Ethics and Business Ingredients for Great Leadership

7/27/2019 Ethics and Business Ingredients for Great Leadership

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Ethics + Business: Ingredients for GreatLeadership

ByClaudia PeusandArmin Pircher Verdorfer

Imagine you have been asked to support a company with their employee survey. You havedone your research, compiled a questionnaire capturing common questions on employeeattitudes such as job satisfaction, commitment, and participation and are now excited topresent it to the CEO. You expect him to approve of the survey, but instead he yells In whatuniverse do you live?! We cannot ask people whether they feel supported and whether theyperceive to have enough authority to decide things in their area of work or even beyond. Justimagine what this can provoke. Once we ask them about these things they will want to havethem. After a pause he continues: We already have the problem that our employeesalways want explanations for our decisions. Its not like in our branches in another part of theworld 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 thatdoes not at all consider employees needs the best or even the only way to besuccessful?

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 atight ship? Research suggests otherwise; numerous studies1 point to the fact that leaders ofhigh integrity with a clear understanding of their own personal ethics, who establish andembed values into their organization and treat people with dignity and respect more oftenachieve sustainable organizational success. In other words: engaging in leadership with anethical orientation pays off.

What is leadership with an ethical orientation?

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

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 bypeople. 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 beingof followers.

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

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

Fourth, good leadership is about moderation and balance. Good leaders try to find a way tomake 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 forcreating a more humanistic and successful organization.2
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1. Be aware of your responsibility

Winston Churchill said, The price of greatness is responsibility. In fact, taking onresponsibility is one of the core elements of leadership. However, the crucial questionis to whom are you as a manager responsible? To your shareholders, and yourshareholders alone? To your employees? And even your customers?

Neither is your responsibility as a leader only about setting and achieving businessgoals nor does it refer exclusively to the performance and well-being of yoursubordinates. Your decisions impact many in the long run, including your employees,customers, the environment and the community in which you are located. But has itcrossed 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 youin your daily work as a leader? Do your employees know these values and see youas a role model in enacting them? Research clearly shows that vagueness andambiguity 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 fromyour followers. Be clear in answering the question: how do we (ethically) handlethings around here? Of course, this means that you are challenged to visibly practicewhat you preach and act in accordance with your own expectations. As a leader youare a role model and you lead by example. There is hardly anything worse for yourcredibility 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 leadersabsence.

3. Provide meaning and a compelling vision for your followers

Outstanding leaders have a clear vision for their organization. The vision iscompelling and pulls people towards them. As a successful leader you arechallenged to engage and develop your employees to act in accordance with yourvision. This requires the communication of meaning. In fact, one of the first wordsthat children learn, and then repeat continuously, is why. Human beings have abasic need for meaning and purpose; we need to understand what is happening andwhy. It is not only about what we do, it is much more about why we do it. In the longrun, this has a great impact on organizational performance and productivity:emotionally committed people perform well while the leader is present, but incontrast to clock watchersthey perform equally well in the leaders absence.

4. Be fair

As delineated above, a main function of good leaders is to carry comprehensiveresponsibility, which, of course, includes responsibility for decisions directly impactingsubordinates. 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 allpeople and achieve business results. A lot of the times you do not have theresources to give your employees equal shares. But maybe that is not necessary oreven not fair either. Research distinguishes four categories of fairness: Outcomefairness, process fairness, interpersonal fairness, and informational fairness.

Outcome fairness refers to the extent employees perceive the distribution of outcomes as fair (mostnotably pay, promotion, and praise). Here, the question is: What rule should be applied to ensure a fairdistribution of outcomes? Some individuals are guided by a principle of equality. This means thateveryone should receive the same outcomes. The principle of need on the other hand, proposes thatthose 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. Ingeneral, people want to get what they deserve. This means that fair treatment is a matter of distributing


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outcomes to individuals in proportion to their performance in terms of effort and productivity. However, afair distribution of resources can often not be achieved. When that is the case, it is particularly importantto achieve procedural fairness.

Procedural fairness refers to the procedures and processes underlying a decision. But what makesprocedures fair? A number of studies have answered this question. First, people directly affected by thedecisions want to have a voice in the process. They care about whether their opinions are heard andgiven serious consideration. Second, there is an emphasis on consistency. This includes that decisionmakers 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 communicatebad news as candidly as good news? Adequacy, clarity, and sincerity of communications are keyelements 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 peoplesperceptions of leader fairness. Business researcher Allen Lind and Jerald Greenbergfound striking evidence for this fact. They investigated downsizing firms and trackedthe management of the downsizing process in these firms. The results: in a study3 ofnearly 1000 people they found that only 1% of ex-employees who felt that a highlevel 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 whereno explanation for the layoffs was given to the staff and where process fairness waslow, 17% of the ex-employees filed a lawsuit. One can easily imagine what thismeans in monetary terms: the costs of legal defense were enormous. The authors ofthe 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 whereprocess 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 gotright to the point by saying Management is nothing more than motivating otherpeople. Psychologist and widely known motivation researcher Abraham Maslowstated that human motivation is based on people seeking fulfillment through personalgrowth. Yes, its true, people really want to grow and realize their personal potential.As a great leader, you want to be right there supporting this need. Offeringopportunities for professional and personal development is an important way to showyou care for your followers. And if people perceive an opportunity to develop and puttheir 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, ratherthan taking purely autocratic decisions, seek to involve their followers in the processand encourage participation. They rely on their employees knowledge and expertisefor completion of tasks and do not fear to delegate authority to others. Encouragingparticipation 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 intheir potential, they feel you have their interest at heart and they will give back withtheir hearts.

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


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

The relation between leadership patterns and the creation of a positiveorganizational climate can be explained as a social learning process. By rolemodeling 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 orientationresults in a climate that fosters not only the commitment and the engagement of theemployees, but also their abilities to act in an ethical and responsible manner. In anutshell, a positive organizational climate is characterized by the following features4:

1. Constructive conflict and confrontation: This means an atmosphere where conflicts and disagreements arefaced 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 mutualrespect. Ask yourself: Are employees treated with dignity and respect regardless of their qualifications orposition?

3. Open communication and participative cooperation: This aspect refers to an atmosphere where peoplecan speak their mind without fear of negative consequences. Conflicts are negotiated between equals andemployees participate in making important decisions.

4. Trust-based assignment of responsibility: This aspect describes a climate where everyone is challengedaccording to their skill set. Employees feel that individual contributions are sufficiently recognized and that themanagement demonstrates confidence in employees ability to act responsibly.

5. Organizational concern for the individual: This aspect refers to the perceptions employees have about thewillingness of the management to put itself in the shoes of the employees and to try to balance the needs ofthe individual with the interests of the organization. This means that management considers employeeswellbeing when making important decisions that affect them. In such a climate, the employees also supportand help each other in order to achieve organizational goals. The fair allocation of outputs among employeesand 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 orientationin 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 measuredperformance. In fact, research has shown that the positive effects pertain not only to higherlevels of ownership and engagement in the workforce but also to the financial performanceof 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 ofthe above-mentioned ethical principles. This leadership style is characterized by a strongemphasis on follower development. It values goals that go beyond pure self-interest and hasa 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 ofbusiness units within a major Canadian financial institution. Data clearly showed that highlevels 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 largepublic transportation company. In this study, the leader of the companys 45 branches wererated by their followers with regard to different leadership styles, among themtransformational leadership. The results revealed a clear relationship between the level oftransformational 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 seriousconcern for serving the collective good.

Besides such positive outcomes, it is also crucial to consider potential costs of not leadingwith an ethical orientation. This becomes especially relevant when employees engage in


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counterproductive behaviors that may harm the organization. The USB trading scandal, forinstance, has become an inglorious example of what can happen when leaders fail to set theright tone and a culture of personal greed undermines ethical safeguards. In fact, althoughwe often prefer to blame a few bad apples for misbehaviour in organizations, the truth isthat the organizational environment including leadership and organizational climate is themost critical factor in creating (un)ethical organizations. Thus, besides giving peopleinformation 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 beurged to engage in harmful behaviors if they perceive their work environment as negativeand if they feel that management has treated them unfairly. There are, for instance, manyexamples of retaliatory behaviors as a consequence of untrusting and poor leadershipbehaviour, ranging from purposefully slowing down production to stealing or sabotage.

Furthermore, there is considerable research showing that fairness perceptions play adecisive role in predicting inappropriate work behavior. When employees perceive that theyhave been treated unfairly, these feelings often lead to a desire for retaliation or some otherform of misbehaviour such as theft, padding expense accounts, or even the destruction ofcompany 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 directlylinked to theft rates, when the procedure was perceived as unfair by the employees. In afield study7 he assessed theft rates in manufacturing plants during a period in which pay wastemporarily 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 heavilymitigated when management used process fairness. Greenberg writes: Pay cuts that wereexplained in an honest and caring manner were not seen by employees as being as unfairas pay cuts that were not explained carefully. In fact, the study revealed that when thereason for the pay cuts was thoroughly and caringly explained to employees, feelings ofunfair 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 forthe overall performance and the success of an organization. The direct financial damagesdue to theft or poor product quality are clear. But also indirect costs are high: toxicinterpersonal relationships undermine employee wellbeing and motivation. In the long run,not only the productivity will suffer, but also the companys reputation.

Overall, these studies show that leadership with an ethical orientation is not somehowunworldly or far removed from reality. There is a moral imperative for leaders to createhumane organizations. It is, simply said, the right thing to do. But moral responsibility andbusiness 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 positiveand favourable organizational climate and thus build a more humanistic and successfulorganization.

Asking yourself these questions stimulates and develops self-awareness, which means thatyou 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? Makethis process become a habit, but remain objective and do not judge yourself too severelywhen you see that you have not been acting according to your values and goals. The reasonfor becoming self-aware is to learn and change.

Leading with ethics is not contrary to business goals. Quite the contrary: in the longterm, ethics and performance run parallel: they both grow taller or they both remainsmall.


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Much has been written about leadership. Being a leader is in itself a challenge and it isevident that todays turbulent business environment places multiple and tough demands onleaders. They assume high levels of responsibility and are often faced with difficultdecisions. 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 bothremain small.

About the Authors

Claudia Peusis a professor at TUM School of Management, Technische UniversittMnchen, and academic director of the universitys executive education center. She earnedher Ph.D. from Ludwig Maximilian University and spent three years in the United States as avisiting scholar at the Sloan School of Management, Massachusetts Institute of Technology,and at Harvard University. Her research focuses on the personnel, organizational andsocietal aspects of effective leadership in academic and business organizations.

Armin Pircher Verdorferis a Postdoc at TUM School of Management, TechnischeUniversitt Mnchen. After he received his MS in Psychology and a BA in Philosophy, heobtained his doctoral degree in Psychology in 2010 at LFU Innsbruck. In 2011 he served asa 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.

References1. Peus, C., Kerschreiter, R., Frey, D., & Traut-Mattausch, E. (2010). What is the value?Economic effects of ethically-oriented leadership. Zeitschrift fr Psychologie/Journal ofPsychology, 218, 198-212.2. Peus, C., & Frey, D. (2009). Humanism at work: Crucial organizational cultures andleadership 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.3. 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 wrongfultermination lawsuits.Administrative Science Quarterly, 45, 557-590.4. Pircher Verdorfer, A., Weber, W.G., Unterrainer, C. & Seyr, S. (2012). The socio-moralclimate concept: A contribution in exploring effects of the ethical context inorganizations. Economic and Industrial Democracy.DOI: 10.1177/0143831X12450054.
http://www.professoren.tum.de/en/peus-claudia/http://www.professoren.tum.de/en/peus-claudia/http://www.rm.wi.tum.de/en/team/wissenschaftliche-mitarbeiterinnen/arminpircher/http://www.rm.wi.tum.de/en/team/wissenschaftliche-mitarbeiterinnen/arminpircher/http://www.rm.wi.tum.de/en/team/wissenschaftliche-mitarbeiterinnen/arminpircher/http://www.professoren.tum.de/en/peus-claudia/


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5. Howell, J. M., & Avolio, B. J. (1993). Transformational leadership, transactionalleadership, locus of control, and support for innovation: Key predictors ofconsolidatedbusiness- unit performance. Journal of Applied Psychology, 78, 891902.6. Rowold, J., & Heinitz, K. (2007). Transformational and charismatic leadership: Assessingthe convergent, divergent and criterion validity of the MLQ and the CKS. The LeadershipQuarterly, 18, 121133.7.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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Ethics and Business Ingredients for Great Leadership