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CHAPTER 6 Leadership Ethics and Social Responsibility The purpose of this chapter is to examine important issues about leadership ethics and social responsibility. The focus is on leaders rather than on a general treatment of business ethics, and includes a summary of the theory of ethics. Skill building is also incorporated into this chapter. CHAPTER OUTLINE AND LECTURE NOTES Being ethical and socially responsible is part of being an effective leader even if many financially successful executives are unethical and socially irresponsible. I. PRINCIPLES OF ETHICAL AND MORAL LEADERSHIP Ethics is the study of moral obligations, or separating right from wrong. Also, ethics are the accepted guidelines of behavior for groups or institutions. Morals are an individual’s determination of what is right or wrong and is influenced by his or her values. A moral leader will practice good ethics. Edwin H. Locke argues that ethics is at the center of leadership because the goal of a rational leader is to merge the interests of all parties so that everyone benefits and the organization prospers. A. B. Five Ethical Leadership Behaviors 1. Be Honest and Trustworthy and Have Integrity in Dealing with Others. Trustworthiness contributes to leadership effectiveness. It appears, however, that trust in business leaders is low. Integrity refers to loyalty to rational principles, thereby practicing what one preaches regardless of emotional or social pressure. (A criminal can have integrity by consistently engaging in criminal behavior.) 2. Pay Attention to All Stakeholders. Maximizing shareholder wealth is not a sufficient role for a leader. Another behavior of authentic leaders is to perceive their role to including having an ethical responsibility to all of their shareholders. 3. Build Community. The leader helps people achieve a common goal, and searches for goals compatible to all. The Global Compact seeks to build community by getting member companies to make explicit statements about human rights in their policies. 4. Respect the Individual. Respecting individuals is a principle of ethical and moral leadership that incorporates other aspects of morality. For example, if you tell the truth, you respect others well enough to be honest. Keeping promises also shows respect. 5. Accomplish Silent Victories. Joseph Badaracco, Jr. observes that modesty and restraint are largely responsible for the achievement of the most effective moral leaders in business. Factors Contributing to Ethical Differences One key factor is the leader’s level of greed, gluttony, and avarice, as reflected in some instances of excessive executive compensation (see Table 6-1). People sometimes choose the wrong path based on rationalization, leading people to focus on the intention of the action, not the action itself. A third factor is implied permission—“nobody is telling me to stop, so it must be okay.” A fouth key factor behind ethical differences is the leader’s level of moral development: preconventional (intent of receiving rewards and avoiding punishment); conventional (conform to societal norms); and postconventional (internalized set of principles that may go Copyright © Cengage Learning. All rights reserved. 44 Chapter 6: Leadership Ethics and Social Responsibility beyond laws of a society). A fifth factor contributing to the moral excesses of business leaders is that many of them have developed a sense of entitlement. Some CEOs lose their sense of reality and feel entitled to whatever they can get away with or steal. A sixth factor is the situation, particularly the organizational culture. A person’s character is a seventh factor that contributes to ethical differences. C. II. The Ethical Mind for Leaders Howard Gardner believes that for a leader to stay ethical, he or she must develop an ethical mind, or a point of view that helps the individual aspire to good work that matters to their colleagues, companies, and society in general. A starting point is to believe that retaining an ethical compass is essential to organizational health. Early-life influences are helpful. Warren Buffet appears to have an ethical mind. GUIDELINES FOR EVALUATING THE ETHICS OF A DECISION The Center for Business Ethics at Bentley College has developed six questions to evaluate the ethics of a specific decision: A. B. C. D. Is it right? Is it fair? Who gets hurt? Would you be comfortable if the details of your decision or actions were made public in the media or through email? E. What would you tell your child, sibling, or young relative to do? F. How does it smell? Ethical issues that require a fun through the guide are usually subtle rather than blatant or an issue that falls into the gray zone. A Job Seeker’s Ethics Audit, presented in Table 6–1, presents an ethical screen from the standpoint of an individual screening a potential employer. III. A SAMPLING OF UNETHICAL LEADERSHIP BEHAVIORS Table 6–2 presents a sample of the type of unethical, immoral, and often illegal behavior engaged in by business leaders whose acts have been publicly reported. It is possible than an appeal may have changed the final outcome of a ruling against an executive. A quick Internet search will bring the table entries up to date. IV. LEADERSHIP, SOCIAL RESPONSIBILITY, AND CREATING AN ETHICAL ORGANIZATIONAL CULTURE Good deeds are important for leaders. Corporate social responsibility is having obligations to society beyond their economic obligations to owners or stockholders and also beyond those prescribed by law or contract. Social responsibility involves a firm’s impact on society. Here we look at a few socially responsible actions. Being socially responsible fits into the “Thou Shalt” approach, versus “Thou Shalt Not.”. A. Providing for Strategic Leadership of Ethics and Social Responsibility Senior managers can become ethics leaders. If high ethics receive top priority, workers are more likely to behave ethically. Strategic leadership of ethics and social responsibility includes leading by example. B. Creating a Pleasant Workplace A social responsibility initiative that directly affects the well-being of people is the creation of a comfortable, pleasant, and intellectually stimulating work environment. The Fortune designation of “best company to work for” fits directly here, as measured by the Great Place to Work Institute. Copyright © Cengage Learning. All rights reserved. Chapter 6: Leadership Ethics and Social Responsibility V. 45 C. Helping Build a Sustainable Environment Socially responsible leaders influence others to preserve the external environment through a variety of actions that go beyond mandatory environmental controls. Helping build a sustainable environment can involve hundreds of different actions such as making packaging smaller, using more fluorescent lighting, and using solar panels and wind turbines. Another way for a leader to help the environment is to be directly in the recycling business. D. Engaging In Philanthropy A standard organizational leadership approach to social responsibility is to donate money to charity and various causes. A recent development is for corporate leaders to demand a good return on investment for their donated money, such as obtaining evidence that literacy rates improved when money was donated to a reading program. Another approach to getting a rapid turnaround on charitable giving is for a company to respond directly to immediate needs, such as aiding wildfire victims. E. Working with Suppliers to Improve Working Conditions An excellent opportunity for practicing social responsibility is for company leaders to work with suppliers to improve physical and mental working conditions. The justification for helping the supplier to improve working conditions is that the supplier’s employees are often in dire need of a paying job. F. Establishing Written Codes of Ethical Conduct Written codes of conduct are widely used as guidelines for ethical and socially responsible behavior. Regardless of the industry, most codes deal with quite similar issues such as conflicts of interest, and vendor relationships. G. Developing Formal Mechanisms for Dealing with Ethical Problems Many large employers have ethics programs of various types. An ethics committee to establish policy and conduct audits is typical. The United States Federal Government has a unit for dealing with ethical problems called the Pentagon’s Standards of Office Conduct. H. Accepting Whistleblowers A whistleblower is an employee who discloses organizational wrongdoing to parties who can take action. Whistleblowers are often ostracized and humiliated by the companies they hope to improve, and half the time they are ignored. The Enron Corporation case was originally exposed by a whistleblower who was a vice president at the firm. More than half the time, the pleas of whistleblowers are ignored. H. Providing Training in Ethics and Social Responsibility Ethics training programs reinforce the idea that ethically and socially responsible behavior is both morally right and good for business. Much of the content of this chapter reflects the type of information communicated in such programs. Training programs in ethics and social responsibility are most likely to be effective when the organizational culture encourages ethical behavior. At the annual Caterpillar ethics training, all 95,000 employees ponder a series of questions presented to them via the Internet or paper. I. Placing Company Interests over Personal Interests People who look beyond self-interest to build partnerships in pursuit of the greater good contribute to success in today’s interdependent world. “We” leaders unify, rather than divide. ETHICAL BEHAVIOR AND ORGANIZATIONAL PERFORMANCE A new model states that when demand for social responsibility investments increase, valuemaximizing managers will find it in their self-interest to make these investments even if cash flow Copyright © Cengage Learning. All rights reserved. 46 Chapter 6: Leadership Ethics and Social Responsibility is reduced. Also, when demand for social responsibility investments is high, making these investments the company’s market value might increase. The relationships between social responsibility and profits can also work in two directions. More profitable firms can better afford to invest in social responsibility initiatives, and these initiatives can in turn lead to more profits. The virtuous circle means that corporate social performance and corporate financial performance feed and reinforce each other. Being ethical also helps avoid the costs of paying huge fines for being unethical, including charges of discrimination and class action lawsuits because of improper financial reporting. VI. GUIDELINES FOR ACTION AND SKILL DEVELOPMENT Being ethical is an effective interpersonal skill. If you develop close relationships with people you are more likely to be ethical in your dealings with them. The stronger the relationship between people, the more likely they will behave ethically toward each other. It is essential to build close relationships with work associates. COMMENTS ON EXPERIENTIAL EXERCISES Leadership Self-Assessment Quiz 6-1: The Leader Integrity Scale A curious aspect about this scale is that it provides clues as to what actually constitutes unethical behavior for leaders. An activity of potential merit would be to compare these scores with the organizational politics questionnaire (Leadership Self-Assessment Quiz 7-3) in the next chapter. People who score very high as a political player should tend to have high scores on the integrity scale (high score reflecting low integrity). Leadership Self-Assessment Quiz 6-2: The Air Force Character Attriubtes Checklist The Air Force checklist is helpful in reviewing traits and behavior that are intuitively related to having high character. Many of these ideas also support being a team player and a good organizational citizen. Leadership Skill-Building Exercise 6-1: The Best Buy In-Store Website We suspect that most students will conclude that having an in-store Website that differs from the external Website is unethical. It may be illuminating to students to know that a company as well known as Best Buy would have such low ethics in a specific business practice. Another ethical wrinkle here is that the customer base of Best Buy is people who make use of the computer and Internet. Leadership Skill-Building Exercise 6-2: Dealing with Defining Moments Dealing with defining moments is a helpful vehicle for understanding the complexity of ethical decision making. Students will be divided on these issues, with some taking the position that a hard-nosed business decision is best because it is fairest to all concerned. Other students will go out of their way to be humanistic, such as giving an average-performing employee an above-average salary increase so he can better care for his ill mother. Copyright © Cengage Learning. All rights reserved. Chapter 6: Leadership Ethics and Social Responsibility 47 COMMENTS ON DISCUSSION QUESTIONS AND ACTIVITIES 1. If the president of the United States, George W. Bush, engaged in questionable ethical behavior while he was an energy company executive, why should you worry about being ethical? A major issue here is to think about why being ethical is important, particularly if some rich and famous people are unethical. Reasons for being ethical include the following: (a) the world would be a better place if more people in key positions were ethical; (b) ethical behavior is important based on universal rights such as fairness and justice, so possible positive consequences of being unethical are irrelevant; and (c) having high ethics is more important than fame and money. 2. The majority of business executives accused of unethical behavior have studied ethics either as a subject in a business course or as an entire course. So what do you think went wrong? For many business executives, information about ethics remains cognitive knowledge, without being internalized (learned emotionally). When the temptations to become rich or to make the firm look good to shareholders present themselves, the emotion of greed preempts cognitive knowledge about ethics. 3. The Humane Society is trying to block Amazon.com from selling magazines like The Feathered Warrior and The Gamecock because the magazines encourage cockfighting, and run advertisements for blades that attach to the legs of birds. The Human Society emphasizes that cockfighting is illegal in all states, and is also unethical. How should Amazon respond to the Humane Society? Leadership at Amazon.com faces an ethical dilemma. If the company does not sell the cockfighting-oriented magazines, it could be accused of blocking freedom of expression. Yet because the freedom of expression in this case is aimed at illegal and unethical behavior, many would argue that Amazon.com has a moral obligation not to sell the books. The argument is similar to an online store refusing to sell magazines containing child pornography or information about home-made bombs. 4. CityWatcher.com, a company that provides surveillance security services, implanted radio frequency identification chips into the arms of two willing employees to help control access to secure areas. What ethical issues might be involved in planting RFID chips in employees, even if the workers consent? One ethical issue here is whether it is reasonable to invade an employee’s body for company purposes. Unlike wearing a badge or a sensor, the chip is planted under the employee’s skin. Company leadership should ponder whether the implanted chip could conceivably create an infection. Another potential ethical issue is how far a company can go in controlling employee behavior. 5. How can consumers use the Internet to help control the ethical behavior of business leaders? In recent years consumers who believe they have been treated unfairly have taken to Websites or blogs with their complaints. Such behavior can act as a constraint on unethical behavior by business leaders. However, a backlash against these complainers has started with company legal advisors bringing lawsuits against unfounded complaints. 6. In what ways are many retail customers quite unethical? Unethical and illegal behavior by retail customers has a substantial impact on the cost of conducting business. Among these unethical and illegal behaviors are: stealing merchandise; eating food without paying for it; purchasing expensive items, using then once, and returning Copyright © Cengage Learning. All rights reserved. 48 Chapter 6: Leadership Ethics and Social Responsibility them for a refund; and misusing a product so it breaks and demanding a full refund. Students can supply loads of interesting examples of unethical customers. 7. What is your position on the ethics of a business leader receiving $100 million or more in annual compensation? We have all heard the arguments that top-level executives are paid so much because of competition, as well as supply and demand. These are the same reasons given to justify awarding a $100 million contract to a football quarterback. One of the many ethical issues here is “Who gets hurt?” when an executive is paid over $100 million per year. A plausible answer is that without such excessive pay to one person, many jobs could be saved, many employees could be given a raise, and bigger dividends could be paid to shareholders. 8. Should leaders of companies that produce fattening food that can lead to cardiac problems and obesity be targeted for being socially irresponsible? Most students will probably say that the individual has a choice about eating fatty foods, so servers of high-cholesterol food are not being socially irresponsible. However, an emerging trend is to target producers and servers of high-cholesterol food as being socially irresponsible. A major lawsuit was initiated against McDonalds in 2002, accusing the company of urging children to become obese. (Apparently, this lawsuit was ultimately rejected.) Ben & Jerry’s has been cited as socially irresponsible because of the high fat content of its ice cream. The latter is a strange twist because so many management writers have cited Ben & Jerry’s as a model of a socially responsible company. 9. A study by Liberty Mutual Research Institute found that approximately 2,600 deaths and 330,000 injuries annual in the United States each year are attributed to speaking on cell phones while driving. What social responsibility obligations should cell phone service providers have for dealing with this problem? Cell phone service providers might exercise the same type of social responsibility obligations as those companies that manufacture or distribute alcoholic beverages. Companies that sell such beverages often advertise about the importance of responsible drinking. Perhaps cell phone companies could ask purchasers to sign a “user agreement” about not using a cell phone while driving, or at least to use a hands-free device while talking on the phone. 10. Explain if you would be willing to accept a smaller salary increase or bonus so your employer could invest in a socially responsible cause such as providing s helter for homeless people or Internet access for poor children? The answer to this question could be a valid measure of the extent to which the student believes in social responsibility. Many students would ask that the company find other ways of funding social responsibility than he or she taking a pay cut. Yet other students with a more charitable attitude might be willing to forego some compensation. The response of many students would be mediated by the amount of compensation turned over to the socially responsible cause. A ten-percent salary increase or bonus might be a cutoff point for many students. Copyright © Cengage Learning. All rights reserved. Chapter 6: Leadership Ethics and Social Responsibility 49 PLAUSIBLE RESPONSES TO CASE QUESTIONS Leadership Case Problem A: Rent-Way Slides Away This case illustrates how a business fraud can severely weaken a company despite good intentions by company leadership to fix the problem. 1. What do you think of the ethics of the Rent-Way’s basic business model of rent-to-own that focuses on low-income people? As with many ethical problems, we can find to perspectives on whether or not Rent-Way’s basic model is ethically sound. On the negative side, Rent-Way customers pay much more for their merchandise including finance charges than they would if they shopped at traditional stores. In this respect, Rent-Way customers are being treated unethically. The other argument is that RentWay makes it possible for people to own furniture who lack the cash or the credit-worthiness to make purchases at traditional stores. 2. What might have leadership at Rent-Way done to have prevented the accounting irregularities that brought the company into disfavor? An accounting-oriented answer here is that Rent-Way must have lacked an effective set of management controls that would have been effective at detecting fraud. A more leadershiporiented answer is that the company needed to have established an ethical climate that would have made accounting fraud unlikely. In a business on the ethical fringe, such a climate was probably unlikely. 3. What else could Morgenstern have done to help his company recover from the scandal? Morgenstern claims he did everything in his power to help the company recover from the scandal. We wonder if he and his finance team could have found a way to obtain lower-cost financing to help Rent-Way get through their credit crunch. Or maybe the company could have survived as a smaller company, leaving open the more profitable stores. 4. Should the company have gone to the expense of an annual convention in Las Vegas when it was facing major financial problems? Holding a convention in Las Vegas was probably a bad idea because Las Vegas symbolizes excessive costs and risking money even if the reality is that the price of convention facilities in Las Vegas is competitive with many cities. Rent-Way leadership needed to send out a message that frugality was needed to save the company. Leadership Case Problem B: “GE, Can’t You Just Shut Up and Sell Us Stuff?” An important theme to this case is that a company being socially responsible with respect to the environment can create some conflict, even within the leader’s company. 1. What do you advise leaders at GE to do about satisfying customers who are not so environmentally conscious? When it appears that a customer is interested in discussing environmental issues, GE might back off on such discussions. If true, GE representatives might mention casually that the company’s environmental initiatives are not adding fees to products and services. Copyright © Cengage Learning. All rights reserved. 50 2. Chapter 6: Leadership Ethics and Social Responsibility What is your opinion of the ethics of GE leadership engaging in environmentally friendly activities while at the same time selling products that are environmentally unfriendly? GE would have to close or sell vast amounts of its operations to avoid selling any products that are environmentally unfriendly. Many products judged to be environmentally unfriendly are part of everyday living including automobiles, gas furnaces, air conditioners, washing machines, and dryers. We therefore think that a company can work toward conserving the environment without going to the extreme of eliminating all environmentally unfriendly products and services. 3. How should Immelt deal with GE managers who do not agree with his concern about reducing CO2 emissions? Immelt should continue to emphasize that reducing CO2 emissions are part of the company’s strategy, and are therefore not going to change. Managers throughout the company might be encouraged to contribute ideas for reducing CO2 emissions. Immelt could take the heavy-handed approach of including the reduction of CO2 emissions as a factor in judging managerial performance. 4. What is your opinion of the level of social responsibility shown by Immelt and most likely his executive team at GE? Immelt and his executive team appear to have an above-average degree of social responsibility as reflected in their attitudes and initiatives about conserving the environment. In the past, GE had a poor reputation for being environmentally friendly with respect to the Hudson River. Immelt is a supporter of being environmentally friendly yet he is concerned about the economic welfare of the company. Some of the initiatives Immelt proposes are what he perceives to be a political necessity, rather than a deep commitment to environmental friendliness. Copyright © Cengage Learning. All rights reserved.