Ethical Leadership and Leader Member Exchange (LMX) Theory

Abstract

The aim of this paper is to evaluate the contribution that developments in the area of ethical leadership and trust have made to our understanding of effective people management within organisations. This paper is based on a case study from Harvard Business Review (2007) called "IBM - Leading the Turnaround". The author will use Leader Member Exchange (LMX) theory by Graen and Uhl-Bien (1995) and integrate the ideas of ethical leadership to critically evaluate the leadership style of the CEO of IBM Louis V. Gerstner that led to the turnaround of IBM. In particular, the author will focus on the following question: What role did trust play in the leadership style of Gerstner in the transformation of IBM?
When Gerstner became the CEO of IBM in 1993, an $8.1 billion loss on the stock market was announced by IBM; this was one of the largest in U.S. history. Gerstner was facing a difficult job as stock market commentators were rapidly writing off IBM as a 'slow elephant' and, as a result, IBM's workforce was not in any state to accept change. Gerstner's first task was to analyse what was going wrong within IBM, despite having dedicated people, high technological infrastructure, and a sound strategy, he found that IBM was suffering from its own success during the many years of operation. Its own success was its downfall, for it had become slow moving and inward looking.
Organisationally, it had become a decentralised 'kingdom' in which none of the business units communicated with each other. Gerstner realised that, if IBM was to be saved, he had to lead this massive organisation through cultural change. He realised that changing the attitude and behaviour of thousands of people was hard to accomplish, but was the main key to success. Management could not change organisational culture through words and policies alone; leaders such as Gerstner had to create the conditions for transformation and invite employees to respond willingly.
IBM had a tradition of appointing executives from within. Indeed, Gerstner was the first CEO to be hired form outside; this in itself was revolutionary and created widespread internal concern. Before Gerstner arrived, it was accepted that the break-up of IBM was inevitable. The question was only what form this would take. Morale was at rock-bottom, and Gerstner's appointment did nothing to raise spirits. It was assumed he had been brought in to 'wield the hatchet'.
Therefore, it was a real surprise when Gerstner made himself open to input from anyone in the company. It was even more surprising when he announced that IBM's strength lay in its integration and that there would be no break-up. Immediately spirits started to soar. Everyone knew there would be a pain, but now it seemed it would be on a much lower level, and employees were prepared to listen for a change. While it took time to build trust, Gerstner's no-nonsense style created confidence that someone was in charge. His actions were not popular, but they were decisive. It was this that steadily led to a sense of trust; he did what he said he would do, and he proved himself trustworthy.
In the next section, the author will provide a background to leader-member exchange (LMX) theory and relate it to ethical leadership so that we can explore the leadership style of Gerstner during the change at IBM.

Full text

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ETHICAL LEADERSHIP AND LEADER MEMBER EXCHANGE (LMX) THEORY
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ETHICAL LEADERSHIP
AND LEADER MEMBER
EXCHANGE (LMX) THEORY
The aim of this paper is to evaluate the contribution that developments in the area of ethical leadership and trust have
made to our understanding of effective people management within organisations. This paper is based on a case study
from Harvard Business Review (2007) called "IBM - Leading the Turnaround". The author will use Leader Member
Exchange (LMX) theory by Graen and Uhl-Bien (1995) and integrate the ideas of ethical leadership to critically evaluate
the leadership style of the CEO of IBM Louis V. Gerstner that led to the turnaround of IBM. In particular, the author will
focus on the following question: What role did trust play in the leadership style of Gerstner in the transformation of IBM?
When Gerstner became the CEO of IBM in 1993, an $8.1 billion loss on the stock market was announced by IBM; this was
one of the largest in U.S. history. Gerstner was facing a difcult job as stock market commentators were rapidly writing
off IBM as a 'slow elephant' and, as a result, IBM's workforce was not in any state to accept change. Gerstner's rst task
was to analyse what was going wrong within IBM, despite having dedicated people, high technological infrastructure, and
a sound strategy, he found that IBM was suffering from its own success during the many years of operation. Its own success
was its downfall, for it had become slow moving and inward looking.
Organisationally, it had become a decentralised 'kingdom' in which none of the business units communicated with each
other. Gerstner realised that, if IBM was to be saved, he had to lead this massive organisation through cultural change. He
realised that changing the attitude and behaviour of thousands of people was hard to accomplish, but was the main key to
success. Management could not change organisational culture through words and policies alone; leaders such as Gerstner
had to create the conditions for transformation and invite employees to respond willingly.
IBM had a tradition of appointing executives from within. Indeed, Gerstner was the rst CEO to be hired form outside;
this in itself was revolutionary and created widespread internal concern. Before Gerstner arrived, it was accepted that
the break-up of IBM was inevitable. The question was only what form this would take. Morale was at rock-bottom, and
Gerstner's appointment did nothing to raise spirits. It was assumed he had been brought in to 'wield the hatchet'.
Therefore, it was a real surprise when Gerstner made himself open to input from anyone in the company. It was even more
surprising when he announced that IBM's strength lay in its integration and that there would be no break-up. Immediately
spirits started to soar. Everyone knew there would be a pain, but now it seemed it would be on a much lower level, and
employees were prepared to listen for a change. While it took time to build trust, Gerstner's no-nonsense style created
condence that someone was in charge. His actions were not popular, but they were decisive. It was this that steadily led
to a sense of trust; he did what he said he would do, and he proved himself trustworthy.
In the next section, the author will provide a background to leader-member exchange (LMX) theory and relate it to ethical
leadership so that we can explore the leadership style of Gerstner during the change at IBM.
ŠEJLA BABIČ
BASED ON A CASE STUDY IBM "LEADING THE TURNAROUND"
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LEADER MEMBER EXCHANGE (LMX) THEORY AND ETHICAL LEADERSHIP
Leader-member exchange (LMX) theory by Graen and Uhl-Bien (1995) focuses on the relationship between
the leader and member. The key principle of LMX theory is that leaders develop different types of exchange
relationships with their followers and the quality of the relationship that is developed alters the impact on
outcomes of this leader and member exchange. Therefore, according to LMX theory, leadership occurs when
leaders and followers are able to develop effective relationships that result in mutual inuence (Uhl-Bien, 2006).
Leadership can be described as a process that involves several factors; one of these could be the ability to
inuence others and motivate them to reach a common oriented goal, like the change required at IBM
(Northouse, 2007, pp. 2-9). This would require leadership changes that foster relationships and accompany
ethical burdens and responsibilities, as making a change in people may inuence not only their working lives,
but also the lives of people around them. Trust, therefore, plays a central role in developing relationships with
employees during the process of change management.
LMX theory explores how leaders and managers develop relationships with team members, and it explains
how those relationships can either contribute to the growth and assist change or hold people back in the
leadership context. In LMX theory trust is described as a leader's authentic behaviour, a leader's trustworthy
behaviour and how it is implemented in daily actions are key components of LMX exchanges.
The LMX process is based on the assumption that leaders pay attention to the traits, skills and competencies
of their followers during the exchange process (Figure 1) and assess whether they are competent and
effective to take care of a certain position or work in the organisation. From the perspective of the follower,
the main question is how trustworthy the leader is.
According to Graen and Uhl-Bien (1995) researchers have found that high-quality leader-member
exchanges produce less employee de-motivation and greater organisation commitment. Graen and Uhl-
Bien have also suggested that leadership making develops progressively over time in three phases: (1) the
stranger phase, (2) the acquaintance phase, and (3) the mature partnership phase. During the nal phase
(3), the mature partnership relationship is marked by high-quality leader-member exchanges that involve a
high degree of mutual trust, respect, and obligation towards each other. Such high quality relationships will
produce high LMX during the transformational leadership phase such as the one faced at IBM.
Figure.1: LMX model illustrating the exchange process
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The quality of the exchange process will, therefore, depend upon the qualitative characteristics of the
exchange between leader and member. Such qualitative characteristics could be 'ethical values' and trust
will play a major role in this process. Such 'ethical values' can be considered as qualitative characteristics
that create high LMX in transformational leadership. We could say that 'ethical value' congruence between
the leader and the member could be dened as the degree of agreement between the leader's value
system and the member's value system, a high degree of agreement would point towards a high LMX.
Weiss (1978, pp. 711-718) has found that people aligned their values with the values of their leader if
they perceived their leader as trustful. Leaders, therefore, have an ethical responsibility and one of the
characteristics that exercise such responsibilities are accommodating the value systems of the members in
the leadership process. According to Beauchamp and Bowie (1988), this requires the essential ability of
leaders to be sensitive to the interests and concerns of others.
With such an attentive attitude, an ethical leader may foster change in others and lead people towards change
in an organisation similar to the one required at IBM. Heifetz (1994) states that in order for such effective
changes to occur successfully, leaders have to exercise their authority with a notion of responsibility, a
responsibility that requires respect for the prospective change in others. Heifetz (1994) calls this a "holding
environment" where trust, nurturance, and empathy are exercised with the aim of change. Such a change
would generally be resisted; however, Heifetz (1994) says that in such a "supportive context" followers
would generally feel secure to face the hurdles of change more effectively and to manage issues that may
arise. During the change at IBM, Gerstner was instrumental in changing the mental orientation of his
employees from a self-centric to a customer-centric point of view. Initially, this was resisted, and he had to
develop an environment of "supportive context" where employees would trust the leader (Heifetz, 1994).
Therefore, he used his authority and got employees to pay attention to the issues facing IBM. He recognised
the values in others and identied the changes required so that conicting values would be reduced during
the high congruence process that led to a high LMX. As Heifetz (1994) says, Gerstner recognised the
benets of the existing environment at IBM and utilised the importance of trust in a "supportive context"
where employees would feel safe to confront any hurdles the process of change.
So, for a transformational leader to lead change effectively, the needs, values, and moral of employees
have to be at the forefront. Burns (1978) in his theory of transformational leadership emphasises that
a transformational leadership requires a focus by leaders to assist employees to higher standards of
moral responsibility. He states that leadership has a moral dimension, and he characterises this as ethical
leadership. He stresses that leaders need to engage themselves with employees and assist them in their
personal struggles concerning conicting values so that these are aligned with organisational values in
the process of effective change. It is, therefore, the responsibility of the leader to assist employees in the
assessment of their own values and through trust align these values with organisation values in the process
of change, this "connection", Burn (1978) says, that raises the level of morality in both the leader and the
employee and develops trust, an essential element of ethical leadership.
As a transformational ethical leader, according to Bass (1985), Gerstner led to initiate change at several
business processes within IBM, and these processes of change were not easy to implement for a company
that has been described as moving like a "slow elephant". Gerstner had to initiate specic conditions for
this transformation and for employees to respond to these necessary changes. Some of these changes
were to gain the support of major customers by establishing credibility, comparing expense to revenue of
IBM with those of leading competitors in the market to monitor expense reduction, re-engineer business
processes at IBM to reduce overheads, and sell off unproductive assets.
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In order to carry out these changes, Burns (1978) stresses that ethical leadership requires engagement with
employees, and this process of engagement requires the identication of personal values and realigning
them with changing corporate values, a process that would create a high degree of congruence in aligned
ethical values and therefore a high LMX. Such a process involves several stages where the leader has to
recognise the importance of personal values, develop a level of trust in the managers' abilities to change
and communicate the importance of realigned corporate values. Burns emphasises that when such a
process works effectively, the leader attends to the personal motivations of the managers and re-directs
them to a better set of moral values that are congruent with corporate values.
In many ways, one can note a common theme running through the different perspectives of ethical
leadership and its relationship with LMX theory presented in the last section, the main ones being that
a high quality leader-member engagement is essential to ethical leadership. It is also essential for ethical
leaders to pay close attention to the needs of their employees; these leadership theories are similar to
those presented in the "Ethics of Caring" by Gilligan (1982). Gilligan emphasises ve key principles relating
to ethical leadership with the origins of these can being traced back to the works of Aristotle. These
principles provide the foundation for the development of ethical leadership traits; these principles are
respect, service, justice, honesty, and community.
These are shown in Figure 1 which has been adapted from Northouse (2007). Briey discussing each of
these traits, we see that leaders who respect others, approach people with trust, and acknowledge others'
values and ideas. Leaders who exercise this trait in their leadership are seen as providing service towards
others; they are considered as altruistic and are placing their followers' welfare as a priority in their plans
to implement change. This service trait has been emphasised by several authors on ethical leadership
maintaining that attending to the service of others, and developing trust is the primary building blocks of
ethical leadership.
Figure 2. Trust and the principles of leadership.
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The importance of these traits can also be seen in the works of Senge (1990). In his work on learning
organisations, Senge emphasises that one of the most important tasks for a leader in learning organisations
is the stewardship role; the steward (servant), or the visionary of change, directs implementation during the
change process. This viewpoint has the characteristics of not being self-centered; it involves a deliberate
step taken by the leader with a motive of integrating one's vision with that of others in the organisation.
Senge, therefore, stresses that ethical leadership concerns itself with fairness and justice, with fairness
playing a role in integrating personal values with organisational values and justice demanding that the
leader place issues of fairness as a motive of their decision making.
Here we may look to the works of Beauchamp and Bowie (1998), who have outlined principles that may
guide an ethical leader in distributing the benets and burdens relating to transformational change fairly.
The fourth principle of ethical leadership relates to the manifestation of honesty in an ethical leader. For
Gerstner, the communication of change at IBM was not an easy task; he had to represent the reality of the
situation at IBM and the challenge for him was to strike a balance between being truthful and to monitor
what information to disclose in particular stages of the transformation at IBM.
Dalla Costa (1998) makes this point clearly in his book "The Ethical Imperative" where he states that
"being honest" is more than just "not deceiving"; for an ethical leader, Della Costa points out that being
honest is governed by the characteristics such as to not promise what you cannot deliver, not misrepresent
information, not suppress obligations, not to reject accountability, and not openly accept that the
competitive pressures of business are an open reason to release our responsibility towards the respect
and dignity of others. Burns (1978) placed this characteristic of honesty at the centre of his theory of
transformational leadership. With the exercise of these four principles, the ethical leader, therefore, fosters
a community, a community created with belonging that has the characteristics of trust placed in the ethical
leader, a community that is bonded together and believes in the vision of the transformational leader such
as Gerstner. One of the eight principles that Gerstner developed at IBM to transform employees' beliefs
was that outstanding dedicated people make it all happen, particularly when the work together as a team.
THE ROLE OF TRUST IN HIGH LMX EXCHANGES
Central to these ve principles of leadership is the role that trust has to play in each one of them. The
ve principles of leadership presented in Figure 1 represent actions that an ethical leader follows as part
of his/her character. These actions can cause successful change when the leader has developed trust. For
example, respect of others can be exercised successfully only if the other person respects and trusts the
leader in the rst place. Similar arguments can be applied for the other four principles of ethical leadership.
Gerstner at IBM exercised these ve principles of ethical leadership to bring about transformational
change, and he was trusted as a leader and his team had condence in what he was planning. We can use
the model of ethical leadership from Northouse (2007) and adapt it with the idea of trust as developed by
the author and see how this change was achieved at IBM. This can be seen in Figure 3, which shows how
Gerstner as a leader led IBM trough the necessary transformational changes.
The main component that functions actively through the ve ethical leadership traits is the notion of trust.
When you trust someone, or someone trusts you, things can move more quickly and effectively. Less
obvious, but not less important, are the benets of trusting others which are the abilities to trust customers
for greater efciency and creativity in serving them.
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Figure 3. Relationship of the Ethical Leadership and Trust Model to change at IBM led by Gerstner.
We note that Gerstner would not have been able to lead with trust unless he was personally trustworthy and
capable of trusting. A trust relationship, therefore, has three aspects: (1) two asymmetrical roles - one who
trusts, another who is trusted, (2) the element of risk, and (3) reciprocating the roles of trustor and trustee.
Trust can be seen as a dance with two players: one who trusts, and one who is trusted. Most leaders and
managers focus more on being trusted that on trusting. Learning to juggle these is a critical skill for ethical
leadership. The best way to be trusted is to be worthy of trust, to be trustworthy. By far the most efcient
and effective strategy for being trusted is to actually be trustworthy. But what does that mean? One thing
it means is actively exercising certain personal traits. Whether from habit or personality, personal traits are
what allow others to consider us trustworthy or not. We will use the term 'virtues' to describe these traits.
It implies a consistency of character that provides a guidepost for the individual, and that can be relied upon
others. It may not be absolute, but we expect it to withstand some level of incentives, group pressure, or
business process. A virtue is something that we see as getting to the heart of a person.
According to Maister, Green and Galford (2000), there are four such traits: credibility, reliability, intimacy,
and (low) self orientation; they can be expressed, on a scale of 1 to 10, in the form of an equation, the
Trustworthiness Equation, and they cover most of the usages of "trustworthiness" in common and business
language, as well as across cultures. The Trust Equation arrays the four virtues in the form of an equation.
This format allows for discussion about interplay and impact though should not be taken too literally as a
description of something that exists outside the model.
The trustworthiness equation is:
Credibility is largely about words. We might say; I can trust what she says about this issue, meaning
we recognise her degree or her credentials, her statements are logical, she uses recognised means of
communication, there are no spelling errors in her resume, and so forth.
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Reliability applies more to actions. We might say; I can trust him to do (whatever he said he would do),
meaning he is dependable, predictable, a person of integrity; someone who honours his word, and if he
cannot honour it, takes immediate responsibility for it. Reliability is only trust equation component that
literally requires time, because it requires repeated experiences which happen over time.
Intimacy refers to a sense of security. We might say, I trust her with this information, meaning she is
sensitive to our needs, knows when and to whom to pass information along, and knows just how to treat it.
Self-Orientation is in the denominator of a trust equation, high levels of self-orientation mean low
level of trustworthiness. High self-orientation comes in two forms: selshness and self obsession; the
latter is less obvious, therefore, more pernicious in business.
Any interaction with another human being is a potential source of fear, thus of ght or ight, but also an
opportunity to behave differently, in ways that create trust. Overcoming self-orientation is not a business
process, an analytic, or even a skill such as practicing tennis or a golf shot. It is a self-willed psychological
state in which we are ego-comfortable enough with our own selves to relate to others without fear or
desire to control.
The role that trust has to play in ethical leadership is, therefore, a crucial element in the overall character
of the ethical leader bringing about transformational change in any organisation. Credibility, reliability,
intimacy and self-orientation are, therefore, important variables that dene trustworthiness in its
relationship together with the key factors of ethical leadership dened in Figure 4.
Figure 4: Illustrating Ethical Leadership, Trustworthiness and LMX Relationships
HIGH LMX
ENVIRONMENT
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LMX and ethical leadership theories make several positive contributions to our understanding of the
leadership process carried out by Gerstner at IBM. LXM theory uses the dyadic exchange relationship
as the main leadership process and emphasise that effective leadership is contingent on effective leader-
member exchanges. The author has attempted to add content to this effective leader-member exchange
by using the model of ethical leadership and trust. LMX theory is also related to positive organisational
outcomes, and in a review of their research Graen and Uhl-Bien (1995) point out that it is related to
performance, organisational commitment, and many other important organisational variables. One of
the criticisms of LMX theory is that the basic ideas of the theory are not yet fully developed. For example,
it fails to explain how high-quality leader-member exchanges are created, trust and trustworthiness may
play key roles, as explained above, however, the role of different cultural values and abilities of different
people to acquire the ethical values is not really researched. There is also the problem of measurement
of leader-member exchanges in LMX theory by Graen and Uhl-Bien (1995) and Schriesheim et al. (2001).
No empirical studies have been carried out that use dyadic measures to analyse the LMX process and its
effectiveness with the ethical leadership model and further investigate the role of trust.
To conclude this paper, the author has attempted to explain the leadership process carried out at IBM
during the change management process using the LMX leadership model. This model was developed
further by the author to explain the importance of ethical leadership together with the notion of trust.
Trust was incorporated within the ethical leadership model adopted from Northouse (2007) to integrate
it with the LMX leadership process. In doing this, the transformational change that was implemented by
Gerstner at IBM was taken as an example of a practical ethical leader creating a high LMX. The emphasis
has been to develop the LMX model further by the application of ethical leadership theories to the IBM
case study on transformational change and to critically develop a discussion that shows the importance of
trust in the transformational leader leading change at IBM.
CONCLUSION
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Bass, B.M. (1985) Leadership and performance beyond expectations. New York: Free Press.
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REFERENCES
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APPENDIX 1 - CASE STUDY
LEADING THE TURNAROUND: LOU GERSTNER OF IBM
By Paul Sheppard, Wharton MBA Student and Deputy Editor, Wharton Leadership Digest
Lou Gerstner, retired Chairman and CEO of IBM, recently spoke at Wharton
about his experience of leading one of the most celebrated turnarounds in
corporate history.
In a pragmatic and modest speech, Gerstner was weary of drawing platitudes
of leadership that could be applied to every situation. Rather he wanted to
describe what happened at IBM and draw lessons from it.
When Gerstner took over in 1993, IBM had just announced a $8.1 billion loss; the largest in US history.
He had 100 days of cash left and IBM was already being written off by commentators as a dinosaur and an
also-ran. Not surprisingly, IBM's workforce was demoralized and hostile.
Gerstner's rst task was to analyze the problem. Despite having good people, great technology and a sound
strategy, he found that IBM was suffering from a "success syndrome." Gerstner described IBM in the 1960s,
70s and 80s as "the greatest commercial institution ever created." But instead of continuing to build on this
legacy, it had become insular, inward-looking and rigid.
Organizationally, it had become a decentralized efdom in which none of the business units communi-
cated with each other. Gerstner realized that his overarching task was to lead a massive organizational and
cultural change.
Gerstner quickly found ways to stop bleeding cash and identied the company's principal growth engines.
He wanted to break the assumption that customers would always buy IBM because of its past achieve-
ments. He then started to rebuild the company around the customer.
To reintegrate the organization, he sought to provide total solutions to customers. To do so, he needed
to transform almost every business process conducted by IBM. He cautioned his audience of star struck
MBAs that managing a complete turnaround was not as glamorous as they might think. He quoted one of
his senior managers who likened the implementation of the reengineering process to going to work every
day and "setting your hair alight and then putting it out with a hammer."
Painful as the process was, it was successful. The business units had been reintegrated and Gerstner made
$14 billion of cost savings. Gerstner said that he learnt three fundamental lessons from his time at IBM; the
importance of:
1. Focus. Gerstner stressed the how imperative it was for a leader to love their
business and to "kill
yourself to make it successful." There is no substitute for hard work and the desire to win. CEOs
face a multitude of choices, often peddled by a multitude of self-interested advisors, but they need
to focus on exploiting competitive advantages in core businesses. Accordingly, it is the CEO's re-
sponsibility to manage consultants, investment bankers and advertising agencies so to best serve
their business rather than let them set the agenda.
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2. Execution. Gerstner said
that execution is what really separates business leaders. As an ex-McK-
insey Director, Gerstner said that consultants' "dirty little secret" was that it is not that difcult to
come up with attractive strategies in public markets in which everyone has good information. The
true differentiator was how you implement them.
3. Personal leadership. Gerstner said that despite the volumes of business books written on leader-
ship recently, he still thought that this was the most undervalued element of institutional change.
When asked later for his advice of how MBA graduates should behave to strive to emulate his suc-
cess, Gerstner said that as a start you should always strive to do the job you are doing better than
the guy before you.
Finally, Gerstner wanted to discuss the importance and challenges of transforming corporate culture. For
him, institutional culture is not what is said but it what is done. As an example of cultural change, Gerstner
discussed abolishing IBM's notorious dress code. He said that at the time the public reception was as if he
"had sold the company to the Russians." But for Gerstner, it was common sense for IBM's salesmen to dress
as their customers were doing.
Gerstner said that changing the attitude and behavior of thousands of people is hard to accomplish but key
to success. The work environment is the crucible for individuals' productivity. Management cannot change
culture through words and policies alone. All leaders can do is create the conditions for transformation and
invite employees to respond. Not surprisingly, he attributed IBM's success to the thousands of employees
who were willing to react to his initiatives and work hard to make the elephant dance again.
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Download Date | 9/24/15 11:12 PM