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Leadership by Example Instead of an Iron Fist – Why Value Based Strategy to Business Ethics Works Better

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Abstract

Abstract Our research shows that iron fist does not work when companies want to promote business ethics and performance. It is not that such coercive power does not work, - we found based on a multimethod research approach in the retail industry that it actually lead to increased unethical business values and leak of service performance. But there are light in the tunnel for forward looking managers. Business ethics is a dynamic variable possible to change by value based leadership. It is not a stone wall impossible to adjust, affect or change. If you want to boost team values and commitment, - try to lead by example – leave your iron fist at home!
Leadership by Example Instead of an Iron Fist –
Why Value Based Strategy to Business Ethics Works Better!1
Harald Biong
BI Norwegian Business School
Department of Marketing
Centre for Advanced Research in Retailing
N-0442 Oslo, Norway
Phone: +47 46 41 05 26
harald.biong@bi.no
Roland E. Kidwell
University of Wyoming
Department of Management and Marketing
College of Business
Dept. 3275, 1000 E. University Ave.
Laramie, WY, USA 82070
rkidwell@uwyo.edu
Arne Nygaard
BI Norwegian Business School
Department of Marketing
Centre for Advanced Research in Retailing
N-0442 Oslo, Norway
Phone: +47 46 41 05 49
arne.nygaard@bi.no
Ragnhild Silkoset
BI Norwegian Business School
Department of Marketing
N-0442 Oslo, Norway
Phone: +47 46 41 05 65
ragnhild.silkoset@bi.no
Oslo, October, 2012
1 The authors are listed alphabetically and all contributed equally to the development of this article. We
acknowledge the SUPTEK-program and Centre for Advanced Research in Retailing (CARR) that provided
funding for this study.
Abstract
Our research1 shows that iron fist does not work when companies want to promote
business ethics and performance. It is not that such coercive power does not work, - we found
based on a multimethod research approach in the retail industry that it actually lead to
increased unethical business values and leak of service performance. But there are light in the
tunnel for forward looking managers. Business ethics is a dynamic variable possible to change
by value based leadership. It is not a stone wall impossible to adjust, affect or change. If you
want to boost team values and commitment, - try to lead by example – leave your iron fist at
home!
Power has always been one of the best managerial tools to influence, control and
develop business efficiency. However, it also alters, affect and change ethical values.
Although the intentions are good, - coercive power will lead to harmful ethical values. Our
analyses, though, show that nothing influence employees more than a good example. The
leadership through role model that is the “the good example” or “the good shepherd” (or
reference power as is the scientific expression) is the best way to support and promote ethical
values. Leadership as “the good shepherd” is far better than the coercive tyranny.
Development of explicit role models is crucial to the ethical values in the organization. The
good thing is that our research proves that ethical values promote service quality. Influence by
example has far more impact than other sources of influence. Firms like Pepsico preaching
Performance with Purpose”, Chevron “Human Energy” and Walmart “Live Better” now
realize that value based visions are flexible preconditions for business ethics, globalization
and performance2. Walmart previously presented a long list of coercive rules and threats to
their employees. Their new Live Better strategy focuses more on ethical performance goals
instead of a command and control approach3. Here the value based approach inspire and
motivate employees to support Walmart’s visions.
The role of leadership has become more inconsistent with the explicit intentions of
ethical behavior that you can find on every company webpage around the world. The high
profile head of the International Monetary Fund (IMF), Dominique Strauss-Kahn resigned, -
but IMF had explicit rules of conduct. The BP CEO, Tony Hayward regrets to go on a sailing
trip during the largest oil spill in the history of oil exploration in the Mexican Gulf. Still the
explicit code of conduct for these organizations employees shined on their webpage.
Increasingly, business performance and business ethics interacts. Sir Terry Leahy,
CEO of Tesco, expressed that ethics increasingly affects financial decisions4. The leadership
role has become increasingly complex in the way stakeholder interests have to be balanced
against profits5. The study that we have conducted indicates that easy way out is to exhibit
ethical codes on the webpage and to force the codes of conduct into employee contracts with
the company. For instance, Walmart intended to force their global “Statement of Ethics” on
their employees, but paradoxically ended up in a destructive conflict with the German Labor
Unions6. A fundamentally different approach is to create organizational consensus to moral
commitment. Shared ethical values produce employee perceptions of belonging to the
organization7. Programs that enforce ethical intentions may have opposite effects. The
empirical evidence that we present in the next chapter produce this surprising insights.
Methods
There has been a long tradition of research to analyze how sources of power affect
performance8. We gathered data from one of Ahold’s (owns Giant, Shop & Shop in the US
and have operations in America, Europe and in Asia) European grocery chains. We
characterized the primary stakeholder interest groups as 1. Owners and top management in the
retail chain 2. Retail store managers (franchisees and employees) and 3. Customers9. The
power and dependence between brand ownership, chain management and grocery stores
reflected the performance data available in this study. The retail managers indicated the use
of chain ownership power to affect retail decisions in each store, ethical values, and
organizational commitment. “Mystery shopper” data indicated the level of customer service
quality. We added sales revenue data to the performance variables in the model. Consequently,
the model rested on primary interests from three stakeholder groups, owners (economic
performance), customers (“mystic customer”-data), employees (perceived organizational
commitment) and management (power sources). We got 225 questionnaires back (44%). See a
further presentation of the methodology, analyses and results in Appendix A.
How can management change business ethics and behavior? Power to affect business
relationships is in general described as the potential to influence another party to change
behavior10. Consistent with Emerson (1962) classic article, power is not a personal aspect but
social dimension intrinsic in the relationship between two business partners11. The concept
includes multiple sources of power that the management needs to exercise power12:
(1) coercive power (the employee perceives that management has the ability to punish the
employee);
(2) reward power (the employee perceives that management can reward the employee
to achieve specific goals),
(3) reference or identification power (the employee identifies with management and
therefore management objectives) and
(4) expert power (the employee perceives that management has special knowledge
and expertise and that therefore it is rational to follow specific goals).
(5) legitimate power (the employee perceives that management has a legitimate, often
contracted, the right to prescribe the employee behaves in a certain way),
The literature refers to both coercive power (1) and non-coercive power (2-5) above.
Influence strategies that involve more non-coercive power tend to be associated with fewer
conflicts than the use of coercive power.
Conclusion # 1
Iron fist does not work – it makes it worse
Coercive power is related to one strong practice to promote compliance to ethics.
Influence strategies have been rooted in command and control, rules, punishment and
reporting13. The failure to fulfill obligations or to reach deadlines might cause coercive power.
Some studies have previously found negative effects of coercive power on ethical behavior14.
Our study strongly supported previous findings. The chain management use of coercive power
negatively affected ethic values among retailer managers. We also found that coercive power
jeopardized service quality performance. Command, control and monitoring approach to
ethical values most probably have a significant negative effect. Our results are consistent
with the conclusions in the US survey by the Boston Research Group (BRG). More than half
of the employees in the iron fist (BRG uses the term “blind-obedience” firms) companies
observed unethical behavior in contrast to only one fourth of the employees in value based
strategy category of companies15. Furthermore, BRG also found that only a fourth of the “iron
fist” companies were potentially whistle blowers against unethical behavior while more than
90 % of employees in the value based strategy group of companies16.
Conclusion # 2
Legal Power cannot Business Ethics
Trevino et al. (1999) survey of 10000 employees in six industries showed that formal
ethical programs did not work as well as value-based informal programs17. Consistent with her
research we found that the rule based regime that prescribes ethical behavior, - did not make a
difference. We found no statistical relationship between legal influence and business ethics
values. We believe that legal power indeed affect behavior and operations. However, based on
the statistical model we do not think that it influences ethical values. We did not measure
whether employees perceived that the rules were morally right. There might be a good reason
to follow rules that is morally right especially if employees feel that legal procedures are
fair18.
Wal-Mart strategy to force ethical rules on to employees in Germany in 2005 lead to a
destructive conflict with the employees and a law suit they lost. Wal-Mart handed over a 33
pages code of conduct to each employee. Actually the ethical rules violated personal freedom
given by the unwritten norms and procedures to handle ethical problems19. The case indicates
that the situation is different in the US and in Europe. The formal pressure to apply legal
power is more present in the US because of ethics consultancies, ethics conferences, journals,
awards and media focus. The use of legal power to intentionally achieve business ethics is
also fueled by events like ENRON and WorldCom. Although this logic is intentionally
rational, it does not mean that it is empirically right.
Conclusion # 3
Rewards cannot improve Ethics – Money can’t buy you Love!
Along with common practice in business life, one should assume that ethical values
can be stimulated when giving the employees economic incentives. Economic incentives are
strong behavioral motives applied in franchising, sales, agents and employees. The
conventional wisdom rooted in franchising, bonuses, stock value options and other rewards
for almost all other means does not work when it comes to ethical values. Our results do not
support financial incentives in order to improve ethical values. Outcome performance systems
like bonuses or other incentives, however, might instead deteriorate ethical values in the
organization because it jeopardizes what the employees feel are fair. Weak outcome fairness
might weaken ethical values and commitment20.
Conclusion # 4
The Good Shepherd – the power of Role Model with a good Example
Reference power measures the store managers’ identification with the owners of the
brand21. The brand owners specify ethical values that the store managers want to follow by
example. The employees or franchisee store managers is guided by their own voluntary values
to follow the brand owner. The results show that people are more guided by their values and
conscience when their behavior is not monitored22. Integrity guides role models that diffuse
values throughout the company, integrate new employees and through examples discourage
unethical behavior. Reference power is strongly allied with value based strategies. Consistent
with our findings Trevino found that value based strategies resulted in fewer reported cases of
unethical behavior, higher attention around ethical behavior and a culture to report unethical
behavior23.
Conclusion # 5
The Ethical Power of Expertise – it helps!
We now that knowledge and expertise has a close interaction with trust in general.
Without trust it is not possible to transfer knowledge especially in a more active business
format like in business innovation, entrepreneurship as well as nurturing and develop
managerial talent and market knowledge within the company. Staff follows knowledgeable
leadership because they believe they take better decisions24. The professionalization of
business ethics based on expertise in the area should affect the ethical values. For instance
General Dynamics have a program director that handles unethical behavior reported by other
employees25. Consistent with this, our investigation indicate that store managers ethical values
are positively influenced by the perceived expertise of the headquarters central managers.
Conclusion # 6
Ethics makes the difference – it nurtures Organizational Commitment and improve
Service Quality
Organizational commitment is the bonding between the retail store managers and the
brand company26 . Organizational commitment reduces the gap between the interests of the
brand owners and the store managers27. It eliminates the goal conflict embedded in the
delegation of a brand to another person or firm. Our data show that store managers ethical
values significantly affected the level of commitment to the entire organization.
As a byproduct of the enhanced organizational commitment, the employees and
franchisees consistently work in the interests of the entire organization. One of the
disadvantages of the strong commitment might be that people is loyal to the old culture. The
question might be if high commitment can reduce the dynamic change necessary to adapt to
new market developments28. However, organizational commitment puts the customers and not
personal interests in the center of business attention29. We find a line of correlations between
solid knowledge, strong ethical values and satisfied customers.
Summary
Our findings emphasize that business ethics cannot be seen isolated from its
antecedents and context. Despite the rational intentions to create favorable ethical values
within the organization, - our study shows that the use of coercive power to achieve such
goals might be contra-productive. Our data from a multinational retail company show that
voluntary and non- coercive influence is much more effective in creating a climate of ethical
values. Both the reference power of the good example in role models as well as expert power
stimulate and foster ethical values. Moreover, ethical values produce organizational
commitment. Commitment creates and builds better bases for service quality in the
organization. Our investigation showed that perceived organizational commitment by the
store managers affected service quality measured by “mystic customers”.
Leadership in the form of role models and good examples has been vastly under
estimated in organizational research. Our research shows that the power of a role model
(reference power) is the crucial instrument to create ethical values, commitment and
performance. Consequently, our findings should alarm management that thinks they can
outsource ethics to consultants, research, ethics conferences or journals. The old recipes to set
a good example are still very much alive in the business sector. Leadership roles are often
passive and sometimes negative. They unconsciously are harmful role models demanding
something different from their employees than themselves. The long time effects of negative
role models are most probably destructive both to ethical values, commitment and long time
performance. We also found that employees trust influence in the form of expertise.
Consequently, investments in knowledge are crucial not only to produce service and products
in competitive markets. Expertise is a constructive device that builds ethical values,
commitment and performance.
APPENDIX A
Overview of Methods, Analyses and Results
NOTES
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