by Liz Sweigart
With stakeholders and shareholders vying for attention, CEOs need to develop a new kind of ethical leadership to build trust in society and deliver results.
Claire was looking forward to the long holiday weekend. After two brutal weeks of late nights and early mornings getting ready for a new product launch, dealing with supplier disruptions in China, and managing a sudden labor shortage in Germany, the Fortune 500 CEO was ready to catch her breath and spend some quality time with her family. The plan was to leave first thing Saturday morning to beat the traffic headed to the shore. Instead of the alarm, though, Claire awoke to her cellphone buzzing. It was her company’s general counsel. The night before, one of the company’s top executives had been recorded drunkenly berating a waiter in racist and homophobic terms. Posted to TikTok within minutes, the video had already amassed more than 2.5 million views and was spreading like wildfire across Twitter and Facebook. Social media commentators were demanding action, institutional investors were calling, and requests for comment were flooding in from major news outlets. “Claire, how do you want to handle this?” asked the lawyer on the other end of the line.
Although it sounds like a nightmare, this scenario, a composite of actual events, has become all too real for many CEOs.
In the past, few executives might have considered addressing social issues as part of their job description. Now, in an era when a single tweet can obliterate US$4 billion of a company’s value, it’s become even more important for leaders to understand how to negotiate this sensitive territory: in fact, it’s a business imperative. Executives need to know how to make sense of and engage with these issues so they can simultaneously deliver business results that satisfy shareholders, build trust with their employees, and meet the expectation many have that organizations are responsible for driving more equitable outcomes for society.
And the issues on the table are expanding rapidly. We saw this when North Carolina passed a bill in 2016 banning transgender people from using bathrooms in public buildings that did not correspond with their birth sex. Payments firm PayPal responded by curtailing its investments in the state, and performers canceled concerts and events. Amy Cooper, an employee of financial-services firm Franklin Templeton, was summarily dismissed by the company in 2020 after social media channels exploded with outrage over a viral video of her racially charged altercation with a Black bird-watcher in New York’s Central Park. More recently, when state legislatures proposed laws to restrict voting rights in Georgia, locally headquartered companies Delta Air Lines and Coca-Cola eventually came out against the move, following heated public debates. Underlying these demands is the notion that businesses have certain moral and ethical obligations to the public.
Increasingly, ordinary people, customers, employees, suppliers, and even social media influencers expect leaders to speak out and act ethically, and immediately, when it comes to issues of justice and equity in their organizations—and in society at large. These emerging leadership challenges cannot be delegated or outsourced if companies are to build and retain stakeholder trust. And they most certainly weren’t on the radar when most of today’s executives were in business school or working their way up the corporate ladder. No, these new challenges require a fundamental shift in how business leaders understand and practice ethical leadership.
The present conceptualization of ethical leadership considers leaders as moral individuals within their organization (and increasingly in society). But it does not address how to bridge the gap between internal and external stakeholders’ expectations. The negotiation of this complex set of relationships requires the integration of what might appear to be competing codes and values: the fiduciary responsibility to maximize investment returns versus the moral obligation to fulfill the organization’s stated purpose and contribute positively to the external world. It’s a difficult balancing act. For example, retrofitting manufacturing plants to cut carbon emissions in support of environmental sustainability goals may be the right thing to do. But it can cost a company hundreds of millions of dollars in upgrades and lost productivity, negatively affect quarterly earnings, erode the balance sheet, and depress share price.
CEOs, rather than being heroes or charismatic leaders, have to become moral integrators: people who recognize this tension and have the self-awareness to use collaboration and listening skills to navigate a world in which accountability is defined in different ways by different audiences.
Defining ethical leadership
Morals are an individual’s standards for right behavior. Ethics are the codification of individuals’ morals that inform the decisions they make and the actions they take. For instance, a person who believes institutionally raising animals for food is morally wrong may choose to adopt an ethic of veganism.
CEOs, rather than being heroes or charismatic leaders, have to become moral integrators: people who have the self-awareness to navigate a world in which accountability is defined in different ways.
So, what is ethical leadership, and where does moral integration fit in? Ethical leadership came into its own starting in the early 2000s, largely in response to corporate scandals such as that at Enron, the high-profile energy company that collapsed owing to fraud. Historically, the academic literature has defined ethical leaders as both “moral persons,” meaning that they themselves act in a moral fashion, and “moral managers,” meaning that they foster an environment that inspires or compels others to behave morally.
This definition has since been enhanced by introducing the dimension of moral entrepreneurship, whereby leaders innovate new norms of behavior that contribute to society’s moral development and build stakeholder trust. Consider the CEO of Seattle-based Gravity Payments, Dan Price, who in 2015 instituted a $70,000 minimum salary among his employees, or the menstrual hygiene company that includes people of diverse gender expressions in its advertising rather than only cisgender (people whose sense of identity corresponds with their birth sex) women.
The operational and financial benefits of ethical leadership are significant and demonstrable. Studies show that ethical leadership improves the bottom line and produces returns. It directly combats corporate wrongdoing, such as financial fraud. There’s a link between ethical leaders and positive employee performance. When employees trust their leaders to act ethically, they are more willing to speak up when they see something wrong. The employees of ethical leaders tend to be more satisfied with their jobs and more willing to go the extra mile. In social psychology, that’s called organizational citizen behavior (OCB). OCB describes discretionary actions on the part of employees that are outside the formal performance management and compensation systems and beneficial (or intended to be beneficial) to the organization. For instance, OCB is demonstrated by that salaried employee who stays late and works over the weekend to help others meet a pressing deadline, or the one who volunteers to organize office-wide social events and brings homemade treats for team members’ birthdays. Ethical leaders increase OCB, and studies have demonstrated that OCB is a contributing factor to enhanced firm performance.
Two case studies
As part of my doctoral studies, I analyzed how organizations applied ethical leadership in response to publicized incidents of anti-Black racism involving their employees. The goal was to test the idea for the role of moral integrator. I focused on two cases that took place in the United States in the last three years within publicly traded companies. The cases followed the same basic pattern: a casual observer’s smartphone video of an employee demonstrating racist behavior went viral; social media users quickly identified the employee’s company and flooded its social media accounts with demands for an organizational response.
In one case, the event occurred in the workplace; in the other, it transpired outside the office, but the location did not appear to make a difference in how the public reacted. In both cases, the companies responded to the outcry with a mix of statements on social media, press releases, and traditional news interviews with corporate executives detailing the steps the company was taking to address the situation.
The employee in one of the cases was terminated as soon as the video went viral. In a video interview with a business news outlet, the company’s CEO discussed the decision to immediately fire the employee in terms of aligning management’s actions with the organization’s stated values, claiming “zero tolerance for any kind of racism.” Journalists questioned the CEO’s portrayal of the company’s ethos, noting that former executives and current board members had financially supported political candidates with ties to white nationalism and that the company’s track record of hiring and promoting underrepresented groups was abysmal.
In an open letter on the company’s website, the CEO repeated the importance of diversity and inclusion (D&I) to her personally and to the company, noting that D&I directly contributed to delivering superior service to clients and returns for investors. However, none of the company’s public quarterly or annual reports bore any mention of D&I. The topic was also absent from the two earnings calls following the event. Neither the company’s leaders nor the analysts raised it.
The response in this first case exemplified a lack of moral integration by the organization’s leaders. Although the CEO made the expected remarks in the media about the incident and about the company’s values, and the company acted quickly to discipline the employee, when it came to communicating with investors and proactively taking a stand on the issue of racism, the executives were silent. The message conveyed was that the company outwardly presented an image of caring about D&I but inwardly considered it irrelevant to investors. In other words, talk of anti-racism was a show for the public rather than a topic for the boardroom. The company’s response did not move the dial or signal that this was a watershed moment. To a degree, it came from a standard tool kit. Firing an employee for behavior that violates a company’s code of conduct is an established human resources practice.
Public reaction to the company’s handling of this incident was mixed. Members of the business press heaped praise on the CEO for being so passionate about D&I. Social media commentators lamented the lack of tangible outcomes, noting that firing a single employee and returning to business as usual did not address systemic issues. Ultimately, the incident and the company’s response did not appear to hurt earnings or share price. The executives lived up to their fiduciary responsibility to investors but not to the expectations of some stakeholders.
In the second case I examined, the executives approached their response differently. The employee was not terminated as a result of the incident. Rather than focusing on the employee, the CEO and other leaders concentrated on the broader issue of racism in business and society. They framed the event as management’s failure to properly train and educate employees about unconscious racial bias. “This is on me and my team,” said the CEO. Some cable news journalists questioned whether this response from the company would make it a target for activists looking to create trouble for prominent brands. One interviewer seemed to imply that the problem was the recording and sharing of the event rather than the incident itself. The executives dismissed this notion. Instead, they acknowledged that they could not eradicate racism because it was a systemic issue in society—but they could address it within their company. And they transparently put forth a plan to start driving change there. Moreover, they made their training curriculum freely available online for other organizations to use.
The incident and the cost the company incurred in responding to it were proactively discussed by the executives on the two earnings calls following the event and mentioned in the quarterly and annual reports. Most importantly, these executives were humble. They met with the individuals who were harmed in the incident and apologized. They also listened to concerns from community groups and publicly shared what they learned. The company’s earnings and stock price rose following the incident, and the company earned praise from stakeholders across the board.
Source: strategy+business