The Role of Ethical Leadership in Organizations

1. 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

2. 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

3. “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.

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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 Joann Lublin (2003) "Panel Officers Governance Rules." Wall Street Journal, Jan. 10, p.1.

14. 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

15. 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

16. 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

17. 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!!!

18. 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

19. Question... • Are business ethics & social responsibility directly related to financial performance?

20. 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

21. 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

22. 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

23. 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

24. Resources... • www.e-businessethics.com • Ferrell, Fraedrich & Ferrell, Business Ethics (2002), Houghton Mifflin Co.

25. Questions