Ethical Practices From Proper Leadership Case Study

Question

Task:
Case Study: CEO power, accountability and transparency.

Source: White Paper on Corporate Governance and Leadership, 1st International Forum, Paris of The Council on Business and Society

The purpose of this assignment is to critique a relevant case study by using theories of leadership and governance to combine with concepts of power, politics, corporate social responsibility and governance presented during the second half of the course. You are required to form a group of 4 to 5 students to complete assessment 3 and 4. Following are three questions that you need to answer by reviewing the case study, relevant literature and real-life examples.

1: The case study details some bad behaviour from CEOs that leads them to being singled out as villains who steal from the company or shirk their responsibilities. Using ideas about ethics and good governance, explain how a board of governors might prevent such bad behaviour in the CEO?

2: The case study argues that the CEO is the focal point in a company’s governance - the ultimate decision maker responsible before all stakeholders. Explain, in detail and supported by theories from the module, how a high performing CEO should be leading by example.

3: The case study suggests that CEOs must leverage the loyalty of their employees and help them feel they belong. Examine how he might achieve that through some or all of the following concepts: organisational climate, organisational community, teamwork, diversity, flexibility, organisational culture and/or organisational change.

Answer

Supervisory measures by board to prevent managerial delinquency
The recent years have borne witness to a plethora of high level corporate scams affecting not only financial interests of the society but the degradation of the environment itself which will have far reaching impacts on the society. Notable examples are the Enron, WorldCom and Paramat Corporation scandal. British Petroleum was found spilling an astounding 5000 oil barrels a day into the Atlantic Ocean. Wells Fargo Bank was fined more than 300 million USD for creation of more than 3 million fake customer accounts. Needless to say, that the overall public confidence and trust on corporate management is at an all-time low which can have significant impacts on tangibles such as investment in public companies. As per this leadership case study, a large majority of these scandals could however have been avoided by able corporate governance and ethics with timely supervision of the Board enabled by a culture of transparency and cross-accountability in corporates.

Relevant theories of corporate governance
Agency Theory: The owner shareholders appoint managers (directors) to manage day to day affairs in the best interest of the owners as their agents (Clarke, 2004). However, Agency Theory suffers from the most basic fallacy of human greed and managers exploit the high degree of autonomy to advance their own self-interest (Padilla, 2000; Bhimani, 2008). As such, it requires a high level of supervision and regulations to minimize potential risks.
Stewardship Theory: This theory advocates for providing a high level of autonomy to managers and employees to foster a sense of identity and ownership with the firm so as to development of intrinsic interest towards the firm’s development. Proponents like Daly et al (2003) root for this style of management as they that the performance of the firm is linked to the personal reputation of higher management.

Measures taken by the board to curb higher managerial (c-level) and employee delinquency
Creation of an Ethics and Audit Committee headed by a CECO comprising of non-executive directions can be created to promote a culture of integrity in the organisation by creating control processes and code of conduct guides to be followed by employees and management. The committee can be headed by the office of the Chief Ethics and Compliance Officer (CECO). Three subcommittees are essential – the audit committee, ethics and compliance committee and ad-hoc committee to tackle miscellaneous problems. According to the leadership case study, the guiding principle of the committee should be to ensure top quality of product while integrating employee safety and satisfaction standards, sustainability, environmental impact and integration of the employee stewardship theory into the core business philosophy.

The CECO in- charge of daily management of the company should possess wide knowledge regarding CSR laws, ethical theories and application and active listening and empathy skills. The CECO has to report to the Board, should evaluate all executive pay and keep a close link with the in- house legal team and general counsel of the Company (Constance E. Bagley, et. al., 2017)

Implementing Online Standards and Procedures in Ethics and Compliance to management, detect and curb unethical or illegal behavior to minimize damage to the firm. The policies should be well-drafted, clearly stated with the organisation core principles, priorities, mission statements and procedures, and supplied by relatable and easy to understand examples. All employees and higher level management including Board members and C-level executives should be trained and educated in the policies. Some very good examples of this include the “The Spirit and the Letter” by General Electric and “Our Credo” by Johnson and Johnson.

Due care while hiring C-level execs to ensure honour and high moral fibre should be ensured. In additional to professional and technical competence, three key characteristics – responsibility, integrity, compassion - should be looked at (Constance E. Bagley, et. al., 2017). Through background checks should be conducted including if possible interviews of candidates who have worked under such execs.

Ensuring non-retaliation against employees for speaking up against managers is perhaps one of the most important factors. Anonymous or confidential complaint mechanisms should set up. Open-ended broad satisfaction surveys amongst can help the Board and CECO gauge the pervading workplace environment. An industry specific policy in medicine often gives a break between surgeries to ensure debriefing of everyone from senior surgeon to nurses present in the operating room to make sure everything has gone according to plan (Constance E. Bagley, et. al., 2017).

Establishing clear escalation policies go a long way in ensuring product quality and employment safety particularly in the manufacturing industry. As per this leadership case study, having a clear policy of what issue should be handled locally by the department and what has to be escalated to the higher corporate manager can be the key to ensure timely product delivery while avoiding accidents.

Applying the same standards across the organisation from low level employees to C-level execs is the first step to fostering a sense of fairness. It is asserted from this leadership case study that when misconduct by a high level manager is detected the company must take steps or it can result in major legal hurdles and fall outs. Foe eg. 1998, a whopping $3.5 million in punitive damages was imposed by a Palo Alto Court on Baker & Mckenzie which failed to curb sexual harassment by one of its execs in spite of being aware of the issue. As per the leadership case study Volkswagen, Oliver Schmidt of Volkswagen was sentenced to seven years in prison along with a fine of 400,000 USD for the Volkswagen diesel emissions scandal which needless to say had a major fallout on the company.

Lastly, it is important to be prepared to handle misconduct and failures in compliance as an eventuality by hiring PR and social media experts and consulting Govt. personnel and by making swift alterations to internal protocols and policies and taking responsibility. For e.g., after General Motors agreed to pay penalty of 900 million in damages, CEO Mary Barra famously said “Apologies don’t amount to much if you don’t change your behavior”.

How CEOs should lead by example
It’s said that a good CEO can compensate for a bad Board, but a good Board can never compensate for a bad CEO (Patricia Charle?ty, 2013; pg. 10). A CEO is the face and anchor of the company and is critical to business growth and is the single most important factor for the growth or death of a Company. He is the face of the company to the public and for employees is the one who is responsible for developing the corporate culture internally. Thus, according to this leadership case study it is crucial that the CEO must maintain this culture by leading by example to avoid hypocrisy and fallout in form of loss of public trust and employee attrition.

The two major theories of leadership in modern business in this leadership case study is the Transactional Leadership theory and Servant Leadership theory.

Transformational leadership theory
As per the leadership case study this theory encourages the leader to form a trust with stakeholders and employees, increase their intrinsic and extrinsic motivation, morality and transform them with their own charisma and leadership (Burns, 2004). They provide employees with a mission and vision to believe in and massively improve employee morale and loyalty by making them focus on something greater than themselves (Bass, 1990).

Promoting transparency in personal criticism and leadership –
Siemens was embroiled in a scandal accused of bribing Govt. agents to secure public contracts in 2006, the main reason cited by General Counsel Peter Solmssen was lack a central leader and lack of a single CEO which enabled multiple departments to operate autonomously without any central accountability enabling departmental managers to pocket illegal personal gains. According to this leadership case study the new CEO revived the company by making integrity the top priority and seeking the involvement of investors, shareholders, and labour unions by establishing a culture of absolute transparency (Patricia Charle?ty 2013, pg. 72)

Another astute example in this leadership case study is that of CEO Glenn Kelman of the Redfin Company which was an online real estate broker agency which returned 2/3rd of the brokerage fees back to customers. This led to them being ostracized by conventional real estate brokers who resorted to blacklisting customers who used Redfin. The CEO combatted this by stating a public blog and reporting all the going ons inside Redfin and often satirizing himself as the CEO. The market loved the transparency and it gained with customer trust within clients leading to massive growth.

Taking responsibility by personally responding to criticism -
The usual business practice after a major corporate scandal is to let PR firms handle it, however, when Toyota had to recall 12 million cars in 2009 and 2010 for faulty brakes, the CEO Jim Lentz himself went live on an online forum “Dig” where members of the public and even past employees fired hard hitting questions. Mr. Lentz took responsibility and that has undoubtedly positively impacted the company’s reputation and image.

In another example used in this leadership case study is in 1997, when robbery at one of their stores resulted in the death of three employees, Starbucks CEO Howard Schultz himself flew to Washington DC to speak with members of the bereaved families instead of delegating the responsibility and letting PR firms handle the crisis. His compassionate attitudes did not go unnoticed and garnered with wide appreciation from employees and the public.

In the 1980s Toro, a manufacture of commercial law and golf course management equipment used to be inundated by around a hundred serious injury lawsuits on average due to the hazardous nature of the equipment sold After the appointment of CEO Ken Melrose, he started a policy of sending company representatives to meet with the injured personal to offer a settlement. This act of empathy paid off, and since 1991, the yearly lawsuit rate dropped to about 1 every year.

Servant leadership theory
According to the leadership case study this theory advocates that the leader or the manager serves as a “servant” putting the needs of his employees and associates at the forefront instead maximizing shareholder profits (Sen, 2002). It seeks the growth of peers and advocates the trickle-down effects to profits by employees taking ownership as a result by the Stewardship theory (Kashyap, 2014).

Sacrificing short-term profits for long term employee value –
Following the 9/11 attacks, airlines were forced to cease operations for many days which led to massive loss of profits. The majority of airlines started to let go of employees amounting up to 20% of their workforce to reduce operational costs and retain shareholder value to survive. However, Southwest Airlines CEO James Parker went against the curve and announced that they would be retaining all of their employees and initiated a profit sharing payment to employees costing the company 179.8 million dollars. Mr. Parker believed that Southwest had established a sound ethical business practice of focus on human resources for the past 30 years and he was not about to let go now (Glen Stansberry, 2010). Needless to say, Southwest bounced back massively after 911 restrictions were lifted and enjoyed a high degree of customer satisfaction because they employees took ownership of ensuring such for the company.

Encouraging a culture of transparency, openness and approachability –
Another instance in this leadership case study is when Costo’s CEO Jim Sinegal made it incredibly easy for employees to directly reach him for troubleshooting. He answered his own phone calls without the assistance of a bevy of personal secretaries, encouraging employees to call him by his first name, having an open office without walls and expensive decorations and paying himself a yearly salary of a comparatively modest sum of 350,000 USD while his counter-parts raked in millions. His contract also has stringent termination for low performance clauses. As a result, Costo has one of the lowest employee turnover rates in the industry.

Ensuring Worker’s safety and satisfaction
According to the findings from one such leadership case study, Starbucks is one of the companies known for their employee welfare policies. They offer insurance to even part-time workers (Glen Stansberry, 2010).

Encouraging works to speak-up and offer input
Whistleblowing by employees are a major source of fear amongst corporate houses and many are advised to observe silence and are coerced with termination and prosecution behind lengthy and overarching draconian confidentiality agreements.

However, IBM turned it into a marketing tool by encouraging its over 300,000 employees to speak up in public and within the organisation by enabling them with a formal corporate blogging policy. Their blogs are now a widely-trusted source in the technology industry and an undoubtedly valuable marketing tool for the company (Glen Stansberry, 2010).

Encouraging and implementing employee ownership
In the 1980s, TDIndustries was facing a massive funding crunch due to the weak health of the Texas banking industry during that time so much so that the Company was facing a threat of going under unable to gather resources for the large construction projects in its industry. The Company reached out to its employees by offering a “Defined Retirement Plan” for contribution by employees to the resources of the company in exchange of ownership. Because of a long standing corporate culture of transparency, it received 30% more funds than required. Today it’s one of the giants of the industrial construction industry and is largely employee owned.

How ceos should win loyalty of workforce
Improving organizational climate and culture: According to this leadership case study one of the most vital intangibles in an organisation is the climate or the culture. This includes its policies, openness, principles, mission and goals. The improvement of Organizational climate for employees is paramount for the smooth functioning of the organisation. Here are some steps for improvement.

Flexibility between work and private life
Reconciliation between work and private life by practices like flexible timings, remote work opportunities, holiday workhours, weekend scheduling, half-days for family events help to increase employee satisfaction. Social benefits and amenities such as free massages, parking, subsidized meals can also help.

Decluttering the workspace
Decluttering can improve focus and performance and increase productivity. Going paperless wherever possible, like replacing office memos with online work groups is essential.

Fostering Innovation and Ideas
Employees can be encourages to share suggestions and innovative ideas with the management to boost their morale and also transform the business.

Iimproving teamwork
Effective utilization of teamwork produces far better results than individual work. Howver its essential to ensure a cohesive team as dissonance can be harmful. Here are some ways.

Organizational Communication
As per this leadership case study proper communication and coordination between departments are essential work a healthy work environment. Ideas for improvement can include utilization of suggestion boards, idea sharing sessions, departmental break-fast, weekly team meetings and informal outings.

Job Recognition
Out human brain is wired to feel invigorated by validation. Recognition of effort and valuable work by the higher management can boost employee morale significantly and incentivize them to work harder with a sense of purpose. Rewards programs for hitting targets and performance bonuses are widely used.

Effective Mediation
Friction between co-workers is inevitable. It is thus wise to have impartial judgement-free mediation policies in the workplace facilitated by the HR or third party professionals to resolve dispute quickly and effectively.

Increasing diversity
Increasing diversity in the workplace can have several benefits like a wider source of viewpoints and ideas, increased empathy, increasing customer or client base, signaling openness and avoiding tunnel vision. This leadership case study identified that some practices like hiring over a broader geographical area, having accommodating and flexible recruitment and exit policies, having a diversity quota, providing diversity training to employees and increased employee participation in formulating management policies go a long way in increasing diversity.

Reference List
Bass, Bernard M. (1990). "From transactional to transformational leadership: Learning to share the vision". Organizational Dynamics. 18 (3): 19–31

Bhimani, A. (2008) “Making Corporate Governance Count: The Fusion of Ethics and Economic Rationality”. Journal of Management and Governance, Vol. 12, No. 2, pp. 135-147

Burns, James Macgregor (2004) “Transformational Leadership” ISBN 9780802141187.

Clark, T. (2004) “Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance” London and New York: Routledge

Constance E. BagleyBruno CovaLee D. Augsburger (2017) “How Boards Can Reduce Corporate Misbehavior”. Harvard Business Review

Daily, C.M., Dalton, D.R. and Canella, A.A. (2003) “Corporate Governance: Decades of Dialogue and Data”. Academy of Management Review, Vol. 28, No. 3, pp. 371-382

Glen Stansberry (2010). “10 Business Leaders You Should Strive To Emulate”. Businessinsider.com. Available at: https://www.businessinsider.com/10-examples-of-excellent-business-leadership-2010-2?IR=T. Last accessed: 22nd August, 2019, 12:57 P.M.

Kashyap, Vaneet; Rangnekar, Santosh (2014-12-07). "Servant leadership, employer brand perception, trust in leaders and turnover intentions: a sequential mediation model". Review of Managerial Science. 10 (3): 437–461.

Padilla, A. (2002) “Can Agency Theory Justify The Regulation Of Insider Trading”. The Quarterly Journal of Austrian Economics, Vol. 5, No. 1, pp. 3-38

Patricia Charle?ty (2013). Corporate Governance and Leadership: First international forum. Paris. White paper, pp.80.

Sendjaya, Sen; Sarros, James C. (2002-09-01). "Servant Leadership: Its Origin, Development, and Application in Organizations". Journal of Leadership & Organizational Studies. 9 (2): 57–64.