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The Role of Ethical Leadership in

Organizations

Dr. O.C. Ferrell

olorado State University

General Session NAII Executive Round Table Seminar

February 3, 2003

Las Vegas, Nevada



Corporate Responsibility Crisis...

“Opinion polls now place business people

in lower esteem than politicians.” -Jennifer Merritt (2002) “For MBAs, Soul Searching 101,”

Business Week, Sept. 16, p. 64.

“A W.S.J./NBC poll found that 57% of

general public believed that standards &values of corporate leaders & executives

had dropped in the last 20 years.” -Eric Hellweg (2002) www.business2.0.com, Sept. 10



“An ABC News/Washington Post survey

indicated 63% of the public felt that

regulation of corporations is necessary to protect the public.”

“Seventy-five percent of those surveyed by

ABC, expressed limited confidence in largecorporations.”

-Gary Langer (2002) “Confidence in Business: Was Low and Still Is,”

www.abcnews.com, Sept. 10.



Corporate Confidence Crisis

Bernard Ebbers-Worldcom; Kenneth Lay-Enron

– financial reporting, personal loans, general oversight

Dennis Koslowski-Tyco; Andrew Fastow-Enron;

John Rigas-Adelphia – conflicts of interest, financial fraud & improper loans

Jack Grubman-Salomon Smith Barney

– provided IPOs to Ebbers & other CEOs based on investment

banking relationship Henry Blodgett-Merrill Lynch

– urged small investors to put money in stocks that he privately

down rated



Developing Trust & Confidence

in Businessindividuals alone did not cause our current

crisis

the following stakeholders were all involved

in supporting a culture of deception &

manipulation – board members -regulators

– top management -politicians

– attorneys -mass media

– accounting firms -investors

– securities analysts -colleges of business



Corporate Reform...

The 2002 Sarbanes-Oxley Act was the most

sweeping change in corporate governance

and the regulation of accounting practicessince the Securities and Exchange Act of

1934.

– Supported by Republicans & Democrats

– Provides oversight to restore stakeholder

confidence

– Requires business ethics infrastructure



Sarbanes Oxley Reform

Independent Accounting Oversight Board

CEOs and CFOs certify financial statements

Board Audit Committee to consist of independent

members (no material interests) No consulting & auditing by the same firm

No loans to officers & board members

Code of ethics for senior financial officers

– register with the SEC

Whistle-blower protection

10 year penalty for mail/wire fraud

Analysts certify objective reports



Sarbanes Oxley Reform

Company attorney must report fraud to top management &

if necessary to the board of directors

– if nothing is done, attorney must withdraw from representation

Mutual fund managers must disclose how shareholder proxies are voted-providing investors information about

how their shares influence decisions



Corporate Governance

Formal systems of accountability & control

for organizational decisions & resources

Major Issues:

– shareholder rights

– executive compensation

– mergers & acquisitions

– board compensation & structure

– auditing & control

– risk management

– CEO selection & executive succession plans



Models of Corporate Governance

Shareholder Model – maximization of wealth for investors & owners

– developing and improving the formal system of

performance accountability between management & thefirms stakeholders

– making decisions based on what is in the best interest

for investors

Stakeholder Model – considers the interests of employees, suppliers,

government agencies, communities, & groups with

which it interacts

– assumes collaborative & relational approach



Joann Lublin (2003) "Panel Officers

Governance Rules." Wall StreetJournal, Jan. 10, p.1.

Corporate Governance Best

Practices Support to split roles of CEO and Chairman

– Chubb Corp. (& others) named a board member as non-executive

chairman

Outside directors meet alone as often as necessary Independent internal ombudsman to encourage

internal reporting of misconduct

– often called ethics officer

Formation of an internal audit function of every publiccompany

Support for codes of ethics to improve shareholder

relations & auditing practice



Predicted Trend in Corporate

GovernanceBoard responsibility for developing company

purpose statements that cover stakeholder interests

Annual reports will include more non-financial

information

Boards will be required to self-assess

Board member selection processes will become

increasingly formalized

Boards will need to work more as teams

Board membership will require more time



Internal Control & Risk

ManagementControls are used to safeguard corporate assets &

resources, protect the reliability of organizational

information & ensure compliance with regulations,

laws & contracts

– limit employee or management opportunism

– ensure that board members have access to timely &

quality information

– the ability to anticipate & remedy organizational risks

• minimize negative situations

• uncertainties need to be hedged



Future of Corporate Governance

Moving from a shareholder model to a

stakeholder model

Greater organizational-level accountabilityGreater general support for corporate

governance

Governments are playing a more significantrole



How does ethical decision

making occur in organizations?#1 influencer of ethical/unethical behavior is

the influence of top management & the

corporate culture

business ethics in an organization relates to a

corporate culture of values, programs,

enforcement & leadership

stakeholders must support organizational

ethics initiatives-it’s good business

– stop focusing on the short term!!!



Recommendations for Business

Leaders...Take responsibility for educating your

managers about corporate responsibility

& business ethicsTop management needs to make sure

there are visible & supported programs

– do not rely upon individual ethics & thecharacter of employees alone



Question...

Are business ethics & social

responsibility directly related to

financial performance?



Business Ethics Initiatives Have

Been Tied To...Greater efficiency in daily operations

Greater employee commitment

Improved financial performance

Higher product quality

Improved decision making

Increased customer loyalty

Improved reputation



Trust in Corporate Citizenship

Trust is the “glue” that holds organizational

relationships together

Stephen Covey contends, low trust results inorganizational decay & relationship

deterioration

– political problems & inefficiencyMost workers feel they can be trusted more

than they can trust others



Employees & Trust

All organizational members should share a

sense of trust

Trust should exist between departmentswithin a firm

Ethics Resource Center study shows that

93% of employees who say trust isfrequently evident in their organization

report satisfaction with their employer



Companies Convicted of

Misconduct...Provide significantly lower returns on assets

& lower returns on sales than firms that

have not been convictedOrganizational misconduct can result in:

– loss of reputation

– supplier concerns – investor concerns

– greater government scrutiny



Resources...

www.e-businessethics.com

Ferrell, Fraedrich & Ferrell,

Business Ethics (2002),

Houghton Mifflin Co.



Questions

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