Ethical essentially states that people in an

Ethical leadership is not only important because it leads to financial and strategic success for organizations, it’s important because it’s the right thing for the greater good.

In this lesson, we’ll discuss why ethical leadership is so critical.

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The Importance of Ethical Leadership

There is no shortage of examples where the lack of ethical leadership has led to financial loss and even the collapse of entire companies. In the early 2000s, Enron, WorldCom, and Arthur Anderson, companies that were leaders of their industries and decades old, collapsed because of the unethical accounting process and business decisions of their executives.

Many would say it was unethical leaders pushing overly aggressive lending practices that led to the financial crisis of 2007. Along with trillions of dollars in lost pensions and retirements, that crash was the beginning of what became the worst recession the world has seen since the Great Depression. The effects of unethical leadership continue to linger throughout the world, even 10 and 15 years after those decisions were made.

How Ethical Leadership Matters

If ethical leadership is important shouldn’t be a question; history provides an unequivocal and firm ‘yes’ to that. How an ethical leader can exert influence within their organization, and even beyond their official sphere of power, is important to understand. Part of the answer can be found in the tendency for groups to follow the leader, good or bad.

Part of the answer can be found in the fundamental assumption of capitalism that good ethics are rewarded by consumers. And part of the answer is found in the study of organizational behavior and how an organization can take on the culture of the people within it, especially those with power and influence.Research in organizational behavior – the study of how individuals behave as part of an organization or group – has repeatedly identified a phenomenon referred to as herd mentality.

Herd mentality essentially states that people in an organization will act as a herd, taking behavioral cues from one another. While groups of people with shared interests will behave similarly, that desired behavior has to start somewhere. Hopefully, that behavior is seen in terms of ethical leadership by top-level executives and every level of management throughout the organization.

Capitalism’s Reward

One of the fundamental assumptions of capitalism is that consumers make decisions that drive producers in, or out, of the marketplace.

If a firm makes a product that is too expensive, low quality, or doesn’t meet consumers’ needs, they can’t sell their goods and have to close shop.Capitalism assumes that ethical leadership is one of many components consumers reward through their purchasing decisions. If a company has a reputation for unethical leadership, consumers will stop purchasing that company’s goods, creating a link between company survival or success and ethical leadership.

Even in the United States there are companies that are often the target of protests because of the wage they pay their employees, or the lack of other important benefits like adequate sick leave or health insurance.

The Company Is the People

As mentioned earlier, while a company or organization can be seen as an individual for financial or legal reasons, it isn’t a living, breathing organism. But, an organization still has a culture, a reputation, and even a personality. Think of companies like Apple or Google and compare them to companies like Walmart or Exxon.

You can imagine if those companies were people, what type of person they would be. That’s how an organization’s culture is seen by customers.Because the people make the company and the leaders have a strong influence on the people, ethical leadership is an essential part of establishing a positive corporate culture. While we’ve talked about a couple ways that ethical leadership can directly impact company performance, it isn’t only important because of the economic or legal benefits it provides.

Doing the Right Thing

Bill Gates, founder and former CEO and Chairman of Microsoft, often quotes a concept from the Bible, saying ‘From those to whom much is given, much is required.’ As he explains this belief, he says this isn’t only a financial expectation, such as philanthropy. Gates understands that in a capitalist society, businesses can succeed, in large part, because every member of society chips in a little bit.

Businesses can use roads because we pay taxes; they have access to capital because people invest. Because society is such an important part of business success, Gates understands that when a business succeeds, they owe a large debt to society. Again, this is not just a financial debt, but they owe it to society to be ethical leaders; to be responsible in the way they treat employees, how they advertise their products, and in the business decisions they make.

Lesson Summary

Ethical leadership is as important today as it ever has been. With organizations growing so large and increasing their reach into our daily lives, the leaders of these companies must understand the responsibility that they have to make ethical decisions. Even if doing so because it’s the right thing to do isn’t enough to convince a leader to be ethical, there is plenty of evidence that good ethics leads to economic success. Not only is ethical leadership the right approach to take, it’s the smart approach to take.

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