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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-its 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