Ethical Competency in Business Leadership
This chapter describes two executive mindsets, one that drives firms to neglect social concerns and the other toward recognizing and responding to such concerns. The difference is the ability of the chief executive officer to factor values into his or her decisions while encouraging other employees to do the same. This ability is put forth as a necessary condition for ethical competency in business leadership.
The Role of the Executive Manager in Driving Responsible Corporate Social Performance
Although the idea of a social contract is an ancient one that has come to be associated with a theory of politics, it is also used more generally to elucidate and ground principles for moral relations in society (Narveson 2008, 1948). Business ethicists have invoked this second meaning to explore the nature of the relationship between business and society, especially the moral responsibilities that corporations have to various groups that have stakes in corporate conduct. These stakeholders include customers, suppliers, business partners, stockholders, employees, social activists, the media, government regulators, civic organizations, and local communities (Freeman 1984). The idea is that business organizations are special purpose tools that derive their legitimacy by adhering to society’s expectations of responsible behavior (XXXX 1995). The corollary is that the contract between business and society is a two-way partnership of reciprocal responsibilities. Indeed, Adam Smith’s famous justification of capitalism, as set forth in Wealth of Nations, represents an articulation of this contract in that he justified the activities to be permitted in the economic sector subject to certain boundaries set by the government on behalf of the social good (Collins 1988, 119-120).
The idea of a social contract is not only philosophical, it is ultimately practical. Indeed, the belief that top managers can be drivers for corporate social responsibility came from the business sector itself. Specifically, the roots to this prospect can be traced to the 1950s when corporate leaders in the United States, followed by academics at pedigreed universities, called for business to act as a trustee of social wellbeing. According to Frederick (2006), one of the first such calls came in 1951 from Frank Abrams (Abrams 1951), chairman of the board of directors of Standard Oil of Jersey and the author of a seminal statement about the duties executives have to society. Subsequently, the Committee for Economic Development (CED 1971), constituted mainly by top-level corporate executives, encouraged business to adopt a broader, more humane view of its function in society. That Joseph Wharton founded the first business school in the United States as a vehicle for social enterprise knowledge reflected these early calls for business responsibility. The popularly-held myth that corporate social responsibility advocates and business representatives are in opposing camps is not well founded, given that business practitioners were instrumental in shaping foundational views about the broad social role of business.
One rationale for business to adopt social responsibilities voluntarily is that such a powerful institution could lose legitimacy if not responsive to social expectations (Davis 1964). Consistent with this outlook, business and society scholars have long been interested in how managers can use their discretion to promote responsible corporate conduct (Wood 1991). For example, Jones (1983) asserted that the voluntary adoption of social responsibilities by corporate decision makers constitutes an important mechanism of business self control. Epstein (1987) added that such self regulation involves value-based moral reflection concerning the critical issues posed by a firm’s social environment. It is especially important that executive managers exhibit this ability, given that ethical dilemmas are felt most keenly by lower managers (Posner and Schmidt 1984) while whistleblowers face inordinate burdens when they try to call attention to ethical lapses (Grover 2003; Near, Miceli, and Jensen, 1983). Executives have powerful means at their disposal to prevent or alleviate such dilemmas and promote responsible conduct (Schein 1992), which is why they hold the keys to corporations gaining and keeping social legitimacy (see Selznick 1957).
There are both negative and positive motivations for executives to assume social responsibilities, negative when they act out of fear of adverse legal ramifications or public backlash and positive when they voluntarily seek to enact affirmative obligations to society. Although motivation is a slippery subject, difficult to ascertain, the case of discovery leadership, outlined in this chapter, exemplifies an executive’s proactive willingness to consider the social values at stake in decision making and direct other employees to do the same. This type of decision making is portrayed as a necessary condition for ethical competency in business leadership, and the stage is set for it by a description of the opposite case of myopic leadership that discourages the consideration of values in organizational decision processes. As will be demonstrated, these two executive mindsets imply very different organizational dynamics, one that portends the possibility of responsible social performance and one that does not.1 In conclusion, some implications for research and practice are identified.
First, some disclaimers. In terms of social contract theorizing, discovery leadership does not replace the need for social control of business by stakeholder pressure, the law, public policy, and government regulation. Although research indicates that corporate social responsibility can pay (Orlitzky, Schmidt, and Rynes 2003), there will always be situations when profits collide with other desirable social values. For instance, firms in industries with slim profit margins may fail to invest in expensive equipment designed to prevent accidents that can harm stakeholders and the natural environment. To make such investments may place these firms at a competitive disadvantage, at least in the short run. In such cases, public policy is called for. Indeed, public policy may be necessary even when executives strive for socially attuned or discovery leadership. After all, calculating the benefits and costs of corporate activities and directing firms to internalize certain social costs is a mainstay of government regulation. It is not realistic to expect executive managers to take up this countervailing role. That said, discovery leadership can be seen as a way of enhancing the possibilities for social responsibility in terms of corporate self regulation. This mindset, however, does not displace the need for social control of business.
Another disclaimer is that the many values at stake in business and society relations are not documented Such documentation is beyond the scope of this chapter, since value preferences, ethical norms, and legal standards vary across stakeholder groups and cultures.2 Nevertheless, this chapter is informed by a consensus among business and society scholars that corporations should fulfill an economic function in society while forging and maintaining constructive, collaborative relationships with stakeholders that demonstrate a sensitivity to their concerns (Freeman 1984; Waddock 2002). The stakeholder landscape is replete with important value preferences, as when consumers demand safe products, workers request fair treatment, borrowers expect truth in lending, stockholders desire fiduciary duty, creditors ask for full disclosure, the media pressures for transparency, and activists clamor for environmental protections, just to name a few. Given this landscape, discovery leadership exemplifies an executive mindset capable of considering such value-based expectations as a necessary condition for ethical competency in business. In formulating this model, the method of ideal typing is used, as described in the next section. The focus on executive decision making does not mean that middle or lower managers are irrelevant to responsible corporate social performance. It is simply that their decision making is largely circumscribed by top managers (Simon 1957), which is why they face moral dilemmas when their values are incompatible with those established on a higher level of command (Jackall 1989; Perrow 1986).
Using the Method of Ideal Typing to Model Executive Leadership
Before describing the two prototypes of executive leadership and defining their features, it is important to emphasize that they are ideal types drawn from research on business and society, business ethics, and organizational dynamics. This method relies on Max Weber’s (1922/1947) construction, which amounts to a simplified model that focuses on a subject’s distinctive features so that logical implications can be drawn across levels of analysis. Since this method accentuates a one-sided view of a phenomenon, it can be used to generate theoretical implications from existing classifications of research topics (Bailey 1994). It is used herein to identify the logic implied in well-known classifications of corporate social performance research.3 According to these classifications corporate social responsiveness refers to how business organizations and their agents can actively interact with and manage their stakeholder environments whereas corporate social responsibility accentuates the moral obligations that business has to society (Frederick 1987). The latter goes to the nature of the social contract, discussed earlier.
Specifically, corporate social responsiveness involves the detection of and responses to stakeholder issues by public affairs specialists and other organizational agents charged with external affairs management. Influenced by the work of Ackerman and Bauer (1975), this research focuses on the behavioral patterns and tools that enable firms to respond to social concerns. Managerial in tone and quintessentially pragmatic, inquiry into responsiveness examines company procedures, such as social auditing and social scanning techniques, as means by which organizations can react to or anticipate social expectations, many of which are embodied in public policy as indications of important community values (Preston and Post 1975). Compared to responsibility, responsiveness is more forward looking, action-oriented, and malleable because it is based on the premise that corporations have the capacity to anticipate and adapt to environmental factors. It is this capacity that makes it important to understand the internal decision processes that make responsible corporate social performance possible (XXXX 1995). Responsiveness and responsibility are interrelated in that responsiveness can be shaped or triggered by stakeholder expectations of business responsibilities, some of which were described earlier. Another way to think about this relationship is that responsibility is marked by the moral overtones of social obligations whereas responsiveness exemplifies a “how to” mentality (Frederick 1987). To summarize, responsiveness provides the means for responsible corporate performance, understood as beneficial social impacts.
In terms of ideal typing, the two heuristics of myopic and discovery leadership, described next, do not represent actual organizations. Nor do they constitute full-fledged theories. Rather, they are systems of pure logic that can be used as contrasting points of reference for theory development that incorporates the executive mindset as a driver of ethical competency in the pursuit of responsible social performance. Since ideal types can be used to incorporate the individual, organizational, and societal levels of analysis, this form of modeling is used to personify executive leadership in terms of organizational dynamics and societal impacts. Two vastly different models of leadership are implied. On the one hand, an executive’s failure to recognize the importance of values in decision making, referred to as “value myopia,” connotes an organization that will systematically neglect social concerns. In contrast, an executive ability to be receptive to values, referred to as “discovery leadership,” suggests an organization capable of attuning to social concerns. Put differently, discovery points to the potential executives have to lead their firms to quest for responsible social performance, portrayed as attunement. Before this potential is detailed, its antithesis is given.
Value Myopic Leadership: The Inevitability of Neglectful Social Performance
The overarching proposition in the case of myopic leadership is that when executive managers exhibit myopia by ignoring, suppressing, or denying the role of values in their decisions, then whole organizations will eventually lose touch with stakeholder expectations of responsibility. These value-based expectations are often articulated in the language of rights and justice, such as calls for firms to respect consumers’ right to safety and provide just compensation when defective products cause harm. Figure 1 illustrates how value myopia and organizational neglect go hand in hand, given the mediating effects of two fundamental aspects of organizational life ---the formal chain-of-command structure and the informal culture.
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The logic of this model is as follows. Executives who exhibit myopia use formal and informal means (either consciously or unconsciously) to encourage other employees to follow suit and suppress an awareness of value information in decision processes. As Figure 1 shows, this dynamic gets played out in the formal (hierarchical) and informal (cultural) organization. In terms of the formal organization, executives can promote organizational value myopia by using their official authority to set a narrow range for employee decision making along the chain of command. Practically speaking, this means that executives discourage employees from including information about stakeholder value-based expectations in official reports, memos, agendas, and other feedback mechanisms. It also means that annual performance reviews are not structured to reward employees for incorporating values in their decisions. Therefore, promotions will go to those who imitate or go along with myopia. Over time, the range of discretion for subordinate decision making gets aligned with the narrow value premises set on the higher level of administration (Simon 1957). Adapting Weick’s (1969) terminology, the variety of value information in the environment gets reduced as subordinates select, retain, and enact the narrow mindset of the executive.
In terms of the informal organization, executives can also signal a tacit approval of myopia by using certain cultural mechanisms. For instance, they can mentor sycophants who convey only desired information to them and ignore or shun employees who give fuller accountings (see Schein 1992). They can also encourage stories, legends, and myths that celebrate myopia, such as elevating rhetoric that promotes a narrow focus on profits or managerial power prerogatives instead of a broader appreciation for social concerns.
The upshot of these mechanisms and signals in the formal and informal organization is that myopic decision making gets replicated among employees. When boundary-spanning employees, such as external affairs specialists, align with such shortsightedness, they fail to communicate important information about the social environment to senior managers and others in the organization. This undermines the very task they are supposed to carry out. The two-way arrows in Figure 1 show that the dynamic is self-perpetuating: employees develop a reluctance to convey social concerns to the executive who signaled disinterest in the first place. Executive and organizational myopia inevitably align as the executive proclivity to downplay or ignore values gets played out as a chronic tendency for an organization to neglect social concerns (see Scott and Hart 1979). Eventually this sluggish or inert type of organization loses touch with its host environment and neglectful corporate social performance becomes the norm.