Strategic Leadership Activities for Creating an Ethical Learning Organization

CHAPTER 11
Strategic Leadership: Creating a Learning Organization and an
Ethical Organization
Copyright Anatoli Styf/Shutterstock
1
Learning Objectives
After reading this chapter, you should have a good
understanding of:
11-1 The three key interdependent activities in which all
successful leaders must be continually engaged.
11-2 Two elements of effective leadership: overcoming
barriers to change and using power effectively.
11-3 The crucial role of emotional intelligence (EI) in
successful leadership, as well as its potential drawbacks.
11-4 The importance of creating a learning organization.
11-5 The leader’s role in establishing an ethical
organization.
11-6 The difference between integrity-based and
compliance-based approaches to organizational ethics.
11-7 Several key elements that organizations must have to
become ethical organizations.
©McGraw-Hill Education.

2
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.
3
Strategic Leadership Definition
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 a 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 a 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.
4
Strategic Leadership Model
Exhibit 11.1 Three Interdependent Leadership Activities
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.
5
Question
(1 of 3)

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. Remember the discussion from
chapters 9 & 10: changing the reward system is an example of
designing the organization.
6
Strategic Leadership: Setting a Direction
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 bold visions.
7
Strategic Leadership: Designing the Organization
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 control 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 costs
through detailed and formalized cost and financial control
procedures. Leadership must make sure systems and structures

are compatible with the chosen strategy. For instance, with
regard to corporate strategy, 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) insuffici ent
mechanisms to integrate activities across the organization.
8
Strategic Leadership: Nurturing a Culture
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 ethical behavior via:
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.
9
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 his or her personal and organizational power.
10
Effective Use of Power
Leaders must make effective use of power to:
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
leader’s 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.
11
A Leader’s Bases of Power
Exhibit 11.2 A Leader’s Bases of Power
Jump to Appendix 1 for long description.
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.
12
Emotional Intelligence
Valuable traits of successful leaders:
Technical skills –accounting, operations research
Cognitive abilities –analytical reasoning, quantitative analysis
Emotional intelligence –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.
13

Emotional Intelligence at Work
Exhibit 11.3 The Five Components of Emotional Intelligence at
Work
Jump to Appendix 2 for long description.
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 other s.
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 out 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.
14

Strategic Leadership: Emotional Intelligence, Pros & Cons
Effective leaders should:
Have empathy for others
Be astute judges of people
Be passionate, persistent about pursuing objectives
Create personal connections with people, take time to engage
employees individually & in groups
Be altruistic, focused on the firm’s general welfare, highly
principled
Effective leaders should NOT:
Over-identify, confuse empathy with sympathy
Become overly critical
Allow passion to close their minds to other possibilities
Make too many announced visits, creating a culture of fear &
micromanagement
Be manipulative, selfish, dishonest, use leadership solely to
gain power
Effective Leaders Have Empathy for Others: However, they also
must be able to make the “tough decisions.” Leaders must be
able to appeal to logic and reason and acknowledge others’
feelings so that people feel the decisions are correct, but must
not overidentify with others or confuse empathy with sympathy.
This can make it more difficult to make the tough decisions.
Effective Leaders Are Astute Judges of People: A danger is that
leaders may become judgmental and overly critical about the
shortcomings they perceive in others. They are likely to dismiss
other people’s insights, making them feel undervalued.
Effective Leaders Are Passionate about What They Do, and

They Show It: It’s good to express passion as persistence in
pursuing an objective or a relentless focus on a valued
principle. However, there is a fine line between being excited
about something and letting your passion close your mind to
other possibilities or cause you to ignore realities that others
may see. Effective Leaders Create Personal Connections with
Their People: Most effective leaders take time to engage
employees individually and in groups, listening to their ideas,
suggestions, and concerns and responding in ways that make
people feel that their ideas are respected and appreciated.
However, if the leader makes too many unannounced visits, it
may create a culture of fear and micromanagement. From a
moral standpoint, emotional leadership is neither good nor bad.
On the one hand, emotional leaders can be altruistic, focused on
the general welfare of the company and its employees, and
highly principled. On the other hand, they can be manipulative,
selfish, and dishonest. For example, if a person is using
leadership solely to gain power; that is not leadership at all.
15
Question
(2 of 3)
Complete the following sentence. “Inspiring and motivating
people with a mission or purpose are 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.
16
A Learning Organization
To enhance the firm’s long-term viability, leaders also need to
build a learning organization.
Capable of adapting to change
Able to foster creativity
Willing to question basic assumptions, refresh strategies,
reengineer work
Be ready to ask the probing questions that will lead to success
in highly competitive markets
To enhance the long-term viability of organizations, leaders
also need to build a learning organization. Such an organization
is capable of adapting to change, fostering creativity, and
succeeding in highly competitive markets. Many organizations
get so caught up in carrying out their day-to-day work that they
rarely, if ever, stop to think objectively about themselves and
their businesses. They often fail to ask the probing questions
that might lead them to call into question their basic
assumptions, to refresh their strategies, or to reengineer their
work processes. 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) developing leaders, (3) empowering
employees at all levels, (4) accumulating and sharing internal
knowledge, (5) gathering and integrating external information,
and (6) challenging the status quo and enabling creativity.
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Key Elements of a Learning Organization

Five key elements of a learning organization.
Necessary, but not sufficient.
Inspiring and motivating people with a mission or purpose
Empower employees at all levels
Accumulating and sharing internal knowledge
Gathering and integrating external information
Challenging the status quo and enabling creativity
From Exhibit 11.4 Key Elements of a Learning Organization
Learning and change typically involve the ongoing questioning
of an organization’s status quo or method of procedure. This
means that all individuals throughout the organization must be
reflective. Many organizations get so caught up in carrying out
their day-to-day work that they rarely, if ever, stop to think
objectively about themselves and their businesses.
18
Successful Learning Organizations Motivate People
Successful learning organizations motivate people with a
mission or purpose.
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
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. 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
Successful Learning Organizations Empower Employees
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.
20
Successful Learning Organizations Share Internal Knowledge
Successful learning organizations accumulate & share internal
knowledge.
The firm develops a culture that encourages:
Employee involvement
Widespread sharing from various sources
Identifying opportunities, experimentation
Collaborative decision making
Sharing of best practices
The firm utilizes technology to facilitate this.
Effective organizations must also redistribute information,
knowledge (skills to act on the information), and rewards. 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.
21
Successful learning organizations gather & integrate external
information.
Firms must recognize opportunities & threats, both general &
industry-specific.
By using a variety of sources to acquire external information:
Participation in networks and alliances, communications from
rival firms
By doing both competitive & functional benchmarking

By asking customers
Successful Learning Organizations Gather External Knowledge
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: by tapping into knowledge from partners,
suppliers and competitors via participation in networks and
alliances; monitoring the direct communications from rival
firms and their executives, such as press releases and quarterly-
earnings calls – these communications can provide insight on
the rival’s actions and intended actions. 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 in
which the examples are drawn from any organization, even
those outside the industry. Firms can also focus directly on
customers for information.
22
Successful Learning Organizations Challenge the Status Quo
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
Do the “right thing”
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 serve 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 cultures 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, moving the goalposts to
create flexibility while forecasting, bringing in outsiders to help
neutralize the emotions and biases that might prop up a flop,
looking 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.
23

Creating an Ethical Organization
Ethics has everything to do with leadership.
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 and reflect the values, attitudes, and
behavior patterns that define an organization’s operating
culture. 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.

24
Ethical Orientation
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 shape 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.
25
Ethical Frameworks
Ethical frameworks for integrity include:
Compliance-based ethics program
Prevents, detects, & punishes legal violations
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.
26
Approaches to Ethics
ManagementCharacteristicsApproachActionsEthosCompliance-
basedConformity with externally imposed
standardsEthosIntegrity-basedSelf-governance according to
chosen standardsObjectiveCompliance-basedPrevent criminal
misconductObjectiveIntegrity-basedEnable responsible
conductLeadershipCompliance-basedDriven by legal
officeLeadershipIntegrity-basedDriving by management, with
input from functional staffMethodsCompliance-basedReduced
discretion, training, controls, audits, and
penaltiesMethodsIntegrity-basedEducation, leadership,
accountability, decision processes, auditing, and
penaltiesBehavioral AssumptionsCompliance-
basedIndividualistic, self-interested actorsBehavioral
AssumptionsIntegrity-basedSocial actors, guided by a
combination of self-interest, ideals, values, and social
expectations
Exhibit 11.5 Approaches to Ethics Management
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.
27
Question
(3 of 3)
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. If rewards are given on the basis of outcomes rather
than the means, it may cause employees to perform in an
inappropriate manner.
28
Elements of an Ethical Organization
Interrelated elements of a highly ethical organization include:
Ethical role models
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. Corporate credo = a statement of the
beliefs typically held by managers in a corporation.
29
Ethical Organization Role Models
Ethical role models
Must be consistent in their words & deeds
Values & character must become transparent to an
organization’s employees
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 sharing 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.
30
Ethical Organization Corporate Credos

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.
31
Ethical Organization Reward Systems
Reward & evaluation systems can either support or undermine
an ethical orientation.
Support by creating an evaluation system that rewards ethical
thinking
Actions consistent with words; follows through on
commitments; readily admits mistakes
Undermine by rewarding results regardless of how they were
achieved
Intense competition encourages falsification of data.

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.”
32
Ethical Organization Policies
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 developed
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.
33
ADA APPENDICES
Description of Images
Appendix 1 Strategic Leadership:
A Leader’s Bases of Power
Return to slide.
The graphic classifies the bases of power.
Organizational power is broken down into legitimate power,
reward power, coercive power, and informational powers.
Personal power is divided into referent and expert power.
Appendix 2 Strategic Leadership:
Emotional Intelligence at Work
Return to slide.
The graphic depicts the elements of emotional intelligence.
Self-awareness. The ability to know your own emotions, drives,
values, and goals as well as recognize their impact on others.
Self-regulation. The ability to control or redirect disruptive
emotions and impulses and adapt to changing circumstances.
Empathy. The ability to see and consider other people’s feelings

especially when making decisions.
Social Skill. The ability to build and manage relationships to
move people in the desired direction.
Motivation. Being driven to achieve for the sake of
achievement, not simply for money or status.

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