damages
GM’s reputation. On the other hand, the pharmacy chain CVS removed cigarettes and other
tobacco products from stores, amounting to a loss of $2 million in revenue (Herper, 2014).
The decision reflects leadership’s consideration of customer health over profit.

Frame Actions in Ethical Terms

Ethical leaders view their role as maintaining the integrity of the company by fostering
a culture that encourages ethical behaviors and decisions. They do this by modeling cor-
rect behavior, discussing ethics with their subordinates, and framing business situations
within the ethical dimensions. “The way a business situation is framed may subtly—and
subconsciously—influence the cognition and behavior of those experiencing it” (Clark,
Quigley, & Stumpf, 2014, p. 29). For example, a GE senior manager entered into a distri-
bution contract with a new vendor without completing required due diligence. The man-
ager cited competitive pressures as other firms were courting the vendor. By making the
decision to use an unreliable vender, the manager lacked the ethical leadership expected
by the company. GE fired the manager, citing a strict policy that “competitive pressures
never justify compromising integrity and ‘one strike and you’re out’” (Heineman, 2008,
p. 32). Ethical leadership makes ethics an essential and central part of the organizational
decision-making process.

Ethical leadership integrates ethics into all decisions and considers multiple stakeholder con-
cerns, thus redefining the primary purpose of business. Roddick of The Body Shop felt that
business should be a force for social good first, followed by a secondary orientation toward
bottom line profits (Hartman & Beck-Dudley, 1999). Similarly, GE considers that the role of
business is to fuse high performance with high integrity. GE leadership embeds integrity into
all business processes including manufacturing, engineering, marketing, sales, sourcing, and
research and development by making the business unit leaders responsible for ethical con-
duct (Heineman, 2008). Companies seek employees who understand how ethics relate to
business, incorporate ethics in decision making, and exhibit ethical leadership with integrity
and trustworthiness.

7.3 Becoming an Ethical Leader
What does it take to become an ethical leader? According to Gentile (2010a), it requires that
individuals examine their behavior and values by reflecting on “who [they] really are and
what [they] say and do” (p. 109). Self-assessment begins by asking questions about personal
and professional goals, defining their impact as a leader, and determining how they would
like to feel about themselves and their work. (See Checklist: Becoming an Ethical Leader for
more things to consider in becoming an ethical leader.) Ethical leaders accept responsibility
for the effects of their actions on customers, suppliers, employees, communities, and other
stakeholders.

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Section 7.3 Becoming an Ethical Leader

Companies seek leaders that exhibit behaviors of an ethical leader. Consider the behaviors
that the Prudential Financial executive committee expects of their leaders. The first two
behaviors: “Stands up for what’s right even when unpopular” and “Shows unwavering com-
mitment to high ethical standards and integrity through words and actions” require ethical
leaders to articulate and embody their values and those of the organization. The next two
behaviors: “Acts in the best interest of our shareholders, customers, and the company” and
“Takes personal accountability, and expects the same from others” highlight the imperative
that ethical leaders be accountable for their actions. Finally, pulling from transformational
leadership, an ethical leader needs to be a coach to others and guide them in ethical decisions
inherent in business.

Voicing Values

An ethical leader is a role model for appropriate behavior, though it may be difficult at times.
Organizational pressures for financial performance, group pressures for conformity, and
personal career aspirations provide rationalizations to overlook the ethical issues of a busi-
ness decision. Ethical leaders must recognize ethical traps for misconduct and develop ways
to overcome them (see Chapter 6). Ethical leadership requires a commitment to learn and

Checklist: Becoming an Ethical Leader

To enhance your effectiveness as an ethical leader, how would you respond to the following
questions?

1. What are my most important values and principles?
2. Does my calendar—how I spend my time and attention—reflect these values?
3. What would my subordinates and peers say my values are?
4. What mechanisms and processes have I designed to be sure that the people who

work for me can push back against my authority?
5. What could this organization do or ask me to do that would cause me to resign for

ethical reasons?
6. What do I want to accomplish with my leadership?
7. What do I want people to say about my leadership when I am gone?
8. Can I go home at the end of the day and tell my children (or a loved one) about my

leadership, and use my day’s work to teach them to be ethical leaders?

Reflect on how you answered these questions.

a. How do your responses reflect a commitment to examine your own behavior and
values? Did you delve deeply into each question or answer minimally?

b. How do your responses demonstrate a willingness to accept responsibility for the
effects of your actions on customers, suppliers, employees, communities, and other
stakeholders? How do your responses show a willingness to accept the effect of your
actions on yourself ?

Source: Freeman, R.E., & Steward, L. (2006). Developing ethical leadership. Charlottesville, Virginia: Busi-
ness Institute for Corporate Ethics.

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Section 7.3 Becoming an Ethical Leader

practice skills to demonstrate integrity and voice values. Gentile (2010a) identifies several
ways to develop confidence in voicing values in business:

1. Learn from experience. Reflect on the factors contributing to successfully integrating
integrity and performance, and those factors that inhibit ethical conduct.

2. Learn from others. Watch and learn from other managers who express values in the
workplace and lead ethical groups.

3. Create a support system. Look for mentors or peers who can informally assist with
leadership challenges.

4. Develop two-way conversations up line and down line in the organization. Encour-
age questioning assumptions that an action is appropriate or even warranted.

5. Learn to express difficult messages. Strive to express concerns calmly and without
passing judgment.

6. Know yourself and play to your strengths. Consider how your personal and profes-
sional purpose, risk profile, personal communication style, and self-image can influ-
ence how you lead others.

7. Practice. Seek opportunities to demonstrate integrity and voice values in business or
personal organizations.

To speak up and follow ethical standards takes courage. A leader who makes courageous deci-
sions in tough situations conveys to others the importance of upholding ethical principles.
For example, James Burke displayed great courage in his decision to recall Tylenol products
at a great financial loss to the company (Murphy & Enderle, 1995). Moral courage is action
to preserve values and ethical principles. Kidder (2009) identified three elements of moral
courage: 1) “a commitment to moral principles,” 2) “an awareness of the danger involved in
supporting those principles,” and 3) “a willing endurance of that danger” (p. 7). What must a
leader do to have the courage to stand up for ethical values? Table 7.1 offers a series of steps
for achieving moral courage in an organization.

Table 7.1 Seven steps to moral courage

1. Assess the situation Ask if the situation requires moral courage.
What are motives to stand up?
What is the central concern?

2. Scan for values Contemplate the values that characterize the situation.
Consider the pervasiveness and sensitivity of the situation.

3. Act on conscience Identify one or two key values that are most relevant to the situation.
Dismantle right vs. wrong arguments that might cause inaction.
Recognize situations where there is only one outcome.

4. Understand the risks Assess the dangers involved in acting and failing to act.
Three risks include ambiguity, exposure, and loss.

5. Endure the hardship Do I have the confidence to endure hardship?
Four sources of confidence are experience, character, faith, and intuition.

6. Avoid the inhibitors Identify and circumvent the ethical traps that challenge moral courage.

7. Learn moral courage Three approaches:
Develop skills for expressing morality and moral courage.
Seek mentors or exemplars of moral courage.
Practice moral courage.

Source: Kidder, R.M. (2009). Moral courage. New York: Harper Collins e-books.

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Section 7.3 Becoming an Ethical Leader

The first step involves recognizing a situation where acting ethically requires actions that
may generate some risks. Emotional signals prompt individuals to pay attention to feelings
about moral issues. Sekerka, McCarthy, and Bagozzi (2011) found that managers express
worry, loneliness, fear, shock or surprise, and hurt feelings (often stemming from a sense of
betrayal) when dealing with an ethical situation. The second step requires evaluating which
organizational values or ethical standards are lacking in the situation. By assessing the sig-
nificance of the issue, a leader can determine the most effective form of expressing concern.
When multiple values and ethical standards conflict, the next step is to determine which val-
ues are most important to the situation. Anticipating arguments regarding the importance of
each value can help to provide convincing counterarguments.

The fourth step is to assess the risk of acting or not acting. Challenges that should be consid-
ered are ambiguity (confidence in facts), exposure (visibility within the organization), and
loss (peril to income and personal reputation). To gain the trust of others, an ethical leader
must be able to openly state his or her reasons for acting and have the endurance to stand by
those reasons, which is the fifth step. Four sources of endurance include experience (relying
on past actions), character (values), faith (in doing the right thing), and intuition (gut impulses
are reliable). The sixth step relates to the ethical traps that can inhibit the moral courage to
stand up for integrity. Finally, an ethical leader can learn from the situation to develop skills to
apply moral courage. Three modes of learning include debriefing and discussing the ideas of
moral courage, documenting pathways for moral courage that others can follow, and provid-
ing opportunities to further practice speaking up in the organization.

Accountability

Ethical leaders hold themselves accountable to high ethical standards by acknowledging and
taking responsibility for their mistakes. By being accountable, they earn the right to hold
others accountable for their integrity performance as well. Therefore, ethical leaders must
understand how to portray attitudes that demonstrate their own accountability as well as
how to hold others accountable for their actions.

Such attitudes include credibility, transparency, and responsibility (Turk, 2012). Credibil-
ity comes when leaders consistently follow through by doing what they say they will do—
walking the talk. If they cannot follow through on their word, they explain to their employ-
ees and others what happened without excuses. Accountable leaders demonstrate transpar-
ency by sharing information, communicating their plans and decisions, and keeping both
their managers and direct reports informed. They communicate clear goals for themselves
and their team, along with performance measurement, monitoring techniques, and avenues
for providing feedback. Accountable leaders think about the consequences of an action in
advance, take responsibility for their actions and mistakes, learn from their mistakes, and
accept responsibility for the mistakes of their employees.

Before accepting accountability for a task or project, managers and employees should look at
the following features that encourage accountability:

• Clear expectations with specific, measurable, attainable, realistic, and time-
constrained goals;

• Adequate resources (financial, technical, and human) assigned to complete the job,
including access to required stakeholders;

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Section 7.3 Becoming an Ethical Leader

• The personal competence (ability, skill, and knowledge) and authority to perform
the task; and

• Fair and equitable consequences for both success and mistakes.

Ethical leaders foster a culture of accountability for their employees. They must ensure that
all employees have a clear understanding of what they are accountable for, how it is measured,
and the rewards or consequences for specific outcomes. A leader must earn the employee’s
trust and respect, and understand that employees may be reluctant to admit mistakes. Lead-
ers must make clear which behaviors or actions can be learning opportunities and which
are grounds for termination. Recall GE’s “one strike and you’re out” policy for compromising
integrity to achieve financial performance. Turk (2012) provides questions to ask to deter-
mine whether an organization has a culture of accountability:

• Are poor performers ignored, transferred, or promoted?
• Are there goals at every level, and are they publicized?
• Is performance execution measured or only business results?
• Are individuals and teams recognized and acknowledged?
• Do people hide from responsibility?
• Are problems and conflicts avoided?
• Do priorities compete?
• Are values ignored or taken for granted?
• Is there an atmosphere of change resistance?
• Are people punished for their mistakes? (p. 46)

Being an ethical leader within an organizational culture that prioritizes accountability can be
particularly challenging. Individual leaders should focus their efforts on establishing an ethi-
cal culture within the functional units for which they are responsible. The leader sets the tone
for his or her team’s morale and commitment to integrity.

Coaching

Coaching is one of the most powerful mechanisms a leader can employ to reinforce the orga-
nizational values and an ethical culture (Treviño & Brown, 2004). The role of the leader as
coach involves facilitating development, enabling learning, and supporting individuals and
teams in achieving their objectives (Maak & Pless, 2006). The leader as coach fosters col-
laborative interaction, open communication, and constructive conflict resolution. An ethical
leader encourages all employees to express concerns or seek advice to promote an ethical
culture. Transformational leaders develop skills to coach others to act with integrity and in
line with organizational ethical standards.

An important dimension of coaching is providing employees with constructive sugges-
tions for improvement. There must be a climate of trust and respect in order for them to be
receptive to changing behavior in response to feedback. If they perceive that they are being
evaluated or judged, employees may become defensive or resistant to change. They may feel
moral reproach if they sense that a leader looks down on their ethics. When the feedback
involves a sensitive issue that an employee may not want to hear, the message becomes dif-
ficult to deliver. For example, what is an appropriate way to correct an employee who is being

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Section 7.3 Becoming an Ethical Leader

disrespectful to a coworker? Hicks (2011) recommends the following steps for formatting the
message so that positive change can occur:

1. “Describe behavior, not intention.” Avoid attributing reasons for the unethical
behavior.

2. “Be specific.” When possible, give examples of the inappropriate behavior and
explain how it seems to violate ethical standards.

3. “Avoid global labels.” Refer to the person’s behavior, not their worth as an individual
with labels such as uncaring, unethical, or racist. Labels may be perceived as judg-
mental and could generate a defensive response.

4. “Immediacy is key.” Provide feedback as close to the event as possible, but delay if
you are experiencing anger toward the employee or you need more information.

5. “Focus on behavior that can be changed.” Some behaviors are so habitual that change
would require costly and lengthy interventions. Discuss with the employee ways to
change the behaviors.

6. “Never give feedback when you are angry.” Anger prevents a climate of trust and
openness. If the intention is to coach the employee on changing behavior, take time to
work through strong emotions about the situation before meeting. (p. 85–86)

Being a coach or mentor requires learning best practices for helping others to become respon-
sible and productive employees. Ventriello (2007) offers tips to managers for effectively men-
toring peers or subordinates in the workplace:

• “Share your knowledge and experience freely; otherwise . . . you will provide very
little value as a mentor.”

• “Make time to mentor. Before work, after work, during lunch, or whenever possible
to minimize distractions.”

• “Give your staff projects that push them beyond their comfort zones. This allows
them to learn, grow, and avoid boredom. It elevates team capabilities overall.”

• “Allow for do-overs. Projects with long timelines are best for this. Remember that
do-overs are not failures, but are part of the learning process.”

• “Do not just give assignments—explain how they should be done and why.”
• Good mentors should never ask, “Why are you asking me a question?”
• “Protect your team. Share accountability with them and never expose their inad-

equacies in public.”
• “Give credit where credit is due. Step back, be proud, and let others enjoy their

successes.”
• “Instill trust.” If someone you mentor tells you something in confidence, keep it con-

fidential, unless it is harmful to others or the company.
• “If you are mentoring somebody, be prepared to set him or her free.” You may men-

tor someone who moves on to a better position in another division or another com-
pany. Just remember—you must have done something right. (pp. 67 and 84)

Source: Ventriello, M. (2007). Overcoming the fear of mentoring. Proofs, 90(5), 67–84. Reprinted with per-
mission from Michael Ventriello, owner of Ventriello Communications LLC.

Coaching employees to make ethical decisions in the workplace incorporates all of these
best practices. It involves providing employees with opportunities to learn through chal-
lenging projects that require moral imagination to solve dilemmas without compromis-
ing integrity. Mentoring relationships encourage conversations on ethics and demonstrate

ped82162_07_c07_203-226.indd 222 4/23/15 8:43 AM

Summary & Resources

ethical behavior. Coaching requires leaders to focus on meeting organizational goals rather
than for personal gain. Successful coaching enables employees to become ethical leaders,
thereby fostering an ethical culture within the organization, minimizing risks of misconduct,
and building employee, customer, and shareholder trust in the company.

Summary & Resources

Chapter Summary
The role of an ethical leader is to encourage behavior that aligns with the purpose, vision, and
values of the organization. Leadership styles influence ethical behavior. Transactional leaders
attempt to influence others by offering monetary or recognition rewards for achieving out-
comes. Transformational leaders, on the other hand, motivate others by appealing to morale
and motivation to achieve greater outcomes.

Leaders play a critical role in creating an ethical organizational culture, which determines
what constitutes ethical behavior in the workplace. Ethical leadership provides advantages
within and outside of the organization. Benefits of ethical leadership include a pervasive ethi-
cal culture, less ethical misconduct, and greater employee psychological well-being, job com-
mitment, and performance. An ethical culture with strong ethical leadership provides confi-
dence and instills shareholder and community trust in the company.

Ethical leaders exhibit integrity and strong moral character. They are altruistic and demon-
strate respect for others. An ethical leader promotes team or organizational interests over
those that are self-serving. They encourage ethical conduct in the organization through moti-
vational incentives and consider integrity in compensation and promotion decisions. There
are many examples of corporate founders and CEOs who are exemplars of ethical leadership,
such as Anita Roddick (The Body Shop), Max De Pree (Herman Miller), James Burke (Johnson
& Johnson), Tony Hsieh (Zappos), and Jack Welch (General Electric). There are also many
examples of leadership lacking ethics and integrity, such as Dov Charney (American Apparel),
Dennis Kozlowski (Tyco), and Richard Scrushy (HealthSouth).

Becoming an ethical leader entails developing such practices as voicing values, being account-
able for actions, and coaching others in making ethical decisions. To speak up and follow ethi-
cal standards takes moral courage. Three elements of moral courage are: 1) a commitment to
moral principles, 2) an awareness of the danger involved in supporting those principles, and
3) a willing endurance of that danger. Ethical leaders hold themselves accountable to high
ethical standards by acknowledging and taking responsibility for their mistakes.

The role of the leader as coach involves facilitating development, enabling learning, and sup-
porting individuals and teams in achieving their objectives. Coaching is one of the most pow-
erful mechanisms that leaders can employ to reinforce organizational values and an ethical
culture. Successful coaching develops employees to become ethical leaders, thereby foster-
ing an ethical culture within the organization, minimizing risk of misconduct, and building
employee, customer, and shareholder trust in the company.

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Summary & Resources

Critical Thinking and

Discussion Questions

1. Think about the people you consider to be the most ethical leaders in an organiza-
tion you currently belong to (work, school, community, or otherwise). What qualities
do they possess that make them particularly effective? Does the list of ethical leaders
represent ethnocentric or stereotypical beliefs that could skew your assessment?

2. Consider a company or organization where you have sought employment or where
you would like to seek employment in the future. Analyze the company’s website for
an indication of CEO support of an ethical culture and leadership. What questions
could you ask in a job interview to uncover the degree to which ethical leadership
permeates throughout the organization? Would you be able to work for a company
where leaders were unethical or ethically neutral?

3. Do you see yourself as an ethical leader at work, home, school, in the community,
or elsewhere? Why or why not? What could you do to improve being a role model
for others?

4. Imagine you are the newly assigned ethics officer of Alcoa, the company discussed
in the Chapter introduction. Assess the challenges of ethical leadership in a global
environment. Write a plan for developing ethical leaders in the global company to
avoid unethical decisions and actions.

Key Terms

authentic leader An individual in a
position of power who knows his or her
strengths and weaknesses and always
remains true to himself or herself.

leadership The ability to inspire and moti-
vate people to achieve goals.

management The function of coping with
complexity through the processes of plan-
ning, goal setting, organizing, staffing, bud-
geting, and auditing.

moral courage Action to preserve values
and ethical principles.

moral person An individual of honest and
trustworthy character, who makes ethical
decisions consistently and fairly.

moral manager An organizational leader
who inspires ethical behaviors in others by
setting standards, holding others account-
able, setting a good example, and establish-
ing rewards to encourage ethical conduct.

moral reproach Employee perception that
their leader judges their values as morally
unequal.

political skill A leadership style that com-
bines social perceptiveness or astuteness
with the capacity to adjust one’s behavior to
different and changing situational demands.

servant leader An individual in a posi-
tion of power whose first consideration is
whether other people’s high priority needs
are met.

transformational leader An individual in
a position of power who motivates others by
appealing to morale and inspiring them to
achieve greater outcomes.

transactional leader An individual in a
position of power who influences others
through monetary or recognition rewards
for achieving outcomes.

ped82162_07_c07_203-226.indd 224 4/23/15 8:43 AM

Summary & Resources

Case Study: Ecolab: Encouraging Ethical Leadership
in Global Sales

A chemical company providing products and services to the food preparation industry
would have many opportunities for ethical misconduct, especially when sales occur in over
160 countries. This is the case for Ecolab, the global leader in cleaning, sanitizing, food
safety, and infection prevention products and services. With more than 14,000 direct sales
and service staff, Ecolab assists customers worldwide in the food service, food and bever-
age processing, hospitality, healthcare, government and education, retail, textile care, com-
mercial facilities, and vehicle wash industries.

Ecolab (n.d.) admits to being an aggressive competitor in the industrial cleaning industry,
even including a section in its culture statement saying, “Ambitious and aggressive, driven and
determined, enthusiastic and energetic, we cultivate the opportunity to compete” (para. 4).
International sales have been a part of Ecolab’s growth since its entry into Canada in 1955 and
Swedish subsidiary in 1956, with customer service capabilities in over 160 countries today.

CEO Doug Baker stresses that ethical leadership is fundamental to Ecolab’s business model.
The company creates a climate that is conducive to ethical actions in the sales force by estab-
lishing an industry expectation of honesty, integrity, and commitment to serving customers.
Often, employees will look to the CEO for guidance on strategic priorities communicated
through internal and public venues. According to Baker, “living by my personal moral code is
one of the key reasons I have this job” (Lennick & Kiel, 2005, p. 4). He also stresses organiza-
tional ethics in speeches that include language such as:

. . . our teams and our customers are counting on us to do real things for
them, not theoretical things, and to make a difference where it counts, and
it’s our people that do it. Now, importantly, our people are tied together
by a culture. And it’s an inherited culture, and it’s really the strength of the
company, and why I get to stand here today, and it’s a legacy that goes back
a long way. (Baker, 2007, para. 8)

This message cascades throughout the leadership and country managers around the globe.
In an effort to foster an ethical culture, managers receive ethics training, access to tools, and
are monitored to ensure they are making ethical choices. To communicate tone from the top,
all employees directly receive a letter from Baker. His message reinforces that ethical conduct
is an Ecolab philosophy, regardless of where business is conducted. As one manager stated,
“People want to be known to senior management for the right reasons. They are afraid of
being the one that got the company in trouble and their name would be known to senior
management for all the wrong reasons” (S. Erickson, personal communication, March 12,
2010). The culture encourages salespeople to include their manager and the legal depart-
ment if an ethical issue arises. While Ecolab is very customer focused, losing a customer for
the right reason (price, ethics) is encouraged, as the company has learned from experience
that customers return when they realize the quality of Ecolab’s service.

While Ecolab salespeople work in an aggressive culture, they also strive to perform their jobs
in an ethically sound way because it makes good business sense. When salespeople at Ecolab
say they are going to do something, the expectation is that they will deliver on that promise.
By being honest, fair, and following through on promises, the sales force maintains the trust
of its customers for repeated sales.

(continued)

ped82162_07_c07_203-226.indd 225 4/23/15 8:43 AM

Summary & Resources

Jane, an Ecolab salesperson in the United States, developed a relationship with a new client
for a global contract. The account was substantial and could greatly enhance the company’s
revenues as well as Jane’s compensation. With a signed purchasing contract in hand, she
closed the deal. Shortly thereafter, the client asked Jane for specific sales information, stating
that it was a standard procedure for purchases. The request entailed restating the quantities
and costs on the invoice that differed from the original purchase order. Something did not
feel right to Jane. In all of her sales experience, she had never received such a request from a
client.

Adapted from Gonzalez-Padron, T. (2011). Ecolab Inc.: How a company encourages ethical leader-
ship. In D. D. Warrick & J. Mueller (Eds.), Learning from real world cases—lessons in leadership
(pp. 41–48). Learning from Real World Cases—Lessons in Leadership: Rossi Smith Academic
Publishing.)

Discussion Questions

1. Given the stance of Ecolab leadership, how should Jane handle the client’s request
for additional sales documentation? What would be the possible outcomes of
providing the requested documentation to the client?

2. In what ways does a strong ethical position affect the conduct and culture of an
organization?

3. What are some of the possible consequences internally and externally of not taking a
strong ethical position?

4. What are some things Ecolab does to encourage ethical conduct?
5. What are the characteristics of an ethical leader? How can they influence responsible

behavior in an organization?

Suggested Resources

The Aspen Institute Business and Society Program

http://www.aspeninstitute.org/policy-work/business-society

Business Roundtable Institute for Corporate Ethics

http://www.corporate-ethics.org

Ethisphere Institute

http://www.ethisphere.com

Case Study: Ecolab: Encouraging Ethical Leadership
in Global Sales (continued)

ped82162_07_c07_203-226.indd 226 4/23/15 8:43 AM

http://www.aspeninstitute.org/policy-work/business-society

http://www.corporate-ethics.org

http://www.ethisphere.com

8 Organizational Culture

Damien Dovarganes/Associated Press

Learning Outcomes

After reading this chapter, you should be able to do the following:

• Examine how organizational culture drives ethical behavior.

• Analyze best practices for developing an ethical culture.

• Evaluate the eight criteria required for an effective ethics and compliance program.

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Introduction

Introduction

Target’s Struggle with Ethical Culture

After being one of three U.S. retailers recognized for exemplary ethical standards and prac-
tices for seven consecutive years, Target was not included on Ethisphere Institute’s 2014
World’s Most Ethical Companies list (Adams, 2014). Ethisphere Institute conducts a survey
of large public and private international companies and publishes the annual list in its maga-
zine. Ethical culture is a component in ranking the most ethical companies, looking for the
adoption of a values-based culture in the organization, workforce acceptance of the culture,
and employee behavior according to the ethical culture.

Target’s fall from the list comes after a 2013 data breach of customer credit card data during
the Christmas shopping season. Even with extensive data security measures in place, a Rus-
sian hacker accessed customer credit card and personal information from purchases made
from November 27 to December 15. Reports indicate that Target received initial warning of
malware as early as November 30, but did not take action until enforcement agencies con-
tacted the company two weeks later. Most customers learned of the leaking of their sensitive
data from media news outlets on December 18, one day before Target released a press state-
ment asserting that “Target alerted authorities and financial institutions immediately after
it was made aware of the unauthorized access, and it is putting all appropriate resources
behind these efforts” (Target, 2013, para. 3). As more information emerged, the company
reported the unauthorized access to credit card or personal data of over 110,000 customers.

The manner in which the large retailer handled the data breach crisis demonstrates an orga-
nizational culture that ignored warnings, failed to tell customers all available information,
and lacked empathy for customer concern of financial harm (Levin, 2014). The investors,
employees, managers, and media considered that the organizational culture of Target had
become too controlling and unresponsive to new information. The chief information officer
(CIO) accepted responsibility for the failure of data security and resigned from the company.
In response to shareholder demands for greater accountability, a new chief executive officer
(CEO) and some board members were appointed in 2014.

Why is the focus on Target’s organizational culture after this crisis? Culture matters in busi-
ness. A healthy culture allows employees to live their values and perform without fear of retal-
iation, whereas dysfunctional cultures lead to poor decisions, lower performance, and greater
risk of ethical misconduct scandals (Gebler, 2012). Chapter 1 describes ethical culture as the
degree to which an organization is committed to ethical responsibilities, with expectations
for appropriate behaviors of its employees and suppliers. An ethical organization stresses the
incorporation of values in its strategic planning in order to develop a values-based culture.
United Launch Alliance is an example of a company that integrates values throughout the
organization and represents a basis for their ethical programs.

Chapter 7 examined ethical leadership and its role in creating an ethical culture. A company
with a strong ethical culture makes appropriate behavior a priority through leadership, fair
policies, open discussion of ethics and incentives for ethical behavior (Treviño, Weaver, Gib-
son, & Toffler, 1999). Companies with an ethical culture have formal business ethics programs
that include codes of conduct, ethical training, and reporting mechanisms for misconduct.
While an ethical culture denotes the values, norms, and artifacts of an organization, an ethi-
cal climate refers to employees’ shared perceptions of “ethically appropriate behavior and

ped82162_08_c08_227-254.indd 228 4/23/15 8:45 AM

Section 8.1 Organizational Culture Drives Ethical Behavior

knowledge of procedural steps to address an ethical issue” (Kuntz, Kuntz, Elenkov, & Nab-
irukhina, 2013, p. 319). Ethical climate relates to the collective personality of the organiza-
tion, made up of the employees’ ethical attitudes, views, and decision-making processes (Eth-
ics Resource Center, 2009).

Building on the concept of ethical leadership, this chapter focuses on organizational culture
as a powerful driver of workplace behavior. An ethical culture can incentivize appropriate
behaviors in business. The following material describes how an ethical culture can overcome
informal group pressures for misconduct, how to measure the strength of a company’s ethi-
cal culture, and steps to develop a culture that promotes ethics in an organization. Finally,
the components of an organizational ethics program provide a framework for supporting an
ethical culture. These elements reinforce the importance of having an ethical leader who will
promote the company’s ethical culture.

8.1 Organizational Culture Drives
Ethical Behavior

Every organization with employees has a culture, sometimes termed corporate culture or
company culture, which drives employee behavior. Culture in an organization can be described
as “how we do things around here” (Gebler, 2012, p. 7). Organizational culture refers to “the
pattern of shared values and beliefs that help individuals understand organizational function-
ing and thus provide them with the norms for behavior in the organization” (Deshpande &
Webster, 1989, p. 4). Therefore, the culture of an organization consists of shared basic values,
behavioral norms, and visible artifacts that guide behaviors and decision making (Homburg &
Pflesser, 2000). An ethical culture founded on values will stress expectations for appropriate
behaviors of its employees and suppliers.

Values, Norms, and Artifacts of an Ethical Culture

Shared basic values are basic assumptions outlining desirable ends and means that a group
has invented, discovered, or developed, and that have worked well enough to be considered
valid, and therefore, are taught to new members. Schein (1984) views shared values of an
organization in two ways: 1) overt, espoused values, and 2) values that are taken for granted.

The first relates to stated values that the company strives to follow. Organizations choose
values that reflect the history, heritage, and influence of the founders on the company’s value
structure. The innovative furniture company, Herman Miller, identifies operational values
that include curiosity and exploration as “two great strengths we take from our heritage of
research-based design” (Herman Miller Inc., 2014b, Curiosity & Exploration section, para. 1).
The core values of Heinz include operational and ethical orientations, such as team building
and collaboration, vision, innovation, results, and integrity (see Figure 8.1).

Values that are taken for granted, on the other hand, are considered espoused values that,
over time, transform into underlying assumptions about how things really happen in the
organization. These assumptions reflect the organization’s relationship to the environment,
how to interact with others, whether to trust others, and how to define truth. Target espoused

ped82162_08_c08_227-254.indd 229 4/23/15 8:45 AM

Team Building
& Collaboration

We embrace great ideas
from everywhere and
everyone and respect

all individuals.

As the trusted leader in nutrition and wellness,
Heinz — the original Pure Food Company — is dedicated to the

sustainable health of people, the planet and our Company.

Vision
We define a compelling,

sustainable future
and create the path

to achieve it.

VALUES

Results
We deliver on

commitments, take
accountability and
balance the short-

and long-term.

Innovation
We spot consumer &
customer needs and

meet them with
simple, creative

solutions.

Integrity
We always tell the truth,

act with the highest ethical
standards and ensure that

our products are of the
highest quality.

Mission Statement

VALUES
Section 8.1 Organizational Culture Drives Ethical Behavior

values of great customer service with a mission to deliver “outstanding value, continuous
innovation, and exceptional guest experiences by consistently fulfilling our Expect More. Pay
Less.© brand promise” (Target, 2014, Our mission section, para. 1). Despite this mission, the
company appeared to have underlying assumptions about avoiding problems in order to
make sales targets (Levin, 2014).

Norms are expectations of desirable behavior found in the policies and procedures that guide
organizational decisions and actions. Companies express norms as principles for acceptable
behavior. Chapter 1 defines principles as the rules or standards that inform actions and think-
ing. Heinz builds on its values to offer three guiding principles for employee behavior: 1) “com-
pliance with applicable laws and regulations,” 2) “no conflicts with Heinz’s best interests,” and
3) “adherence to high ethical standards” (Heinz, 2010, p. 6). Google’s ethical code includes the
expected behavior of making money without being evil, which is the foundation for several
core principles to guide the company’s conduct, such as “democracy on the web works” and
“great just isn’t good enough” (Google, 2014, para. 5, 11). Stated organizational principles rep-
resent a company’s preferred behaviors rather than the informal norms followed by most of
its employees. Target’s data security protocol would have prevented continued data loss after
the initial breach if its policies and procedures were indeed a company norm.

Figure 8.1: Heinz core values

Heinz stresses operational and ethical principles in its list of core values.

Source: Heinz. (2010). Global code of conduct. Reprinted with permission.

Team Building
& Collaboration
We embrace great ideas
from everywhere and
everyone and respect
all individuals.
As the trusted leader in nutrition and wellness,
Heinz — the original Pure Food Company — is dedicated to the
sustainable health of people, the planet and our Company.
Vision
We define a compelling,
sustainable future
and create the path
to achieve it.
VALUES
Results
We deliver on
commitments, take
accountability and
balance the short-
and long-term.
Innovation
We spot consumer &
customer needs and
meet them with
simple, creative
solutions.
Integrity
We always tell the truth,
act with the highest ethical
standards and ensure that
our products are of the
highest quality.
Mission Statement
VALUES

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Section 8.1 Organizational Culture Drives Ethical Behavior

Artifacts are tangible expressions of shared values and norms and include a company’s
architecture, technology, manner of dress, rituals, documents, and stories (Schein, 1984). A
company’s code of conduct is an example of an artifact. Heinz incorporates its story to dem-
onstrate company values in its global code of conduct:

It is, and has always been, the policy of H. J. Heinz Company to maintain the
highest level of professional and ethical standards in conducting its business
affairs. The Company places the highest importance on our reputation for
honesty, integrity, and high ethical standards. It is a reputation that originated
with our founder, Henry John Heinz, who used clear bottles for his products,
unlike his competitors, so that customers could see that Heinz’s products
stood for quality and were not made with cheap fillers. (Heinz, 2010, p. 5)

Source: Heinz. (2010). Global code of conduct. Reprinted with permission.

Social media postings are becoming a form of artifact, as their content often reflects a com-
pany’s espoused values. Cisco communicates company values through a public policy blog to
discuss the company positions on issues that are important to their business (Cisco, 2013).
These social media postings can also reflect underlying assumptions of company values. For
example, the tweets and Facebook page of the cofounder of the mobile dating app, Tinder, as
well as the company’s own Twitter account, included statements calling women “sluts” and
“whores” are now evidence in a sexual harassment lawsuit (Bercovici, 2014). A Target corpo-
rate employee’s post blasting the company for an unproductive workplace culture required
a response from Target’s Chief Marketing Officer Jeff Jones. Jones said, “While we would have
preferred to have a conversation like this with the team member directly, speaking openly
and honestly, and challenging norms is exactly what we need to be doing today and every day
going forward” (Malcolm, 2014, para. 6).

Importance of an Ethical Culture

An ethical culture that drives appropriate employee behavior is valuable to an organization.
Chapter 4 established the importance of an ethical organizational culture as it relates to com-
pliance with national guidelines and regulations, but regulatory compliance is not the only
benefit. A strong ethical culture creates greater organizational commitment, stronger job sat-
isfaction, and higher performance in employees. The ethical culture of an organization can
incentivize employees’ behaviors, align the informal culture of the organization with formal
policies and procedures, and attract and retain a talented workforce.

Complying With Regulations
In response to the accounting scandals in the early 2000s, the U.S. Securities Exchange
Commission equated a strong ethical culture with good governance. For example, the 2004
amendment of the U.S. Federal Sentencing Guidelines for Organizations (FSGO) includes a
requirement for companies to “promote an organizational culture that encourages ethical
conduct and a commitment to compliance with the law” (United States Sentencing Commis-
sion, 2013, p. 497). Companies can avoid monetary fines and sanctions by committing to
promote honesty and integrity throughout the organization.

Other countries have similar requirements in their company or have established anti-
corruption legislation. The U.K.’s Companies Act 2006 requires the board of directors to

ped82162_08_c08_227-254.indd 231 4/23/15 8:45 AM

0%

20%

40%

60%

80%

100%

88%

59%

32%

20%

Weak Weak-Leaning Strong-Leaning

Strength of Ethics Culture

StrongE
m

p
lo

y
e
e
s
W

h
o

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b

s
e
rv

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d

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Section 8.1 Organizational Culture Drives Ethical Behavior

encourage a culture that considers the long-term consequences of a business on its employ-
ees, suppliers, consumers, and the environment (Casson, 2013). Yet many of the European
nations continue to focus on technical aspects of director or top management responsi-
bilities instead of the behavioral standards. The Organisation for Economic Co-operation
and Development Guidelines for Multinational Enterprises (2011b) stress the need for an
ethical culture built on a strong corporate governance procedure. The Belgian Directors’
Association (GUBERNA) provides a guide for behaving with integrity with advice such as,
“A director participates in the development and promotion of a culture of honesty” (Casson,
2013, p. 25).

Increasing Ethical Behavior
There is a proven link between an ethical culture and pressure to engage in ethical behaviors
in the workplace. Studies have shown that an organizational culture that supports ethical
values generates higher perceptions of honesty, lower pressures to act unethically, lower
observance of misconduct, and higher reporting of misconduct (Basran, 2012; Basran &
Webley, 2012; Ethics Resource Center, 2010). See Figure 8.2 for findings of the 2013 National
Business Ethics Survey® of the Ethics Resource Center on the relationship of ethical culture
strength and observed misconduct. The study of U.S. workers found that 88% of employees
observed misconduct when their company has a weak ethical culture, significantly more than
the 20% of employees who witnessed misconduct in companies that value ethical perfor-
mance and build strong cultures (Ethics Resource Center, 2013b).

Figure 8.2: Relationship of ethical culture strength and observed misconduct

More employees observe unethical behavior in companies with a weak ethical culture than those with
strong ethics programs.

Source: National Business Ethics Survey of the U.S. Workforce. (2013). Arlington, VA: Ethics Resource Center. Reprinted with permission.

0%
20%
40%
60%
80%
100%
88%
59%
32%
20%
Weak Weak-Leaning Strong-Leaning
Strength of Ethics Culture
StrongE
m
p
lo
y
e
e
s
W
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o
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s

ped82162_08_c08_227-254.indd 232 4/23/15 8:45 AM

Section 8.1 Organizational Culture Drives Ethical Behavior

Studies in the United Kingdom, Germany, France, Italy, and Spain have discovered results that
are similar to those of the U.S. study. In the United Kingdom, 70% of workers with unsup-
portive ethical cultures observed misconduct (Basran & Webley, 2012). Almost half of the
employees surveyed in the four countries in continental Europe observed misconduct when
their employer had a weak ethical culture, whereas only 18% of employees with a strong ethi-
cal climate witnessed unethical behaviors (Basran, 2012).

Aligning Informal Culture of Groups
Ethical companies are able to align the informal culture that guides employees’ behavior with
the formal components of an ethical culture. Recall from Chapter 1 that informal culture is
the mechanism by which employees “learn the ‘true values’ of the organization” (Bazerman &
Tenbrunsel, 2011a, p. 117) through employee stories, observations, and experiences, which
may conflict with organizational values. Formal components, on the other hand, include
structures, policies, decision-making processes, and ethics training. The informal culture
reflects the way things are really done—and is trusted by employees more than formal writ-
ten standards. Therefore, informal cultures have a greater influence on ethical behavior in the
workplace.

Financial and time pressures heavily influence informal cultural norms that conflict with the
formal components of an ethical culture. For example, in a study of Swedish auditors, Svan-
berg and Öhman (2013) found that informal norms can affect audit quality when auditors
experience time and budget pressure from their company or client. Audit firms bid for con-
tracts that often result in tight deadlines. Auditors then deviate from formal procedures by
accepting weak client explanations, endorsing a required audit step without completing the
work or noting the omission of procedures, and shifting time to non-chargeable areas of the
audit or to another client.

Svanberg and Öhman (2013) found that audit firms accept the unethical practice of shifting
time primarily because auditors believe such misconduct will not be detected nor punished.
Shifting time to non-chargeable areas of the audit or another client has become an informal
industry norm. Treviño et al. (1999) found that employees’ perceptions that the company
consistently follows formal codes, policies, and procedures has the greatest influence in pre-
venting the establishment of informal norms that lead to unethical behavior. Therefore, an
ethical culture is required for the formal elements to be part of the larger informal culture to
support ethical conduct every day (Treviño & Brown, 2004).

Attracting a Talented Workforce
Company culture influences how employees describe where they work, understand the busi-
ness, and see themselves as part of the organization (Hansen, 2011). A moral misalignment
occurs when an employee feels that there are ethical or moral differences between how
the company and that individual believe the firm should operate, often becoming a signal
to leave the workplace and seek employment elsewhere (Smith, 2013). Employees are less
likely to leave a company when an organization’s values to respect employees provide for
ethical labor practices in the organization (Stewart, Volpone, Avery, & McKay, 2011). There-
fore, building a strong ethical culture is key to attracting talent that, in turn, determines a
business’s success.

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Section 8.1 Organizational Culture Drives Ethical Behavior

Assessing the Strength of an Ethical Culture

Potential and current employees of an organization should take into consideration its ethical
culture to avoid moral misalignment. However, measuring the strength of an organization’s
ethical culture is challenging. As demonstrated by the Chapter 7 example of Enron’s use of
inspirational quotes on telephone notepads to promote the company values, ethical commit-
ment is much more than simply hanging a plaque on the wall or having the CEO give motiva-
tional speeches. Underlying ethical assumptions are not explicit. See Checklist: Ethical Health
Assessment—How Ethical Is Your Organization? for sample questions that could uncover
implicit norms and the perception of ethical culture strength.

Checklist: Ethical Health Assessment—How Ethical
Is Your Organization?

YES NO
• Is there a general understanding of what is correct conduct in your

organization? � �
• Do you feel that your organization has a culture that encourages

openness between management and employees? � �
• Are there rewards for employees who demonstrate appropriate

ethical behavior? � �
• Do you feel that employees know how to act ethically during crises? � �
• Do employees treat customers fairly and honestly? � �
• Do employees treat each other with respect and honesty? � �
• Are there role models in the organization who demonstrate ethical

decision making? � �
• Do employees receive constructive criticism on how to improve

ethical conduct? � �
• Are employees reprimanded for violating the organization’s ethical

standards? � �
Source: Modified from Ferrell, L., & Ferrell, O.C. (2009). Ethical business. New York: DK Publishing, p. 49.

Questions to Consider

1. What additional questions may uncover the ethical culture of an organization?
2. Which, if any, of these questions are seeking confirmation of the ethical climate

(perceptions) rather than the ethical culture (values, norms, and artifacts)?
3. How could management measure the ethical health of an organization other than

survey questions?

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Section 8.1 Organizational Culture Drives Ethical Behavior

The ethical strength of a business may depend on certain organizational characteristics. As
shown in Table 8.1, the Ethics Resource Center (2010) has found that large organizations
with a highly unionized workforce are more likely to have a weaker ethical culture. Labor
unions can exert economic pressure on employers to restrict enforcement of ethical princi-
ples, limiting the effectiveness of a formal organizational ethics program. A historical example
is the reluctance of U.S. labor unions to integrate racial diversity in the workforce in the 1940s
by striking when companies hired African American workers (Bowie & Dunfee, 2002). The
Ethics Resource Center finding is not supported by other studies that show that large firms
have more resources for implementing formal ethical programs (Ardichvili, Jondle, & Kowske,
2012; Sweeney, Arnold, & Pierce, 2010; Zeng & Luo, 2013). However, some scholars suggest
that smaller firms may be more flexible in responding to changing ethical issues (Jones, 1999;
Perrini, Russo, & Tencati, 2007).

Ownership structure appears to influence the ethical culture strength of an organization in
the United States, but this may not always be the case in other countries. One study revealed
that family-managed companies express a greater ethical focus than nonfamily businesses
do (Blodgett, Dumas, & Zanzi, 2011). In China, the socialist political structure mandates ethi-
cal responsibilities of state-owned enterprises to provide for employees, including housing,
pensions, and healthcare. Foreign-owned enterprises operating in China focus their ethical
programs on the Chinese government’s social development goals in order to gain legitimacy
in the Chinese market (Chen & Touve, 2011). Therefore, Gao (2009) found no difference in
ethical focus and performance by state-owned or foreign companies.

Table 8.1: Company characteristics influencing ethical culture strength

More Likely to Have Strong or Strong-Leaning
Ethical Cultures

More Likely to Have Weak or Weak-Leaning
Ethical Cultures

Non-unionized workers Highly-unionized

Fewer than 500 employees 5001 employees

Privately-held Publicly-traded

Have employee-owners Employees do not hold stock

Source: The importance of ethical culture: Increasing trust and driving down risks. (2010). Arlington, VA: Ethics Resource Center.
Reprinted with permission.

To assess the ethical health of an organization, it is important to look beyond the printed val-
ues and stated norms. Consider the examples of Enron and Target that strived to demonstrate
an ethical culture with values statements, policies and procedures for appropriate behav-
ior, and public statements of a commitment to ethics. Yet, both organizations realized ethical
misconduct disasters that created financial hardship and reputational damage. Were there
apparent signs that these organizations accepted behavior that deviates from ethical stan-
dards? In the case of Enron, Sherron Watkins described two instances in which employees
who had protested accounting and financial reporting practices experienced retaliation, were
reassigned to less attractive positions, or were pushed out of the company. These actions sent
the message that at Enron, “bad behavior was subtly rewarded, and good behavior was pun-
ished” (Beenen & Pinto, 2009, p. 280).

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Section 8.2 Developing an Ethical Culture

Signs pointing to a weak ethical culture at Target include the disgruntled employee’s social
media posting and dismissals of the CIO after the breach of policies that protect customer
data. Whereas the ethical misconduct at Enron brought the company to bankruptcy, Target
may be able to reposition its internal culture and ethical reputation over time. According to
the National Retail Federation, Target is the third largest mass merchandiser in the United
States (Schulz, 2014). One Forbes contributor stated, “Target has a long road ahead of it. It
has some time to make things right. Its cash position seems solid and its debt is reasonable”
(Rosenblum, 2014, para. 11).

To avoid ethical misconduct disasters, company management should regularly consider the
informal character of the organization and the underlying assumptions shaping its ethical
culture. Demonstrating a commitment to ethics and compliance in order to meet regulatory
guidelines is not enough to avoid the financial and reputational damage from unethical busi-
ness practices. Managers must continually assess their organization’s ethical climate in order
for employees to perceive that the company expects ethical behavior. Some measurements
include observable negative actions (e.g., arrests or terminations for noncompliance and
misconduct), reports of unethical actions (e.g., employee, customer, or supplier complaints),
human resource processes (e.g., 360-degree evaluations, exit interviews), employee sur-
veys, focus groups, and interviews. Developing an ethical culture is a continual process that
requires constant care and attention.

8.2 Developing an Ethical Culture
The development of an ethical culture depends on how well the organization’s mission, val-
ues, and standards of conduct align. There is a link between strategic management processes
and organizational culture. The strategic management process consists of four phases to
achieve corporate goals:

1. The definition of vision, mission, and objectives;
2. Analysis of the internal and external environments;
3. Development of strategies; and
4. Implementation and control of outcomes (Laasch & Conaway, 2015).

Laasch and Conaway (2015) link these strategic processes to responsible companies, stress-
ing the need to include “a vision, mission, and strategic objectives aiming at the creation of
a well-balanced triple bottom line of stakeholder value, and moral excellence” (p. 158). For
implementation and control, they recommend the balanced scorecard approach developed
by Kaplan and Norton (1996), which promotes company objectives that reflect more than
financial goals and include learning and growth, internal business processes, and customers.

Three Elements of an Ethical Culture

Companies that think strategically can create a culture that can respond to change. David
Gebler (2012), a recognized thought leader in the emerging field of values-based ethics
and culture risk management, builds on strategic management processes to develop an

ped82162_08_c08_227-254.indd 236 4/23/15 8:45 AM

Vision,
Mission, &

Goals

Standards
of Behavior

Principles
& Beliefs

Commitment Integrity

Ethical
Culture

Transparency

What do we
strive for?

How do we do
what we do?

What do we
stand for?

Section 8.2 Developing an Ethical Culture

integrative model of organizational cultures and values. Figure 8.3 illustrates how the
alignment of three elements of culture with values can create an ethical culture.

Each of the elements in Figure 8.3 contributes to developing an ethical culture. The strength
of the ethical culture of an organization depends on how well each element aligns. Companies
with strong ethical cultures demonstrate a commitment to the organizational purpose and
values. A culture of integrity occurs when formal policies align with the mission and goals of
the company. A culture of accountability and transparency develops when actions reflect the
principles and beliefs of the company. The following sections describe each element individu-
ally, but all are equally important to develop an ethical culture.

Vision, Mission, and Goals
The foundation of an organizational culture is the vision, mission, and goals of the company.
The vision statement expresses the kind of organization the company strives to become. A
clear vision is important to lead employees to high performance. Nan S. Russell, author of The
Titleless Leader: How to Get Things Done When You’re Not in Charge said, “Control the vision,
not the process. If you can help others see what you need from them, you’ll be more likely
to get it. People want a clear vision of what’s expected so they can successfully achieve it”
(Jacobs, 2013). A vision that provides sustained “attention on the essence of winning, moti-
vating people by communicating the value of the target,” demonstrates the strategic intent of
the firm (Hamel & Prahalad, 1989, p. 64).

Figure 8.3: Three elements of an ethical culture

The development of an ethical culture depends on how well the organization’s mission, values, and
standards of conduct align.

Source: Modified from Gebler, D. (2012). The 3 power values: How commitment, integrity, and transparency clear the roadblocks to
performance. CA: Jossey-Bass.

Vision,
Mission, &
Goals
Standards
of Behavior
Principles
& Beliefs
Commitment Integrity
Ethical
Culture
Transparency
What do we
strive for?
How do we do
what we do?
What do we
stand for?

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Section 8.2 Developing an Ethical Culture

Companies with visions communicating strategic intent gain employee commitment to com-
pany goals. Strategic intent denotes the long-term goals of management and reflects core
premises about the purpose of the firm in terms of its stakeholders, which leads to greater
stakeholder attention (Crilly & Sloan, 2012). A winning focus needs to reflect social, envi-
ronmental, and ethical responsibilities. An example of a responsible company with strong
ethics and responsible management is Ecolab, which espouses the vision statement: “Our
vision keeps us focused on what we strive for—to be the global leader in water, hygiene and
energy technologies and services; providing and protecting what is vital: clean water, safe
food, abundant energy and healthy environments” (Ecolab, 2014, para. 1).

The mission statement clarifies the essence of an organization’s existence by defining the
organization’s purpose and goals. The vision and mission need to be meaningful and concrete
so that employees know how to act accordingly. Articulation of the vision and mission to align
with company values is a role of ethical leaders.

Strong leaders are adept at finding the right message and packaging it in a
way that is adapted for different groups of employees and other stakeholders
so that each can see a link between the vision and their own values and self-
concept. This, in turn, should lead to greater commitment toward the vision.
(Esper & Boies, 2013, p. 352)

Mary Barra, the CEO of General Motors (GM), recognizes the role of company leadership to
build an ethical culture during an interview:

[Culture change] has to be leader-led. Dan (Ammann, GM president) and Mark
(Reuss, product development chief ) and I have a very strong partnership and
a consistency between the three of us, in how we’re conveying to employees
what’s important, how we’re going to manage this, and continuing that com-
munication so they feel confident. (Muller, 2014a, para. 13)

Milliman, Gonzalez-Padron, and Ferguson (2012) recommend that companies frame their
mission statements in terms of social benefit or purpose to provide greater intrinsic moti-
vation to employees and enhance the organization’s image with external stakeholders. Her-
man Miller’s mission statement states “Herman Miller strives to create a better world around
you—with inspiring designs and inventive services that enhance the places where people
work, heal, learn and live, and through its commitment to social responsibility” (Herman
Miller, Inc., 2014a, p. 1).

Collins and Porras (1995) describe a visionary company as one that communicates the fol-
lowing three components in a mission statement: (1) core values to which the firm is com-
mitted; (2) core purpose of the firm; and (3) visionary goals the firm will pursue to fulfill
its mission. Goals relate to the company objectives, and include target performance for new
market expansion, growth targets, and profits. As shown in Chapter 7, leaders must rein-
force that meeting financial goals is an unacceptable rationalization for unethical behavior.
A good example is the General Electric (GE) reminders at managerial meetings, such as “No
cutting of corners for commercial considerations will be tolerated. Integrity must never be

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Section 8.2 Developing an Ethical Culture

compromised to make the number” (Heineman, 2008, p. 31). The company’s vision, mission,
and goals must align with its values, principles, and beliefs to achieve employee engagement
and commitment.

Principles and Beliefs
The principles and beliefs of a company express to stakeholders what the company stands
for, and seek to explain why the company is in business. As indicated in Chapter 1, values and
principles provide guidelines for employees as they address ethical business issues. Values
are an important part of culture, whether it is the culture within an industry or an organi-
zation. Core corporate values serve as the cultural cornerstones to guide company conduct
(Lencioni, 2002). Not all core values relate to ethical behavior, however, as many businesses
stress innovation, performance, and profits. Responsible companies relate their principles to
core values, such as integrity, transparency, accountability, and fairness.

As an element of culture, principles and beliefs reflect the norms, or the expected behavior
of an organization. As General Motors assesses its culture, consider whether management’s
alleged handling of faulty ignition switches aligns with its stated corporate values:

• Safety and Quality First: Safety will always be a priority at GM. We continue to
emphasize our safety-first culture in our facilities, and as we grow our business in
new markets. Our safety philosophy is at the heart of the development of each vehi-
cle. In addition to safety, delivering the highest quality vehicles is a major corner-
stone of our promise to our customers. That is why our vehicles go through extreme
testing procedures in the lab, on the road and in our production facilities prior to
being offered to customers.

• Create Lifelong Customers: We take nothing for granted in our efforts to earn the
confidence and loyalty of our customers. We listen to customers to make sure we
are meeting their needs, and are connecting with them on their terms. Through our
relationship with customers, we strive to create passionate brand advocates who
love their vehicle and freely tell others about their experience.

• Innovate: We challenge ourselves to be creative and lead in everything we do. From
implementing the smallest improvements to executing big ideas, we are constantly
increasing our competitive advantage to delight and excite our customers.

• Deliver Long-Term Investment Value: Our shareholders want to feel confident about
their decision to invest in our company. By developing the world’s best vehicles,
building upon our strong financial foundation, growing our business, and operating
with the highest level of integrity, we will continue to deliver positive results.

• Make a Positive Difference: We strive to make a difference in our world and in our
workplace. Whether finding new ways to improve our business operations, achiev-
ing as part of a team or volunteering in the community, we know that our momen-
tum is tied to positive change. (General Motors, 2014, para. 6)

During Senate testimony, CEO Mary Barra admitted that the culture at General Motors had to
change from a cost-cutting culture to a customer-focused culture, stressing the need for all
employees to follow correct procedures for safety and quality (Muller, 2014c).

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Section 8.2 Developing an Ethical Culture

Standards of Behavior
Standards of behavior are a fundamental component of organizational culture. An ethical
culture requires that employees have clear expectations of how to handle ethical issues and
engage in responsible decision making. Standards include rules, guidelines, policies, and pro-
cedures. Yet, having standards of behavior is not enough. Even though Target implemented
state of the art data security measures, employees failed to follow procedures when receiv-
ing reports of data breaches. A healthy company has standards that align with its mission
and values. A good example is expense reporting policies and procedures. Most companies
have strict guidelines about gifts and entertainment, tips, and mileage calculations. In spite
of these guidelines, company goals to increase sales or satisfy customers may conflict with
values of integrity, honesty, and transparency. That may explain why in the United States,
fraudulent expense reimbursements often go undetected for up to two years, with more than
half of employees failing to report coworkers (Ethics Resource Center, 2013b).

Formal statements that convey the organization’s expectations for integrity represent its
code of conduct. Organizations use a variety of names for ethical standards, such as code of
business principles, code of ethics, the way we work, and employee guidelines. Written codes
of conduct are an effective tool for guiding employee behavior and are an important part of
the formal ethics program of an organization.

An Ethical Culture During Crises

Economic or financial pressures can increase the willingness to condone unethical practices in
the workplace, changing the culture of the organization. The Ethics Resource Center (2013b)
has found a tenuous connection between the health of the economy (based on the Standard
& Poor’s 500 Index) and observed misconduct (see Figure 8.4). The Ethics Resource Center
posits that when the economy is doing well, pressure to achieve financial success becomes
the primary focus, obscuring awareness of unethical practices. During economic downturns,
on the other hand, observed misconduct typically declines.

Historically, the National Business Ethics Survey® observes lower misconduct in times of eco-
nomic challenge presumably because companies increased their focus on ethics and employ-
ees were less likely to endanger employment by breaking the rules. As shown in Figure 8.4,
2013 proved to be an exception to the rule. While the economy improved, there were fewer
instances of observed misconduct. The Ethics Resource Center attributes the 2013 reduction
in misconduct to greater attention by U.S. companies on developing an ethical culture.

Figure 8.4: Relationship of economy with misconduct

In 2013, observed misconduct declined even as the economy improved.

Source: National Business Ethics Survey of the U.S. Workforce. (2013). Arlington, VA: Ethics Resource Center. Reprinted with permission.
60%

51%

45%

52%
55%

49%
45%

41%

30%

2000 2003 2005 2007 2009

Observed Misconduct

Average Monthly S&P 500 Index®

2011 2013

1000

2000

ped82162_08_c08_227-254.indd 240 4/23/15 8:45 AM

60%
51%
45%
52%
55%
49%
45%
41%
30%
2000 2003 2005 2007 2009
Observed Misconduct
Average Monthly S&P 500 Index®
2011 2013
1000
2000
Section 8.2 Developing an Ethical Culture
Standards of Behavior
Standards of behavior are a fundamental component of organizational culture. An ethical
culture requires that employees have clear expectations of how to handle ethical issues and
engage in responsible decision making. Standards include rules, guidelines, policies, and pro-
cedures. Yet, having standards of behavior is not enough. Even though Target implemented
state of the art data security measures, employees failed to follow procedures when receiv-
ing reports of data breaches. A healthy company has standards that align with its mission
and values. A good example is expense reporting policies and procedures. Most companies
have strict guidelines about gifts and entertainment, tips, and mileage calculations. In spite
of these guidelines, company goals to increase sales or satisfy customers may conflict with
values of integrity, honesty, and transparency. That may explain why in the United States,
fraudulent expense reimbursements often go undetected for up to two years, with more than
half of employees failing to report coworkers (Ethics Resource Center, 2013b).
Formal statements that convey the organization’s expectations for integrity represent its
code of conduct. Organizations use a variety of names for ethical standards, such as code of
business principles, code of ethics, the way we work, and employee guidelines. Written codes
of conduct are an effective tool for guiding employee behavior and are an important part of
the formal ethics program of an organization.
An Ethical Culture During Crises
Economic or financial pressures can increase the willingness to condone unethical practices in
the workplace, changing the culture of the organization. The Ethics Resource Center (2013b)
has found a tenuous connection between the health of the economy (based on the Standard
& Poor’s 500 Index) and observed misconduct (see Figure 8.4). The Ethics Resource Center
posits that when the economy is doing well, pressure to achieve financial success becomes
the primary focus, obscuring awareness of unethical practices. During economic downturns,
on the other hand, observed misconduct typically declines.
Historically, the National Business Ethics Survey® observes lower misconduct in times of eco-
nomic challenge presumably because companies increased their focus on ethics and employ-
ees were less likely to endanger employment by breaking the rules. As shown in Figure 8.4,
2013 proved to be an exception to the rule. While the economy improved, there were fewer
instances of observed misconduct. The Ethics Resource Center attributes the 2013 reduction
in misconduct to greater attention by U.S. companies on developing an ethical culture.
Figure 8.4: Relationship of economy with misconduct
In 2013, observed misconduct declined even as the economy improved.
Source: National Business Ethics Survey of the U.S. Workforce. (2013). Arlington, VA: Ethics Resource Center. Reprinted with permission.
60%
51%
45%
52%
55%
49%
45%
41%
30%
2000 2003 2005 2007 2009
Observed Misconduct
Average Monthly S&P 500 Index®
2011 2013
1000
2000

Yet, other examples show how economic pressures lead to greater misconduct. The economic
downturn is one reason that Target’s culture moved from a culture of responsiveness and
innovation to an organization slow to react to change or crisis. Investigations of the 2010 oil
spill in the Gulf of Mexico place much of the blame on a culture of cost cutting at BP plc to
make profit targets.

Companies with a healthy ethical culture based on values are more likely to manage economic
or financial crises. Karen Doyne, managing director for crisis communication at Burson-
Marsteller, stated, “Crisis is a test of character. People will want to know if you lived up to your
values” (Ethics Resource Center, 2011, p. 7). See Business Best: Hartford’s Culture Overcomes
Financial Crisis for an example of a company that recognizes the importance of a healthy orga-
nizational culture to meet performance objectives during an economic downturn.

The Hartford found that an ethical culture based on values embedded in principles and stan-
dards can enhance an organization’s capacity to overcome an adverse economic environment.
Employees perceive that the company consistently follows ethical principles of transparency
and accountability. To ensure an ongoing healthy ethical culture, the company should include
formal components of an organizational ethical program.

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Section 8.3 Organizational Ethics Programs

Business Best: Hartford’s Culture Overcomes Financial Crisis

The Hartford Financial Services Group, Inc. (known as The Hartford) provides insurance and
investment products across the United States. With over 18,000 employees, the company
continues to operate since its 1810 inception in Hartford, Connecticut. In 2009, Liam McGee
accepted the role of president and CEO of The Hartford in the midst of the financial collapse
of 2008, which at the time was threatening the company’s existence. The stock price stood at
72% of the 2007 price and the company was facing losses of $2.7 billion. The company was
struggling to honor investment returns and insurance payouts with depleting assets. McGee
guided the company through repayment of a $3.4 billion bailout from the U.S. Troubled Asset
Relief Program (TARP), overhauled the company’s investment portfolio, and restored the
health of the company’s balance sheet. The financial turnaround of The Hartford is one of
McGee’s noted accomplishments during his tenure at the financial services firm.

A shift in the organizational culture allowed The Hartford to recover from the brink of bank-
ruptcy. McGee told a Forbes contributor, “During the crisis and even pre-crisis, the company
had the opportunity to make the changes it needed to make, but it didn’t. People were scared.
You had a 200+ year old company that just went through a near-death experience” (Rogers,
2013, para. 5). The company had a culture of silos and individual business unit activity that
fostered inertia. The management became risk-averse, relying on extensive discussion and
analysis, which ultimately resulted in indecision. McGee created what he calls a “culture of
accountability” that required collaboration and transparency. He said, “I expect our leaders
to wear two caps—be best at your individual business or function, but also work at what’s
best for The Hartford,” (Rogers, 2013, para. 6).

McGee and newly hired executives from rival insurance firms became role models for a cul-
ture of accountability. Under their direction, decisions resulted in action. McGee recounted,
“Employees were shocked that we took action, they expected Chris and me to change our
minds, to follow the old practice of announcing something and not doing it” (Tully, 2014,
para. 14). A focus on accountability and transparency now permeates the company, creating
a culture that fosters employee commitment to organizational goals. Eileen Whelley, execu-
tive vice president of human resources, said, “We have a culture that is very committed to lis-
tening to employees on a regular basis. Our leaders embrace what they hear and take action.
Even during the financial crisis, our employees were incredibly loyal because they knew we
cared about them and it was clear they care about this company” (Whelley, 2012, p. 49).

Questions to Consider

1. Review The Hartford values and mission at http://www.thehartford.com. How do
they reflect an ethical culture?

2. In addition to transparency and accountability, what other beliefs and principles
contribute to a healthy organizational culture?

3. As a prospective employee considering working for The Hartford, how could you
research employee perceptions of the workplace culture?

8.3 Organizational Ethics Programs
An organizational ethics program (or business ethics program) is a tool that owners and
managers use to inspire, encourage, and support responsible business conduct by designing

ped82162_08_c08_227-254.indd 242 4/23/15 8:45 AM

http://www.thehartford.com

Section 8.3 Organizational Ethics Programs

structures and systems to guide and support employees and agents. A business ethics pro-
gram should consider the relevant context of the firm and its organizational culture to iden-
tify challenges for behaving appropriately and to develop responsible ways to meet them. An
ethics program is part of an organization’s compliance initiatives to mitigate risk of illegal
conduct. Whatever the size or purpose of the enterprise, owners and managers will find value
in building an enterprise that sets standards for responsible business conduct, puts them
into practice, and learns from experience. Weber and Wasieleski (2013) find that concern for
building an ethical culture is one of the most important motivations for investing in an ethics
and compliance program. There is a symbiotic relationship between the organization’s ethi-
cal culture and formal ethics program. While an ethics program can build an ethical culture,
inadequate company attention to the program can weaken the ethical culture, thus rendering
the ethics program ineffective.

The Ethics Resource Center (2013b) recommends that an ethics and compliance program
include:

• Written standards of ethical workplace conduct;
• Training on the standards;
• Company resources that provide advice about ethical issues;
• A means to report potential violations confidentially, or anonymously;
• Performance evaluations of ethical conduct;
• Systems to discipline violators; and
• A stated set of guiding values or principles. (p. 17)

These criteria relate to those criteria of an effective ethics and compliance program outlined
in the U.S. FSGO described in Chapter 4. The following section considers each criterion and
how it relates to an ethical culture.

Standards and Procedures

Clear standards and procedures for acceptable behavior are elements of an ethical culture
and make up the foundation of an organizational ethics program. To foster an ethical culture,
companies need to make clear the organization’s expectations for employee behavior. A com-
prehensive code of ethics sets the bar for the way in which a corporation handles all of its
operations. The strength of its ethics code can make the difference between the company’s
success and failure in avoiding ethical misconduct disasters.

However, policies and procedures can be an overvalued tool in business. Without educating
the workforce of the procedures or providing methods of enforcing compliance to the stan-
dards and policies, the likelihood for employees to ignore or bypass procedures increases.
Companies with business in more than one country have the additional challenge of commu-
nicating standards and procedures so that employees worldwide can accept and follow the
codes of conduct. The feature Going Global: IMI plc and Investing in Integrity describes one
multinational company that demonstrates an ethical culture by embedding standards and
procedures throughout the business.

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Section 8.3 Organizational Ethics Programs

Going Global: IMI plc and

Investing in Integrity

IMI plc is a global engineering group providing innovative solutions to leading international
companies in over 50 countries. Its mission statement is “to become one of the world’s lead-
ing engineering companies in the global niche markets we serve and to be recognized for our
innovation, application expertise, and global service” (IMI, 2014, para. 2). IMI was the first
company to gain the Investing in Integrity Charter Mark across its global business. A charter
mark is a common term in the United Kingdom for a certification mark, typically a logo or
seal that verifies company fulfillment of standards. Ethisphere Institute’s Ethics Inside© Cer-
tified logo is another certification of a company’s ethics culture (Ethisphere Institute, 2014).

The Institute of Business Ethics and the Chartered Institute for Securities & Investment
developed the Investing in Integrity accreditation system to reassure a company’s key stake-
holders that the organization demonstrates a commitment to act with integrity at all times.
Companies earning the charter mark demonstrate an ethical culture where ethical policies,
procedures, and practices are embedded within the workforce. An important part of the
process tests an organization’s commitments to ethics against the employees’ experience of
those commitments. Accreditation requires two steps. First, a company completes an online
self-assessment of ethical policies, procedures, and practices. Second, an independent assess-
ment, carried out by Investing in Integrity partner GoodCorporation, involves site visits, staff
interviews, an employee survey, and reviews of documentation. Upon accreditation, a com-
pany may use the charter mark on company material for five years.

The basis of accreditation is an organization’s code of ethics, or similar document, which
guides employees on expectations in handling business ethics issues and relationships. Since
2009, IMI has embraced a code of responsible business called “The IMI Way” to reflect its
expectations for ethical behaviors. The values of innovation, excellence, and integrity form
the foundation for the code. IMI’s code of ethics states:

This code is designed to set a tone and a spirit for us to live by, it is not, and
never could be, an exhaustive explanation of the IMI Way. Here we set out
our values and standards which help us engage in honest discussions and
interactions with our colleagues and other stakeholders such as customers,
business partners, communities and investors. (IMI, n.d., p. 3)

Following each standard are examples from employees worldwide who meet the standard,
along with instructions on where to find the detailed policies, procedures, and processes that
support the standard. Martin Lamb, former CEO of IMI said: “Doing business the right way, the
IMI Way, is at the heart of everything we do and we have welcomed the Investing in Integrity
initiative as an independent way of verifying that we are meeting, and indeed, exceeding, the
high ethical standards we set ourselves across our global organisation” (IMI, 2012, para. 4).

Questions to Consider

1. Why is an organization’s code of conduct the starting point of the Investing in
Integrity accreditation?

2. What is the benefit for companies like IMI to seek third party certification of their
ethics culture? Consider advantages within and outside the company.

3. How should the accreditor respond should companies have an ethical scandal before
the five-year certification expires?

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Section 8.3 Organizational Ethics Programs

There are no concrete requirements for specific standards and procedures to establish an
ethical culture. The code of conduct reflects the unique culture, experiences, and identity of
an organization. For example, a company that has unskilled line workers may have to com-
municate standards in simpler language than a highly technical company does. The code of
conduct should focus on specific high-risk issues for the industry and company. Chapter 9 will
provide further details for creating an effective code of conduct for an organization.

Program Oversight and Management

The second requirement for an organizational program to contribute to an ethical culture
is program oversight and management, which ensure adequate attention to the formal
and informal ethical culture from senior management and the board of directors. As intro-
duced in Chapter 1, top management commitment to stressing ethical programs is the most
important component in encouraging ethical behavior and creating an ethical culture in an
organization. Chapter 7 stressed the role of ethical leaders in creating an ethical culture.
Many companies establish departments solely to manage the ethics program, led by a chief
ethics officer, chief compliance officer, or similar title. Ethics and compliance professionals
contribute to building trust among employees and external stakeholders that the company
will act with integrity. In the United States, the board of directors has a legal obligation to
oversee the ethics and compliance of an organization. The 2004 and 2010 amendments of
the FSGO encourage companies to allow the chief ethics and compliance officer access to
the board of directors.

How can a smaller organization provide program oversight and management? As mentioned
earlier, ethical cultures develop differently in smaller, family-owned companies than in large
publicly listed corporations. Ethical values are connected to the founder’s values, and man-
agement of ethical issues occurs on a more individualized basis. However, small and medium
enterprises may not have the resources of a larger company to invest in an organizational eth-
ics program. Rather than having a CEO represent top management commitment, the owner-
manager of a small company sets the tone at the top. A smaller organization is unlikely to hire
a dedicated ethics professional since its employees are typically generalists with flexible and
multiple roles. Chapter 9 will explore methods for both large and small companies to estab-
lish effective program oversight and management.

Vetting the Delegation of Substantial Authority

In line with the requirement for program oversight and management, the FSGO also have
a requirement for investigating individuals in the company with substantial authority. The
definition of substantial authority personnel is broad and can include many members of
the management team. The guidelines stipulate:

“Substantial authority personnel” means individuals who within the scope of
their authority exercise a substantial measure of discretion in acting on behalf
of an organization. The term includes high-level personnel of the organization,

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Section 8.3 Organizational Ethics Programs

individuals who exercise substantial supervisory authority (e.g., a plant man-
ager, a sales manager), and any other individuals who, although not a part
of an organization’s management, nevertheless exercise substantial discre-
tion when acting within the scope of their authority (e.g., an individual with
authority in an organization to negotiate or set price levels or an individual
authorized to negotiate or approve significant contracts). Whether an indi-
vidual falls within this category must be determined on a case-by-case basis.
(United States Sentencing Commission, 2013, p. 492)

The definition of substantial authority posed by the United States Sentencing Commission
recognizes that top managers and executives are not the only perpetrators of occupational
misconduct. One study found that individuals in purchasing and procurement or marketing
functions are most likely to be involved in and vulnerable to white-collar crime (Gottschalk,
2011). The Association of Certified Fraud Examiners (2012) reported that over two thirds
of occupational fraud is instigated by individuals working in accounting, operations, sales,
executive/upper management, customer service, and purchasing. Companies can incur fines
and penalties for misconduct perpetrated by just a few employees or consultants, such as
Alcoa’s fines for the overseas manager and independent consultant who bribed Bahraini
officials to secure business with a government-owned aluminum plant (ElBoghdady, 2014).
Banks involved in an interest manipulation scandal claimed that a small number of individ-
ual employees committed the unethical practices in violation of company values and policies
(Mock & Enrich, 2013).

The FSGO stipulate that an effective organizational ethics program should “use reasonable
efforts not to include within the substantial authority personnel of the organization any indi-
vidual whom the organization knew, or should have known through the exercise of due dili-
gence, has engaged in illegal activities” (United States Sentencing Commission, 2013, p. 498).
Reasonable efforts include background checks, interviews, and personality assessments.
Through a comprehensive pre-hire screening of managers and employees that engage in
high-risk business decisions, companies can avoid hiring individuals with predispositions to
misconduct and seek employees who fit into an ethical culture.

To maintain an ethical culture, organizations should periodically conduct reviews of indi-
viduals with substantial authority to detect symptoms of misconduct. According to the
Association of Certified Fraud Examiners (2012), individuals with past employment or legal
problems were a small percentage of the perpetrators of occupational fraud. Table 8.2 pro-
vides a summary of behavioral red flags associated with misconduct by profession. Overall,
the most common warning signs were living beyond their means (36% of cases), financial
difficulties (27%), unusually close association with vendors or customers (19%), and exces-
sive control issues in sharing duties (18%). Addiction to alcohol and drugs remains a prob-
lem for organizations, leading to regular drug testing for all positions. However, testing for
controlled substances can decrease employee commitment when not implemented fairly
(Konovsky & Cropanzano, 1991).

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Section 8.3 Organizational Ethics Programs

Table 8.2: Behavioral red flags by profession

Profession
Behavioral
Red Flag

Executive/
Upper
Mgmt. Accounting Operations Sales Purchasing

Customer
Service

Living Beyond
Means

48.1% 43.7% 31.9% 25.9% 38.2% 35.9%

Control Issues 26.4% 19.5% 21.1% 11.8% 22.4% 4.3%

Financial
Difficulties

25.2% 30.4% 31.5% 27.1% 15.8% 33.7%

Unusually Close
Associations

22.6% 6.1% 28.9% 18.2% 47.4% 12%

Divorce/Family
Problems

13.8% 18.8% 15.9% 12.4% 9.2% 17.4%

Past
Employment-
Related
Problems

11.9% 6.5% 9.5% 9.4% 3.9% 7.6%

Addiction
Problems

10.7% 11.3% 7.8% 4.7% 6.6% 8.7%

Past Legal
Problems

8.2% 5.8% 4.3% 3.5% 1.3% 6.5%

Source: Association of Certified Fraud Examiners. (2012). Report to the nations on occupational fraud and abuse: 2012 global
fraud study. Austin, TX: Association of Certified Fraud Examiners, Inc.

Removing individuals prone to misconduct in order to maintain an ethical organization is
reflective of the bad apple theory, which posits that corporate crime is the result of one indi-
vidual who is inherently immoral, greedy, or manipulative (Treviño & Brown, 2004). News
coverage of company scandals include visuals of executives handcuffed and escorted to a
waiting police vehicle. The “perp walks” of the arrests of Bernie Madoff, Ken Lay, and Gold-
man Sachs trader Fabrice Tourre promulgate the bad apple theory. However, this theory fails
to account for the systematic breakdowns that typically contribute to misconduct. As Treviño
and Brown (2004) stress, most employees are followers and much “unethical behavior in
business is supported by the context in which it occurs—either through direct reinforcement
of unethical behavior or through benign neglect” (p. 72). Therefore, an ethical culture sup-
ported by an organizational ethics program can guide employees on how to address ethical
business issues.

Training and Communication

Training and communication are important elements of embedding ethical standards through-
out an organization. The FSGO stipulate that “The organization shall take reasonable steps
to communicate periodically and in a practical manner its standards and procedures . . . by

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Section 8.3 Organizational Ethics Programs

conducting effective training programs and otherwise disseminating information appropriate
to such individuals’ respective roles and responsibilities” (United States Sentencing Commis-
sion, 2013, p. 498). This requirement stresses that an ethical culture requires both training and
communication.

Though research supports that ethics training reduces pressure to compromise ethical
standards and increases the likelihood that employees will report misconduct, awareness
of ethics training varies worldwide. A 2012 study of employees in Italy, France, Germany,
and Spain found that overall, less than half of companies based in those countries provide
ethics training, ranging from 23% in Germany and 27% in France, to 47% in Spain and 60%
in Italy (Basran, 2012). In England, on the other hand, almost two thirds (68%) of full-time
employees in the 2012 British Ethics at Work Survey said their organization provides eth-
ics training (Basran & Webley, 2012). One explanation for the lower prevalence of ethics
training in France and Germany is that although ethics programs are in place, the companies
are not effectively communicating the training throughout the organization. Over 20% of
the employees in continental Europe were not able to answer affirmatively to the question
“My organisation provides training on standards of ethical conduct,” while 27% of German
employees were unsure if ethics training exists in their organization (Basran, 2012). In con-
trast, only 4% of British respondents indicated not knowing if their organization offered
ethics training (Basran & Webley, 2012). In the United States, the percentage of companies
providing ethics training rose from 74% in 2011 to 81% in 2013 (Ethics Resource Center,
2013b).

Open communication and relevant ethics training encourages an ethical culture. Commu-
nication barriers among departments are one explanation for the lapse of safety protocols
at GM and risky investments at The Hartford (Muller, 2014c; Tully, 2014). In contrast, lead-
ership at the chemical company, Ecolab, explicitly emphasizes the importance of cross-
departmental communication and cooperation among employees (Milliman et al., 2012).
Ethics training should be relevant to the audience, yet consistent with the organization’s
values, principles, and ethical standards. Not all employees need to be aware of every pol-
icy and procedure in the company. Rather, employees need training on the specific risks
that could arise in their work and sources for assistance in resolving ethical dilemmas.
Chapter 9 will provide methods for educating the workforce on company ethical standards
and program elements.

Checking, Evaluating, and Reporting

An indication of an ethical culture is the degree to which employees are comfortable in
reporting misconduct without fear of retaliation. Employees become reluctant to share bad
news if the company culture reprimands employees for reporting misconduct. Earlier in
the chapter, rationale for measuring the strength of the company’s ethical culture included
exploring employee perceptions of acceptable behavior. In recognition of the need for con-
tinuous monitoring of the ethical climate of an organization, the FSGO recommend that
organizations take the following steps:

1. To ensure that the organization’s compliance and ethics program is followed, includ-
ing monitoring and auditing to detect criminal conduct;

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Section 8.3 Organizational Ethics Programs

2. To evaluate periodically the effectiveness of the organization’s compliance and ethics
program; and

3. To have and publicize a system, which may include mechanisms that allow for ano-
nymity or confidentiality, whereby the organization’s employees and agents may
report or seek guidance regarding potential or actual criminal conduct without fear of
retaliation. (United States Sentencing Commission, 2013, p. 498)

The criteria for evaluating an organizational ethics program require an organization to pose
three questions about its ethical culture. First, are there controls in place to detect deviance
from company policies and procedures? Second, is the organization acting according to its
ethical standards? Lastly, are employees comfortable speaking up about potential or observed
misconduct?

A strong ethical culture will demonstrate a commitment to ethical conduct by implement-
ing controls such as periodic audits, approval processes, and documentation requirements.
Employees perceive that the company cares about maintaining ethical standards when every-
one must abide by the same rules. In Senate hearings, when asked why an engineer rede-
signed a defective ignition switch without properly recording the procedure, GM’s CEO Mary
Barra had to answer accusations of what one senator called a “culture of cover-up” (Muller,
2014c, para. 2). Barra stated in a 2014 Forbes interview that the company is addressing a
“culture of fear” within GM, a fear of rocking the boat, by implementing a Speak Up For Safety
program. She said:

If someone picks up the phone and says, “Hey, I’m worried about x, y or z,” it’s
important that you answer them, either to say, “Wow, thank you for raising
that issue,” or “Hey, that’s not an issue and here’s why,” so they don’t leave
thinking, “I tried, and they didn’t listen to me. They just ignored me.” (Muller,
2014a, para. 15)

Recall the challenges in assessing the strength of an ethical culture presented earlier in the
chapter. Meaningful metrics of the ethical culture should take into account the organizational
characteristics and industry environment. The metrics need to be quantifiable to evaluate
improvements in the ethical culture or identify risks for misconduct. A common metric is
the number of misconduct reports made to the company ethics department. The challenge
with that metric is interpreting variations in the number of reports. If reports of misconduct
increase, it could signify that employees are more effective at identifying ethical issues than
they were in months or years past. Alternatively, increased misconduct reports may simply
reflect that employees have become more willing to report. Both reasons could indicate an
effective ethics program. On the other hand, increased observations of misconduct may also
signal a weakening of the ethical culture—that more employees are ignoring ethical standards.

Lockheed Martin was able to show that a significant difference in the number and nature of
calls to their ethics department reflected a successful implementation of its new ethics train-
ing program (Gonzalez-Padron, Ferrell, Ferrell, & Smith, 2012). Ethics officers were handling
more calls for guidance rather than reporting. During the calls, officers reinforced the vocabu-
lary and a technique from the training to encourage resolution before an ethical problem
escalated. Options for encouraging employees to report misconduct and assessing the ethics
program are presented in Chapter 9.

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Section 8.3 Organizational Ethics Programs

Disciplinary Procedures and Incentives

Employee perceptions of fairness and an organization’s consistency in enforcing policies and
procedures are an important part of establishing an ethical culture. Discipline for rule viola-
tors sends a strong message to employees: it “reinforces standards, upholds the value of con-
formity to shared norms, and maintains the perception that the organization is a just place
where wrongdoers are held accountable for their actions” (Treviño et al., 1999, p. 139). To
assess whether employees perceive that the organization enforces policies and procedures,
Cullen and Victor (1993) suggest asking employees to rate the truth of four statements:

• It is very important to strictly follow the company’s rules and procedures.
• Everyone is expected to stick by company rules and procedures.
• Successful people in this company go by the book.
• Successful people in this company strictly obey the company policies.

Recognizing that consistent enforcement of ethical standards influences the ethical culture of
an organization, the FSGO includes the following criterion:

The organization’s compliance and ethics program shall be promoted and
enforced consistently throughout the organization through (A) appropriate
incentives to perform in accordance with the compliance and ethics program;
and (B) appropriate disciplinary measures for engaging in criminal conduct
and for failing to take reasonable steps to prevent or detect criminal conduct.
(United States Sentencing Commission, 2013, p. 498)

The original language of the FSGO stressed discipline of misconduct over incentives for
ethical behavior. Despite this emphasis, programs rewarding individuals who demonstrate
exemplary performance in upholding ethical standards are emerging as more companies
recognize that monetary incentives affect the ethical behaviors of employees (Chen &
Sandino, 2012; Tenbrunsel, 1998). The Swiss-based pharmaceutical company Novartis
International AG bases salary and bonus increases, in part, on evaluations of employee
behavior that aligns with company values (Basran & Webley, 2012). Employees at Novar-
tis must meet business objectives and behave ethically in order to receive the greatest
compensation.

Other company incentives for demonstrating ethical behaviors can include employee recog-
nition awards, either through a company selection process or by peers. A St. Louis-based con-
struction services company, ADB Companies, Inc. encourages field management or employ-
ees to award a Spot Award for a fellow worker working safely (ADB, 2013). Each Spot Award
winner receives a gift card and recognition in the company newsletter. Companies like Novar-
tis and ADB recognize that employees pay attention to how leadership responds to violations
and rewards ethical behavior.

Response to Critical Issues

In order to establish an effective ethics and compliance program, organizations must respond
appropriately to critical issues. In doing so, they must investigate, remediate, and disclose
reports of misconduct. This step builds on the previous two steps—monitoring and encour-
aging reporting of misconduct, and consistent enforcement of standards. Establishing and

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Section 8.3 Organizational Ethics Programs

communicating clear guidelines for the investigation of ethics and compliance issues ensures
predictability, consistency, and confidence in the process. The FSGO stipulate “After criminal
conduct has been detected, the organization shall take reasonable steps to respond appro-
priately to the criminal conduct and to prevent further similar criminal conduct, including
making any necessary modifications to the organization’s compliance and ethics program”
(United States Sentencing Commission, 2013, p. 498).

Once aware of misconduct, a company must determine if the action is subject to criminal
prosecution. Most investigations focus on unethical behavior inconsistent with the company
code of conduct and do not require legal action (Ethics & Compliance Officer Association
Foundation, 2008). If the action requires prosecution, the company should then inform the
appropriate governmental authority prior to commencement of regulatory investigations.
Failure to do so may result in fines and penalties.

Investigations of misconduct create tensions among employees or between management and
employees that can weaken an ethical culture. The FSGO do not dictate that an internal inves-
tigation process should exist, however, companies find that handling misconduct internally
before the situation escalates can mitigate risk of illegal behavior. The Ethics and Compliance
Handbook provides guiding principles to respond to reports of misconduct:

• An organization must conduct a prompt, effective, and thorough investigation when
it receives an allegation of unethical or illegal behavior.

• The purpose of an investigation is to establish . . . exactly what happened and what
the organization can learn about preventing future misconduct; determining the
consequences to the individuals involved should be handled separately.

• Each person who is the focus of an investigation . . . must be treated with respect
and dignity. . . .

• . . . An organization may well decide as a matter of fairness or good business practice
to presume that someone accused of acting illegally, unethically, or in violation of
organization policy is innocent until proven otherwise.

• Confidentiality of investigations should be maintained to the greatest extent
possible.

• The organization must proactively work to prevent retaliation against employees
who allege misconduct in good faith. (Ethics & Compliance Officer Association Foun-
dation, 2008, p. 98)

Heinz states in its code of conduct that employees who report a violation in good faith will not
be subject to retaliation. However, the company cautions that “A violation of the requirement to
report violations or to cooperate in an investigation may result in disciplinary action” (Heinz,
2010, p. 8). United Technologies Corporation uses ombudsmen as neutral liaisons between
the employee and the company in receiving reports of misconduct (LRN, 2007a). Chapter 9
will provide specific guidelines for conducting investigations of reported misconduct.

Periodic Risk Assessment

The final criterion for an organizational ethics program involves conducting periodic risk
assessments. Risk is “the possibility that an event will occur and adversely affect the achieve-
ment objectives” (The Committee of Sponsoring Organizations of the Treadway Commission,

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Summary & Resources

2013, p. 4). Risk assessment refers to a systematic process for identifying and evaluating
events that could affect the achievement of company objectives. Risk assessment is the basis
for enterprise risk management, defined as “the process of aligning competitive strat-
egy with the mechanisms that identify, aggregate, mitigate, avoid, and transfer risk” (LRN,
2007a, p. 2).

Identifying risk is part of the business strategic management processes of business plan-
ning through analysis of the internal and external environments. The FSGO recommend that
a company “periodically assess the risk of criminal conduct” and take appropriate action to
modify the organizational ethics program if necessary (United States Sentencing Commis-
sion, 2013, p. 498). Defining ethics and compliance risk is a necessary task for building an
ethical culture. The Committee of Sponsoring Organizations of the Treadway Commission’s
framework for internal controls mentioned in Chapters 1 and 4 considers risk assessment a
part of the process to provide assurance of compliance to laws and regulations

A periodic risk assessment can provide valuable information for maintaining an ethical cul-
ture, such as evaluating the effectiveness of the company’s ethics and compliance program.
Regular review of the internal and external environments allows an organization to accom-
modate changes in the legal and regulatory landscape as well as business and organizational
changes such as mergers or new business models. The risk assessment should prioritize risks
according to their likelihood of occurrence and seriousness of impact; and include an evalu-
ation of why the risks occur and how to reduce each. The result is an action plan to mitigate
high-priority risks. The detailed steps to conduct a risk assessment are explored in Chapter 9.

Summary & Resources

Chapter Summary
Culture matters in business. The culture of an organization consists of shared basic values,
behavioral norms, and visible artifacts that guide appropriate behaviors and ethical decision
making. A healthy culture allows employees to live their values and perform without fear of
retaliation; whereas dysfunctional cultures lead to poor decisions, lower performance, and
greater risk of ethical misconduct scandals.

A main driver for investing in an ethical organizational culture is to comply with national
guidelines and regulations such as the FSGO. In addition, the ethical culture of an organization
can incentivize employees’ behaviors, align the informal culture of the organization with the
formal policies and procedures, and attract and retain a talented workforce. The creation of
an ethical culture depends on how well the organization’s mission, values, and standards of
conduct align. The vision and mission statement need to be meaningful and concrete so that
employees know how to act accordingly. Articulation of the vision and mission to align with
company values is an important role of ethical leaders. In developing an ethical culture, orga-
nizations should consider how the national economy could influence employee alignment
with organizational values and commitment to ethical standards.

An organizational ethics program is part of the formal ethical culture. The goal is to inspire,
encourage, and support responsible business conduct through structures and systems that
guide and support employees and agents. There is a symbiotic relationship between the orga-
nization’s ethical culture and formal ethics program. While an ethics program can build an
ethical culture, inadequate company attention to the program can weaken the ethical culture,

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Summary & Resources

thereby rendering the ethics program ineffective. An ethics and compliance program must
meet the following requirements as established by the FSGO: 1) standards and procedures,
2) program oversight and management, 3) delegation of substantial authority, 4) training and
communication, 5) checking evaluation and reporting, 6) consistent disciplinary procedures
and incentives, 7) response to critical issues, and 8) periodic risk assessment.

Key Terms

artifacts Tangible visible or audible expres-
sions of the shared values and norms of an
organization.

certification mark A logo or seal that veri-
fies company fulfillment of standards.

code of conduct Formal statements that
convey the organization’s expectations for
integrity and become an effective tool for
guiding employee behavior.

enterprise risk management The process
of aligning competitive strategy with the
mechanisms that identify, aggregate, miti-
gate, avoid, and transfer risk.

ethical climate The shared perception of
what constitutes ethically appropriately
behavior and knowledge of procedural steps
to address an ethical issue.

goals The objectives a company is striving
to achieve, including target performance for
new market expansion, growth targets, and
profits.

mission statement A written statement
that clarifies the essence of an organization’s
existence by defining the organization’s pur-
pose and goals.

moral misalignment Ethical or moral
differences in how the company and an
employee believes the firm should operate.

norms Expectations of desirable behavior
found in the policies and procedures that
guide organizational decisions and actions.

organizational culture The pattern of
shared values and beliefs that helps individ-
uals understand organizational functioning
and thus provides them with the norms for
behavior in the organization.

organizational ethics program A tool
that owners and managers use to inspire,
encourage, and support responsible busi-
ness conduct by designing structures and
systems to guide and support employees
and agents.

risk The possibility that an event will
occur and adversely affect the achievement
objectives.

risk assessment A systematic process
for identifying and evaluating events that
could affect the achievement of company
objectives.

shared basic values Basic assumptions
outlining desirable ends and means that a
group has invented, discovered, or devel-
oped, and that have worked well enough to
be considered valid, and, therefore, to be
taught to new members.

substantial authority personnel Individu-
als who, within the scope of their authority,
exercise a substantial measure of discretion
in acting on behalf of an organization.

vision statement Written narrative that
delineates what an organization ultimately
should become and achieve.

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Summary & Resources

Critical Thinking and Discussion Questions

1. What is the difference between the ethical culture and the ethical climate of a com-
pany? How are they interrelated?

2. How would you convince an organization to invest in an ethical culture? Develop a
proposal for management to develop an ethical culture.

3. Assess the ethical culture of an organization where you currently work or would like
to work. Consider how to discern the values, norms, and artifacts of the organization.

4. Review Ethisphere Institute’s most recent list of the World’s Most Ethical Companies.
Which companies do you recognize? What companies are not there that you would
expect to see? Review some of the listed companies’ websites to see if the Ethisphere
certified label appears.

5. Look up the vision and mission statement of a company of your choice and rewrite it
by integrating responsible business considerations. Then rewrite the strategic goals
based on the new mission statement.

6. How can an organizational ethics program be effective in guiding the informal cul-
ture to support ethical behaviors? Argue for an organizational ethics program as part
of an ethical culture.

7. Relate the criteria for an organizational ethics program to the elements of an ethical
culture in Figure 8.3.

Suggested Resources

Investing in Integrity

http://www.investinginintegrity.org.uk

Institute of Business Ethics

http://www.ibe.org.uk

GoodCorporation

Home

Ethics Resource Center

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http://www.investinginintegrity.org.uk

http://www.ibe.org.uk

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