Ethical Leadership

Chapter 7 opens with three learning outcomes, reproduced below since they map directly onto the chapter's three major sections.

1. Assess the global challenges of ethical leadership and explain the importance of ethical leadership in a business organization.
2. Analyze the characteristics of an ethical leader.
3. Describe individual strategies to demonstrate ethical leadership in an organization.

Alcoa, the global leader in lightweight metals engineering and manufacturing, calls itself a values-driven company; its code of conduct credits a 135-year commitment to values for its success (Alcoa, 2022). In 1985, chairman and CEO Charles W. Parry argued ethics is not something businessmen must violate to make a profit, but something they must implement to prevent chaos, and that managers, executives, shareholders, and workers should all hold each other accountable for ethical practice. By 2008 Alcoa's director of ethics and compliance was focusing training on plant superintendents and supervisors, "because they set the example for the greatest number of employees" (Napsha, 2008, para. 8), delivering anticorruption and gift-policy training to management in 44 countries — taking local law into account while holding company values constant regardless of location. Bill O'Rourke, president of Alcoa Russia from 2005–2008, has described using ethical leadership to hold employees accountable for gift/entertainment violations and visa noncompliance (O'Rourke, 2019).

Despite this award-winning program, Alcoa managers in Australia ran a bribery scheme dating to 1989: an intermediary in Bahrain secured business while funneling payments to the royal Bahraini family. U.K. and U.S. investigations found a consultant set up shell companies that invoiced the Bahraini aluminum company at inflated rates to fund kickbacks — tens of millions of dollars to senior Bahraini officials over 20 years (Miller et al., 2014). In 2014 Alcoa and Alcoa World Alumina LLC pleaded guilty to violating the Foreign Corrupt Practices Act and paid $384 million in fines.

The case draws the chapter's central distinction: management copes with complexity through planning, goal setting, organizing, staffing, budgeting, and auditing; leadership inspires and motivates people to achieve goals (Kotter, 1990). Even after Alcoa's corporate office flagged possible impropriety in the Bahrain arrangement, Alcoa Australia managers called the account "one of our most important 'blue ribbon' alumina accounts" (Miller et al., 2014, p. B1) — management without ethical leadership. An ethical leader champions behavior aligned with the organization's purpose, vision, and values; Freeman and Steward (2006) describe ethical leaders as "first and foremost members of their own organizations and stakeholder groups" who "see their constituents as not just followers, but rather as stakeholders striving to achieve that same common purpose, vision, and values" (p. 3). In a global business, that means interacting with stakeholders locally and globally — employees will not embrace ethical standards if only headquarters executives care about conduct and compliance (LRN, 2007); managers at every location must become ethical leaders capable of modeling responsible conduct, encouraging ethical and lawful behavior, and handling reports of violations.

Leaders play a critical role in creating an organization's ethical culture because their actions determine what counts as acceptable behavior in the workplace; employees perceive that culture through their experiences with superiors. Some scholars define ethical leadership behaviorally: Lu and Guy (2014) call it "the quality of guidance and role modeling provided by the worker's superior" (p. 10), while Brown et al. (2005) define it as "the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two-way communication, reinforcement, and decision-making" (p. 200).

Employees must also decide to accept a leader's guidance. "It is accepted wisdom among people who study leadership intently that no leadership exists without followers" (Uhl-Bien et al., 2014, p. 83). Followership is "the ability to effectively follow the directives and support the efforts of a leader to maximize a structured organization" (Bjugstad et al., 2006, p. 304) — but followership does not mean blind obedience when asked to act unethically. Whether someone follows depends on their perception of the leader's values, their trust in the leader, and whether they see the relationship as passive obedience or a partnership (Carsten & Uhl-Bien, 2013; Plachy & Smunt, 2022); followers who perceive a coproducing relationship are more likely to challenge directives, propose alternatives, and refuse to participate in unethical behavior.

Leadership behavior is, in essence, the foundation of a company's culture. An organization builds an ethical culture when leaders at every level — including managers and supervisors — model integrity by talking about the importance of ethical conduct and referencing organizational values as a decision framework, exemplifying the conduct they expect of employees, and holding subordinates accountable for ethical behavior (Ethics & Compliance Initiative, 2018a, p. 24).

Enron: When Informal Culture Overrides Formal Values

Leadership actions can reinforce a formal ethics and compliance program — or support an informal culture of misconduct instead. Enron was a rising, profitable energy-commodities company through the 1990s; in 2001 it went bankrupt after fraudulent accounting practices covering up losses came to light (McLean et al., 2001). Its stated core values were respect, integrity, communication, and excellence, and quotes celebrating communication were distributed on telephone notepads company-wide — even though bringing bad news to management was informally discouraged. As whistleblower Sherron Watkins put it, "At Enron, we had a firm culture in place that emphasized making earnings targets no matter what, and I don't think any one person could have changed that culture" (Beenen & Pinto, 2009, p. 279). Despite formal messaging, it was the informal culture that actually governed employee behavior — the chapter's illustration (Figure 7.1) of how ethical leadership shapes informal culture (Gonzalez-Padron, 2017).

Many leadership styles bear on ethical and responsible leadership: transactional, servant, authentic, and transformational, among others (de Klerk & Jooste, 2023; Toor & Ofori, 2009; Yukl et al., 2013). Responsible leadership "cultivates sustainable and trustful relationships to different stakeholders inside and outside the organization and co-ordinate[s] their action to achieve common objectives (e.g., triple bottom-line goals), business sustainability and legitimacy and ultimately to help realize a good (i.e., ethically sound) and shared business vision" (Maak & Pless, 2006, p. 103). Responsible leaders are ethical leaders; Pless (2007) adds that responsible leadership "reflects the fact that corporate responsibility is first and foremost a leadership challenge, which requires leaders who care, who are morally conscious, open towards the diversity of stakeholders inside and outside the corporation and who are aware of and understand the responsibilities of business in society" (p. 438).

Transactional Leadership — Compliance Through Rewards

Transactional leaders influence others by offering monetary or recognition rewards for achieving outcomes — a task-oriented approach built on clear expectations and rewards. It fails when leaders cannot deliver the promised rewards (Bass, 1985), and employees may take shortcuts just to get paid. Transactional leadership is therefore associated more with compliance that maximizes outcomes than with actually modeling ethical behavior (Groves & LaRocca, 2011).

Table 7.1 — Values in Common Across Leadership Styles

Servant, authentic, and transformational leadership styles carry a moral component and focus on employee development. Reviewing the literature, de Klerk and Jooste (2023) found six values held in common across responsible, ethical, servant, authentic, and transformational leadership — reproduced below exactly as the chapter presents them.

Servant Leadership

Servant leaders ask first whether other people's needs are being met. Greenleaf (1970) writes that servant leadership "begins with the natural feeling one wants to serve, to serve first. Then conscious choice brings one to aspire to lead" — sharply different from "one who is leader first." The difference shows in "the care taken by the servant-first to make sure that other people's highest priority needs are being served. The best test, and difficult to administer, is this: Do those served grow as persons? Do they, while being served, become healthier, wiser, freer, more autonomous, more likely themselves to become servants? And, what is the effect on the least privileged in society? Will they benefit or at least not be further deprived?" (p. 13). Spears (2021) adds that servant leaders draw on "listening, empathy, healing, awareness, persuasion, conceptualization, foresight, stewardship, commitment to the growth of people, and building community" (p. 4). Studies link servant leadership to trust, empowerment, vision, altruism, intrinsic motivation, commitment, and service (Parris & Peachey, 2013), and to employee well-being, job satisfaction, commitment, trust, and ethical behavior (Neubert et al., 2022).

Authentic Leadership

Authentic leaders know their strengths and weaknesses and stay true to themselves. Avolio and Gardner (2005) describe them as "anchored by their own deep sense of self; they know where they stand on important issues, values and beliefs. With that base they stay their course and convey to others, often-times through actions, not just words, what they represent in terms of principles, values and ethics" (pp. 329–330). Employees more readily adopt the ethical behaviors of a leader perceived as genuine, making authenticity an important component of an ethical organization (Verbos et al., 2007).

Transformational Leadership

Transformational leaders motivate others by appealing to morale and inspiring greater outcomes — a relation-oriented style focused on collaboration toward organizational goals. These leaders serve as trusted role models, develop shared visions and team spirit, stimulate innovation and creativity through open dialogue, and coach personal development tailored to each employee (Bass & Avolio, 1993). This style establishes clear ethical principles and guidelines employees can use to recognize values conflicts and realign their own behavior.

The Common Thread: Empowerment

Ethical, responsible, servant, authentic, and transformational styles all differ from transactional leadership by empowering employees to take an active role in meeting organizational goals and following ethical principles (de Klerk & Jooste, 2023; Kark et al., 2003), whereas transactional leadership seeks to influence behavior rather than empower it. Employee empowerment is the belief that one can affect one's own work role and context (Spreitzer, 1995); employees empowered to help develop ethics codes and policies are more likely to make decisions aligned with them. Nike and Adidas AG maintained ethical labor standards at apparel factories in emerging countries by empowering supply-chain managers to evaluate contract manufacturers' labor practices and develop creative fixes (Arnold & Hartman, 2003). In public relations, empathetic and empowering leaders are advancing diversity, equity, and inclusion practices (Berg & Miller, 2023). Empowered employees recognize personal responsibility for their own decisions and hold peers accountable for ethical decisions too (Parboteeah et al., 2010).

Organizations generally expect executives — the CEO, CFO, board of directors — to bear primary responsibility for establishing and enforcing ethical behavior. But employees do not actually differentiate between the ethical leadership of executives and frontline supervisors (Treviño, Weaver, Gibson, & Toffler, 1999). Because individuals in leadership and management positions need close working relationships with direct reports to serve as ethical role models, many organizations now develop all supervisors or group leaders as ethical leaders (Treviño, Weaver, & Reynolds, 2006; Walumbwa, Morrison, & Christensen, 2012).

Business Best: Prudential Financial Develops Ethical Leaders

Prudential Financial, Inc., a global financial-services leader with over 40,000 employees in 50 countries, is recognized among Fortune's World's Most Admired Companies and Ethisphere's World's Most Ethical Companies, with 12 U.S. honors for inclusive workplace practices and international recognition in Poland, Brazil, Ireland, Mexico, Taiwan, and Korea. A letter of commitment signed by all U.S. headquarters leadership states: "At Prudential, we have a longstanding commitment to conduct business with integrity. It's how we have delivered on our promises to customers for more than 145 years. And it is critical to achieve our purpose of making lives better by solving the financial challenges of our changing world" (Prudential Financial Inc., 2024, para. 1). Its code of conduct calls leaders and managers to role-model the right behaviors and inspire others to do the same; build a workplace where ethical behavior is expected and understood; protect the Prudential brand and reputation; base business decisions on high ethical standards; maintain current, effective controls and procedures; factor ethical behavior into hiring, promotion, compensation, and discipline decisions; foster a speak-up culture with open communication and no retaliation; and hold team members accountable for completing required training (Prudential Financial Inc., 2022b, p. 7).

Prudential backs this with a formal global ethics support structure — manager accountability for subordinates' ethics and compliance, ongoing manager training, and annual ethical leadership assessments. Even so, unethical conduct led to the resignation of CFO James Turner for offering employment to a relative of a Hong Kong insurance regulator, violating the code of conduct (Yu, 2023). Following recommendations from the Business Ethics Leadership Alliance (BELA), Prudential also created an ethics champion program: Business Ethics Officers in each business function worldwide, each overseeing no more than 2,000 employees as the first point of contact for ethics questions (Prudential Financial Inc., 2022a).

Employees perform better when they feel supervisors and executives take ethics seriously. Comprehensive ethical programs — tools and training paired with genuine leadership — minimize ethical and legal dilemmas across the workforce; when employees feel safe reporting problems, their psychological well-being improves, which in turn strengthens organizational commitment. Employees commit more to organizations they perceive as trustworthy, fair, and honest in top management and immediate supervision. Organizational commitment is the emotional attachment between employees and employer that "influences whether they will remain or leave the organization, whether they accept the organization's values and goals, and how much effort they put forth on the job" (Philipp & Lopez, 2013, p. 305) — and it drives enhanced performance and innovation. Yidong and Xinxin (2013), studying Chinese workers, found that perceived ethical leadership increases innovative work behavior, defined as the "generation, promotion, and application of new ideas intended in the work role, group or organization, which aims at improving organizational performance" (p. 443).

Organizational commitment rises when employees feel valued and secure. Ethical leadership can ease financial or job-loss anxiety that would otherwise erode attachment to the organization — research shows it increases pay satisfaction and commitment even in short-term, economically motivated relationships (Philipp & Lopez, 2013; Ruiz-Palomino et al., 2013), and during COVID-19, employees felt safer and more confident amid ambiguity when their supervisor modeled ethical leadership (Cakir et al., 2023). Altogether, ethical leadership delivers a pervasive ethical culture, fewer instances of misconduct, and greater employee well-being, commitment, and performance — plus shareholder and community confidence, which is why ethical leadership sits at the core of building trust in business (Hamm, 2022; Seidman, 2004).

Research finds ethical leaders typically possess four general attributes relating to traits, behaviors, decisions, and encouragement (Resick et al., 2006; Treviño & Brown, 2004):

• An ethical leader must exhibit a strong moral character and integrity.
• He or she is altruistic and demonstrates respect for others.
• The decisions of ethical leaders demonstrate a collective motivation that promotes team or organizational interests over self-serving interests.
• Ethical leaders encourage ethical conduct through motivational incentives and consider integrity in compensation and promotion decisions (E. N. Johnson et al., 2012).

Moral Person vs. Moral Manager

Employees judge a leader along two separate dimensions: whether the leader is a moral person and whether the leader is a moral manager (Treviño et al., 2000). A moral person is honest and trustworthy, making ethical decisions consistently and fairly. A moral manager inspires ethical behavior in others by setting standards, holding people accountable, modeling good example, and rewarding ethical conduct. A leader who talks about expected ethics without acting ethically is a hypocritical manager. An ethical leader is strong on both dimensions; an unethical manager is weak on both. Archie Carroll (1987) describes an immoral manager as one focused on profits who treats ethical or legal obligations as obstacles to circumvent, while an amoral leader fails to consider ethical dimensions at all, whether intentionally or from lack of awareness. Treviño et al. (2000) label leaders who are not immoral but simply do not prioritize ethics as ethically neutral.

Employees also judge leaders through a skewed lens — beliefs formed by prior experience shape how they read a leader's ethics (Messick & Bazerman, 1996), and perceptions of ethical leadership depend on feelings of supervisor effectiveness, trust, and satisfaction with that supervisor (Brown et al., 2005). Marquardt et al. (2018) found that Black leaders were perceived as less ethical than White leaders when ethics were ambiguous or the leader was hypocritical — but not when each leader showed a clear personal commitment to ethics. Employees also tend to equate ethical leadership with political skill — "combining social perceptiveness or astuteness with the capacity to adjust one's behavior to different and changing situational demands" (Ferris et al., 2002, p. 111); leaders with strong political skill can inflate employees' perception of their ethicality and cause employees to accept deviant behavior (Harvey et al., 2014), and supervisors with strong moral intensity may rate themselves as more ethical than employees would agree with (Kuenzi et al., 2019).

Table 7.2 — Freeman and Steward's Eight Characteristics

Freeman and Steward (2006) developed eight characteristics of ethical leaders from scholarly research and executive interviews; the chapter examines each in turn, and Table 7.2 summarizes them here.

Personify Organizational Values

"Can you walk the talk and talk the walk?" "Actions speak louder than words." These phrases capture an ethical leader's core characteristic: leading by example. Ng and Sears (2020) show "a CEO's words and actions matter in setting the stage for the implementation of diversity initiatives" (p. 446), but also require real investment in HR resources to support them — Kelly (the global staffing company) President and CEO Peter Quigley describes backing clear diversity-hiring goals with AI technology, training, and a Chief Diversity Officer (Waddill, 2022).

When an executive acts as though exempt from the organization's own ethics, it signals that unethical conduct is acceptable. MacLean et al. (2015) found hypocritical leadership produces an informal culture of noncompliance that reduces ethics and compliance programs to symbolic gestures. Managers who behave unfairly or dishonestly create job insecurity, since employees notice the gap between stated procedures and actual leadership behavior (Loi et al., 2012); this can lead employees to question company information and their own career prospects, driving greater turnover (Greenbaum et al., 2015).

The costs of failing this characteristic are concrete: companies lose around $226 million in shareholder wealth when a CEO develops a reputation for unethical conduct (Cline et al., 2018), and boards typically remove the leader. American Apparel founder/CEO Dov Charney's use of company funds for family travel plus repeated sexual-harassment allegations led the board to push his resignation (Kapner, 2014); Best Buy CEO Brian Dunn resigned in 2012 over a policy-violating relationship with a female employee; Slync's founder was fired by the board after using $25 million in investor money on a private jet and stadium luxury boxes, resulting in fraud charges (U.S. Attorney's Office Northern District of Texas, 2023) — the company closed in 2023, unable to survive the reputational damage.

Freeman and Steward (2006) stress that "it is important for leaders to tell a compelling and morally rich story, but ethical leaders must also embody and live the story" (p. 3) — the CEO's reputation for ethics sets the tone for the whole organization. Howard Schultz of Starbucks modeled this in the company's founding vision: "We like to say that we are not in the coffee business serving people, but in the people business serving coffee."

Focus on Organizational Success

Ethical leaders demonstrate collective motivation — team or organizational interests over self-interest — and show genuine concern for the people contributing to that success (Freeman & Steward, 2006; Treviño et al., 2000). Starbucks CEO Kevin Johnson illustrated this early in the COVID-19 pandemic: cafés switched to drive-thru/delivery only, and the day after, employees ("partners") were offered 30 days of pay whether or not they came to work (Starbucks Corporation, 2020). Managers still showed up; teams volunteered to cover quarantined colleagues and understaffed locations. An Arizona store manager, Leah, summarized it: "All of this is worth it if I make sure my partners know and my customers know they matter to me and they matter to Starbucks. It's the heart of who we are" (Starbucks Corporation, 2020, para. 35).

By contrast, narcissistic leaders focused on self-glorification and self-gratification are more likely to engage in unethical behavior (Hoffman et al., 2013), and self-serving resource allocation increases when standards of conduct are ambiguous (Noval & Hernandez, 2019) — misconduct can go undetected and escalate in a weak ethical culture, though a strong culture makes subordinates and peers less likely to view a narcissist as ethical in the first place. Examples of leaders who chose personal gain over organizational performance: Slync's founder (private jet, luxury boxes); Tyco International's Dennis Kozlowski (a $6,000 shower curtain, $15,000 umbrella stand, $2 million birthday party) (Prentice, 2012); and HealthSouth's Richard Scrushy, who according to former CFO Weston Smith (2013) "loved being in the spotlight at all times… formed a band that traveled in style on one of the company's jets and went so far as to tour in Australia following a ribbon-cutting at a new HealthSouth hospital" (p. 908) while inflating earnings and asset values by almost $2.7 billion.

A leader's definition of success signals whether they will lead ethically. Gentile (2010a) recommends defining one's professional purpose around broad organizational goals rather than personal career advancement. Herman Miller founder Max De Pree: "Ethics and leadership intersect in the common good. Leaders should subsume their needs to those of their followers and they must learn how to make a commitment to the common good. Finally, leaders should know how to bear, rather than inflict, pain" (Murphy & Enderle, 1995, p. 123). Cutting corners to drive profits ranks among the top three concerns of U.S. and U.K. companies (Association of International Certified Professional Accountants, 2023). Jack Welch and Jeff Immelt of General Electric connected performance with integrity directly: "No cutting of corners for commercial considerations will be tolerated. Integrity must never be compromised to make the number" (Heineman, 2008, p. 31) — GE defines its role as high performance with high integrity. Pfizer and Moderna faced similar pressure during COVID-19 vaccine development, needing to demonstrate integrity and transparency despite perceptions of "cutting corners" (Lawrence, 2021); Moderna's Kristin Rand described a purpose beyond profit: "There is a feeling of responsibility to a whole world that is watching and waiting for some sort of hope… there is a responsibility to get it out there to the public at large" (Lawrence, 2021, p. 14).

Understand the Values of Others

Ethical leaders must recognize that each individual approaches situations from their own ethical perspective, and that differing viewpoints can spark organizational conflict or cause employees to disobey directives. Freeman and Steward (2006) note that "Ethical leaders can understand why different people make different choices, but still have a strong grasp on what they would do and why" (p. 6). Global organizations must consider how age, nationality, and other factors shape how employees perceive headquarters' ethical initiatives (Richards et al., 2012); understanding coworkers' or employees' values lets an ethical leader recognize them and assess how well they align with organizational values.

Moral reproach occurs when employees sense a leader judges their values as morally inferior. Stouten et al. (2013) found that employees who perceive moral reproach are more likely to engage in deviant behavior — morally judgmental leaders make employees feel distrusted to do the right thing. Ethical leaders instead discuss expected ethical standards openly and create dialogue about how employees experience those standards day to day. Responsible companies recognize that ethical leadership requires respecting people and local norms — employees respond poorly to bare dictates and need to understand why standards exist. Heineman (2008) recommends designing "programs that don't heap scorn on local culture (and, by implication, on our employees, their families, and their friends), but rather explain why those practices are unacceptable in a global company" (p. 84).

Find the Best People

Ethical leaders treat finding and developing the best people as a moral imperative (Freeman & Steward, 2006), and HR should support building a workplace culture around it. Socially responsible human resource management (SRHRM) — HR practices that promote ethical and responsible employee behavior — combined with ethical leaders, increases employee well-being, speaking up, and ethical behavior (Z. Zhang et al., 2022; Zhao et al., 2023); the 2024 LRN Ethics & Compliance Program Effectiveness Report found more companies now build ethical behavior into performance systems, major hiring decisions, promotion, and bonuses.

Recruiting the best people means weighing ethics and character in selection — increasingly hard with remote hiring, which demands "open-mindedness and moral integrity in virtual work settings" (Gupta & Pathak, 2024, p. 79). Centric Consulting, with over 1,100 employees across the U.S. and India, spends 50% of its hiring process assessing culture fit, sorting culture into what can be taught (innovation, client-delivery philosophy) versus what is difficult or impossible to teach (kindness, integrity) (English et al., 2022, p. 297); candidates lacking the hard-to-teach traits are not offered positions, and new hires get cultural training and leadership mentorship.

Selection and termination practices themselves reflect organizational culture. After his 2006 fraud conviction, Enron CEO Ken Lay expressed concern that the young, aggressive, highly educated employees the company attracted were bending and inventing rules around energy trading (Ferrell & Ferrell, 2011); Enron's annual "rank and yank" review process, which cut the bottom 10–15% of employees each year, contributed to employees' unwillingness to speak up about the accounting entries that ultimately caused its collapse (Beenen & Pinto, 2009). Rank-and-yank fell out of favor after Enron for the competitive rivalry it generates ("Bartleby: When Rank Leads to Rancour," 2020), and biased assessment methodology can produce disproportionate dismissals of minority workers when used for layoffs (Giumetti et al., 2015) — yet companies still use ranking for promotion and evaluation, and Amazon employees have pushed for legislation over the lack of transparency in ranking criteria (Soper, 2022).

Leaders bear responsibility for employee development, even though some managers worry that training makes employees more likely to leave (T. W. H. Ng et al., 2024). With workers more mobile, organizations increasingly build employability — "having the competitive skills required to find work when we need it, wherever we can find it" (Waterman et al., 1994, p. 87). Employees confident in their ability to find future work tend to be higher performers, more innovative, and more satisfied (Hahn & Kim, 2018; Matsuo, 2022; Stoffers et al., 2020) — but confident, employable workers are also more likely to leave if they perceive a supervisor as unethical or showing favoritism (Matsuo, 2022; Shamsudin et al., 2023).

Ethical leaders tie compensation and promotion to integrity. If a coworker lies to customers to make sales, an ethical leader opposes the practice and withholds bonuses or recognition for the resulting quota performance — rewarding the perpetrator instead would erode other employees' trust and their expectation that everyone is held to the same standard. The practical challenge is measuring ethical conduct: performance evaluations are subjective, and managers may not know an employee is bending rules. Some organizations gather input from peers, subordinates, and customers, or use self-assessment questions such as whether the employee has successfully communicated support for the code of conduct, has ensured a monitored compliance plan in their area, or can point to recent decisions demonstrating a commitment to integrity (Ethics & Compliance Initiative, 2018b, p. 22) — the goal being to make integrity a recognized, discussed part of employee evaluation.

Create Conversations About Ethics

Ethical leaders encourage deeper conversations about ethics, values, stakeholder principles, and societal expectations to embed ethical behavior in organizational culture. When leaders talk about ethics and values, workers hold each other responsible for actually living them; the conversations surface alternatives and reinforce a culture employees take pride in. Providing a platform for colleagues to discuss ethics leads to more ethical decisions (Treviño, den Nieuwenboer, & Kish-Gephart, 2014).

Former Johnson & Johnson CEO James Burke exemplifies this. As a health and wellness company, J&J's products can improve health and save lives; in the 1980s Burke ordered a full Tylenol recall at great financial cost after learning of cyanide-laced capsules in the Chicago area. J&J's strong ethical culture traces to Burke's early tenure, when he held challenge meetings around the world where managers debated the company's long-standing credo and values (Freeman & Steward, 2006); to keep senior executives from becoming hypocritical leaders, Burke required them to "either subscribe to the credo or remove it from the wall" (Treviño & Brown, 2004, p. 75). Formal top-management communication matters, but direct supervisors have a greater day-to-day impact on how employees perceive ethical behavior (Ferrère et al., 2022). J&J administers a Global Credo Survey every two years asking whether coworkers' and managers' behavior reflects company values; its 2012 leadership development program centered on "frequent and meaningful, formal and informal, conversations that fuel a culture of high performance" (Johnson & Johnson, 2014, para. 8), and during COVID-19, decisions about PPE distribution and use of an HIV drug to treat the disease were made using an ethical framework grounded in the credo (Waldstreicher, 2021).

Create Mechanisms of Dissent

Employees need encouragement from leadership to voice concerns when behavior conflicts with ethical standards. To avoid the ethical traps of obedience to authority, groupthink, and conformity bias, employees must be able to object without fear of retaliation when an internal process or business decision is wrong (Freeman & Steward, 2006). Wells Fargo is the chapter's example of the consequences of not speaking up — pressure to conform drove overly optimistic, risky behavior across the organization (Lilly et al., 2021).

A speak-up culture is part of the Ethics & Compliance Initiative's High Quality Program criteria; Pillar 4 specifies "SPEAKING UP: The organization encourages, protects and values the reporting of concerns and suspected wrongdoing" (Ethics & Compliance Initiative, 2018a, p. 3). Yet only about half of employees in a 2023 survey felt safe speaking up without retaliation (Ethisphere Institute, 2023), so building a speak-up culture requires addressing the informal pressures to conform and stay quiet.

Psychological safety is the shared belief that it is safe to take interpersonal risks, be authentic, and voice concerns without retaliation (Edmondson, 1999). Pixar runs a mentorship program to help all employees, especially those feeling marginalized or vulnerable, feel safe speaking up (Woolf, 2024); U.S. Bank credits supervisor training on psychological safety, including the phrase "leaders speak last," for building its speak-up culture (Lawrence, 2020, p. 19). Chief Ethics Officer Katie Lawler explains: "At its core, psychological safety is having an environment where people feel like it is safe to speak up, offer a new idea, report a concern, and challenge the status quo without fear. We're trying to cultivate as an environment where people can speak up without feeling like they're taking a risk" (Lawrence, 2020, pp. 18–19).

Know the Limits of Values

Ethical leaders recognize that values have limits and can conflict with one another. Freeman and Steward (2006) write that "ethical leaders have an acute sense of the limits of the values they live and are prepared with solid reasons to defend their chosen course of action" (p. 7) — balancing ethical values against organizational demands like innovation, profitability, and viability.

General Motors chose profit over customer safety by not replacing a fatally flawed ignition switch in Chevy Cobalts, reportedly to save less than $1 per switch (Nelson, 2014) — a decision that cost lives and heavily damaged GM's reputation. Boeing's quality-control failures, tied to a cultural shift toward cost savings, similarly resulted in lost lives, injuries, and near-misses, destroying its reputation for quality and safety (Tully, 2024); Boeing specifically ignored worker concerns about inadequate manufacturing quality controls. In contrast, CVS voluntarily removed cigarettes and tobacco products from its stores at a cost of about $2 million in revenue (Herper, 2014), reflecting leadership's choice to prioritize customer health over profit. Ethical leaders also listened and responded to employee views on workplace racism after the 2020 racial protests — two-thirds of large companies and a third of small businesses took some action ("Survey: Racism in the U.S. Workplace and Employers' Response to the Protests," 2020), with open communication with leadership being employees' most desired response; DEI programs implemented for moral reasons, rather than purely business reasons, are more successful at addressing workplace inequities (Beach & Segars, 2022).

Frame Actions in Ethical Terms

Ethical leaders maintain organizational integrity by modeling correct behavior, discussing ethics with subordinates, and explicitly framing business situations in ethical terms — "the way a business situation is framed may subtly — and subconsciously — influence the cognition and behavior of those experiencing it" (Clark et al., 2014, p. 29). Employees can otherwise fall into moral myopia, "a distortion of moral vision, ranging from shortsightedness to near blindness, which affects an individual's perception of an ethical dilemma" (Drumwright & Murphy, 2004, p. 11) — related to ethical fading and moral blindness, it describes a tendency to notice ethical issues close at hand while missing the larger context.

Some organizations treat business and ethics as entirely separate domains — Edward Freeman's (1994) separation thesis: "The discourse of business and the discourse of ethics can be separated so that sentences like, 'x is a business decision' have no moral content, and 'x is a moral decision' have no business content" (p. 412). Ethical leaders instead stress that business actions must not violate ethical principles, contradict business standards, or harm stakeholders (recall Chapter 3's two-fold test for identifying ethical dimensions, Pekel & Wallace, 2006). A GE senior manager who entered a distribution contract with a new vendor without completing required due diligence — citing competitive pressure from other firms courting the vendor — was fired under GE's strict policy that "competitive pressures never justify compromising integrity and 'one strike and you're out'" (Heineman, 2008, p. 32).

Make Difficult Decisions

Ethical leaders do not avoid difficult decisions even when every option conflicts with personal or organizational values. Ignoring the ethical dimensions of a decision may produce a simpler solution, but not an ethically sound one; ethical leaders demand consideration of every ethical dimension regardless of difficulty (Treviño et al., 2003). Ecolab's management, for example, will decline a customer sale if the terms fall outside acceptable practice (see the case study below). As Nonaka and Takeuchi (2011) put it, "Wise leaders make decisions only after they figure out what is good for the organization and society" (p. 64).

Ethical leadership does not mean ignoring business goals — it requires moral imagination, defined in Chapter 6 as the "ability to imaginatively discern various possibilities for acting within a given situation and to envision the potential help and harm that are likely to result from a given action" (M. Johnson, 1993, p. 202). Moral imagination lets a leader resolve dilemmas in new ways without compromising integrity — for example, resolving employee conflicts by considering every factor, ensuring due process, and treating employees as part of a community (Moberg, 2003). Salesforce and Apple used novel approaches to protect consumer data ahead of competitors like Google and Facebook (Hargrave et al., 2020), illustrating moral imagination applied to a genuine business challenge.

Becoming an ethical leader starts with self-examination. Gentile (2010a) frames it as reflecting on "who [they] really are and what [they] say and do" (p. 109) — asking about personal and professional goals, the impact one wants to have as a leader, and how one wants to feel about oneself and one's work. Ethical leaders accept responsibility for how their actions affect customers, suppliers, employees, communities, and other stakeholders.

Organizations look for four behaviors in ethical leaders: self-awareness of emotions in ethical reasoning (a form of emotional intelligence); embodying personal and organizational ethics as a role model; holding themselves and others accountable for ethical practice; and — drawing on transformational leadership — coaching others through the ethical decisions inherent in business. The next four subsections take each in turn.

Emotional Intelligence

Leaders with high emotional intelligence are more likely to act ethically and make decisions that benefit all stakeholders (Angelidis & Ibrahim, 2011). Emotional intelligence is "the set of abilities that enable a person to generate, recognize, express, understand, and evaluate their own, and others', emotions in order to guide thinking and action that successfully cope with environmental demands and pressures" (Van Rooy & Viswesvaran, 2004, p. 72; Van Rooy et al., 2005). Self-awareness of how emotions shape relationships helps leaders avoid reacting negatively under stress — Kass Thomas (2021) describes how emotional intelligence supported ethical leadership through COVID-19 pandemic tensions; a senior manager at a leading U.S. realty firm reported, "When I was vulnerable, I performed better when my seniors empathized with me. When I replicated this behavior with my teams, they outperformed. This, despite conditions being challenging during Covid" (K. Thomas, 2021, p. 28). Pless (2007) frames responsible and ethical leadership as requiring cognitive, emotional, relational, and moral qualities together; companies investing in emotional intelligence training see gains in performance, safety, employee motivation, and ethical conduct (Boyatzis & Oosten, 2003).

Voicing Ethical Values

An ethical leader models appropriate behavior even when it's difficult — organizational pressure for financial performance, group pressure to conform, and personal career ambition can all rationalize overlooking a decision's ethical dimensions. Ethical leaders must recognize the ethical traps for misconduct covered in Chapter 6 and develop ways past them, committing to learn and practice the skills of voicing values. Gentile (2010a) identifies seven ways to build confidence in voicing values:

1. Learn from experience — reflect on what helps integrate integrity and performance, and what inhibits ethical conduct.
2. Learn from others — watch and learn from managers who express values and lead ethical teams.
3. Create a support system — find mentors or peers who can informally help with leadership challenges.
4. Develop two-way conversations up and down the organization — encourage questioning whether an action is truly appropriate or warranted.
5. Learn to express difficult messages — express concerns calmly and without passing judgment.
6. Know yourself and play to your strengths — consider how your purpose, risk profile, communication style, and self-image shape how you lead.
7. Practice — actively seek opportunities to demonstrate integrity and voice values.

Speaking up and holding to ethical standards takes courage. A leader who makes courageous decisions under pressure signals to others how important upholding ethical principles really is. Former Olympus CEO Michael Woodward's moral courage — exposing fraud at the Japanese camera company at the cost of his job and personal safety — is the chapter's example ("Paying a Price for Doing What's Right," 2012). Moral courage is taking action to preserve values and ethical principles; Kidder (2009) identifies three elements: (a) "a commitment to moral principles," (b) "an awareness of the danger involved in supporting those principles," and (c) "a willing endurance of that danger" (p. 7).

Table 7.3 — Seven Steps to Moral Courage

Sekerka et al. (2011) found managers facing an ethical situation report worry, loneliness, fear, shock or surprise, and hurt feelings (often from a sense of betrayal) — these emotional signals are what prompt Step 1's recognition that acting ethically carries risk. Step 2 evaluates which organizational values or ethical standards are lacking; Step 3 determines which values matter most when several conflict, anticipating counterarguments in advance. Step 4 weighs ambiguity (confidence in the facts), exposure (visibility within the organization), and loss (peril to income and reputation). Step 5 requires the endurance to stand by one's stated reasons, drawing on experience, character, faith, and intuition. Step 6 addresses the ethical traps (Chapter 6) that can inhibit moral courage. Step 7 closes the loop by learning from the experience — debriefing and discussing moral courage, documenting a pathway others can follow, and practicing speaking up again.

Accountability

Ethical leaders hold themselves to high standards by acknowledging and taking responsibility for their mistakes — earning, in turn, the right to hold others accountable. The Ethics & Compliance Initiative (2024) frames accountability as what lets a culture of integrity permeate an organization: "Company and departmental leaders should embrace their ownership and ultimate accountability for business integrity outcomes, just as they do financial accountability. Likewise, every employee, starting with but not limited to leadership levels[,] should know, understand, and (by design) be accountable for how their work sustains and advances the company's purpose" (p. 24).

Accountability has three components: credibility, transparency, and responsibility. Credibility comes from consistently doing what you say you'll do — walking the talk — and explaining honestly, without excuses, when you cannot follow through (Grimshaw et al., 2006). Transparency means sharing information, communicating plans and decisions, and keeping both managers and direct reports informed, with clear goals, performance measurement, monitoring, and feedback channels (Ethics & Compliance Initiative, 2024). Responsibility means thinking through consequences in advance, owning one's own mistakes, learning from them, and accepting responsibility for employees' mistakes too (K. Zhang et al., 2024).

Before accepting accountability for a task, managers and employees should confirm four features are in place: clear expectations with specific, measurable, attainable, realistic, and time-constrained goals; adequate financial, technical, and human resources, including access to needed stakeholders; the personal competence and authority to perform the task; and fair, equitable consequences for both success and mistakes.

Ethical leaders build a culture of accountability by making sure every employee understands what they are accountable for, how it's measured, and what the rewards or consequences are — inclusively, with room for feedback from all stakeholders (failing to hold anyone but leadership accountable for DEI commitments, for instance, is a common way such policies fail; Corley, 2020). Leaders must also earn trust, since employees may be reluctant to admit mistakes (K. Zhang et al., 2024), and must be clear about which behaviors are learning opportunities versus grounds for termination — recall GE's "one strike and you're out" policy on integrity. Turk (2012) offers ten diagnostic questions for whether an organization has a true culture of accountability, including whether poor performers are ignored, transferred, or promoted; whether goals exist and are publicized at every level; whether performance execution (not just business results) is measured; whether people hide from responsibility or avoid problems and conflicts; whether values are taken for granted; and whether people are punished for honest mistakes (p. 46).

Coaching

Coaching is one of the most powerful mechanisms a leader has for reinforcing organizational values and an ethical culture (Treviño & Brown, 2004). As coach, a leader facilitates development, enables learning, and supports individuals and teams in reaching their goals (Maak & Pless, 2006) — fostering collaboration, open communication, and constructive conflict resolution, and encouraging employees to raise concerns or seek advice. Transformational leaders in particular develop the skill of coaching others toward integrity and organizational ethical standards.

Coaching depends on giving employees constructive suggestions for improvement inside a climate of trust and respect — employees who feel evaluated or judged become defensive, and moral reproach (feeling judged on one's ethics) makes difficult feedback even harder to deliver. Hicks (2011) offers guidance for formatting corrective feedback so it produces change rather than defensiveness: describe behavior, not intention (avoid attributing motives); be specific, with concrete examples of the behavior and how it violates standards; avoid global labels (critique the behavior, not the person's worth, since labels like "uncaring" or "unethical" read as judgmental); deliver feedback with immediacy, as close to the event as possible, unless you are angry or need more information; focus on behavior that can actually be changed; and never give feedback while angry, since anger undermines trust and openness (pp. 85–86).

Moral Mentorship

Ventriello (2007) offers ten practical tips for mentoring peers or subordinates: share knowledge and experience freely, or you provide little value as a mentor; make time to mentor, even before/after work or during lunch; give staff projects that push them beyond their comfort zone to build capability; allow do-overs on long-timeline projects, treating them as part of learning, not failure; explain how and why assignments should be done, not just what; never ask "why are you asking me a question?"; protect your team by sharing accountability and never exposing their inadequacies publicly; give credit where due and let others enjoy their successes; instill trust by keeping confidences (unless harmful to others or the company); and be prepared to "set free" someone you mentor who moves on to a better opportunity — a sign you did something right (pp. 67, 84).

Coaching employees toward ethical decisions applies all of these practices together: challenging projects that call for moral imagination, mentoring conversations that model ethical behavior, and a consistent focus on organizational goals rather than personal gain. Done well, coaching turns employees into ethical leaders themselves — fostering an ethical culture, reducing the risk of misconduct, and building the trust of employees, customers, and shareholders alike.

An ethical leader's role is to encourage behavior aligned with the organization's purpose, vision, and values. Leadership style shapes ethical behavior: followers may support a leader's directives or challenge them when asked to act unethically. Transactional leaders influence others through monetary or recognition rewards for outcomes; transformational leaders instead motivate by appealing to morale and inspiring greater outcomes.

Leaders play a critical role in shaping an organization's ethical culture, which in turn defines what counts as ethical behavior in the workplace. Ethical leadership benefits organizations inside and out — a pervasive ethical culture, less misconduct, and greater employee psychological well-being, commitment, and performance, plus the shareholder and community trust that follows from it.

Ethical leaders exhibit integrity and strong moral character. They are altruistic and demonstrate respect for others, promote team or organizational interests over self-interest, encourage ethical conduct through motivational incentives, and factor integrity into compensation and promotion decisions. They weigh ethical dimensions when making tough decisions and frame those decisions explicitly in ethical terms.

Becoming an ethical leader means developing emotional intelligence, voicing values, being accountable for one's actions, and coaching others toward ethical decisions. Speaking up and holding to ethical standards takes moral courage — a commitment to moral principles, awareness of the danger in supporting them, and a willing endurance of that danger. Ethical leaders hold themselves accountable to high standards by acknowledging and owning their mistakes.

The leader-as-coach facilitates development, enables learning, and supports individuals and teams toward their objectives — one of the most powerful mechanisms available for reinforcing organizational values and an ethical culture. Successful coaching develops employees into ethical leaders themselves, fostering an ethical culture, minimizing the risk of misconduct, and building employee, customer, and shareholder trust.

Chapter 7 ends with four critical thinking and discussion questions, each paired below with a concise model answer grounded in the chapter's content.

1. Think about the people you consider the most ethical leaders in an organization you currently belong to. What qualities do they possess that make them particularly effective? Does the list represent ethnocentric or stereotypical beliefs that could skew your assessment?

A strong answer maps the named individuals against Freeman and Steward's (2006) nine characteristics — do they personify values, focus on organizational success over self-interest, create speak-up mechanisms, make hard calls? The self-check matters too: research shows perceptions of ethical leadership are genuinely skewed by prior beliefs and even race (Marquardt et al., 2018), so a thoughtful answer questions whether the leaders who come to mind reflect real ethical behavior or a narrower, potentially biased mental image of "what a leader looks like."

2. Consider a company where you have sought or would like to seek employment. Analyze the company's website for evidence of CEO support of an ethical culture and leadership. What questions could you ask in a job interview to uncover how deeply ethical leadership permeates the organization? Would you work for a company with unethical or ethically neutral leaders?

Look for the Prudential-style signals: a signed leadership commitment letter, a code of conduct that names specific leader expectations, ethics officers or an ethics champion structure, and public recognition (Ethisphere, Fortune) as evidence of sustained investment rather than a one-time statement. Interview questions should probe moral-manager behaviors specifically — how ethics factors into promotion and compensation decisions, whether the company tracks psychological safety or speak-up rates, and how leadership has handled a past ethical lapse. Whether you'd work for an ethically neutral or unethical employer is a personal risk-tolerance question, but the chapter's evidence (Alcoa, Enron, GM, Boeing) suggests the reputational and personal costs of working under weak ethical leadership are real and can extend to everyone in the organization, not just its leaders.

3. Do you see yourself as an ethical leader at work, home, school, in the community, or elsewhere? Why or why not? What could you do to improve being a role model for others?

This question calls for the self-assessment Gentile (2010a) describes — reflecting honestly on "who you really are and what you say and do" (p. 109) against the moral-person/moral-manager distinction: are you personally honest and fair, and do you actively hold others to standards, model behavior, and reward integrity? A strong answer names concrete gaps (e.g., strong personal integrity but no practice of holding others accountable) and ties improvement to one of the four practices — building emotional intelligence, practicing voicing values, strengthening accountability habits, or coaching others more deliberately.

4. Imagine you are the newly assigned ethics officer of Alcoa. Assess the challenges of ethical leadership in a global environment. Write a plan for developing ethical leaders in the global company to avoid unethical decisions and actions.

The Alcoa case shows that a well-regarded, well-resourced ethics program is not sufficient on its own — the Australia bribery scheme ran for two decades under an award-winning compliance structure because local managers treated the account as too valuable to question and corporate concern about the arrangement did not translate into local accountability. A sound plan borrows directly from the chapter: push ethical leadership training down to plant supervisors, not just executives (as Alcoa itself began doing in 2008); build local business-ethics-officer coverage similar to Prudential's model, so no manager is more than one step from an ethics contact; create genuine mechanisms of dissent and psychological safety so employees flagging a "too good to question" account are heard before a bribery scheme, not after; and hold managers accountable for both financial and integrity outcomes, per the Ethics & Compliance Initiative's (2024) accountability framework, so that flagging a risky deal is rewarded rather than penalized.

Ecolab is a chemical company providing products and services to the food, healthcare, and hospitality industries — a business with many opportunities for ethical misconduct given sales in over 170 countries. With more than 26,000 direct sales and service staff, Ecolab serves customers at three million locations across food service, food and beverage processing, hospitality, healthcare, government and education, retail, textile care, commercial facilities, and vehicle wash industries.

Sales and service are Ecolab's competitive advantage. Its strategy for complex global business problems pairs "continuous, customer-centric innovation and personalized, on-site service" (Ecolab Inc., 2024, p. 5); international sales have driven its growth for decades, with service capability today in over 170 countries. Former CEO Doug Baker made ethical leadership fundamental to the business model, establishing an industry expectation of honesty, integrity, and customer service that cascades through leadership and country managers worldwide — managers receive ethics training and tools and are monitored for ethical decision-making. Ecolab has been named one of Ethisphere's World's Most Ethical Companies every year since 2007. Current CEO and Chairman Christophe Beck, who succeeded Baker, said in 2023: "Our values are at the core of everything we do, and we are proud to be recognized for our efforts to build trust and credibility with our associates, customers, and other stakeholders.… We are committed to doing the right thing, even when it's difficult or unpopular because we know that ethical behavior is critical to our long-term growth and success" (Ecolab USA Inc., 2023a).

One manager described the culture's internal incentive plainly: "People want to be known to senior management for the right reasons. They are afraid of being the one that got the company in trouble and their name would be known to senior management for all the wrong reasons" (S. Erickson, personal communication, March 12, 2010). Salespeople are encouraged to loop in their manager and legal department when an ethical issue arises, and losing a customer for the right reason — price or ethics — is accepted, since Ecolab has learned that customers often return once they recognize the quality of its service. The sales force is expected to deliver on what it promises; honesty, fairness, and follow-through sustain customer trust for repeat business.

The Dilemma: Jane's Client Request

Jane, a U.S. Ecolab salesperson, developed a relationship with a new client for a global contract — a substantial account that would meaningfully enhance both company revenue and Jane's compensation. With a signed purchasing contract in hand, she closed the deal. Shortly after, the client asked her for specific sales information, framing it as standard procedure: restating the quantities and costs on the invoice differently from the original purchase order. Something did not feel right to Jane — in all her sales experience, she had never received a request like this from a client.

A strong answer to Jane's dilemma applies the chapter directly: restating invoice quantities and costs to differ from the signed purchase order is a classic red flag for fraud (potentially fictitious billing, kickbacks, or tax/customs evasion on the client's side), and Ecolab's own culture — encouraging salespeople to involve their manager and legal department, and accepting the loss of a customer over ethics — gives Jane a sanctioned path to escalate rather than comply. Declining and elevating the request protects Jane, protects Ecolab's reputation, and is consistent with Doug Baker's and Christophe Beck's stated expectation that the sales force do the right thing even when it costs a valuable account.

The chapter's own Key Terms list, each given a one-line definition grounded in how the chapter uses it.

A single table capturing the chapter's leadership-style comparison, its two-dimension test for ethical leaders, Freeman and Steward's nine characteristics, and the four practices for becoming an ethical leader.