The Role of Ethical Leadership in

Organizations
Dr. O.C. Ferrell
Colorado 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 large
corporations.”
 -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 Business
individuals 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 practices
since 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 & the
firms 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 Street
Journal, 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 public
company
 Support for codes of ethics to improve shareholder
relations & auditing practice
Predicted Trend in Corporate
Governance
Board 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
Management
Controls 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 accountability
Greater general support for corporate
governance
Governments are playing a more significant
role
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 ethics
Top management needs to make sure
there are visible & supported programs
– do not rely upon individual ethics & the
character 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 in
organizational decay & relationship
deterioration
– political problems & inefficiency
Most 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 departments
within a firm
Ethics Resource Center study shows that
93% of employees who say trust is
frequently 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 convicted
Organizational 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