姝 Academy of Management Executive, 2004, Vol. 18, No.
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The case for ethical leadership
Dov Seidman
The Three Pillars
Physical security, financial prosperity, and ethical
and spiritual sustenance or meaning are three fun-
damental requirements of a life worth living. In the
immediate aftermath of 9/11, all three of these
foundational pillars of life shook violently. An un-
known and amorphous enemy threatened our
sense of security and invincibility. The extensive
recession following the bursting of the dot-com
bubble called both short- and long-term prosperity
into question. The scandals that unfolded in all
walks of civic life, particularly in corporations, in-
dicated that America had lost its moral and ethical
footing.
What made the situation so troubling was that
all three pillars shook simultaneously. Histori-
cally, when one or two of the pillars were shaking,
there was always at least one other pillar to lean
on as a source of stability. In this crisis, people had
nowhere to turn. Two and a half years later, there
are reasons to be hopeful about our physical secu-
rity and the global economic recovery. I suggest,
however, that we are still in the grip of a profound
crisis of trust—the third pillar continues to
shake—in the basic fixtures that hold civil society
together. People and all sorts of institutions whom
we formerly revered—professors, religious lead-
ers, politicians, and business executives— have
betrayed our trust, confidence, and loyalty.
A Crisis of Trust
This crisis of trust in our basic institutions is so
troubling precisely because the lack of trust is in
so many cases well deserved. Broken promises,
obfuscation, spin, concealment, all have created a
suspicion— often unfortunately true—that there is
something to hide.
Late last year my company, LRN, commissioned
a research study with Wirthlin Worldwide to as-
sess and compare the attitudes of Main Street
Americans and executives on the current state of
ethics and responsibility in corporate America.
The results were dismal. Over two-thirds (71%) of
134
the Americans polled said that none, very few, or
only some corporations operated in a fair and hon-
est manner. Nowhere is the crisis of trust more
acute and widespread than in corporate America,
although the recent scandals overseas point to a
global problem that defies national borders. In
light of the power, influence, and impact of corpo-
rations, any hope of stabilizing the third pillar and
restoring trust will not only need to involve busi-
ness; it must, I believe, be led by business and
business leaders.
Nowhere is the crisis of trust more acute
and widespread than in corporate
America.
As the CEO of a company that has the privilege
of working with many of the world’s most admired
corporations, I have seen first hand the impact of
this crisis of trust on corporate America. I have
observed how the crisis has impeded the ability of
business to take risks, innovate, and pursue
progress. Cynicism has spread throughout compa-
nies. I’ve seen distraction from fundamentals and
real lost opportunity. Conversely, I have also seen
that those companies with long-standing tradi-
tions and reputations for doing what is right have
withstood the crisis the best.
The value of reputation has always been impor-
tant to and bestowed considerable benefits on cor-
porations. But now reputation is more important
and more central. An increasing number of Amer-
icans—not simply financial professionals—now
own more of corporations. Corporations find them-
selves under heightened scrutiny from Main Street
investors, employees, and retirees who care about
more than whether the companies they have in-
vested in and have worked for are simply making
the numbers.
One need only look to the market capitalization
of companies with excellent reputations and those
with poor reputations to discern the centrality of
2004 Seidman
reputation in the marketplace. In light of this new
involvement, and now scrutiny by Main Street, rep-
utation and perception have moved from important
to critical and are more determinative than ever.
Reputation cannot be fabricated or asserted; it can
only be earned through the consistent demonstra-
tion of trustworthy conduct. If you’re careless, in-
deed if you don’t consistently do the right thing,
what has taken years to build can be destroyed in
a matter of moments.
What is necessary for having a sound and en-
during reputation? First, you cannot have a good
reputation without trust. Only those who have
proven through their conduct that their represen-
tations can be relied upon can earn the benefit of a
strong reputation. When do we trust someone?
Only when we have experience that provides tan-
gible evidence that someone has not taken advan-
tage of us—that they can be relied upon to be true
to their word—will we consider them trustworthy.
What underlies this consistent, trustworthy con-
duct? Ethical behavior. Treating others as we
would like to be treated. Just as you cannot enjoy a
good reputation without trust, you cannot be trust-
worthy without ethical behavior. Accordingly, you
cannot enjoy a good reputation without ethics.
Therefore the restoration of reputation must begin
with ethics at the foundation.
The New Transparency
Virtue has been, is, and always will be its own
reward. The best companies have always under-
stood this and have refused to pursue the easy
path to short-term gains at the sacrifice of long-
term value and reputation. But there has been a
sea change. Circumstances have combined to tan-
gibly reward adherence to virtue. It has become
practical to be principled. Why? Because the rules
have changed to lay bare corporate behavior
forever. The profound impact of technology has
enabled greater transparency in evaluating busi-
ness, institutions, and organizations. The corpor-
ate veil has been pierced.
While at one time confusion, denial, and stone-
walling could have prevented the worst from com-
ing out, we now are able to find out the real truth,
not the conveniently packaged version. Employees
use Internet chat rooms to share their experiences
and discuss what it is like to work at companies.
The power of computing has increased as the cost
has decreased. Computers beat Grand Masters in
chess. Every statement ever uttered and every
email and instant message ever created can now
be economically captured, catalogued, and re-
trieved, often with as little effort as a few key-
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strokes on a computer. Transparency has demysti-
fied our institutions, particularly business.
In addition to the very real abuses that have
compromised the public’s trust in business, an-
other fundamental, irreversible shift has occurred
in the degree to which we are connected to each
other. We’re not so much connected as we are hy-
perconnected—more closely connected and in
more ways than we even yet comprehend.
In a sense, technological progress has out-
stripped our ability to understand its implications
and each other. Competing languages, potentially
incompatible value systems, and different cultures
all come together in proximate relationships, even
though we have not developed frameworks for un-
derstanding and reconciling the incompatibilities.
A single email can be instantly dispersed to mil-
lions of customers, shareholders, regulators, and
other stakeholders. Technology has made the
strange familiar and the familiar strange. Until we
acclimate to this new paradigm of connectedness,
the potential for doubt, confusion, misapprehen-
sion, and misunderstanding becomes even more
probable and complex.
Technology has made the strange
familiar and the familiar strange.
Yet in light of the unstoppable progress of trans-
parency and connectedness, there is really no al-
ternative but to embrace it. The response is to
conduct business as if you have nothing to hide.
But before you behave as if you have nothing to
hide, you really had better have nothing to hide.
Where I see this going is nothing short of business
returning to the foundations of capitalism— ethical
capitalism.
Ethical Capitalism
Adding to the lack of faith in business, govern-
ment, and other institutions is a conviction that
ethics and business don’t mix, or at least don’t mix
very well. I disagree. Ethics is not only compatible
with business; it is essential to business success.
The Eleventh Commandment, “thou shalt not get
caught,” no longer applies. In an earlier era you
might hope to get away with it; with the new trans-
parency, it is not a question of whether you will be
found out, but when. Reasserting the centrality of
ethics to the world of business—not at the margins,
not even in peaceful coexistence, but as essential
underpinnings to performance and success—re-
136 Academy of Management Executive
turns capitalism to its philosophical underpin-
nings.
Within the origins of capitalism is a moral im-
perative to improve society and create human
progress. Adam Smith, let’s not forget, was the
chair of the Moral Philosophy Department at Glas-
gow University before he wrote The Wealth of Na-
tions. Although frequently cited for advocating the
role of untrammeled self-interest, Smith noted the
rationale for his support: “The uniform, constant
and uninterrupted effort of every man to better his
condition is frequently powerful enough to main-
tain the natural progress of things toward improve-
ment.” In Smith’s famous formulation, trade only
ultimately works with trust “by mutual consent
and mutual advantage.”
It is easy to lose sight of this, given that ethics in
business seems to have been recently more hon-
ored in the breach. Moreover, business leaders do
not typically frame what they do in terms of ethics;
they think in terms of business results. CEOs, ex-
ecutive and line management leaders, and board-
rooms around the world invest tremendous energy
asking and answering questions like:
• How do we create high-performance teams?
• How can we promote better, more thoughtful de-
cisions?
• How can we be sure our offerings are well con-
ceived and of the highest quality?
• How do we promote more loyal relationships
with key stakeholders?
• How can our customers be confident in the
safety and efficacy of our products?
Although these goals are not framed in terms of
ethics, they are at their core actually asking for
ethics. Ethics can seem like an abstraction, apart if
not divorced from the real world. But when framed
in terms of how people treat each other— how peo-
ple get along and behave, how people trust each
other— ethics takes on a far more practical appli-
cation. For example, a 2002 study found that trust
by suppliers and customers actually cut the cost of
an automobile by ten to fifteen per cent and that
“writing contracts, haggling, and assigning blame
was so much more extensive in the least-trusted
firm that the dollar value of parts purchased per
procurement employee was less than one-fifth
what it was in the most-trusted firm.”1
A pernicious cost lies in the corrosive cynicism
caused by distrust. Creating trust is not easy, and
it isn’t done overnight, particularly in cultures with
a predisposition toward cynicism. It is not done by
creating a culture of acquiescence— one in which
people simply follow rules because they’ve been
told to follow the rules. Huge bureaucracies are
May
built up to enforce acquiescence, but requiring
blind obedience to rules doesn’t work; it merely
leads to new, more innovative ways around the
rules. People must understand the reason behind
the rules before they can really adopt the values
that animate them as well. That takes ethical
leadership.
Ethical Leadership
Thomas Jefferson remarked, “The price of liberty is
eternal vigilance.” The same is true of instilling
and maintaining common values that define cul-
tures. Creating and maintaining shared beliefs
and common values is not an organic process but
one that requires constant vigilance and self-
regulation. To assure a perpetual self-sustaining
dynamic of trust, people need to have frameworks
for creating and maintaining self-knowledge. The
crisis of trust in business was not caused by lack of
capacity but by effort and tremendous acumen
misdirected toward the wrong objectives.
The crisis of trust in business was not
caused by lack of capacity but by effort
and tremendous acumen misdirected
toward the wrong objectives.
Ethical leadership starts with a vision that mak-
ing ethics essential and central within the fabric of
an organization will enable it to achieve its aspi-
rations. Ethics at the core and as a constant under-
pinning will channel abilities and skills to sustain-
able, appropriate activities. Leaders encourage
what they reward and celebrate. It is no small
wonder that employees who see their colleagues
engaging in or endorsing questionable behavior
begin to emulate it— either consciously or uncon-
sciously.
Many of the current scandals arose out of too
many people basing decisions on what they could
do, as opposed to considering what they should
have done. As Supreme Court Justice Potter Stew-
art noted, “There is a big difference between what
you have a right to do and what is right to do.” Not
until leadership rewards and celebrates ethical
conduct, even when it is inconvenient, and, yes,
sometimes unprofitable in the short term, will oth-
ers in the organization believe that the commit-
ment to ethical conduct is real, rather than a con-
venient rhetorical crutch.
The fiction and abstraction of the corporate form
can cause us to forget that corporations are essen-
tially associations— communities and cultures—
2004
comprised of people who either work together or
work apart. Although employees want to meet and
in many cases exceed the expectations of their
bosses, they also are deeply affected by how their
peers think and behave. Who gets invited to lunch
and who is invited to join in games of bridge and
bowling on Thursday nights all depend on unwrit-
ten standards, behaviors, and expectations that
comprise a corporate culture. Because of the pro-
found influence of colleagues, an exclusive focus
on laws, rules, and compliance will not ultimately
get the job done, nor will ethical leadership by the
top brass alone. Organizations must nurture ethi-
cal leaders from the factory floor to the board room
and instill a belief that ethical leadership is every-
one’s responsibility, if an enduring, cohesive cor-
porate culture is to be built.
Part of determining the values to which an or-
ganization and its people ascribe can be accom-
plished by defining the values they shun. In other
words, agreement on what is improper, embarrass-
ing, and shameful has a socializing effect that
enables cultures to define what they stand for, by
defining what they stand against. By allocating
rewards and, where necessary, shifting the bur-
dens of shame, ethical leadership can guide the
development of corporate culture. For example,
Americans experience considerable social pres-
sure to remain silent in the face of wrongdoing.
Although people might not lie if confronted, they
do not necessarily volunteer on their own, offering
a tacit endorsement of the misconduct. Instead of
considering this silence shameful, those who
speak up against wrongdoing bear the burdens of
embarrassment and opprobrium, rather than those
who avert their eyes.
By allocating rewards and, where
necessary, shifting the burdens of shame,
ethical leadership can guide the
development of corporate culture.
Ethical leadership over time can create a cul-
tural realignment around this and other ethical
dynamics in the workplace. To do so, the rewards
have to shift, practices must change, and the bur-
dens need to be properly allocated. First, ethics
needs to be discussed, modeled, and reinforced
constantly. Here, we can look to the safety and
quality movements for inspiration.
The values of quality and safety at one time
seemed just as amorphous, subjective, and intan-
gible as ethics can seem today. At one time, work-
place injury and death were viewed as a cost of
Seidman 137
doing business. Quality control meant removing
defective products from the end of an assembly
line. People didn’t even have a coherent and pre-
cise way to talk about quality and safety in terms
of business operations. Now we have methods like
Six Sigma for measuring and calibrating quality
and safety. The focus has shifted to consider the
process—the how—as well as the outcome—the
what.
We can do the same with ethics. A major chem-
ical company requires that every meeting, regard-
less of subject, begin with a safety message. For an
outsider, it can be odd to sit in a meeting with
someone telling you where the emergency exits
are. Yet it creates a culture in which everyone
recognizes the importance of safety. Imagine a
business world in which every meeting begins
with a reminder of the importance of ethical be-
havior, and ethics is discussed and considered as
an essential component of every task. Such a dy-
namic would quickly create a new sense of the
value of ethics and the commitment of companies
to it and would moreover enlist an expanding
group of ethical leaders to keep doing what is right
at top of mind, rather than relegated to the margins
as attention focuses on what is considered “real
work.”
Ethical leaders must build ethics inextricably
into how they conduct business. We need to de-
sign-in business goals that do not encourage em-
ployees to take shortcuts. We need to not just offer
resources for those who want to report ethical vio-
lations; we must back those resources with real
rewards for using them. Despite the crisis of trust,
there is no better time. Now, more than ever, it has
become practical to be principled. And if we want
to stabilize the third pillar, we really don’t have a
choice.
Proven Approaches to Ethical Leadership
If we agree that ethical leadership matters, how do
we go about creating organizations of ethical lead-
ers? Here are four specific actions you can take.
Demonstrate the Unequivocal Importance of
Ethics from the Top
If your ethics education program seems like more
talk than commitment, you may find that employ-
ees parrot the right responses but don’t modify how
they behave. Use the power of the executive suite
to tangibly demonstrate importance. CEO also
means Chief Ethics Officer. For example, the CEO
of a major defense contractor personally tele-
phoned each member of the company’s manage-
138 Academy of Management Executive
ment team who did not complete an ethics educa-
tion program within the agreed-upon timeframe.
Most employees would not relish receiving that
call from their CEO.
Make Ethics Essential to Career Advancement
Make it a sign of career advancement to be aligned
with the program. An aerospace and industrial
manufacturing company appointed over 200 Busi-
ness Practice Officers who are specifically ac-
countable for ethics in each business unit. Being
selected for this critical job is an indication that an
employee is on the fast track to becoming a future
company senior leader.
Publicly Reward Ethical Behavior; Publicly
Punish Lapses
Employee review and evaluation programs can ac-
centuate the importance that an organization
places on ethics through tangible, material re-
wards as well. Celebrate failures in the name of
integrity. A major consumer products company
shuttered down a plant for four months rather than
pay a $5,000 bribe to a government official of the
country in which the plant was operating. Punish
performance achieved at the expense of ethics.
May
Ethics Is for Everyone
Make sure your ethics program is not limited to
headquarters, or even the United States. Use tech-
nology to reach far-flung outposts and get your
employees on common ground, despite geo-
graphic, language, or cultural barriers. Include ev-
eryone in the program; don’t gloss over cultural or
hierarchical differences; cut across barriers to es-
tablish the common, higher ground. Create ethical
leaders everywhere.
Endnotes
1
This study was presented at the Academy of Management’s
2002 annual meeting. See http://myaom.pace.edu/octane8admin/
websites/aomonline/default.asp?ID⫽27.
Dov Seidman is founder, chair-
man, and CEO of Los Angeles-
based LRN, a company that
helps the Global 2000 build and
sustain strong, ethical corpo-
rate cultures and promote effec-
tive corporate governance. He
writes and speaks frequently
on successfully weaving ethi-
cal principles into the fabric of
business. He holds degrees
from Harvard Law School, Ox-
ford University, and UCLA.
Contact: dseidman@lrn.com.