Ethical Decision Making and Ethical Leadership

To improve ethical decision making in business, one must first understand how individuals make ethical decisions in an organizational environment. Too often it is assumed that individuals in organizations make ethical decisions in the same way that they make ethical decisions at home, in their family, or in their personal lives. Within the context of an organizational work group, however, few individuals have the freedom to decide ethical issues independent of organizational pressures.


The first step in ethical decision making is to recognize that an ethical issue requires an individual or work group to choose among several actions that various stakeholders inside or outside the firm will ultimately evaluate as right or wrong.

Ethical issue intensity, then, can be defined as the relevance or importance of an ethical issue in the eyes of the individual, work group, and/or organization. it is personal and temporal in character to accommodate values, beliefs, needs, perceptions, the special characteristics of the situation, and the personal pressure prevailing at a particular place and time.

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Ethical – issue intensity reflects the ethical sensitivity of the individual or work group that faces the ethical decision – making process. Research suggest that individuals are subject to six “spheres of influence” when confronted with ethical choices – the workplace, family, religion, legal system, community, and profession – and that the level of importance of each of these influences wiil vary depending on how important the decision maker perceives the issue to be. Additionally, the individuals sense of the situation’s moral intensity increase the individuals perceptiveness regarding ethical problems, which in turn reduces his or her intention to unethically.

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Moral intensity relates to a persons perception of social pressure and the harm the decision will have on others. The perception of ethical issue intensity can be influenced by managements use of reward and punishments, corporate policies, and corporate values to sensitize employees. In the words, managers can affect the degree to which employees perceive the importance of an ethical issue through positive and/or negative incentives.


When people need to resolve ethical issues in their daily lives, they often base their decisions on their own values and principles of right or wrong. The generally learn these values and principles through the socialization process with family members, social groups, and religion and in their formal education. Research regarding individual factors that affect ethical awareness, judgment, intent, and behavior include gender, education, work experience, nationality, age, and locus of control.

Education, the number of years spent in pursuit of academic knowledge, is also a significant factor in the ethical decision-making process. The important thing to remember about education is that it does not reflect experience. Work experiences is defined as the number of years within a specific job, occupation, and/or industry. Generally, the more education or work experiences that one has, the better he/she is at ethical decision making.

Nationality is the legal relationship between a person and the country in which he/she is born. Age is another individuals factors that has been researched within business ethics. In other words, the older you are, the more ethical you are. However, recent research suggest that there is probably a more complex relationship between ethics and age.

Locus of control relates to individual differences in relation to a generalized beliefs about how one is affected by internal versus external events or reinforcements. In other word, the concept relates to where people view themselves in relation to power. Those who believe in external control see themselves as going with the flow because that’s all they can do. They believed that the events in their lives are do to uncontrollable forces. They consider what they want to achieve depends on luck, chance, and powerful people in their company. Conversely, those who believe in internal control believe that they control the events in their lives by their own effort and skill, viewing themselves as masters of their destinies and trusting in their capacity to influence their environment.


Although people can and do make individual ethical choices in business situations, no one operates in a vacuum. Indeed, research has established that in the workplace the organizations values often have greater influence on decisions than a persons own values. Ethical choices in business are most often made jointly, in work groups and committees, or in conversations and discussions with coworkers. The outcome of this learning process depend on the strength of each person personal values, the opportunities he or she has to behave unethically, and the exposure he or she has to others two behave ethically or unethically.

A corporate culture can be defined as a set of values, beliefs, goals, norms and ways of solving problems that members of an organization share. An important component of corporate, or organizational, culture is the company’s ethical culture. Whereas corporate culture involves values and rules that prescribe a wide range of behavior for organizational members, the ethical culture reflects whether the firm also has an ethical conscience.

Ethical is a function of many factors, including corporate policies on ethics, top managements leadership on ethical issues, the influence of coworkers, and the opportunity for unethical behavior.

Obedience to authority is another aspect of the influence that significant others can exercise. Obedience to authority helps to explain why many employees resolve business ethics issues by simply following the directives as superior.


Opportunity describes the conditions in an organization that limit or permit ethical or unethical behavior. Opportunity results from conditions that either provide rewards, whether internal or external, or fail to erect barriers against unethical behavior. Example of internal rewards include feelings of goodness and personal worth generated by performing altruistic acts. External reward refer to what an individual expects to receive from others in the social environment. Rewards are external to the individual to the degree that they bring social approval, status, and esteem.

An example of a condition that fails to erect barriers against unethical behavior is a company policy that does not punish employees who accept large gifts from clients. Opportunity relates to individuals immediate job context – where they work, whom they work with, and the nature of the work.

Opportunity also comes from knowledge. Major misconduct observed among employees in the workplace include lying to employees, customers, vendors, or the public or with holding needed information from them. The opportunity for unethical behavior cannot be eliminated without aggressive enforcement of codes and rules.


Ethical dilemmas involve problem-solving situations in which decision rules are often vague or in conflict. The results of an ethical decision are often uncertain, no one can always tell us whether we have made the right decision.

An individuals intentions and the final decision regarding what action he or she will take are the last steps in the ethical decision-making process. When the individual intention and behavior are inconsistent with his or her ethical judgment, the person may feel guilty.

Guilt or uneasiness is the first sign that an unethical decision has occurred. The next step is changing one’s behavior to reduce such feelings. This change can reflect a persons values shifting to fit the decision or the person changing his or her decision type the next time a similar situations occurs. For those who begin the value shift, the following are the usual justifications that will reduce and finally eliminate guilt: 1.I need the paycheck and cant afford to quit right now.

2.Those around me are doing it so why shouldn’t I? they believe it’s okay 3.If I hadn’t have done this, I may not be able to get a good reference from my boss or company when I leave. 4.This is not such a big deal, given the potential benefits 5.Business is business with a different set of rules

6.If not me, someone else would do it and get reward

The road to success depends on how the business person defines success. The success concepts drives intentions and behavior in business either implicitly or explicitly. USING THE ETHICAL DECISION-MAKING FRAMWORK TO IMPROVE ETHICAL DECISIONS It bears repeating that it is impossible to tell you what is right or wrong; instead, we are attempting to prepare you make in framed ethical decisions. Although this chapter does not moralize by telling you what to do in a specific situation, it does provide an overview of typical decision-making processes and factor that influence ethical decisions.

The framework is not a guide for how to make decisions but is intended to provide you with insights and knowledge about typical ethical decision making processes in business organizations. Because it is impossible to agree on normative judgments about what is ethical, business ethics scholars developing descriptive models have instead focused on regularities in decision making and the various phenomena that interact in a dynamic environment to produce predictable behavioral patterns.


Leadership the ability on authority to guide and direct others toward achievement of a goal, has significant impact on ethical decision making because leader have the power to motive others and enforce the organization’s rules policies as well as their own viewpoints.


Leadership styles influence many aspects of organizational behavior, including employees’ acceptance of and adherence to organizational norms and values. Styles that focus on building strong organizational values among employees contribute to shared standards of conduct. The ethical leadership concept is not only for CEOs, boards of directors, and managers but can also be fellow employees. Ethical leadership by the CEO requires an understanding of the firm’s vision and values, as well as the challenges of responsibility and the risk in achieving organizational objectives. Six leadership styles that are based on emotional intelligence—the ability to manage ourselves and our relationships effectively—have been identified by Daniel Goleman.

1.The coercive leader demands instantaneous obedience and focuses on achievement, initiative, and self-control. Although this style can be very effective during times of crisis or during a turnaround, it otherwise creates a negative climate for organizational performance. 2.The authoritative leader—considered to be one of the most effective styles—inspires employees to follow a vision, facilitates change, and creates a strongly positive performance climate. 3.The affiliative leader values people, their emotions, and their needs and relies on friendship and trust to promote flexibility, innovation, and risk taking.

4.The democratic leader relies on participation and teamwork to reach collaborative decisions. This style focuses on communication and creates a positive climate for achieving results. 5.The pacesetting leader can create a negative climate because of the high standards that he or she sets. This style works best for attaining quick results from highly motivated individuals who value achievement and take the initiative. 6.The coaching leader builds a positive climate by developing skills to foster long-term success, delegating responsibility, and skillfully issuing challenging assignments.

Transactional leaders attempt to create employee satisfaction through negotiating, or “bartering,” for desired behaviors or levels of performance. Transformational leaders strive to raise employees’ level of commitment and to foster trust and motivation.


In particular, we believe that ethical leadership is based on holistic thinking that embraces the complex and challenging issues that companies face on a daily basis. Ethical leaders need both knowledge and experience to make the right decision. Strong ethical leaders have both the courage and the most complete information to make decisions that will be the best in the long run. Strong ethical leaders must stick to their principles and, if necessary, be ready to leave the organization if its corporate governance system is so flawed that it is impossible to make the right choice.

Ethical Leaders Have Strong Personal Character

There is general agreement that ethical leadership is highly unlikely without a strong personal character. The question is how to teach or develop a moral person in a corporate environment. White, a leading authority on character development, believes the focus should be on “ethical reasoning” rather than on being a “moral person.”

Ethical Leaders Have a Passion to Do Right

The passion to do right is “the glue that holds ethical concepts together.” Some leaders develop this trait early in life, whereas others develop it over time through experience, reason, or spiritual growth. They often cite familiar arguments for doing right—to keep. society from disintegrating, to alleviate human suffering, to advance human prosperity, toresolve conflicts of interest fairly and logically, to praise the good and punish the guilty, or just because something “is the right thing to do.”

Ethical Leaders Are Proactive

Ethical leaders do not hang around waiting for ethical problems to arise. They anticipate, plan, and act proactively to avoid potential ethical crises.44 One way to be proactive is to take a leadership role in developing effective programs that provide employees with guidance and support for making more ethical choices even in the face of considerable pressure to do otherwise.

Ethical Leaders Consider Stakeholders’ Interests

Ethical leaders consider the interests of and implications for all stakeholders, not just those that have an economic impact on the firm. This requires acknowledging and monitoring the concerns of all legitimate stakeholders, actively communicating and cooperating with them, employing processes that are respectful of them, recognizing interdependencies among them, avoiding activities that would harm their human rights, and recognizing the potential conflicts between leaders’ “own role as corporate stakeholders and their legal and moral responsibilities for the interests of other stakeholders.

Ethical Leaders Are Role Models for the Organization’s Values If leaders do not actively serve as role models for the organization’s core values, then those values become nothing more than lip service. According to behavioral scientist Brent Smith, as role models, leaders are the primary influence on individual ethical behavior. Leaders whose decisions and actions are contrary to the firm’s values send a signal that the firm’s values are trivial or irrelevant. Firms such as Countrywide Financial articulated core values that were only used as window dressing. On the other hand, when leaders model the firm’s core values at every turn, the results can be powerful

Ethical Leaders Are Transparent and Actively Involved in Organizational Decision Making Being transparent fosters openness, freedom to express ideas, and the ability to question conduct, and it encourages stakeholders to learn about and comment on what a firm is doing. Transparent leaders will not be effective unless they are personally involved in the key decisions that have ethical ramifications. Transformational leaders are collaborative, which opens the door for transparency through interpersonal exchange. Earlier we said that transformational leaders instill commitment and respect for values that provide guidance on how to deal with ethical issues.

Ethical Leaders Are Competent Managers Who Take a Holistic View of the Firm’s Ethical Culture Ethical leaders can see a holistic view of their organization and therefore view ethics as a strategic component of decision making, much like marketing, information systems, production, and so on. Although his company is called Waste Management, CEO David P. Steiner is as committed to renewable energy as just about anyone working for a multibillion dollar business. Steiner was selected as one of the 100 Most Influential People in Business Ethics by the Ethisphere Institute in 2007, and his company, Waste Management, was chosen as one of the World’s Most Ethical Companies in 2008.

Case study : Tyco International: Leadership Crisis


On September 12, 2002, national television showcased Tyco International’s former chief executive officer (CEO) L. Dennis Kozlowski and former chief financial officer (CFO) Mark H. Swartz in handcuffs after being arrested and charged with misappropriating more than $170 million from the company. They were also accused of stealing more than $430 million through fraudulent sales of Tyco stock and concealing the information from shareholders. The two executives were charged with more than thirty counts of misconduct, including grand larceny, enterprise corruption, and falsifying business records. Another executive, former general counsel Mark A. Belnick, was charged with concealing $14 million in personal loans. Months after the initial arrests, charges and lawsuits were still being filed—making the Tyco scandal one of the most notorious of the early 2000s.


Founded in 1960 by Arthur J. Rosenberg, Tyco began as an investment and holding company focused on solid-state science and energy conversion. It developed the first laser with a sustained beam for use in medical procedures. Rosenberg later shifted his focus to the commercial sector. In 1964, Tyco became a publicly traded company. It also began a series of rapid acquisitions—sixteen companies by 1968. The expansion continued through 1982, as the company sought to fill gaps in its development and distribution networks. Between 1973 and 1982, the firm grew from $34 million to $500 million in consolidated sales.


In 1975, armed with a degree in accounting, Dennis Kozlowski went to work for Tyco, following brief stints at SCM Corporation and Nashua Corporation. He soon found a friend and mentor in then CEO Joseph Gaziano. Kozlowski was impressed by Gaziano’s lavish lifestyle—company jets, extravagant vacations, company cars, and country club memberships. However, Gaziano’s reign ended abruptly in 1982 when he died of cancer. Gaziano was replaced by John F. Fort III, who differed sharply in management style. Where Gaziano had been extravagant, Fort was analytical and thrifty. His goal was to increase profits for shareholders and cut the extravagant spending characterizing Gaziano’s tenure, and Wall Street responded positively to Tyco’s new direction. Kozlowski, who had thrived under Gaziano, was forced to adapt to the abrupt change in leadership.

Adept at crunching numbers, Kozlowski focused on helping to achieve Fort’s vision of putting shareholders first. Kozlowski’s largest acquisition was Wormald International, a $360 million global fire-protection concern. Integrating Wormald proved problematic, and Fort was reportedly unhappy with such a large purchase. Fort and Kozlowski also disagreed over rapid changes made to Grinnell. Kozlowski responded by lobbying to convince Tyco’s board of directors that problems with Wormald were a “bump in the road” and that the firm should continue its strategy of acquiring profitable companies that met guidelines.


After Fort’s departure, Dennis Kozlowski, then 46, found himself helming Tyco International. With a new lifestyle—parties and multiple homes in Boca Raton, Nantucket, Beaver Creek, and New York City—and an aggressive management style, he appeared to be following in the footsteps of his mentor, former CEO Joseph Gaziano. Kozlowski knew Tyco from the bottom up, and stated that he was determined to make it the greatest company of the next century. Among other things, he recognized that one of Tyco’s major shortcomings was its reliance on cyclical industries, which tend to be very sensitive to economic ups and downs. In 1997, Kozlowski acquired ADT Security Services, a British-owned company located in Bermuda. By structuring the deal as a “reverse takeover,” wherein a public company is acquired by a private company so as to avoid the lengthy process of going public, Tyco acquired a global presence as well as ADT’s Bermuda registration.

The majority of members had served for ten years or more, and they were familiar with Kozlowski’s management style. As directors, they were responsible for protecting Tyco’s shareholders through disclosure of questionable situations or issues that might seem unethical or inappropriate. Despite this, after the arrests of Kozlowski and Swartz, investigations uncovered the following troubling relationships among the board’s members: 1.Richard Bodman invested $5 million for Kozlowski in a private stock fund managed by Bodman. 2.Frank E. Walsh, Jr. received $20 million for helping to arrange the acquisition of CIT Group without the other board members’ knowledge. 3.Walsh also held controlling interest in two firms that received more than $3.5 million for leasing an aircraft and providing pilot services to Tyco between 1996 and 2002.

4.Stephen Foss received $751,101 for supplying a Cessna Citation aircraft and pilot services. 5.Lord Michael Ashcroft used $2.5 million in Tyco funds to purchase a home. Meanwhile, Jeanne Terrile, an analyst from Merrill Lynch who worked for Tyco, was not impressed with Kozlowski’s activities and Tyco’s performance. Her job at Merrill Lynch was to make recommendations to investors on whether to buy, hold, or sell specific stocks. After Terrile wrote a negative review of Tyco’s rapid acquisitions and mergers and refused to upgrade Merrill’s position on Tyco’s stock, Kozlowski met with David Komansky, the CEO of Merrill Lynch.


In early 2002, Kozlowski announced Tyco’s split of its four divisions into independent, publicly traded companies: Security and Electronics, Healthcare, Fire Protection and Flow Control, and Financial Services. Kozlowski stated, “I am extremely proud of Tyco’s performance. We have built a 5 great portfolio of businesses and over the five years ended September 30, 2001, we have delivered earnings per share growth at a compounded annual rate of over 40 percent and industry-leading operating profit margins in each of our businesses. During this same period, we have increased annual free cash flow from $240 million in 1996 to $4.8 billion in fiscal 2001.

Nonetheless, even with this performance, Tyco is trading at a 2002 P/E multiple of 12.0x, a discount of almost 50 percent to the S&P 500.” Also in 2002, the New York State Bank Department observed large sums of money moving in and out of Tyco’s accounts. What made this unusual was that the funds were being transferred into Kozlowski’s personal accounts.

Authorities discovered that Kozlowski had sought to avoid around $1 million in New York state import taxes. In September of that year, Dennis Kozlowski and Mark Swartz, who also had resigned, were indicted on thirty-eight felony counts for allegedly stealing $170 million from Tyco and fraudulently selling an additional $430 million in stock options. Among other allegations, Kozlowski was accused of taking $242 million from a program intended to help Tyco employees buy company stock.


After Kozlowski’s resignation, Edward Breen replaced him as CEO. The company filed suit against Dennis Kozlowski and Mark Swartz for more than $100 million. The SEC allows companies to sue insiders who profited by buying and selling company stock within a six-month period. Tyco stated, “To hold him accountable for his misconduct, we seek not only full payment for the funds he misappropriated but also punitive damages for the serious harm he did to Tyco and its shareholders.”

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Ethical Decision Making and Ethical Leadership. (2016, Sep 28). Retrieved from

Ethical Decision Making and Ethical Leadership

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