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business ethics Leadership & ethics Management and Leadership

Why is Ethical Leadership Important?

Increasing Public Awareness of Ethics

Since the 2008 financial crisis, the public awareness and concern with ethical behaviour of organisations has been increasing. With consumers and potential clients more aware of business ethics than ever before, it is important that companies regard ethics as a top priority  and develop a framework and workplace culture that places ethics in high regard.

With the rise of social media platforms, and digital communication the impact of negative publicity is amplified in real time. Consumers and investors alike take a much detailed look at the company’s reputation, culture of ethics and governance before investing. Organisations have much to gain by investing in promoting their company ethics and even use it as a “greenwashing” tactic.

Ford, Pepsi Co., L’Oreal and Starbucks are examples of companies that in the past few years have been at the top of the most ethically perceived companies lists. Ethisphere Institute is one organisation that publishes ratings which allow customers and investors to assess organisational ethical stance on a yearly basis.  Ethisphere’s EQ framework, shown in Figure 2, highlights the main fields by which companies are ranked: ethics compliance (35%), CSR initiatives (20%), ethical leadership and innovation (10%).

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Figure 2: Ethical Qualities Framework (Source: Ethisphere 2017)

Corporate Ethical Lapses and CEO Dismissals

Over the past several years, companies have become much more likely to dismiss their CEOs because of a scandal or improper conduct by the CEO — including fraud, bribery, insider trading, inflated resumes, and sexual indiscretions.

  • Globally, trust & confidence in CEOs has been decreasing from 2011 to 2016 (Grande 2016) while CEO dismissals for ethical lapses have increased by an avg. 4%
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Figure 3: CEO turnover by region from 2007 to 2016 (Source: Grande 2016)

Shifting Management Paradigms

The shifting management paradigms from stability and uniformity to change and crisis management, demand leaders to find new approaches to respond to the increasing challenges of managing complex organisations. These changes require today’s leaders to evolve to a new mind-set centred around integrity, diversity inclusion, empowerment and collaboration. These continual and rapid changes in business environment have enhanced the need for ethical leadership, replacing the traditional leader which is perceived as a self-centred leader-hero with a more humble leader who empowers his followers and is focused on a higher purpose.

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Figure 1: Old vs New Paradigm of Management (Source: Based on Daft and Merlo 2015)

For today’s leaders the responsibility for preventing or minimizing wrongdoing is daunting. The best way to prevent ethical lapses is to build a culture of integrity—and to put in place effective leadership and governance structures, processes and controls that discourage wrongdoing.  Knowing how to organically infuse ethics into everyday business practices and understanding how to communicate the importance of ethical behavior across divisions is a strong top-level leadership skill to develop.

References:

Daft R. and Pirola-Merlo A. (2015) The Leadership Experience: Asia Pacific Edition, 1st Edn. Cengage Learning: Australia.

Ethisphere Org. (2016). ‘World’s Most Ethical Companies’ [online] available from: <http://worldsmostethicalcompanies.ethisphere.com/honorees/> [30 Aug 2017].

Pwc (2016) ‘Are CEOs Less Ethical Than in the Past?’ [online] available from <https://www.strategyand.pwc.com/ceosuccess&gt; [30 Aug 2017].

By Alle Ceambur

Digital marketing expert and copywriter. I have over 6 years of experience in business consulting. Passionate to help startups grow online.

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