In case you’re not yet convinced of the importance of ethical leadership, here’s a thought experiment. Does the name “Enron” mean anything to you?
The Enron scandal happened way back in 2001, and yet the company is still a household name for all the wrong reasons. The lack of ethical leadership displayed in the build-up to the company’s collapse has been dissected in countless books, movies, documentaries, newspaper articles, and even theatre.
In business, your reputation is everything, and when you do the wrong thing, people will remember it for a long time. Even when ethical lapses don’t lead to such a spectacular collapse, they still affect a company’s reputation. News stories from the BBC News show that Facebook’s image was tarnished by the Cambridge Analytica scandal in 2018, and Volkswagen is still trying to live down its emissions scandal from 2015.
But ethical leadership isn't just about trying to avoid a scandal. As you’ll see in this article, there are positive reasons to be an ethical leader too. If you model the right behaviour, you can inspire your employees to achieve more while acting responsibly.
So read on to learn what ethical leadership is, what the benefits are, and how to create and sustain an ethical culture in your business. You’ll also see some examples of ethical leadership in action. Whether you want to run your own business or be a successful manager in someone else’s, you’ll learn why an ethical approach is so important and how to put it into practice.
1. What Is Ethical Leadership?
Let’s start by getting clear on our definitions. Oxford Dictionaries defines “ethics” as:
“Moral principles that govern a person's behaviour or the conducting of an activity.”
So ethical leadership means acting according to your moral principles in your day-to-day business life and decision-making. To put it simply, it means doing the right thing.
The complexity, of course, comes about because many moral principles aren't universally held. We can all agree, I think, that it’s morally wrong to kill and steal and suchlike, but on other issues, such as the ethics of animal testing, opinions differ based on religion, culture, and personal beliefs.
On top of that, sometimes one moral principle comes into conflict with another. You may prize freedom of speech, for example, but what if one of your employees uses that freedom to abuse another?
So ethical leadership means staying true to your moral principles, while also being aware of the complexity of some ethical issues and being sensitive to the differing views of your employees and managing the conflicts that may arise.
Unfortunately, ethics and leadership don’t always go together. According to a 2021 study by Principia, although 97% of leaders said they wanted to ensure their company did the right thing, there were shortfalls in what actually happened:
- Only 73% of respondents had fully implemented a code of conduct.
- Just 49% said their organization values people who challenge superiors when necessary.
- Just 47% said that people in their organization madke the right decisions in ethical grey areas.
So there’s a long way to go. In the rest of this tutorial, you’ll see how to meet the challenges of ethics and leadership in your business.
2. The Benefits of Ethical Leadership
As we saw in the introduction, ethical lapses can have profound consequences, from loss of reputation to the collapse of the entire company. Even if you’re not operating on the scale of Enron, your business is still subject to this risk.
When the post mortems were conducted on various corporate scandals over the years, it usually became clear that the mistakes could've been avoided if strong ethical leadership had been in place and managers had questioned or prevented the wrongdoing before it escalated.
But it’s not all negative. Studies have found practical, positive benefits too. For example, one study published in ScienceDirect showed that ethical leadership made employees less likely to leave. Given the high cost of employee turnover, this is a significant benefit.
As we’ll see in the next section, ethical leadership is about creating a culture in which people do the right thing. So there are many benefits that flow from that, from small things like employees being less likely to steal the stationery to much larger things like treating customers in the right way and making decisions for the long-term benefit of a wide variety of stakeholders instead of for short-term personal gain.
Ethical leadership also has subsets too, such as environmental ethics. You can read more about that and why it’s important in this tutorial:
3. How to Create an Ethical Culture
So how do you behave in an ethical way as a leader and create a culture in which ethical considerations are respected? Here are some steps to follow:
Define Your Personal and Organisational Values
As we discussed in section 1, ethical behaviour doesn’t mean the same thing to everyone. So the first thing to do is to define what it means to you. What are your core values? If you’re not sure, you can find out more about the process of defining them in this tutorial:
Then, if you run your own business, move on to define your business’s values, which you can learn about in Julia Melymbrose’s tutorial:
If you work for someone else, your company will probably already have a values statement (if it doesn’t, push for it to create one!). So you just need to get clear on how your own values and beliefs intersect with those of the company.
Conduct an Ethics Audit
Now, you need to see the current state of your organisation. Examine how you are complying with your stated values right now. Ask yourself what are some areas in which you could improve. Read this useful guide from the National Council of Nonprofits for more details on how to conduct an ethics audit. (This resource is aimed at nonprofits, but most of the steps are appropriate for businesses too).
Develop a Code of Conduct
A values statement is a good start, but you also need to get specific. What kinds of behaviour are acceptable or unacceptable? What do you expect from yourself and your employees? It’s impossible to cover every eventuality, but you can provide guidelines on how to handle common ethical dilemmas such as conflicts of interest. You can read Google's code of conduct to get an idea of what to include.
Model the Right Behaviour
This one is quite self-explanatory, but I mention it up front because you can’t preach ethics and leadership, then practise something else yourself. Don’t ever ask someone to do something that goes against the company's values. Lead by example.
Train Your Staff
It’s sad to say, but ethical leadership may be new for your employees. In many companies, it’s all about the fabled “bottom line,” and people are encouraged to cut corners and bend rules in pursuit of greater profit. Organise training for your staff on ethical decision-making, so that they're clear about what you expect from them and so that they've got time to think through and discuss the issues involved.
Talk About It All the Time
But while training is important, you need to go much further. You need to communicate the importance of ethical behaviour in every speech you give or report you send out. Don’t let it be a “one and done” situation, where people attend the training and then never hear about it again. To be an ethical leader and create a truly ethical business culture, you need to keep reinforcing your message.
Distinguish Between Ethics and Rules
To some people, ethical behaviour means complying with the law or with rules laid down by the industry regulator (often in response to one of those scandals we were talking about!). You need to understand—and to make it clear to your employees—that ethical behaviour is a different thing. There may be times when you could make a lot of money while following all the laws and regulations, but it would be unethical because it conflicts with your personal or company values. Encourage employees to view ethics in terms of values, not compliance.
Embed Ethics and Leadership in Your Goals and Performance Evaluations
If you want to behave in a certain way and encourage others to do the same, you need to set goals and measure progress. Include ethical considerations in your personal goals and those of your company and employees, and make them part of the performance evaluations at the end of the year. Make it clear that, while profit is important, it’s not more important than ethical integrity.
Hire the Right People
Of course, you want to hire the right people anyway—but when you've got an ethical leadership approach, your definition of the “right people” may change. As well as finding people with the right skills and experience, you’ll also want to find people who display the right ethical approach to their work. So mention ethical behaviour in your job descriptions, ask about it in interviews, and bring it up when you’re checking references.
Good leaders don’t just lay down the law—they involve people in the decision-making process and welcome feedback. This is particularly important in the field of ethics, where people may have different belief systems and the values you’ve come up with may not work for everybody or may meet with different interpretations. Open discussion is important, so encourage employees to share their experiences and thoughts with you and make modifications as necessary.
Hold Yourself and Others Accountable
Ethical leadership is about more than just fine talk. There will be situations in which your employees make mistakes and you need to hold them accountable for that. Similarly, you can’t excuse yourself or other senior managers from this process. In fact, you should hold yourself to even higher standards. And on the flip side, of course, you should also celebrate the positive moments and publicly reward people who do the right thing.
4. Ethical Leadership Examples
So what does ethical leadership look like in practice? Here are a few examples:
Rose Marcario, Patagonia
Outdoor clothing company Patagonia had a strong ethical core thanks to its founder, Yvon Chouinard. For many years, it has donated at least 1% of sales or 10% of profit—whichever is more—to environmental groups.
After Rose Marcario joined the company as CFO in 2008 and became CEO in 2014, she took that to a new level—while achieving financial success too. She fought to defend public lands and created Patagonia Action Works to help its customers become involved in environmental and social activism. She encouraged customers to exchange and repair their clothes rather than always buying new ones.
According to a Fast Company article, Marcario is scornful of the business community’s “suicidal” addiction to quarterly earnings and encourages her employees to work on a “30-year framework.” In 2016, employees suggested donating all of the company’s Black Friday sales to grassroots environmental organizations, and “Marcario green-lighted the plan within 30 minutes via text message.” Although Marcario stepped down in 2020, she had a strong impact on Patagonia and the wider business community.
Collis Ta’eed, Envato
Envato, the company that runs this site, has a pretty clear set of core values established by Collis Ta’eed and his cofounders in the early days of the startup.
- When the Community Succeeds, We Succeed
- Focus on Results
- Tell It Like It Is
- Fair Go
- Not Just the Bottom Line
- Diverse and Inclusive
- The Right People, The Right Environment
But, of course, a values statement on its own isn't enough—you've got to put it into practice. To take a couple of examples, for the values “When the Community Succeeds, We Succeed” and “Not Just the Bottom Line,” the company has focused from the start on achieving long-term success by building a community and putting the interests of that community first.
As a marketplace for digital products, Envato pays out a higher share of revenue to those who create those products than its competitors do. Since its launch 12 years ago, it has paid out more than $1 billion to its creative community and enabled 1,500 authors to make a full-time living from selling items on Envato Market.
The company is also working to give people a “Fair Go” and create a “Diverse and Inclusive” workplace by, among other things, providing mentoring and wellness programs, offering flexible work and 18 weeks of paid parental leave, and creating a developer apprenticeship program to increase the diversity of its workforce. It has been named one of Australia’s best places to work for six years straight.
Tim Cook, Apple
We all know Apple isn’t perfect. The company has made headlines over the years for its use of low-wage Chinese labour and for keeping much of its money overseas, out of reach of the U.S. tax authorities.
But, in other areas, Apple CEO Tim Cook has displayed ethical leadership. As The New York Times reported, he is one of the few corporate CEOs to talk about moral responsibility:
“I think we have a moral responsibility to help grow the economy, to help grow jobs, to contribute to this country and to contribute to the other countries that we do business in. I think there’s still probably a more significant group that feels my sole responsibility is to Wall Street.”
It’s not just talk either. Under Cook’s leadership, Apple has switched to 100% renewable energy for all of its corporate facilities in the U.S. and in 23 other countries. He’s been working to increase diversity in tech and to provide educational materials to community colleges to help more people become coders.
You can learn more about Apple’s ethical policies on its supplier responsibility page. Or watch Tim Cook talking about ethical leadership in this Duke University interview:
As we discussed earlier, ethical leadership is complicated. You'll always have critics, and if you try to be ethical you'll face charges of hypocrisy, but the important thing is to do what you can, recognising that perfection is unattainable.
In this tutorial, you’ve learned what ethical leadership is and what the benefits of ethical leadership are. You’ve also seen how to put it into practice and create an ethical culture in your organisation.
But even if you've created an ethical culture, ethical leadership is still a full-time job. You need to keep dealing with the ethical dilemmas that come up and enforcing your code of conduct. It’s also important to keep evaluating your own behaviour and making sure you live up to the standards you’ve set.
There will be times when the ethical dilemmas are tricky and it’s not always clear what the right thing to do is. In those cases, it’s good to remember that ethical leadership isn't an individual pursuit. Talking to plenty of your employees and involving them in the decision-making process will not only lead to a better outcome, but will also make them feel included and valued.
People may not all agree with every decision you make, but the more transparent and honest you are and the more closely you stick to the values you’ve set out, the more they’ll understand and respect those decisions. That’s the essence of ethical leadership.
To learn more about moral leadership and business ethics, read some of our other tutorials on values in business. If your business doesn't already have a plan for ethical leadership in place, why not use the steps outlined in this tutorial to start encouraging an ethical culture?
Editorial Note: This content was originally published in 2018. We're sharing it again because our editors have determined that this information is still accurate and relevant.