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Dr. Linda Ferrell

Ethical Leadership

The Role of Ethical Leadership in Organizational Performance

O.C. Ferrell*

Professor of Marketing

  Colorado State University

Fort Collins, CO 80523

(970) 491-4398



Linda Ferrell

Department of Marketing

University of Northern Colorado

College of Business Administration

Greeley, CO 80639

 (970) 351-2810



Submitted to the Journal of Management Systems-March, 1999.

* Contact Author.





Evidence is presented to support that organizational performance can be enhanced through ethical leadership.  An ethical corporate culture has been associated with trust, commitment to quality, customer satisfaction, employee commitment, and financial performance. There is an opportunity for managers to take a proactive approach to incorporating ethical concerns into strategic planning. In addition, there has been public policy support for top management to be responsible for organizational ethics.  Academic researchers can assist by investigating the relationship between ethical leadership and organizational performance variables.


                         The Role of Ethical Leadership in Organizational Performance

There is increasing support that it is good business for an organization to be ethical and that ethical cultures emerge from strong leadership.  The rewards to organizations supporting ethical cultures include increased efficiency in daily operations and decision making, employee commitment, product quality improvements, customer loyalty, and improved financial performance (Ferrell, Maignan, and Loe 1999).  Three different approaches are used by companies to implement ethics initiatives.  Through compliance an organization can use internal controls to gain ethical conformity.  Organizations may use ethics in public relations to enhance their reputation and gain extra media attention.  A third, more committed approach involves using a value-based philosophy that incorporates the first two philosophies and focuses on creating an ethical culture through committed leadership.  Ethical leaders can establish shared values that influence the ethical conduct of employees and improves relationships with customers, suppliers, investors, and society at large.


Ethical decision making models (Ferrell and Gresham 1985, Trevino 1986, and Hunt and Vitell 1986) explore the importance of organizational culture and consequently leadership on ethical decision making in organizations.  These models have been examined and empirically tested to confirm that organizational ethical climate has a significant impact on individual and work group ethical decisions (Jones 1991).  Leadership provides the process of influencing individuals and groups in an organization to achieve a goal--such as an ethical workplace.  Ethical leadership often comes from top managers who occupy a formal position of legitimate power and from informal interpersonal relationships and personal characteristics.  Many corporations have leaders who combine both formal and informal value based leadership to shape the reputation of their organization. 

Corporations featured in Fortune=s annual issue examining the most admired companies have, in common, very dynamic and strong leaders or leadership heritages that affect the firm=s reputation.  General Electric has been acknowledged as a firm with excellent leadership because of the insights of CEO, Jack Welch.  GE spends over $800 million a year on training and leadership development (about half of what it invests in research and development)(Stewart, Harrington, and Griffin Sol 1998).  On the other hand, there have been ethical scandals at GE possibly evolving from a relentless drive for profits (Boyle, 1999).  General Electric CEO, Jack Welch has earned the nickname ANeutron Jack@--the bomb that destroys people, but leaves buildings intact.  Bill Gates as founder and CEO of Microsoft has garnered much attention from the government for alleged anti-trust activities, but sustains admiration in this country.  Coca-Cola embraces the cultural spirit of Roberto Goizueta and his protégé Doug Ivester and has experienced phenomenal growth and international expansion over the past ten years.  All three of these firms with outstanding leaders are among the ten most admired firms, based on Fortune=s survey of corporate reputation.  But these examples illustrate that having a good corporate reputation may not be the same thing as having a value system that maintains an ethical corporate culture.  However, an investment in these ten most admired companies in the last year would have realized a 19.8% return versus a 11.4% return for the Standard and Poor=s 500 (Brown 1999).  Over the last ten years investing in Fortune=s ten most admired companies from 1998 yielded nearly three times the earnings as the S&P 500. (Stewart, Harrington, and Griffin Sol 1998).


Many agree that the character and success of the most admired companies emanates from their leader.  John Kotter notes that there are five things that leaders must do.  First, leaders should create a common goal or vision for the company.  Leaders are also good at getting Abuy in@ or support from significant partners.  Great leaders are also great motivators and know how to use the resources that are available to them.  The last characteristic is more of a spirit, but great leaders love their jobs and approach them with tenacity, passion and commitment (Stewart, Harrington, and Griffin Sol 1998). 

Leadership can also provide corporate values and a social network framework to support ethical behavior.  The constraints and opportunities provided by social relationships in an organization may be most predictive of unethical behavior when personal character dimensions present weak or moderate restraints on unethical behavior (Brass, Butterfield, and Skaggs 1998).  Leadership that focuses on building strong organizational values among employees creates agreement on norms of conduct and patterns of shared relationships.  Leaders in highly visible positions in the organization play a key role in transmitting and diffusing values, norms, and codes of ethics (Brass, Butterfield, and Skaggs 1998).  The need for ethical leadership in providing structure to the organizational values and to provide a deterrent to unethical behavior has been supported in previous research (Trevino and Youngblood 1990).  This structure can integrate employees through participation in informal groups and through more formal ethics training programs and other methods to develop ethics consideration in decision making.


The purpose of this article is to examine existing knowledge on the role of an ethical culture and ethical leadership in organizational performance.  Dimensions of organizational performance examined include trust, commitment to quality, customer satisfaction, employee commitment, and financial performance.  A strategy of developing and implementing ethical leadership in an organization as well as suggestions for future research is included to provide directions for continuous improvement of an organizational ethical climate.


                                               The Outcomes of Ethical Leadership

Ethical conduct and business performance have been related in many ways.  Organizations are facing increased pressure from their stakeholders including customers, employees, and investors.  On the average, U.S. corporations now lose half of their customers within five years, half of their employees within four, and half of their investors within less than a year (Covey 1998).  Disloyalty at current rates damages corporate performance by 25-30 percent based on a study of >The Loyalty Effect= by Frederick Reichheld.  Considering such turbulence and disloyalty, building trust and long term relationships with key stakeholders is critical.  For example, supply chain relationships require dependability, reliability, trust, and cooperation.  Creating meaningful relationships with employees means more than simply providing employment.   Employees should be helped to develop their own career goals and the organization should support such objectives.  Stress and pressure on employees can destroy loyalty and lead to lower performance, turnover, and the propensity to engage in unethical behavior to meet short term objectives.  To minimize the effects of such stress and take care of employees unique needs, organizations have begun offering flextime, telecommuting, job sharing, etc., but all endeavors require mutual trust. 


Investors look at the bottom line for profits or the potential for increased stock prices.  Investors also look to see if there are any potential liabilities associated with the company=s past or present behavior. Therefore, CEOs work to communicate with investors and potential investors about the firm=s reputation, direction, and financial performance.  Stockholders are a major concern as roughly half of investors sell their stock in companies within one year, and the average household replaces 80 percent of its common stock portfolio each year (Rynecki 1998).  Therefore, the development of trust and confidence with investors is important to sustain financial stability of the firm.

Three out of four consumers indicated they avoid buying from certain businesses because of poor service and business conduct in a Cone/Roper study (Business Ethics, 1997).  Texaco=s statements about minorities damaged the company reputation and boycotts resulted.  Exxon=s oil spill in Alaska produced similar results, and until tuna producers adapted their practices to accommodate dolphins, through the use of >dolphin friendly= nets, they found many protestors shying from their products.  Boycotts may also result when customers perceive that employees or subcontractors of an organization are not being treated fairly as was the case with Nike. 



Stephen R. Covey encourages companies to examine the impact of trust on the bottom line in addition to profits, earnings-per-share, and other figures traditionally thought to determine the success of the company (Rynecki 1998).  Covey indicates that low levels of trust result in organizational decay as relationships deteriorate political strife, infighting, and general inefficiency result.  Employee commitment to the organization decreases, product quality drops, customers leave, and employee turnover skyrockets as ethical compliance decreases (Rynecki 1998). According to Covey, organizations with little or not trust have no basis for future success.


Trust creates a predisposition to develop confidence in the expected behavior of co-workers.  When engaged in a trust relationship one assumes some risk that the expected behavior will not be performed by the other party.  Trustworthiness in an individual=s character means an ongoing attempt to engage in trust building relationships. Research indicates that greater trust exists when employees perceive an organizational climate as ethical (Loe 1996).  This research considered trust among employees both within various departments and between departments throughout the organization.  Higher levels of ethical climate were greatest for relationships within individual departments, but also were a significant factor in interdepartmental relationships (Loe 1996).  Programs to create an ethical work climate result in individuals who are more willing to trust their co-workers.  Employees, in such a work climate, can reasonably expect to be treated with full respect and consideration from their co-workers and superiors.  Trust within an organization can contribute to creating greater efficiencies in relationships between managers, subordinates, and top level executives.  As Doney and Canon (1997) stated, Ahigher levels of trust in the organization Aenable parties to focus on...the relationship, ultimately enhancing competitiveness and reducing transaction costs@ (p.35).

Organizational initiatives to improve trust often generate long term benefits.  During a strike at UPS, FedEx employees were faced with increased packages, pick-ups, and consequently work hours.  Without any additional incentives, FedEx employees worked to satisfy customers.  When the strike was over, FedEx thanked its employees with $20 million in bonuses or roughly 10 percent of their salary (including the overtime that they had worked during the strike) (Moskowitz and Levering 1998).  FedEx also has a generous profit sharing plan, well communicated and managed grievance procedures, and a >no-layoff policy=.


Commitment to Quality


In a survey of managers sponsored by the Ethics Officer Association, 48 percent of the respondents indicated they had done something unethical at work.  The number one breach of ethics by these employees was compromising quality with respect to customers (Arizona State University, 1997).  This same survey revealed that three-fourths of the respondents felt they could be more ethical if they could bring ethical issues to the attention of superiors and others in the company.  As employees perceive an improvement in the ethical climate of their organization, their commitment to achieving these high quality standards also increases (Loe 1996).  A commitment to continuous improvement of quality appears to be interdependent with an organizations= ethical climate. Many efficiencies, including a reduction of cycle time, are achieved through employees knowing what to do in situations with ethical concern.  Decision making based on maximizing value and increasing trust with customers and all stakeholders means that employees can focus on building quality into all relationships.  Employees do not have to waste time developing schemes to manipulate or cover up deception or questionable acts.

An ethical work climate will not only have a positive effect on employee commitment to quality, but will also have a positive effect on the firm=s competitive position.  One measure of quality is a customer satisfaction index score.  The impact on a company=s image as well as its ability to attract new customers will be determined by service quality improvement (Hartline and Ferrell 1996).  Companies with a high quality customer satisfaction score include Mercedes, BMW, Saturn, Waterford Crystal, Sony, and Timberland.  These companies maintain high product quality through a corporate culture that focuses on building high integrity relationships with employees, suppliers, and customers. 


Many disasters, such as the space shuttle Challenger, share a common belief among experts that management was not ethically centered (Allinson 1995).  According to Allinson, an organization must implement high standards for production quality, employee relations, and customer satisfaction.  Ethically-centered management should emphasize: 1). designating managers responsible for quality; 2.) assigning responsibility for determining if the end product is problem free and of the very highest quality; 3.) show respect for employees by providing opportunities for feedback including suggestions and warnings; and 4.) soliciting an expert base for consultation, decision making, and continuous quality improvement (Allinson 1995).

A good example of a corporate culture which focuses on quality and ethics is Starbucks.  Starbucks has won a number of ethics awards and has been recognized as a role model of social responsibility.  The company=s first priority is taking care of the employees in its retail stores who communicate with and serve customers.  Starbucks executives believe that by taking care of these employees, the company can provide long-term value to shareholders (Schultz and Yang 1997).  The company=s commitment to people extends beyond its coffee bar counters.  Building on its concern for quality of life, Starbucks developed a framework for a code of conduct to improve working conditions in the countries from which it imports coffee; it was the first importer of an agricultural commodity to do so.  By paying a premium (i.e.-above market) price for coffee, Starbucks hopes to not just increase the supply of high-quality coffee, but also to improve workers= lives (Business Ethics, 1998).  A concern for social responsibility and ethics-respecting employees, protecting workers who supply the coffee beans, and educating consumers about the merits of high quality coffee products-is basic to the Starbucks philosophy and success.


Customer Satisfaction


Leadership is important to the development of a market orientation that focuses on the customer.  In a national survey by Cone/Roper, 52 percent of executives strongly agreed that a corporate leader=s responsibility is to the greatest good for all of its stakeholders which includes customers (Business Ethics, 1997).  As consumers are responding to ethically concerned businesses, being good can be extremely profitable (Business Ethics, 1997).  Leadership should establish a strategic plan to develop a customer orientation that provides products that satisfy customers= needs through a coordinated effort that allows the company to also achieve its goals.  High integrity businesses that operate for long-term profitability, develop long-term relationships with mutual respect and cooperation with customers.  Through customer relationships, the business continually deepens the customer=s dependence on the company and as the customer=s confidence grows, this in turn increases the firm=s understanding of the requirements to serve the customer.  Successful businesses provide for marketing research and information systems that permit cooperative problem solving with customers as partners. 

Loe (1996) found a correlation between a good organizational ethical climate and market orientation.  This means that all functional areas of business focus on creating and maintaining quality customer relationships.  Leadership from top management creates a value system where employees support and contribute to understanding the demands and concerns of customers.  An ethical climate builds a strong competitive position that has been shown to positively effect business performance and innovativeness (Ferrell, Maignan and Loe 1999). 


Customers are likely to switch to brands associated with companies that have a good ethics reputation, if price and quality were equal.  On the other hand, unethical behavior could trigger disloyalty and a switch to a competitor=s brand.  In some cases, the firm=s employee and distribution infrastructure can be disrupted by ethical problems. Subway Sandwich Shops has had

more problems than any of its competitors and has distinguished itself as a business that must deal with conflict with its franchisees.  Disputes disclosed in an annual report required by the Federal Trade Commission total 160-more than the combined total listed by Subway=s seven largest competitors.  Many franchisees claim Subway has defrauded and damaged them by opening too many new franchises in their neighborhoods.  After the U.S. House Committee on Small Business studied the franchise for six years, staff economist Dean Sagar concluded: ASubway=s is the biggest problem in franchising and emerges as one of the key examples of every abuse you can think of.@ (Behar, 1998)  While the average customer who buys a sandwich may not be aware of the ethical dilemmas in the Subway organization, these issues can influence the quality of the product and customer satisfaction.  Negative publicity about disputes could cause some consumers to avoid Subway.


Employee Commitment

Employees spend much of their waking hours at work.  A commitment to the welfare of employees by the organization results in increased loyalty and support of the company=s objectives from the employees.  A survey by Wilson Learning Corporation found that 80 percent of employees were inactive--@just doing their job but unwilling to expend their energy@ (Kelly 1997).  Employees often do the minimum to get by or have no commitment to the organization because they do not share core values about work, ethics and goals, their performance may suffer.


Organizational ethical climate is important to employees.  A study conducted by the Center for Corporate Community Relations at Boston College that examined Polaroid and Gillette, found that 84 percent of the employees believed a company=s image in the community is important (Business Ethics (a), 1997).  The experience of Starbucks Coffee provides additional support to the idea that fair treatment of employees improves productivity and profitability.  Starbucks offers excellent health benefits and an employee stock ownership plan (termed ABean Stock@) for all of its workers, even though most of them are part-time (Schultz and Yang 1997).  This policy makes the employee benefit at Starbucks much more extensive and expensive than those of competitors.  Employees appear to appreciate Starbuck=s efforts; its annual turnover tate is 55 percent compared to the industry norm of 400 percent while sales and profits have risen 50 percent a year for six consecutive years (Smith 1996).  Starbucks recognizes its commitment to employees in its mission statement which says that Awe should treat each other with respect and dignity.@  It is also worth noting that Starbucks gives its employees one pound of free coffee each week.  The company has made it clear to shareholders that the employees are among the most important assets of the company.

Maignan (1997) found a positive relationship between corporate citizenship (defined as economic, legal, ethical, and discretionary activities) and employee commitment to the firm.  Employee commitment is also linked to improved quality of products, enhanced customer loyalty, and lower costs due to a decrease in employee turnover.  The activities associated with training new employees can decrease an organization=s performance in all areas.  There are countless examples of firms such as Mitsubishi Motors in Normal, Illinois that have permitted sexual harassment, intimidation, and other conduct that allowed employees to be exploited.  These firms have learned that there can be a tremendous negative association between ethical climate and employee commitment.


Financial Performance

Corporate citizenship (defined as economic, legal, ethical, and philanthropic dimensions) has been found to be positively associated with return on investment, return on assets, and sales growth (Maignan 1997).  Verschoor (1998) found a positive relationship between overall financial performance and an emphasis on ethics as an aspect of corporate governance.  This study compared companies with a commitment to ethics with companies that had no such commitment.   It is often assumed that a profitable organization has the resources to be responsible.  Research indicates that businesses with greater resources--regardless of their staff size--have the resources to promote their ethics along with serving their customers, valuing their employees, and establishing trust with the public (Maignan 1997).  These results are consistent with earlier studies that also found a positive relationship between ethical climate as evaluated by experts in both past and future business performance (Graves and Waddock 1997).  Also, firms that are convicted of misconduct experience a significantly lower return on assets and return on sales than unconvicted firms.  The negative effect on return on sales did not appear until the third year following the conviction, according to a study by Baucus and Baucus.  In addition, multiple convictions are more harmful than a single conviction (Baucus and Baucus 1997).


An ethical organizational climate contributes to profits by reducing the cost of business transactions, establishing trust and preserving the social capital necessary for doing business (Bowie 1998).  Many companies are viewing business ethics as a source of increased profits and competitive advantage.  While often it is assumed that there is an inverse relationship between ethics and profits, a more balanced view and evidence supports that ethics enhances the bottom line (Bowie 1998).  Since businesses are a part of many other institutions in society, misconduct creates many costs and inefficiencies for other institutions such as the legal, political, and educational systems.  Pollution and environmental crimes lower the social capital and the quality of life.  Some economists have concluded that business ethics Aserves as an important lubricant of the social system (Arrow 1974).  Society may become productive over time because institutions that promote trust provide necessary incentives for participants in the economic system to attain economic success (North 1990).  The resource advantage theory developed by Hunt (1999) views that laws, traditions, and ethics produce order by structuring social interactions in an economy.  A high integrity infrastructure in society provides the opportunity or resource-advantage for economic growth and a firm=s financial performance (Hunt 1999).


                         Ethical Leadership Develops An Ethical Organizational Climate

An organization must desire to improve their ethical performance before significant progress can occur.  Strategic planning with leadership in developing values and a program to implement a higher level of ethical performance is important to improving a firm=s ethical climate.  Without a formal program that establishes and monitors ethical performance, ethics will depend on varying beliefs about ethics or the situational ethics of different managers. Through leadership, shared core values about the ethical climate can provide a unified effort to be a high integrity organization.


Some leaders assume that by hiring or promoting ethical managers, an organizational ethical climate will occur automatically.  This ignores the fact that an individuals may have limited opportunity to enforce their own personal ethics on management systems and informal decision making that occurs in the organization.  Co-workers and supervisors have the greatest impact on whether an individual makes an ethical or unethical decision in the workplace (Ferrell and Gresham 1985).  Many times individuals within the organization do not know what constitutes specific ethical violations such as consumer fraud or deceptive advertising or copyright violations.  In addition, it has been shown that roughly 10 percent of the population will take advantage of a situation if the opportunity exists and the risk is perceived as low (Thorne LeClair, Ferrell, and Fraedrich 1998).

Some leaders assume that as long as certain behavior is legal, that ethics is not a major concern.  Leaders that want to obtain the benefits of an ethical climate cannot leave the ethical leadership dimension to organizational lawyers who may not have the background to establish and communicate desired ethical behavior.  The organization should also think of ethics as an organizational commitment that establishes behavior that is above the minimum requirements of the law.

Some managers fail to consider the ethical climate of the organization as an important part of strategic planning and operations.  This group often considers ethics as a cost, not a benefit.  In addition, there is often a feeling that concerns about ethics could diminish performance and decrease competitive advantage.  Evidence presented in this article demonstrates that an ethical organizational climate is correlated with many performance variables and has been linked with increased profits.  There is still a Acost oriented@ approach that ethics activities such as training are a cost that is deducted from the bottom line.  Top leaders should understand the benefits of ethics and their responsibility to provide leadership necessary to overcome the cost oriented approach to organizational ethics programs.  Ethics programs should join total quality management programs, sales force, and teamwork training as associated with the bottom line.


Leadership Styles That Influence Organizational Ethics

Leadership styles influence organizational behavior.  Two dominant styles of leadership include transactional and transformational leadership.  Transactional leaders attempt to create employee satisfaction through negotiating for levels of performance, in essence, bartering for the desired behaviors.  Transformational leaders, in contrast, try to raise the level of commitment of employees and create greater trust and motivation (Burns 1978).  Transformational leaders attempt to promote activities and behavior through a shared vision and common learning experiences.  Transformational leadership considers the employees needs and aspirations in conjunction with organizational needs.  Therefore, there is greater relationship commitment when dealing with transformational leaders versus transactional leaders (Sujan, Weitz, and Kumar 1994).  Both transformational and transactional leaders can positively influence the organizational culture, however, transformational leaders will have a stronger influence than transactional leadership on co-worker support and the building of an ethical culture. 


Leaders who successfully innovate and manage the organization through periods of change tend to possess high transformational skills (Howell and Frost 1987).  Commitment levels are raised among employees through a shared vision.  In contrast, Sujan, Weitz, and Kumar (1994) note, Aa transformational leader transmits a sense of mission, arouses new ways of thinking, and consequently stimulates learning experiences.@  The relationship that exists between an employee with an ethics issue and a manager that is transactional results in a path-goal process with the rule, procedure, or code the objective.  Transactional leadership focuses on making sure the required conduct and procedures are implemented.  The barter aspects of negotiation to achieve the desired outcomes result in a dynamic relationship between leaders and employees rooted in situational politics where reaction, conflict, and crisis influence the relationship more than ethical concerns.  Transactional leadership has been shown to affect a series of outcomes such as role clarity, conduct expectations, and relationship commitment (Bass 1985).

Transactional and transformational leaders can have different and positive effects on organizational ethics.  Transactional leaders are postulated to produce employees who achieve the negotiated level of required ethical performance or compliance.  As long as employees and leaders find the exchange mutually rewarding, the compliance relationship is likely to be successful.  However, transactional leadership is best suited for quickly changing ethical behaviors or reacting to ethical problems or issues.  In contrast, transformational leadership builds commitment and respect for values that provide agreement on how to deal with ethical issues.  This value driven approach to an ethical culture still requires training and continuous communication to provide a unified effort and organizational learning through shared experiences.  Transformational ethical leadership is best suited for higher levels of ethical commitment and stakeholder support for an ethical culture.


Implementing Ethics Programs Through Leadership


Pressure for ethical leadership is coming from both federal and state governments that are establishing increased organizational accountability for misconduct.  Prior to the 1991 passage of the guidelines, laws focused on individual accountability for misconduct.  Now, under the Federal Sentencing Guidelines for Organizations (FSGO), however, both the individual as well as the organization are held accountable for violations of federal law.  Top management leadership is, therefore, fundamentally responsible for establishing, maintaining, and revising ethical compliance programs that control and prevent employee misconduct.  Key objectives of the FSGO are to train employees, self-monitor and supervise employee conduct, deter unethical acts, and punish organizational members who engage in illegal acts.  Codes of ethics, employee ethics training, hotlines, compliance directors, newsletters, brochures, and other communication methods are typical components of a FSGO compliance program.  Development of an ethics program acts as a buffer, keeping firms away from the thin line that separates unethical and illegal conduct.  This aspect of program implementation is focused more on transactional leadership.

Ethics training and communication can go beyond strictly legal compliance to communicate the values orientation of the organization.  Effective programs establish an organizational support system for the core values established by top management.  Other components of an ethics program include an ethics task force, full time ethics officer, employee reporting mechanisms (such as hotlines), employee manuals, cd-roms, and codes of ethics, and certificate programs.  Some companies consider the Aethical fit@ of potential future employees as to whether their values fit with the organization.  Ethics programs which are comprehensive and maintain the support of top management have a positive impact on employee attitudes and behaviors.  This aspect of program implementation is focused more on transformational leadership.


If an organization=s value system and policies reward or provide opportunities to engage in misconduct through a lack of organizational leadership and little support for the guidelines, then the organization may incur not only penalties but also the loss of customer trust, public confidence, and other intangible assets.  For this reason, organizational leaders cannot take solely legalistic approach to managing ethics initiatives.  The organization must want to be a good citizen and recognize the importance of ethics in organizational success.  By creating an ethical culture through a leadership style that encourages employees to participate, everyone plays a role in ethical decisions and actions.

Finally, a large number of managers are developing core values about ethics and implementing an effective organizational ethics program.  Top management should recognize the need to develop an ethics program that communicates the values of the organization but also helps protect the company from legal problems.  By establishing a value based program that also meets the FSGO requirements, the commitment to ethics can be viewed as an investment in improving organizational performance and protecting the organization from rogue employees who could destroy the reputation of the firm by creating serious legal problems.  An effective values based ethics commitment should be integrated into all strategic planning and implementation.  Ethical leadership helps the bottom line by improving competitive advantage through improved performance and fewer negative events that damage corporate reputation.



Through research and the experiences of managers, there is growing support that ethical organizational cultures improve bottom line performance.  Ethical cultures and trust have been associated with employee commitment, product quality, customer loyalty, and improved financial performance.  Establishing shared ethical values and developing a formal ethics program can create a social network to establish agreement on norms of conduct, trust in relationships, and a commitment to organizational goals.  An ethical culture increases efficiency in daily decision making and builds strong positive relationships with all stakeholders.


Research to determine the role of leadership and ethics initiatives in corporate governance could provide additional support to the organizational ethics and performance linkage.  Research to determine best practices for effective ethics leadership could help develop a framework for effective leadership styles for a particular industry.  Research to determine what management practices have resulted in excellent ethical cultures would also be helpful to firms interested in best practices.  Organizational ethical leadership should be studied within the context of strategic planning, implementation, and the relationships with various stakeholders.  The study of organizational leaders ethics commitment, including core values, planning systems, rewards, training, and control, could be an important contribution to overall understanding of these relationships.

Based on our assessment and investigation, the role of transactional and transformational leadership should be considered in developing an ethical organizational culture.  It is possible that transactional leadership styles may be most effective for ethical compliance and internal control.  On the other hand, transformational leadership styles may be more important in developing a long term commitment to core values with a cultural approach to ethics.  The impact of these leadership styles on the attitudes and behaviors of employees is another are for future research.

While organizational ethics is still viewed by many managers as just Astaying out of legal trouble@, support has been developed for a proactive approach to organizational ethics.  There is an opportunity for academic research to assist in evaluating the hypothesis that there are positive relationships between organizational performance variables and ethical leadership. If ethical behavior can be even more linked to organizational performance, then there will be even more support for the hypothesis that Agood ethics is good business.@




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