1. Strategic Leadership: Creating a Learning Organization and an Ethical Organization
chapter 11

2. Learning Objectives
After reading this chapter, you should have a good understanding of: LO11.1 The three key interdependent activities in which all successful leaders must be continually engaged. LO11.2 Two elements of effective leadership: overcoming barriers to change and the effective use of power. LO11.3 The crucial role of emotional intelligence (EI) in successful leadership as well as its potential drawbacks.

3. Learning Objectives
LO11.4 The importance of developing competency companions and creating a learning organization. LO11.5 The leader’s role in establishing an ethical organization. LO11.6 The difference between integrity-based and compliance-based approaches to organizational ethics. LO11.7 Several key elements that organizations must have to become an ethical organization.

4. Strategic Leadership Consider…
To both create and implement proper strategies, firms must have strong and effective leadership.
What are the activities that leaders engage in, and what practices and capabilities enable leaders to be effective at sustaining a competitive advantage for their firms?
To what degree does ethical leadership matter?
To both create and implement proper strategies, firms must have strong and effective leadership, and this leadership must be strategic in managing, adapting, and coping in the face of increased environmental complexity and uncertainty. In order to be successful at creating and sustaining a competitive advantage, leaders must engage in several activities, utilizing key capabilities, one of which is emotional intelligence, and the other of which is an awareness of how to create and maintain an ethical organization. Effective leaders play an important and often pivotal role in creating an organizational culture that pursues excellence while adhering to high standards of ethical behavior.

5. Strategic Leadership
Leadership is the process of transforming organizations from what they are to what the leader would have them become.
Successful leaders are
Proactive – dissatisfied with the status quo
Goal oriented – visualizing successful futures
Focused on the creation & implementation of a creative vision – understanding the process
Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. Leadership = the process of transforming organizations from what they are to what the leader would have them become. This definition implies dissatisfaction with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission.

6. Strategic Leadership
Successful leaders recognize three interdependent activities that must be continually reassessed for organizations to succeed. These activities are (1) setting a direction, (2) designing the organization, and (3) nurturing a culture dedicated to excellence and ethical behavior. The interdependent nature of these three activities is self evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today’s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken.
Exhibit 11.1 Three Interdependent Leadership Activities

7. Question?
XYZ’s CEO scrapped the company’s commission- based reward system because it was rewarding employees for inappropriate behavior. This is an example of
setting a direction.
designing the organization.
unethical behavior.
failure to maintain the status quo.
Answer: B. although setting a direction for the organization is important, the organization’s control systems must be designed so they are consistent with the direction and the culture the CEO is trying to enable. Changing the reward system is an example of designing the organization.

8. Strategic Leadership
Setting a direction requires the ability to scan the environment for knowledge about
All stakeholders
Salient environmental trends & events
Then integrate that knowledge into a strategic vision of what the organization could become
A clear future direction
A framework for the firm’s mission & goals
Leading to enhanced employee communication, participation, & commitment
Setting a direction = a strategic leadership activity of strategy analysis and strategy formulation. In order to set a direction for the organization, the leader needs a holistic understanding of the firm’s stakeholders, as well as an awareness of other salient environmental trends and events. This knowledge must be integrated into a vision of what the organization could become. This leadership activity requires the capacity to solve increasingly complex problems, become proactive in approach, and develop viable strategic options. A strategic vision provides many benefits: a clear future direction; a framework for the organization’s mission and goals; and enhanced employee communication, participation, and commitment. In order to do this, leaders sometimes need more creative solutions than incremental ones. They must come up with revolutionary visions. See Strategy Spotlight for how 3M’s managers empower lower-level employees to generate sustainability improvements.

9. Strategic Leadership
Designing the organization requires building mechanisms to implement the leader’s vision and strategies through
Structures & teams
Systems & processes
Lack of appropriate design could cause problems
Managers who don’t understand their responsibilities
Reward systems that are not motivating
Inappropriate financial systems
Insufficient integrating mechanisms
Designing the organization = a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader’s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. For instance, without appropriately structuring organizational activities, a firm would generally be unable to obtain an overall low cost advantage. It would be unable to closely monitor its cost through detailed and formalized cost and financial control procedures. Likewise, an unrelated diversification strategy would rely on financial or objective indicators of performance, whereas a related diversification strategy would necessitate reward systems that emphasize behavioral measures. At times, almost all leaders have difficulty implementing their vision and strategies. Such problems may stem from a variety of sources: (1) a lack of understanding of responsibility and accountability among managers; (2) reward systems that do not motivate individuals (or collectives such as groups and divisions) toward desired organizational goals; (3) inadequate or inappropriate budgeting and control systems; (4) insufficient mechanisms to integrate activities across the organization.

10. Strategic Leadership
Nurturing an excellent and ethical organizational culture is a key leadership activity, requiring that managers & leaders
Accept personal responsibility for developing & strengthening ethical behavior
Consistently demonstrate that such behavior is central to the mission & vision of the firm
Develop & reinforce
Role models
Corporate credos & codes of conduct
Reward & evaluation systems, policies & procedures
Excellent and ethical organizational culture = an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. Leaders play a key role in changing, developing, and sustaining an organization’s culture. Managers and top executives must accept personal responsibility for developing and strengthening ethical behavior throughout the organization. They must consistently demonstrate that such behavior is central to the vision and mission of the organization. Several elements must be present and reinforced for a firm to become highly ethical, including role models, corporate credos and codes of conduct, reward and evaluation systems, and policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power.

11. Example: A Strategic Leadership Encore?
In May, 2013, Procter & Gamble CEO Bob McDonald stepped down, and ex-CEO A.G. Lafley returned to the job - since Lafley’s 4- year absence, P&G has lost market share, reduced profits & shareholder value, and lost some promising executives.
McDonald’s mantra - purpose-inspired growth
Lafley’s motto – the consumer is boss
Which vision will end up being most successful?
Taking the post holds risks for the 65-year-old executive. Since stepping aside almost four years ago, he has retained a rock star reputation as one of America’s most lionized corporate chieftains. Now his legacy will rest on whether he can turn around P&G, an iconic company that brought the world Tide and Pampers and yet has failed to adapt to changing circumstances. P&G Under Lafley = doubled sales, boosted P&G market share by $100 million, grew portfolio of billion-dollar brands from 10 to 24, acquired Wella & Gilette, developed new brands such as Swiffer & Febreze. In the last few years, since Lafley’s absence, P&G has lost market share, reduced profits & shareholder value, and lost some promising executives.
McDonald’s mantra -- “living a life driven by purpose is more meaningful and rewarding than meandering through life without direction. My life’s purpose is to improve lives” -
Lafeley’s motto – businesses fail when they don't make difficult choices about where and how they can win particular markets and put the full weight of the business behind them. Read more: See Case 29: Procter & Gamble for more details about Lafley’s tenure.

12. Strategic Leadership: Overcoming Barriers to Change
Leaders must overcome barriers to change
Organizations are prone to inertia, slow to learn, adapt, & change because of
Vested interests in the status quo
Systemic barriers
Behavioral barriers
Political barriers
Personal time constraints
The success of the leader’s organization often depends on how he or she meets challenges and delivers on promises. This requires a leader to overcome barriers to change. Barriers to change = characteristics of individuals and organizations that prevent a leader from transforming an organization. Organizations at all levels are prone to inertia and are slow to learn, adapt, and change. Many people have vested interests in the status quo = a barrier to change that stems from people’s risk aversion. There are also systemic barriers = barriers to change that stem from an organizational design that impedes the proper flow and evaluation of information; behavioral barriers = barriers to change associated with the tendency for managers to look at issues from a biased or limited perspective based on their prior education and experience; political barriers = barriers to change related to conflicts arising from power relationships; personal time constraints = a barrier to change that stems from people’s not having sufficient time for strategic thinking and reflection. Leaders must draw on a range of personal skills as well as organizational mechanisms to move their organizations forward in the face of such barriers. One of the most important tools a leader has for overcoming barriers to change is their personal and organizational power.

13. Strategic Leadership: Effective Use of Power
Leaders must make effective use of power
Influence other people’s behavior
Persuade them to do things they otherwise would not do
Overcome resistance & opposition
Sources of power
Organizational bases of power
Legitimate, reward, coercive, information
Personal bases of power
Referent, expert
Successful leadership requires effective use of power in overcoming barriers to change. Power = a leader’s ability to get things done in a way he or she wants them to be done. Power is the ability to influence other people’s behavior, to persuade them to do things that they otherwise would not do, and to overcome resistance and opposition. Effective exercise of power is essential for successful leadership. A leader derives his or her power from several sources or bases. Organizational bases of power = a formal management position that is the basis of the leaders power. This is power that a person wields because of his or her formal management position, and includes legitimate, reward, coercive, and information power. = Personal bases of power = a leader’s personality characteristics and behavior that are the basis of the leaders power. A leader might also be able to influence subordinates because of his or her personal attributes or charisma, attributes that cause subordinates to identify with the leader – referent power; or the leader is the expert on whom subordinates depend for information that they need to do their jobs successfully, so they rely on the leader’s expertise and knowledge – expert power.

14. Strategic Leadership: Effective Use of Power
Organizational power comes through the leader’s formal management position. Legitimate power is derived from organizationally conferred decision-making authority and is exercised by virtue of a manager’s position in the organization. Reward power depends on the ability of the leader or manager to confer rewards for positive behaviors or outcomes. Coercive power is the power a manager exercises over employees using fear of punishment for errors of omission or commission. Information power arises from a manager’s access, control, and distribution of information that is not freely available to everyone in an organization. A leader might also be able to influence subordinates because of his or her personality characteristics and behavior. These are personal bases of power and include referent power or a subordinate’s identification with the leader. Using referent power, a leader’s personal attributes or charisma might influence subordinates and make them devoted to that leader. The source of expert power is the leader’s expertise and knowledge. The leader is the expert on who subordinates depend for information that they need to do their job successfully. Successful leaders use the different bases of power, and often a combination of them, as appropriate to meet the demands of the situation, such as the nature of the task, the personality characteristics of the subordinates, and the urgency of the issue. Persuasion and developing consensus are often essential, but so is pressing for action. At some point stragglers must be prodded into line.
Exhibit 11.2 A Leader’s Bases of Power

15. Strategic Leadership: Emotional Intelligence
The valuable traits of successful leaders:
Technical skills – like accounting, operations research
Cognitive abilities – like analytical reasoning, quantitative analysis
Emotional intelligence – like self- management, managing relationships with others
Self-awareness, self regulation, motivation, empathy, social skills
Valuable traits of successful leaders can be grouped into three broad sets of capabilities: purely technical skills (like accounting or operations research), cognitive abilities (like analytical reasoning or quantitative analysis), or emotional intelligence (like self-management and managing relationships). Emotional intelligence = an individual’s capacity for recognizing his or her own emotions and those of others, including the five components of self-awareness, self-regulation, motivation, empathy, and social skills.

16. Strategic Leadership: Emotional Intelligence
Psychologist/journalist Daniel Goleman defines emotional intelligence (EI) as the capacity for recognizing one’s own emotions and those of others. Recent studies of successful managers have found that effective leaders consistently have a high level of EI. Although IQ and technical skills are necessary for attaining higher-level managerial positions, EI, on the other hand, is essential for leadership success. Self awareness involves a person having a deep understanding of his or her emotions, strengths, weaknesses, and drives. People with strong social awareness are neither overly critical nor unrealistically optimistic. Instead, they are honest with themselves and others. Self-regulation, which is akin to an ongoing inner conversation, frees us from being prisoners of our feelings. People who have self-regulation find ways to control inner feelings and even channel them in useful ways. Self-regulated people are able to create an environment of trust and fairness. Motivated people show a passion for the work itself, such as seeking a creative challenges, a love of learning, and taking pride in a job well done. Empathy is probably the most easily recognizable component of EI. Empathy means thoughtfully considering an employee’s feelings, along with other factors, in the process of making intelligent decisions. Social skill may be viewed as friendliness with a purpose: moving people in the direction you desire, whether that’s agreement on a new marketing strategy or enthusiasm about a new product. However there are some drawbacks of EI, which are discussed on page 357.
Exhibit 11.3 The Five Components of Emotional Intelligence at Work
Source: Reprinted by permission of Harvard Business Review. Exhibit from “What Makes a Leader,” by D. Goleman, January Copyright © 2004 by the Harvard Business School Publishing Corporation; all rights reserved.

17. Question?
Complete the following sentence. “Inspiring and motivating people with a mission or purpose is a ____________ for developing an organization that can learn and adapt.”
necessary and sufficient condition
necessary, but not a sufficient condition
goal, but not a necessary condition
goal and a required pre-condition
Answer: B. inspiring and motivating people with a mission or purpose is a necessary but not sufficient condition for developing an organization that can learn and adapt to a rapidly changing, complex, and interconnected environment. Inspiration alone is not enough.

18. Strategic Leadership: A Learning Organization
Successful learning organizations
Create a proactive, creative approach to the unknown
Actively solicit the involvement of employees at all levels
Enable all employees to use their intelligence & apply their imagination
A learning environment involves
An organization-wide commitment to change
An action orientation, applicable tools & methods
Learning organizations = organizations that create a proactive, creative approach to the unknown, characterized by (1) inspiring and motivating people with a mission and purpose, (2) empowering employees at all levels, (3) accumulating and sharing internal knowledge, (4) gathering and integrating external information, and (5) challenging the status quo and enabling creativity. Higher-level skills are required of everyone, not just those at the top. The learning environment involves organization-wide commitment to change, an action orientation, and applicable tools and methods. It must be viewed by everyone as a guiding philosophy and not simply as another change program.

19. Strategic Leadership: A Learning Organization
Successful learning organizations create a proactive, creative approach to the unknown, actively solicit the involvement of employees at all levels, and enable all employees to use their intelligence and apply their imagination. A critical requirement of all organizations is that everyone feels and supports a compelling purpose.
Exhibit 11.4 Key Elements of a Learning Organization

20. Strategic Leadership: A Learning Organization
Successful learning organizations empower employees at all levels
The leaders/managers roles involve
Becoming coaches, information providers, teachers, decision-makers, facilitators, supporters, or listeners
Soliciting individuals’ input, valuing others’ ideas & initiatives
Providing for trust, cultural control, & expertise at all levels
When empowering employees at all levels, a manager’s role becomes one of creating an environment where employees can achieve their potential as they help move the organization toward its goals. Instead of viewing themselves as resource controllers and powerbrokers, leaders must envision themselves as flexible resources willing to assume numerous roles as coaches, information providers, teachers, decision-makers, facilitators, supporters, or listeners, depending on the needs of their employees. Leading edge organizations recognize the need for trust, cultural control, and expertise at all levels. In the information economy, the strongest organizations are those that effectively use the talents of all the players on the team. Empowering individuals by soliciting their input helps an organization to enjoy better employee morale. It also helps create a culture in which middle- and lower-level employees feel that their ideas and initiatives will be valued.

21. Strategic Leadership: A Learning Organization
Successful learning organizations accumulate & share internal knowledge
The firm shares information:
Customer expectations & feedback
Financial information
Business goals
How key value-creating activities are related to each other
The firm allocates rewards based on how effectively employees use this information
Effective organizations must also redistribute information, knowledge (skills to act on the information), and rewards. The company needs to disseminate information by sharing customer expectations and feedback as well as financial information. The employees must know about the goals of the business as well as how key value-creating activities in the organization are related to one another. Finally, organizations should allocate rewards based on how effectively employees use information, knowledge, and power to improve customer service quality and the company’s overall performance. In addition to enhancing the sharing of company information both up and down as well as across the organization, leaders also have to develop means to tap into some of the more informal sources of internal information, by listening to what their people, customers, and suppliers are telling them.

22. Strategic Leadership: A Learning Organization
Successful learning organizations gather & integrate external information
Firms must recognize opportunities & threats, both general & industry-specific
By using the Internet
By using trade journals & membership in professional organizations
By doing both competitive & functional benchmarking
By asking customers
Recognizing opportunities, as well as threats, in the external environment is vital to a firm’s success. As organizations and environments become more complex and evolve rapidly, it is far more critical for employees and managers to become even more aware of environmental trends and events – both general and industry-specific – and more knowledgeable about their firm’s competitors and customers. This external information can come from various sources: (1) the Internet, which has dramatically accelerated the speed with which anyone can track down useful information or locate people who might have useful information; (2) company employees at all levels can use “garden-variety” traditional sources to acquire external information. Much can be gleaned by reading trade and professional journals, books, and popular business magazines. Other venues for gathering external information include membership in professional or trade organizations, attendance at meetings and conventions, and networking among colleagues inside and outside of the industry. (3) Benchmarking can be a useful means of employing extra information. Benchmarking = managers seeking out best examples of a particular practice as part of an ongoing effort to improve the corresponding practice in their own organization. Competitive benchmarking = benchmarking where the examples are drawn from competitors in the industry. Functional benchmarking = benchmarking where the examples are drawn from any organization, even those outside the industry. (4) Firms can also focus directly on customers for information.

23. Strategic Leadership: A Learning Organization
Successful learning organizations challenge the status quo & enable creativity
Leaders must bring about useful change
Forcefully create a sense of urgency
Establish a “culture of dissent”
Foster a culture that encourages risk-taking & learning from mistakes
Formalize forums for failure; move the goalposts; bring in outsiders; prove yourself wrong, not right
Leaders face barriers when trying to bring about change in an organization: vested interests in the status quo, systemic barriers, political barriers, behavioral barriers, and personal time constraints. For a firm to become a learning organization, it must overcome such barriers in order to foster creativity and enable it to permeate the firm. This becomes quite a challenge if the firm is entrenched in a status quo mentality. Perhaps the best way to challenge the status quo is for the leader to forcefully create a sense of urgency. Such initiative, if sincere and credible, establishes a shared mission and the need for major transformations. It can channel energies to bring about both change and creative endeavors. Establishing a “culture of dissent” can be another effective means of questioning the status quo and serving as a spur toward creativity. Here norms are established whereby dissenters can openly question the superior’s perspective without fear of retaliation or retribution. Companies that cultivate a culture that encourages risk-taking, a culture of experimentation and curiosity, make sure that failure is not, in essence, an obscene word. They encourage mistakes as a key part of their competitive advantage. Some approaches to encourage risk-taking and learning from mistakes include formalizing forums for failure by sharing lessons of failure, move the goalposts to create flexibility while forecasting, bring in outsiders to help neutralize the emotions and biases that might prop up a flop, look for supporting rather than countervailing evidence to prove yourself wrong, not right. Failure can even play an important and positive role in one’s professional development.

24. Strategic Leadership: Creating an Ethical Organization
Ethics deals with right and wrong
Ethical beliefs come from religion, ethnic heritage, family practices, community standards, educational experiences, friends & neighbors
Organizational ethics promote an operating culture & determine acceptable behavior
Ethical beliefs come from the values, attitudes, & behavioral patterns of leadership
Unethical business practices involve the tacit, if not explicit, cooperation of others
Ethics = a system of right and wrong that assists individuals in deciding when an act is moral or immoral and/or socially desirable or not. The sources for an individual’s ethics include religious beliefs, national and ethnic heritage, family practices, community standards, educational experiences, and friends and neighbors. Organizational ethics = the values, attitudes, and behavioral patterns that define an organization’s operating culture and that determine what an organization holds as acceptable behavior. Business ethics has everything to do with leadership. Seldom does the character flaw of a lone actor completely explain corporate misconduct. Instead, unethical business practices typically involve the tacit, if not explicit, cooperation of others. Ethics is as much an organizational as a personal issue. Leaders who fail to provide proper leadership to institute proper controls and systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misleads.

25. Strategic Leadership: Creating an Ethical Organization
The ethical orientation of the leader is a key factor in promoting ethical behavior
Integrity & ethical values
Shape behaviors
Provide a common frame of reference
Act as a unifying force
Have a positive effect on employee commitment & motivation to excel
Can create value & a competitive advantage
Ethical orientation = the practices that firms use to promote an ethical business culture, including ethical role models, corporate credos and codes of conduct, ethically-based reward and evaluation systems, and consistently enforced ethical policies and procedures. Ethical leaders must take personal, ethical responsibility for their actions and decision making. Leaders who exhibit high ethical standards become role models for others and raise an organization’s overall level of ethical behavior. The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shaped the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. They provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. Organizational ethics help to define what a company is and what it stands for. The advantages of a strong ethical orientation can have a positive effect on employee commitment and motivation to excel. This is particularly important in today’s knowledge-intensive organizations, where human capital is critical in creating value and competitive advantages.

26. Strategic Leadership: Creating an Ethical Organization
Ethical frameworks for integrity include:
The compliance-based ethics program
Prevents, detects, & punishes legal violations
The integrity-based ethics program
Enables ethical conduct
Examines organizational members’ core guiding values, thoughts, & actions
Defines responsibility & aspirations for ethical conduct
There cannot be high-integrity organizations without high-integrity individuals. However, individual integrity is rarely self-sustaining. Organizational integrity rests on a concept of purpose, responsibility, and ideals for an organization as a whole. An important responsibility of leadership is to create this ethical framework and develop the organizational capabilities to make it operational. There are two approaches that can be used to create this ethical framework. Faced with the prospect of litigation, several organizations reactively implement compliance-based ethics programs = programs for building ethical organizations that have the goal of preventing, detecting, and punishing legal violations. But being ethical is much more than being legal, and an integrity-based approach addresses the issue of ethics in a more comprehensive manner. Integrity-based ethics programs = programs for building ethical organizations that combine a concern for law with an emphasis on managerial responsibility for ethical behavior, including (1) enabling ethical conduct; (2) examining the organization’s and members’ core guiding values, thoughts, and actions; and (3) defining the responsibilities and aspirations that constitute an organization’s ethical compass.

27. Strategic Leadership: Creating an Ethical Organization
Compliance-based approaches are externally motivated – that is, based on the fear of punishment for doing something unlawful. On the other hand, integrity-based approaches are driven by personal and organizational commitment to ethical behavior. A corporate counsel may play a role in designing and implementing integrity strategies, but it is managers at all levels and across all functions that are involved in the process. Once integrated into the day-to-day operations, such strategies can prevent damaging ethical lapses, while tapping into powerful human impulses for moral thought and action. Ethics becomes the governing egos of an organization and not burdensome constraints.
Exhibit 11.5 Approaches to Ethics Management
Source: Reprinted by permission of Harvard Business Review. Exhibit from “Managing Organizational Integrity,” by L. S. Paine. Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.

28. Question?
Proactive measures to prevent organizational ethics problems include all of the following except
instituting a reward system which considers outcomes as its primary criterion.
using leaders as role models of ethical behavior.
issuing statements describing the organization’s commitment to certain standards of behavior.
using the organization’s information systems as a control system.
Answer: A. A firm must have several key elements to become a highly ethical organization. These elements are highly interrelated. If a firm issues a statement saying that certain standards of behavior are critical, and encourages that this code of conduct be enforced by policies based on sound corporate governance practices (such as properly audited financial statements), and then distributes rewards based on outcomes rather than the means by which goals and objectives are achieved, this does not hold up managers who achieve these outcomes as being appropriate ethical role models.

29. Strategic Leadership: Creating an Ethical Organization
Interrelated elements of a highly ethical organization include
Ethical role models
Corporate credos & codes of conduct
Ethically-based reward & evaluation systems
Consistently enforced ethical policies & procedures
A firm must have several key elements to become a highly ethical organization. These elements are highly interrelated. For instant, reward structures and policies will be useless if leaders are not sound role models.

30. Strategic Leadership: Creating an Ethical Organization
Ethical role models
Must be consistent in their words & deeds
Their values & character must become transparent to an organization’s employees
They must take responsibility for ethical lapses within the organization
Courageous behavior by leaders helps to strengthen an organization’s ethical environment
For good or for bad, leaders are role models in their organizations. Clearly, leaders must “walk the talk”; they must be consistent in their words and deeds. The values as well as the character of leaders become transparent to an organization’s employees through their behaviors. When leaders do not believe in the ethical standards that they are trying to inspire, they will not be effective as good role models. Being an effective leader often includes taking responsibility for ethical lapses within the organization – even though the executives themselves are not directly involved. By taking responsibility for misdeeds, the top executives – through their highly visible action – can make it clear that responsibility and penalties for ethical lapses go well beyond the “guilty” parties. Such courageous behavior by leaders helps to strengthen an organization’s ethical environment.

31. Strategic Leadership: Creating an Ethical Organization
Corporate credos & codes of conduct
Provide a statement & guidelines for norms, beliefs & decision-making
Provide employees with clear understanding of the organization’s position regarding behavior
Provide the basis for employees to refuse to commit unethical acts
Contents of credos & codes of conduct must be known to employees
Corporate credo = a statement of the beliefs typically held by managers in a Corporation. Corporate credos and codes of conduct are mechanisms that provide statements of norms and beliefs as well as guidelines for decision-making. They provide employees with a clear understanding of the organization’s policies and ethical position. Such guidelines also provide the basis for employees to refuse to commit unethical acts and help to make them aware of issues before they are faced with the situation. For such codes to be truly effective, organization members must be aware of them and what behavioral guidelines they contain. See Strategy Spotlight 11.9 to learn the four key purposes served by codes of conduct.

32. Strategic Leadership: Creating an Ethical Organization
Reward & evaluation systems can either support or undermine an ethical orientation
Support by creating an evaluation system that rewards ethical thinking
Actions are consistent with words; follows through on commitments; readily admits mistakes
Undermines by rewarding results regardless of how they were achieved
Intense competition encourages falsification of scores
It is entirely possible for a highly ethical leader to preside over an organization that commits several unethical acts. How? A flaw in the organization’s reward system may inadvertently cause individuals to act in an inappropriate manner if rewards are seen as being distributed on the basis of outcomes rather than the means by which goals and objectives are achieved. Unethical or illegal behaviors are also more likely to take place when competition is intense. Therefore, many companies have developed reward and evaluation systems that evaluate whether a manager is acting in an ethical manner. See the example of Raytheon’s “Leadership Assessment Instrument”.

33. Strategic Leadership: Creating an Ethical Organization
Carefully developed policies & procedures can help guide ethical behavior
By specifying proper relationships with customers & suppliers
Through global sourcing guidelines to identify conflicts of interest
By encouraging employees to behave ethically
Through effective communication, enforcement, & monitoring
Through sound corporate governance practices
Compliance with Sarbanes Oxley Act of 2002
Many situations that a firm faces have regular, identifiable patterns. Leaders tend to handle such routine by establishing a policy or procedure to be followed that can be applied uniformly to each occurrence. Such guidelines can be useful in specifying the proper relationships with the firm’s customers and suppliers, i.e. through stringent global sourcing guidelines that determine the relationship between the company and its suppliers when awarding new contracts. Carefully develop policies and procedures guide behavior so that all employees will be encouraged to behave in an ethical manner. However they must be reinforced with effective communication, enforcement, and monitoring, as well as sound corporate governance practices. In addition, the Sarbanes-Oxley Act of 2002 provides considerable legal protection to employees of publicly traded companies who report unethical or illegal practices.

34. Example: Effects of Unethical Leadership?
In June 2013, video game maker Zynga laid off 18% of its workforce, in the face of increased competition from smaller & nimbler rivals
Zynga CEO Mark Pincus, named Founder of the Year in 2010, has said the company culture is “about growth”
Pincus has also been heard to tell employees he doesn’t want innovation: “You’re not smarter than your competitor. Just copy what they do and do it until you get their numbers.”
Perhaps some of those laid-off employees are relieved to have the chance to work elsewhere?
Zynga on Monday announced it will lay off 520 employees, or 18% of its workforce, as part of an effort to stabilize finances at the struggling video game company. The job cuts will be issued across all parts of the company, and Zynga will close down a few office locations. The "Farmville" maker didn't say which offices will be shuttered, but the tech blog AllThingsD reported that New York, Los Angeles and Dallas are on the chopping block. Zynga said the "substantial" cost reductions from the layoffs will save the company $70 million to $80 million a year. Shares of Zynga (ZNGA) tumbled 10% on the news. "None of us ever expected to face a day like today, especially when so much of our culture has been about growth," Zynga CEO Mark Pincus wrote in a blog post. "But I think we all know this is necessary to move forward." Social gaming has become so popular that it's been difficult to maintain a leadership position, Pincus added. (From These layoffs were necessary to cut costs - it seems that executives were trying to “bank” team members: only a small portion of a given studio was really needed to create a mobile game, but Zynga didn’t want to lose the other team members, so they were kept around on the assumption that the mobile business would grow. Eventually, however, executives decided this was happening in too many locations and was ultimately unsustainable. The company will try to focus on a smaller number of franchises (using fewer employees) and try to turn each of them into a big brand name. The hope is that by restructuring the company, Zynga can replicate the success of some of its startup competitors. (See However, CEO Pincus has been known for not truly valuing innovation, and encouraging his employees to be less than ethical – see See Case 19: Zynga, for more background on the company and CEO behavior.