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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
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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.
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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.
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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
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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.
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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.
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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.
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