What is Ethical Leadership?

Feb, 2011 Professor Bob Wood, Director of the MBS Centre for Ethical Leadership, explains how leaders can instil a sense of ethics in their organisations.

Questions of ethics and how human beings treat one another in daily interactions probably first arose when humans began to form communities and had brains big enough to realize that short term gains may lead to longer-term losses. Moral education would have followed soon after. Formal ethics training has been around for more than 2000 years. Every major religion is based on a core of ethical principles that are preached and communicated to members and others through all available modes of communication. Beyond religious sources, ethics and their application to human behaviour have long been a standard of philosophers and integral to university training and formal education. In most societies, instruction in how to treat other people is an integral part of daily interactions amongst family members, friends and others that people come in contact with. Despite the long history of widespread ethical education, the incidence of ethical failures remains as prevalent as ever. In modern business, the magnitude of the problems consequent on ethical failures has grown with the increasing size, opaqueness and potential impact of the modern corporation. Recently, we have examples of a 35-year-old trader losing $360 million of NAB customers funds in a trading scandal. Then there is Enron, which has become synonymous with corporate moral failure. Not just for the treatment of earnings, but for the manipulation of the California power market and the impact that had on ordinary citizens, particularly the elderly and frail who were denied access to air conditioning during brown outs. In Australia, many corporate failures over the last 20 years have included questions of unethical behaviour, Adelaide Steamships, Bond Corporation, Harris Scarfe, and One Tel, to name a few. Why do some people not act ethically?

Is it just greed or is it often a case of ordinary people who might prefer to be good, doing bad things? Many ethical scholars like Gourlay Professor Ed Freeman, argue the latter, which begs the question why? My answer is that ethical training needs some rethinking in the context of leadership. Lets start with the premise that most people, particularly business leaders want to be ethical in their conduct. This is no "Pollyanna" assumption about the inherent goodness of people but is grounded in solid evidence from 100 years of research into human behaviour. Ethics is about social relations and the evidence is that people want good social relations; it is good for their mental health and their sense of self. Excluding psychopaths and sociopaths, for most human beings their sense of self worth is tied to feelings of decency, integrity and the respect and trust of other people. Behaving ethically is a path to that sense of self worth. Ethical failures, particularly being caught behaving unethically, leads to a loss of self-worth, unless it is buttressed with rationalizations. Even rationalizations, such as denial of responsibility or claims that everyone does it are evidence that people who behave unethically want to protect their sense of self-worth. So people want to behave ethically, but they often dont. Why? I believe one important reason is that it is often hard to know what is the right thing to do. Even with good intentions, it is hard to be ethical in modern society. Ethical problems are rarely simple judgments of right or wrong of the sort you might encounter in a case study or ethics exam. They are more likely to be dynamic, unfolding problems where there the relevant facts and the individuals to be considered are in a state of flux. They are more like the problem solving required in a Geoffery Robinson hypothetical than the answer to a problem in an ethics exam. As an example, in a recent conversation with senior executives at a mining corporation this was exactly how they described their involvement in Land Rights negotiations. They went into the negotiations with what everyone at the initial meeting agreed was a generous offer. But they were still trying to negotiate an agreement 9 months later. What they thought was a one trial event of offer and acceptance had turned into a multitrial dynamic problem solving process where the stakeholders, values and positions changed over time, often in response to the offers on the table and the negotiation processes. Most complex ethical problems are like that. How do leaders ensure ethical action in their teams and organizations?

Leadership for me is a process of engaging and influencing people toward some goals or outcomes. When the leader is trying to influence people to act in an ethical manner, then we are talking about ethical leadership. Is there any other type?, you might well ask. It is important to note that being an ethical person is not the same as being ethical leader. Kenneth Lay, the former Chairman of Enron, by all accounts was a practicing Christian who used his personal wealth to advance many community causes. His friends and family believe he was an ethical person. However, he also happened to be the leader of a major corporation that engaged in corrupt activity during his tenure and, therefore, he failed in his ethical leadership. So what is required for effective ethical leadership? First is what you do. Good leaders have to be role models and, for much behaviour, particularly ethical behaviour, they have to practice what they preach. Alignment of ones own behaviour with ethical values is a necessary but not sufficient condition for effective ethical leadership. Second is what you say. Leaders engage and influence people through their communications. In fact, communications are probably the most flexible and universally effective tool that leaders have at their disposal. To be an effective leader, you have to be an effective communicator. This does not mean you have to be charismatic. It does mean that you must present clear and consistent messages that are understood, remembered and acted upon. In the case of ethical leadership, communications also needs to consider the language that is tolerated in discussions of people and problems. For example, sexist and racist jokes are not consistent with the creation of an ethical culture. Ethical leadership also requires that you align what you say with what you do. Failure to so is hypocrisy and a very shaky foundation for claims of being an ethical leader.

The third mechanism for leaders to engage and influence staff is the systems in his or her organization. Examples include compensation, budgeting and performance assessment systems. It is the leaders responsibility to ensure that systems are free from moral hazard and that they promote ethical behaviour. For example, if the staff in a professional services firm is required to bill a certain number of hours each month, irrespective of market conditions or other mitigating factors, the leader who sanctions the system must accept some responsibility for the fact that some staff will bill hours that have not been worked. Another example I came across recently was that of a computer company that negotiated terms of 45 days payment to suppliers and then had an internal accounts payable policy of not issuing payments

until 90 days for small and less powerful suppliers. The leader who approved that policy was behaving unethically because he or she created a system that influenced other people to behave unethically. The fourth mechanism is the culture the leader creates. This includes the language and tolerance of errors, both of which influence whether people and organizations learn from ethical failure or compound their mistakes and lock themselves into a set of rationalizations that diminish their capacity for ethical action. Let me explain through the example of Lockheed Aircraft Company. Back in the 1980s bribes to foreign governments became a norm among business development staff at Lockheed. This was facilitated by the use of euphemistic language in which the bribes were described as economic infrastructure development payments. However, the only infrastructure going up was the bank account of corrupt government officials. So, if we are to develop ethical leaders our ethics training must go beyond simply teaching models of ethics applied to static case studies and teach students how to provide leadership of dynamic, complex problems, through their communications and through the development of systems and cultures that promote ethical behaviour. How we might do that can be the subject of a later discussion.