Four Financial Returns on Ethical Behavior: The Business Case for Responsibility

Shannon Brown is a Ph.D. student at Benedictine University’s Center for Values-Driven Leadership (CVDL) and has served in leadership positions with Thomson Reuters, Tata Consultancy Services and BoomTime.  In addition, she is an adjunct faculty member at Dominican University where she teaches courses in leadership studies.

Corporate behavior over the last decade has provided much fodder for debate in the popular press regarding the need for higher ethical standards in business, yet many people feel that little progress has been made. No one has been held accountable for the recent financial system meltdown, and the U.S. seems to be slowly returning to the pattern of behavior that created that very situation.

Why is it so difficult to shine a spotlight on ethics in business? To systematically work to increase ethical leadership? I believe it is because businesses are often resistant to change without proof of positive financial impact. After all, businesses are in the game to make money, so to change a practice requires proof that the change will increase profitability.

There is ample empirical evidence for the case that increased ethical leadership improves organizational performance and directly impacts the bottom line. Unfortunately, that business case hasn’t been made strongly enough in the media or the board room. So if you’re building your case for ethical leadership at your organization, here are four financial returns on responsible behavior:

Keep Your Best Performers Satisfied

At the individual contributor level, ethical leadership has been correlated with follower (employee) ethical decision-making, pro-social behavior, follower satisfaction, follower motivation and follower motivational commitment. Pro-social behavior includes increased positive citizenship behavior and a willingness to do more than the bare minimum requirements of the job because of the nature of the relationship with the leader. In other words, people who have a supervisor who engages in ethical behavior are more likely to engage in ethical decision making and behavior themselves, are more likely to exhibit organizational citizenship behaviors, are happier and more committed to their jobs and to the organization overall. The financial reward of an engaged workforce is clear: increased productivity, decreased turnover.

Optimize Your Team’s Performance

From the management perspective, ethical decision-making has been linked to organizational effectiveness. “Moral managers” reward ethical conduct and discipline unethical behavior at all levels of the organization. This conduct allows employees to consistently see appropriate behavior receive reward, and inappropriate behavior receive punishment, so the employee learns through cues what behavior is acceptable within the organization. We’ve recently seen how this can go wrong, through the alleged actions of Penn State’s athletic department. When positive reward systems are put in place, it is good for the organization’s bottom line

Build a Base of Strong Support

Responsible behavior has an external impact as well. Virtuousness has a “buffering” effect that allows organizations to be more resilient against negative events, which helps maintain the positive feelings within the organization even when bad things happen, such as downsizing. One study shows that these behaviors have positive impact on bottom line performance.

Moral goodness is good for individuals, developing it is a worthy endeavor on its own; and it is a characteristic of virtuous organizations that benefit all stakeholders. This correlation has a direct impact to bottom line performance and supports the idea that moral and ethical development is good for the individual, good for the organization itself, and good for organizational performance.

Responsible Leadership Creates Space for New Ideas and Compassion

If you’re still not convinced, another argument for ethical leadership is found in the consequences of leadership that is not necessarily seen as unethical, but is seen as ethically neutral. In the absence of clearly positive moral and ethical behavior, there is significant potential for negative impact if a leader is viewed as ethically neutral. When no evidence of positive ethical characteristics and behaviors is visible, followers make assumptions that generally include perceiving ethically neutral leaders as follows:
  • Self-centered; 
  • Less open to input; 
  • Having less concern for others; 
  • Less compassionate; 
  • Having an overall narrower view; 
  • Focused more on financial ends than means to achieve them; 
  • Focused more on short-term bottom line. 
The lack of clarity creates a space for employees to assume that unethical behavior is acceptable. On the contrary, responsible leaders create space for new ideas – potentially money saving or money making innovations – to flow within the organization.

What can your organization do to expand ethical behavior? Hire employees who have experience with ethical decision making through courses, case studies or development programs. Talk about ethics with your management team at all levels. Develop policies that clearly articulate reward and punishment for ethical behaviors, and enforce them consistently. Allow time for managers to consider the ethical implications of their choices rather than rushing to conclusions. Create an organizational culture that assumes ethical behavior and watch the subtle, yet positive, changes throughout your organization.

Read more at these sources:

Brown, M.E. & Trevino, L.K. (2006). Ethical leadership: A review and future directions. The Leadership Quarterly, 17: 595-616.

Cameron, K.S., Bright, D., Caza, A. (2004). Exploring the relationships between organizational virtuousness and performance. American Behavioral Scientist, 47, 766-790.

Trevino, L.K. (1986). Ethical decision making in organizations: A person-situation interactionist model. Academy of Management Review, 11(3), 601-617.

Trevino, L.K., Hartman, L.P., Brown, M. (2000). Moral person and moral manager: How executives develop a reputation for ethical leadership. California Management Review, 42(4), 128-142.

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