McCombs Knowledge To Go

June 14, 2011

Challenges of Ethical Leadership

by Robert Prentice, The Ed & Molly Smith Centennial Professor of Business Law and Faculty Director of

the McCombs Business Honors Program

I. Introduction

A. Leadership Ethics is always a timely topic.

I. Introduction

A. Leadership Ethics is always a timely topic.

1. 1980s: S&L Scandals

2. 1990s & 2000s: Enron-era Scandals

3. 2000s: Subprime Scandals

Recently:

B. The adverse effects of these scandals

make one thing clear:

B. The adverse effects of these scandals

make one thing clear: ethical behavior is essential to the effective functioning of American capitalism.

II. “Moral Leadership” is Critical.

A. Moral Leadership has two aspects:

A. Moral Leadership has two aspects:

1. Managing:

• Establishing ethical norms

• Communicating them to employees

• Punishing breaches

• Rewarding compliance

Trevino: “[Leaders] must make their

expectations of others’ ethical conduct explicit, and they must hold all of their followers accountable for ethical conduct every day through attention to ethics in the performance management systems.”

A. Moral Leadership has two aspects:

1. Managing:

• Establishing ethical norms

• Communicating them to employees

• Punishing breaches

• Rewarding compliance

2. “Walking the Walk”

B. Most adults do not have an adequate

moral compass and therefore “look outside themselves for guidance in moral dilemma situations. “ (Cropanzano &

Walumbwa)

C.

B. Most adults do not have an adequate

moral compass and therefore “look outside themselves for guidance in moral dilemma situations. “

C. In the workplace, they look to their leaders.

D.

B. Most adults do not have an adequate moral

compass and therefore “look outside themselves for guidance in moral dilemma situations. “ (Crapanzano)

C. In the workplace, they look to their leaders.

D. Empirical evidence establishes that few things impact a firm’s overall ethical climate more than the actions of its leaders.

So, I take it as a given that:

1. Ethical leadership is critical to shaping the ethical conduct of a firm; and

2. Ethical conduct by leaders is a critical component of ethical leadership.

And yet…..

Jeff Skilling

William Aramony

Ken Lay

Bernie EbbersRichard Scrushy

Charles Keating Al DunlapDennis Kozlowski

III. Poor Decision Making is a Major Cause of Unethical Actions.

III. Poor Decision Making is a Major Cause of Unethical Actions.

A. Fundamental Attribution Error

1.

III. Poor Decision Making is a Major Cause of Unethical Actions.

A. Fundamental Attribution Error

1. Dispositional vs. Situational

2.

A. Fundamental Attribution Error

1. Dispositional vs. Situational

2. Costa says: “There are truly sinister businesspeople with sinister intentions, but for the most part, ethical and legal lapses are the stuff of average people who know better.”

B. Examples of Poor Decision Making.

1. Obedience to Authority.

1. Obedience to Authority

Milgram study

1. Obedience to Authority.

Milgram Study Stock analysts in the dot-com

boom

Henry Blodget

1. Obedience to Authority.

Milgram Study Stock analysts in the dot-com boom Egil Krogh

2. Conformity Bias Forks

2. Conformity Bias Forks Lines

Solomon Asch

2. Conformity Bias Forks Lines Betty Vinson & “Moral Contagion”

IV. Leaders and Ethical Decision Making

IV. Leaders and Ethical Decision Making

--Some decision making errors are particularly troublesome for leaders

A. Overconfidence

A. Overconfidence.

• Driving/Auditing/Teaching

A. Overconfidence.

• Driving/Auditing/Teaching

• Morals, too

• Are you more moral than your competitors, fellow employees, peers?

A. Overconfidence.

• Driving/Auditing/Teaching

• Morals, too

• Are you more moral than your competitors, fellow employees, peers?

• 92% of Americans are comfortable with their character

• Driving/Auditing/Teaching

• Morals, too

• Are you more moral than your competitors, fellow employees, peers?

• 92% of Americans are comfortable with their character

• This leads to decisions lacking reflection; Ex: Enron

• Driving/Auditing/Teaching• Morals, too

• Are you more moral than your competitors, fellow employees, peers?

• 92% of Americans are comfortable with their character

• This leads to decisions lacking reflection; Ex: Enron

• Leaders, having had much success, have even more confidence in themselves and their character.

Milliken found that “the combination of

power, optimism, and abstract thinking makes powerful people even more certain [than the rest of us]. The more cut off they are from others, the more confident they are that they are right.”

Ken Lay•Minister’s Son•Enron Code of Ethics•Noted Philanthropist

•Convicted Felon

B. Self-Serving Bias

B. Self-Serving Bias Affects how we collect, process,

and remember information

B. Self-Serving Bias Affects how we collect, process, and

remember information Football game

B. Self-Serving Bias Affects how we collect, process, and

remember information Football game Causes people to conclude that what is

best for them is ethically permissible

B. Self-Serving Bias Affects how we collect, process, and

remember information Football game Causes people to conclude that what is

best for them is ethically permissible

Leaders are particularly vulnerable

Ex: “instant entitlement bias”

Leaders are particularly vulnerable

Ex: “instant entitlement bias”

•$15,000 umbrella stand•$6,000 shower curtain•$2,000,000 birthday party

Dennis KozlowskiTyco

C. Moral License.

C. Moral License.

• Most of us unconsciously engage in moral self-regulation.• Moral compensation

• Moral licensing

C. Moral License.

• Most of us unconsciously engage in moral self-regulation.

• Experiments: a. Self-Image

b. Chance to Volunteer

c. Racial Prejudice

C. Moral License.

• Most of us unconsciously engage in moral self-regulation.

• Experiments:

• A particular problem for leaders.

When Ken Lay was found to have

violated Enron’s Code of Ethics by investing in company that did more than 80% of its business with Enron, he called suggestions of impropriety “form over substance.” Rules, he said, “are important, but you should not be a slave to rules either.”

[Bazerman & Tenbrunsel

D. Moral Rationalization

D. Moral Rationalization

• While we think we are reasoning to an ethical conclusion, what we are often doing is:

D. Moral Rationalization

• While we think we are reasoning to an ethical conclusion, what we are often doing is: rationalizing

D. Moral Rationalization

• While we think we are reasoning to an ethical conclusion, what we are often doing is: rationalizing

• Leaders tend to be extroverts prone to impulsive behavior

• While we think we are reasoning to an ethical conclusion, what we are often doing is: rationalizing

• Leaders tend to be extroverts prone to impulsive behavior

• The rest of us are so enamored of leaders that we often judge them less harshly than we would others

• “It is often shocking how top corporate officials (like WorldCom’s Bernie Ebbers) and high government officials (like New York’s Eliot Spitzer) come to the view that the rules that apply to everyone else do not apply to them. Often they do outrageous things with little or no effort to hide their wrongdoing because they become so convinced of their importance to their firm’s mission, which somehow justifies their exempting themselves from legal and ethical standards that apply to others.”

Keltner et al.

Marital therapist Emily Brown: “Success

breeds its own blindness. I talked once to a group of men who’d all become millionaires before the age of 40 and who’d had affairs. They think their wives will never know. Everything else in their lives has worked out….They were completely blind to the harm they had done. They just couldn’t conceive that, as good men, they’d done something bad.”

Hefferman

• Leaders are often tone deaf on ethical issues and … have “uniquely self-serving rationalizations for their unethical actions that often focus on their rights and crowd out any consideration or duties to or caring for others.”

Dacher Keltner et al.

V. Conclusion.

V. Conclusion.

As you lead in your firm and your community:

V. Conclusion.

As you lead in your firm and your community:

• Be vigilant:

V. Conclusion.

As you lead in your firm and your community:

• Be vigilant: keep your ethical antennae up so you can spot ethical minefields before you enter them

•

V. Conclusion.

As you lead in your firm and your community:

• Be vigilant: keep your ethical antennae up so you can spot ethical minefields before you enter them

• Be wary:

V. Conclusion.

As you lead in your firm and your community :

• Be vigilant: keep you antennae up so you can spot ethical minefields before you enter them

• Be wary: remember that even the best intentioned people are prone to ethical missteps

• Be vigilant: keep you antennae up so you can spot ethical minefields before you enter them

• Be wary: remember that even the best intentioned people are prone to ethical missteps

• Be humble:

• Be vigilant: keep you antennae up so

you can spot ethical minefields before you enter them

• Be wary: remember that even the best intentioned people are prone to ethical missteps

• Be humble: “Humility is the solid foundation of all virtues.” (Confucius)

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