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Ethics + Business: Ingredients for Great Leadership

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By Claudia Peus and Armin Pircher Verdorfer

Imagine you have been asked to support a company with their employee survey. You have done your research, compiled a questionnaire capturing common questions on employee attitudes such as job satisfaction, commitment, and participation and are now excited to present it to the CEO. You expect him to approve of the survey, but instead he yells “In what universe do you live?! We cannot ask people whether they feel supported and whether they perceive to have enough authority to decide things in their area of work or even beyond. Just imagine what this can provoke. Once we ask them about these things they will want to have them.” After a pause he continues: “We already have the problem that our employees always want explanations for our decisions. It’s not like in our branches in another part of the world where things are clear. People are told what they are supposed to do and they do it. This is how you achieve business results. But do you really? Is a style of leadership that does not at all consider employees’ needs the best – or even the only – way to be successful?

Leadership is about giving direction to people, setting goals, and, at the end of the day, achieving results. But can these goals only be achieved by being autocratic and by running a tight ship? Research suggests otherwise; numerous studies1 point to the fact that leaders of high integrity with a clear understanding of their own personal ethics, who establish and embed values into their organization and treat people with dignity and respect more often achieve sustainable organizational success. In other words: engaging in leadership with an ethical orientation pays off.

What is leadership with an ethical orientation?
As the name implies, leadership with an ethical orientation is about the ethical dimension of leadership. But what is ethical? Despite controversies about this question, most scholars in the field across the globe agree that acting in a benevolent manner, being honest and treating others respectfully and fairly can be seen as the basis of ethics across different cultures.

What does that mean with regard to the ethical foundation of leadership?

First, good leadership fully takes into account the fact that organizations are made by people. People orientation means treating others as an end in itself rather than as a means. This includes a strong emphasis on human dignity and a sincere concern for the well being of followers.

Second, good leadership is about fairness. Not just lip service but real, focused commitment to making fair and consistent decisions.

Third, good leadership is about responsibility. This is especially important with regard to the long term vision of leaders and their orientation concerning a healthy society and environment.

Fourth, good leadership is about moderation and balance. Good leaders try to find a way to make their relationships with various stakeholders and organizational purposes blend together.

Based on these ethical features, here are six guidelines for being an ethical leader and for creating a more humanistic and successful organization.2

1. Be aware of your responsibility
Winston Churchill said, “The price of greatness is responsibility.” In fact, taking on responsibility is one of the core elements of leadership. However, the crucial question is to whom are you as a manager responsible? To your shareholders, and your shareholders alone? To your employees? And even your customers?

Neither is your responsibility as a leader only about setting and achieving business goals nor does it refer exclusively to the performance and well-being of your subordinates. Your decisions impact many in the long run, including your employees, customers, the environment and the community in which you are located. But has it crossed your mind that you may carry responsibility for these stakeholders?

2. Define and communicate your core values
Ask yourself: What are the most important values, norms, and beliefs that guide you in your daily work as a leader? Do your employees know these values and see you as a role model in enacting them? Research clearly shows that vagueness and ambiguity of ethical expectations represents one of the main sources of follower misconduct. Thus, it is crucial for you as a leader to express what you expect from your followers. Be clear in answering the question: how do we (ethically) handle things around here? Of course, this means that you are challenged to visibly practice what you preach and act in accordance with your own expectations. As a leader you are a role model and you lead by example. There is hardly anything worse for your credibility as a leader than practicing the “do as I say, not as I do” philosophy.

“Emotionally committed people perform well while the leader is present, but –in contrast to clock watchers – they perform equally well in the leader’s absence.”

3. Provide meaning and a compelling vision for your followers
Outstanding leaders have a clear vision for their organization. The vision is compelling and pulls people towards them. As a successful leader you are challenged to engage and develop your employees to act in accordance with your vision. This requires the communication of meaning. In fact, one of the first words that children learn, and then repeat continuously, is “why.” Human beings have a basic need for meaning and purpose; we need to understand what is happening and why. It is not only about what we do, it is much more about why we do it. In the long run, this has a great impact on organizational performance and productivity: emotionally committed people perform well while the leader is present, but –in contrast to clock watchers – they perform equally well in the leader’s absence.

4. Be fair
As delineated above, a main function of good leaders is to carry comprehensive responsibility, which, of course, includes responsibility for decisions directly impacting subordinates. As a leader, ask yourself: how fair are you in making these decisions? But what does being fair even mean? It is clear that you cannot give all things to all people and achieve business results. A lot of the times you do not have the resources to give your employees equal shares. But maybe that is not necessary or even not fair either. Research distinguishes four categories of fairness: Outcome fairness, process fairness, interpersonal fairness, and informational fairness.

  • Outcome fairness refers to the extent employees perceive the distribution of outcomes as fair (most notably pay, promotion, and praise). Here, the question is: What rule should be applied to ensure a fair distribution of outcomes? Some individuals are guided by a principle of “equality.” This means that everyone should receive the same outcomes. The principle of “need” on the other hand, proposes that those in need should get more resources. These two principles, however, ignore differences in talent, effort, and productivity. Research shows that in a business context the principle of “equity” works best. In general, people want to get what they deserve. This means that fair treatment is a matter of distributing outcomes to individuals in proportion to their performance in terms of effort and productivity. However, a fair distribution of resources can often not be achieved. When that is the case, it is particularly important to achieve procedural fairness.
  • Procedural fairness refers to the procedures and processes underlying a decision. But what makes procedures fair? A number of studies have answered this question. First, people directly affected by the decisions want to have a voice in the process. They care about whether their opinions are heard and given serious consideration. Second, there is an emphasis on consistency. This includes that decision makers are impartial and unbiased, and base their decisions on transparent and accurate information.
  • Interpersonal fairness relates to the quality of interpersonal treatment and reflects the degree to which people are treated with sensitivity, dignity, and respect by authorities involved in decision processes.
  • Informational fairness focuses on the amount and quality of information provided by authorities about decisions. Does the leader explain why and how a decision was made? Does the leader communicate bad news as candidly as good news? Adequacy, clarity, and sincerity of communications are key elements of fair decisions.

Taken together, current research shows that outcome fairness is of course important. But procedural and interactional fairness are even stronger predictors of people’s perceptions of leader fairness. Business researcher Allen Lind and Jerald Greenberg found striking evidence for this fact. They investigated downsizing firms and tracked the management of the downsizing process in these firms. The results: in a study3 of nearly 1000 people they found that only 1% of ex-employees who felt that a high level of process fairness had been used and that they had been treated in an honest and respectful manner filed a wrongful termination lawsuit. In contrast, in firms where no explanation for the layoffs was given to the staff and where process fairness was low, 17% of the ex-employees filed a lawsuit. One can easily imagine what this means in monetary terms: the costs of legal defense were enormous. The authors of the study calculated an amount of $1.28 million for every 100 employees dismissed.

“In firms where no explanation for the layoffs was given to the staff and where process fairness was low, 17% of the ex-employees filed a lawsuit.”

5. Develop your followers by stimulating personal growth and self-actualization
Great leaders know that motivated people are the greatest asset any organization has. Lee Iacocca, US automobile businessman and “father” of the Ford Mustang got right to the point by saying “Management is nothing more than motivating other people.” Psychologist and widely known motivation researcher Abraham Maslow stated that human motivation is based on people seeking fulfillment through personal growth. Yes, it’s true, people really want to grow and realize their personal potential. As a great leader, you want to be right there supporting this need. Offering opportunities for professional and personal development is an important way to show you care for your followers. And if people perceive an opportunity to develop and put their best selves to work they will go beyond the call of duty.

6.Encourage employee autonomy and participation
An effective way to develop people is to empower them. In fact, great leaders, rather than taking purely autocratic decisions, seek to involve their followers in the process and encourage participation. They rely on their employees’ knowledge and expertise for completion of tasks and do not fear to delegate authority to others. Encouraging participation demonstrates trust in people and trust is a central element of success. When people perceive that you trust them and that you are sincerely interested in their potential, they feel you have their interest at heart and they will give back with their hearts.

By applying these principles, great leaders can develop healthy and mature partnerships with their followers and thus have a strong impact on their work-related attitudes and behaviours. But good leadership is not only about direct exchanges between leaders and followers. In the long run, leadership is about setting the tone, the atmosphere of an organization, also known as organizational climate.

By practicing leadership with an ethical orientation, leaders can create a favorable organizational climate. Climate refers to the durable features of the organizational environment that is experienced by its members.

The relation between leadership patterns and the creation of a positive organizational climate can be explained as a social learning process. By role modeling appropriate behavior, ethical leaders help create a climate in which doing the right thing is valued. Thus, in the long run, leadership with an ethical orientation results in a climate that fosters not only the commitment and the engagement of the employees, but also their abilities to act in an ethical and responsible manner. In a nutshell, a positive organizational climate is characterized by the following features4:

  1. Constructive conflict and confrontation: This means an atmosphere where conflicts and disagreements are faced openly and in a respectful and honest manner.
  2. Mutual respect: This refers to employees’ perceptions of being valued as persons and not just as numbers. The relationships between people in such an atmosphere are cooperative and characterized by mutual respect. Ask yourself: Are employees treated with dignity and respect regardless of their qualifications or position?
  3. Open communication and participative cooperation: This aspect refers to an atmosphere where people can speak their mind without fear of negative consequences. Conflicts are negotiated between equals and employees participate in making important decisions.
  4. Trust-based assignment of responsibility: This aspect describes a climate where everyone is challenged according to their skill set. Employees feel that individual contributions are sufficiently recognized and that the management demonstrates confidence in employees’ ability to act responsibly.
  5. Organizational concern for the individual: This aspect refers to the perceptions employees have about the willingness of the management to “put itself in the shoes” of the employees and to try to balance the needs of the individual with the interests of the organization. This means that management considers employees’ wellbeing when making important decisions that affect them. In such a climate, the employees also support and help each other in order to achieve organizational goals. The fair allocation of outputs among employees and the use of process fairness can foster such an atmosphere.

Leadership with an ethical orientation pays off
Numerous studies have demonstrated that practices of leadership with an ethical orientation in combination with a favourable work climate are essential predictors of organizational success, most notably for outcomes such as employee wellbeing, staff retention, productivity, customer satisfaction, and overall profitability in terms of objectively measured performance. In fact, research has shown that the positive effects pertain not only to higher levels of ownership and engagement in the workforce but also to the financial performance of a firm. This can be illustrated by the following two studies on transformational leadership.

Transformational leadership is a very prominent leadership style that incorporates many of the above-mentioned ethical principles. This leadership style is characterized by a strong emphasis on follower development. It values goals that go beyond pure self-interest and has a serious concern for serving the collective good.

First, in a seminal study5 in the mid-1990s, management professors Jane Howell and Bruce Avolio investigated the impact of transformational leadership on the economic success of business units within a major Canadian financial institution. Data clearly showed that high levels of transformational leadership were linked to increased productivity improvement, operating expense budget and premium income.

Second, further evidence for this linkage was found in a more recent study6 in Germany. Management professors Jens Rowold and Kathrin Heinitz conducted a survey in a large public transportation company. In this study, the leader of the company’s 45 branches were rated by their followers with regard to different leadership styles, among them transformational leadership. The results revealed a clear relationship between the level of transformational leadership exhibited by the leaders and branches’ annual profit.

“Transformational leadership is characterized by a strong emphasis on follower development. It values goals that go beyond pure self-interest and has a serious concern for serving the collective good.”

Besides such positive outcomes, it is also crucial to consider potential costs of not leading with an ethical orientation. This becomes especially relevant when employees engage in counterproductive behaviors that may harm the organization. The USB trading scandal, for instance, has become an inglorious example of what can happen when leaders fail to set the right tone and a culture of personal greed undermines ethical safeguards. In fact, although we often prefer to blame a few “bad apples” for misbehaviour in organizations, the truth is that the organizational environment – including leadership and organizational climate – is the most critical factor in creating (un)ethical organizations. Thus, besides giving people information about rules and procedures, it is crucial that leaders act as “ethics officers” in their organizations. Followers look to their leaders as role models and act accordingly. Moreover, research has consistently shown that even normally honest employees can be urged to engage in harmful behaviors if they perceive their work environment as negative and if they feel that management has treated them unfairly. There are, for instance, many examples of retaliatory behaviors as a consequence of untrusting and poor leadership behaviour, ranging from purposefully slowing down production to stealing or sabotage.

Furthermore, there is considerable research showing that fairness perceptions play a decisive role in predicting inappropriate work behavior. When employees perceive that they have been treated unfairly, these feelings often lead to a desire for retaliation or some other form of misbehaviour such as theft, padding expense accounts, or even the destruction of company property, to get even. In a pioneering study, justice researcher Jerald Greenberg, professor of Business Ethics at the Ohio State University showed that pay cuts were directly linked to theft rates, when the procedure was perceived as unfair by the employees. In a field study7 he assessed theft rates in manufacturing plants during a period in which pay was temporarily reduced by 15%. In comparison to control groups whose pay was not changed, the groups with the pay cuts had significantly higher theft rates. This effect could be heavily mitigated when management used process fairness. Greenberg writes: “Pay cuts that were explained in an honest and caring manner were not seen by employees as being as unfair as pay cuts that were not explained carefully.” In fact, the study revealed that when the reason for the pay cuts was thoroughly and caringly explained to employees, feelings of unfair treatment were lessened, and the theft rate was significantly reduced.

In other studies, instances of personal aggression including various forms of bullying and harassment have been linked to poor leadership and negative organizational climates.

It goes without saying that all these forms of misbehaviour represent a very serious threat for the overall performance and the success of an organization. The direct financial damages due to theft or poor product quality are clear. But also indirect costs are high: toxic interpersonal relationships undermine employee wellbeing and motivation. In the long run, not only the productivity will suffer, but also the company’s reputation.

Overall, these studies show that leadership with an ethical orientation is not somehow “unworldly” or far removed from reality. There is a moral imperative for leaders to create humane organizations. It is, simply said, the right thing to do. But moral responsibility and business opportunity are not mutually exclusive as research has shown.

In the table below there are 6 key questions for any leader who wants to create a positive and favourable organizational climate and thus build a more humanistic and successful organization.

Asking yourself these questions stimulates and develops self-awareness, which means that you have a solid understanding about who you are as a leader.

Always ask yourself, “what is happening, why is it happening, and where is it going?” Make this process become a habit, but remain objective and do not judge yourself too severely when you see that you have not been acting according to your values and goals. The reason for becoming self-aware is to learn and change.

“Leading with ethics is not contrary to business goals. Quite the contrary: in the long term, ethics and performance run parallel: they both grow taller or they both remain small.”

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Much has been written about leadership. Being a leader is in itself a challenge and it is evident that today’s turbulent business environment places multiple and tough demands on leaders. They assume high levels of responsibility and are often faced with difficult decisions. However, leading with ethics is not contrary to business goals. Quite the contrary: in the long term, ethics and performance run parallel: they both grow taller or they both remain small.

About the Authors
Claudia Peus is a professor at TUM School of Management, Technische Universität München, and academic director of the university’s executive education center. She earned her Ph.D. from Ludwig Maximilian University and spent three years in the United States as a visiting scholar at the Sloan School of Management, Massachusetts Institute of Technology, and at Harvard University. Her research focuses on the personnel, organizational and societal aspects of effective leadership in academic and business organizations.

Armin Pircher Verdorfer is a Postdoc at TUM School of Management, Technische Universität München. After he received his MS in Psychology and a BA in Philosophy, he obtained his doctoral degree in Psychology in 2010 at LFU Innsbruck. In 2011 he served as a Visiting Assistant Professor in the Organizational Dynamics Program at the University of Oklahoma. His research interests are primarily in the areas of organizational climate, employee participation and the ethical dimension of leadership.

References
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. Peus, C., Kerschreiter, R., Frey, D., & Traut-Mattausch, E. (2010). What is the value? Economic effects of ethically-oriented leadership. Zeitschrift für Psychologie/Journal of Psychology, 218, 198-212.
2
. Peus, C., & Frey, D. (2009). Humanism at work: Crucial organizational cultures and leadership principles. In H. Spitzeck, M. Pirson, W. Amann, S. Khan, & E. von Kimakowitz (Hrsg.), Humanism in Business – perspectives on responsible business in society (S. 260-277). Cambridge: Cambridge University Press.
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. Lind, E. A., Greenberg, J., Scott, K. S., and Welchans, T. D. (2000). The winding road from employee to complaintant: Situational and psychological determinants of wrongful termination lawsuits. Administrative Science Quarterly, 45, 557-590.
4
. Pircher Verdorfer, A., Weber, W.G., Unterrainer, C. & Seyr, S. (2012). The socio-moral climate concept: A contribution in exploring effects of the ethical context in organizations. Economic and Industrial Democracy.DOI: 10.1177/0143831X12450054.
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. Howell, J. M., & Avolio, B. J. (1993). Transformational leadership, transactional leadership, locus of control, and support for innovation: Key predictors of consolidatedbusiness- unit performance. Journal of Applied Psychology, 78, 891–902.
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. Rowold, J., & Heinitz, K. (2007). Transformational and charismatic leadership: Assessing the convergent, divergent and criterion validity of the MLQ and the CKS. The Leadership Quarterly, 18, 121–133.
7
.Greenberg, J. (1990). Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75(5), 561-568.

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