MIT SL

SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

Creating an Ethically Strong Organization

CATHERINE BAILEY AND AMANDA SHANTZ

Ensuring that all employees clearly understand appropriate ways to address daily
ethical issues can prevent your company from spiraling into corporate scandal.

leadership team who either orchestrated the scam or

simply turned a blind eye. 1

Of course, VW isn’t an isolated example. Consider the

costly lapses in judgment at Wells Fargo, 2 for instance,
and at Samsung Electronics. 3 Why do such scandals
continue, despite the clear moral and financial
imperatives for ethical action? And — perhaps more
important — what can be done to change matters?

Although some argue that people are innately inclined to

behave unethically out of self-interest, 4 our research
reveals that organizational ethics matter significantly to
most employees and managers, and that people want to
work for employers whose values and principles are
aligned with their own. This suggests that ethical
employers are likely to attract and retain ethical
When German car manufacturer Volkswagen was caught employees. 5 What’s more, research has shown a link
cheating on its diesel emissions testing regime a few years between ethical leadership and task performance,
ago, the subsequent scandal launched numerous lawsuits, organizational citizenship, and other productive work
cost billions of dollars in fines, and severely harmed the behaviors 6 — companies have many compelling
company’s reputation. The actions — and inaction — of reasons to address ethical failings at the earliest
dozens of employees at all levels, across divisions and opportunity. The urgency is all the greater in this digital
countries, contributed to this disaster, including the age, since businesses must continually make rapid, high-
software engineers who designed the cheating device, the stakes choices about how to handle sensitive customer
workers who installed it, the managers who approved the and employee data.
fitting and testing, and the members of the senior

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

To uncover the reasons behind persistent unethical documentation such as human resources policies and
conduct, we asked employees at five U.K. organizations — statements of mission, vision, and values.
a national government department, a nationwide retailer,
a nonprofit in the social services sector, a county-level Daily Dilemmas That
police force, and a construction company — to tell us
about their experiences of both ethical and unethical
Trip People Up
practices on the part of their colleagues, line managers, When employees don’t have a shared understanding of
and senior executives. 7 (See “About the Research.”) We events that unfold around them, what constitutes an
found that the ethical tone of an organization is the ethical response, and the consequences of behaving
cumulative outcome of how its members address daily otherwise, it often means the organization has created an
ethical dilemmas as they go about their work. Over time, ethically weak situation for them. People essentially
a consistent mishandling of these micro-level issues can become free agents, behaving idiosyncratically in the
spiral into macro-level corporate scandal. Here, we absence of clear, strong norms. (An ethically strong
discuss several murky areas that employees must navigate situation, in contrast, is one in which “the right thing to
and ways that organizations can help them make ethical do” is clearly communicated to employees and people
choices day to day. have the motivation and ability to behave in ways that are
consistent with the organization’s ethical code. 8 ) In the
case of VW, an ethically weak situation was allowed to
About tth
he R
Res
eseearch develop over many years, as senior executives prioritized
To inform our study design, we carried out a detailed market share over environmental and legal concerns in
analysis of research over the past 25 years on ethical one judgment call after another.
leadership and decision-making. We then surveyed a
representative sample of 1,319 workers in the United Here are the daily dilemmas we found that tend to muddy
Kingdom and conducted in-depth case studies in five the ethical waters for individuals in decisions both large
U.K. organizations: a central government department and small.
with 18,000 employees, a nationwide retailer with 31,000
Ethic
hicaal di
dissco
conn
nneect. Sometimes employees observe a gap
employees, a nonprofit in the social services sector with
between their personal ethics and those of the wider
1,100 permanent and 300 temporary staffers, a police
organization, and that makes them uneasy. An abundance
force of 3,000 officers plus civilian staffers, and a
of studies show that people want to fit in at work 9 —
construction company with 6,900 employees.
but it’s not just a fit with the requirements of the job or
In four of the organizations, we surveyed 1,033 employees even a fit with the organization’s culture that matters. New
and their 524 line managers. Across all five, we conducted research is beginning to show that people have a strong
46 face-to-face interviews, held 16 focus groups with a desire to gain a sense of moral fit as well. 10
total of 79 participants, and analyzed company
Because they feel this deep-seated need, they’re desperate
to close the gap between their own ethics and those of

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

their organization. When they struggle to do so, they While the nonprofit solved this dilemma by refusing to
often withdraw and may quit their jobs altogether. One provide preferential treatment in exchange for donations,
manager told us, “I’ve worked in businesses that I didn’t situations vary, and what is right for one organization
stay in very long because of the ethics and the culture. I may not be right for another. Even different departments
didn’t feel comfortable.” This sentiment is echoed by within the same organization face competing priorities
many. when having to choose between stakeholder groups.
However, each time an employee or a leader makes a
Conflic
nflicttin
ingg ssttakeholder n
neeeds. Every organization has a decision that implicitly or explicitly favors one
range of stakeholders affected by its decisions, including stakeholder group over another, it sends a message to
employees, suppliers, clients, senior managers, the local other employees about what really matters — and whose
community, wider society, and even the environment. 11 interests the organization is willing to sacrifice.
Organizations may have an explicit approach to balancing
these competing needs — but that may not be the same as Not kkn
nowin
ingg w
whhet
ethher (o
(orr h
hoow) ttoo ssp
peak u
upp. Witnessing
the implicit approach that employees witness every day. unethical conduct by a colleague or superior forces
people to decide: Do I take this further? If so, how? And
When we asked employees and their leaders to rank the what will be the consequences for me and for others?
order in which stakeholders “matter” in important
decisions, consensus was rare. As one employee in the Often, whether or not people challenge unethical
retail sector said, “Even though we’ve got a vision and behavior depends on the nature of the infraction, the
we’ve got an ethical policy framework, I personally feel setting within which it takes place, the seniority and roles
very strongly that [in practice] it’s shareholder, company, of those involved, and the potential risks of challenging
colleague, in that order.” the behavior. Some ethical breaches are especially difficult
to challenge; in many cases, staff may be unwilling to
When groups of stakeholders lobby for special treatment, challenge upward. One government manager seemed to
the situation becomes even more complex. For the have realized this, saying, “I’m quite an outspoken person,
nonprofit we studied, a core challenge was figuring out and nobody has ever challenged my behavior, even
how to handle large donations that are linked to requests though in some circumstances I recognize that I perhaps
for preferential care of the donors’ relatives. One manager go a bit too far.”
told us, “Sometimes, the choices we have to make are not
overtly compromising, but they can make things difficult Possible responses include staying silent, taking the
— people asking for access to services when they’re not individual aside and discussing the matter privately,
entitled to them, or people jumping the queue.” Managers calling the person out in front of others, reporting the
must weigh the monetary worth of the donation against matter to senior staff, or reporting it anonymously via a
the nonprofit’s values of integrity, fairness, and whistle-blowing or anti-harassment program.
transparency.
Some employees we spoke with described instances when
they chose to stay silent. Discussing an event when

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

bonuses were awarded to everyone except the hourly might be relying on that person to
workers on the front line, one retail employee said:
save your life.

It did feel desperately uncomfortable, When employees choose to stay quiet — even with good
but in the end you either rise up as a intentions — alternate viewpoints are silenced, levels of
whole population and say, “No, this engagement and commitment are likely to diminish, 12
and others note that failure to challenge is the norm.
isn’t right, none of us are taking
Conversely, in the construction company, an employee
bonuses,” or you become an outlier was comfortable publicly challenging a colleague for the
and a single person saying, “I don’t use of sexist language; when the perpetrator apologized
want my bonus, I’m going to give it immediately, the interaction sent a positive message to
others about how to handle such situations.
to charity,” or you say nothing. I
Ethics vver
erssus exp
expeedien
dienccy. Another challenge is deciding
didn’t say anything. what to do when the ethical solution to a problem is not
the expedient solution — often because there aren’t
enough hours, dollars, or people to make the ethical
And a junior police officer told us: solution happen. As one retail manager put it:

If you and I were constables and I’d I think our ethics as a business are
seen you behave in an unethical way very, very good. Where we get the
and challenged you about it, that frustration is when we want to do
could cause bad feeling. But then if the right thing with our people, but
you and I went out and faced actually the resource levels that we’re
somebody going crazy with a knife, asked to work on make it impossible
I’d need to know you’d have my back. sometimes.
It’s not like working in an office. You

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

In the context of the police, this kind of problem meant

that officers had to make choices about which crimes to
investigate, causing “a huge amount of strain and stress to
officers because they can’t do the job they’re trained to do,
that they’re paid to do, that they want to do, and is the
reason why they joined in the first place,” according to a
leading officer on the force.

Two Cr
Criitic
icaal E
Elem
lemen
ents
ts ooff E
Etthic
hicaal
Leader
adersshi
hipp
The number of CEOs sacked for ethical misconduct has
risen 36% in the last five years, i including such high- Call to Action
profile examples as Yahoo CEO Scott Thompson, United No organization is free of these dilemmas, but they can be
CEO Jeff Smisek, and LendingClub founder Renaud managed. Our research and analysis suggest that the
Laplanche. But the problem of unethical behavior can’t be following six steps can help leaders set an ethically strong
“solved” simply by firing senior leaders who behave badly. tone so that employees are better equipped to make the
right choices day to day.
To bring about lasting change, organizations must invest
in “distributed” ethical leadership. That is, they must hire 1. A
Accknowleledg
dgee et
ethic
hicaal aam
mbigui
iguitty. Many organizations do
and cultivate leaders at all levels who promote ethical not recognize or discuss ethically tricky situations their
behavior. Two essential ingredients are a strong vision managers and employees face. This drives individuals to
and a deep commitment to stakeholders. internalize their decision-making processes — which can
create a slippery slope.
Our research shows that employees who see their
managers as ethical leaders are more satisfied with their In the police force we studied, even though leading
work, are more willing to go the extra mile, find the work officers were well aware that budget cuts meant increased
that they carry out has significance in the broader scheme workloads and longer hours for the rank and file, they
of things, and are less likely to quit. Unfortunately, most had not openly acknowledged these pressures with their
organizations aren’t poised to reap those rewards. staff and how they might affect day-to-day decision-
making — preventing an authentic dialogue about the
problems or possible solutions. One leading officer said,
“We are really struggling, and we’re not admitting that to
people on the ground.” Officers and staff felt the pressure
but, given the lack of open discussion, assumed that
senior leaders did not care.

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

In organizations with a culture of transparency, people believing that in practice senior executives were more
are more inclined to seek to understand the underlying concerned about hitting performance and sales targets by
rationale for decisions. This has a positive effect on persuading customers to buy add-on products and
ethical decision-making because values are exposed when services than about caring for the customer or providing
they are openly discussed rather than inferred from town excellent customer service. One employee said: “You
hall meetings or company documentation. At the always have that tagline at the end, ‘The customer comes
nonprofit we studied, one executive noted: “You know, first,’ but at the end of the day it’s a business and the
I’ve worked for places where things are done behind people at the top know we need to hit a KPI figure.”
closed doors and you don’t really understand the reasons.
I think here, whatever initiatives are being run, it’s done Confusion about whose needs to prioritize can be
very openly. We don’t make decisions in hiding; we make compounded when an organization has been through a
decisions in a very consultative way.” So when its series of mergers or takeovers that bring together
employees wonder how, for instance, to respond to a different ethical climates. In these cases, leaders have an
donor who requests a service, it’s easier for them to make especially significant role in establishing a consistent
that call, because they have a clear understanding of the ethical framework and guidelines for balancing
organization’s ethical values and are confident they can go stakeholder interests.
to their managers for clarification or support without fear
Providing employees with a clear statement of vision can
of being negatively judged.
help them weigh competing concerns and make
2. C
Cllarif
ifyy tth
he et
ethic
hicaal ttrade-o
rade-offfs. Another important step is appropriate trade-offs. In the police force, for instance, a
to explicitly clarify how employees should balance the widely shared “Plan on a Page” helped officers understand
needs of different stakeholder groups. policing priorities (such as child abuse and exploitation,
modern slavery, and violence) and provided guidance on
Most decisions will affect more than one set of serving the needs of the community (by putting the
stakeholders. Although the needs of all groups can victim first and communicating effectively with the
sometimes be met, trade-offs are usually necessary. When public) while also making the most efficient use of
employees are not sure how to manage this tension, resources.
unethical approaches can develop.
3. En
Enssur
uree rroole-m
le-moode
delin
lingg ffrrom tth
he C-s
C-sui
uitte do
dowwn.
In the retail company, leaders paid lip service to meeting Employees observe how leaders actually handle ethical
customers’ needs above all others, but their behavior dilemmas, rather than what they say about ethics, and
wasn’t always consistent with that message, which created will infer the organization’s real priorities accordingly.
confusion. Employees reported that decision-making was VW is a case in point: Though senior executives claimed
more often governed by immediate profit considerations to care about “clean diesel,” they apparently both
and key performance indicators. Some felt a degree of condoned deliberate cheating on emissions tests and
cynicism toward the company’s “customer first” rhetoric, encouraged employees to hide or destroy its evidence. 13

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

When the senior team sends mixed ethical signals, mid- certain way, and what the consequences are for not doing
level managers may pick and choose what to follow. that.”
These mixed signals cascade through each level of the
organization. As one employee in the construction Although corporate policies and programs alone will not
business said, “If your direct line manager isn’t setting an eliminate unethical practices, 15 their existence is
example for you, it detracts from the message that the essential. For example, at the nonprofit we examined,
business is giving.” employees were frequently confronted with ethical
dilemmas when working with clients, such as how to
We did find that the ethical conduct of mid-level assess mental capacity or how to manage end-of-life
managers can compensate for mixed messages from the issues and determine appropriate levels of treatment and
C-suite, slowing or even reversing the development of an support. The organization helps its employees make
ethically weak situation. In the retail business, for ethical decisions by developing clear policies on
example, the staff talked positively of the “family approaches to care and providing training that specifically
atmosphere” and shared values within individual stores focuses on such challenges.
and regions that counteracted the dominant “cost
control” messages from the head office. However, a much Similarly, at the construction company, part of the
more reliable approach is to set the desired example at the recruitment process involves matching applicants’ ethical
top. The nonprofit fostered an ethically strong situation values with those of the business. It has also adopted a
by clearly showing how core ethical dilemmas should be code of conduct and a formal framework called “What
resolved: When a company bidding to work with it asked Good Looks Like” to guide employee behavior. Training
one of the nonprofit’s trustees to put in a good word for it, on topics such as how to deal with anti-competition risks
its leaders immediately ruled out the company as a and health and safety issues is compulsory for line
partner due to a misalignment of ethical values. managers, and an online system allows for logging any
health and safety issues as they arise. Although employees
4. Em
Embbed et
ethics
hics in co
corrpora
ratte p
poolicies aan
nd p
prrog
ogra
ram
ms. sometimes feel that these processes slow decision-
Ethically strong situations are developed in settings with making, they provide clarity and “consistency, and people
robust codes of conduct and policies for enforcing those know what is expected of them,” according to a front-line
codes. 14 Such policies should include clear rules about manager.
bullying, harassment, and whistle-blowing. And they
should be conveyed and reinforced through on-boarding, 5. Em
Emp power in
indi
divvid
iduuals ttoo h
haandle et
ethic
hicaal bbrreac
achhes.
leadership development, and other training programs. Ethical breaches will inevitably arise, of course —
whether through error, neglect, or deliberate action. But
Without formalized policies around ethics, efforts to ethically strong organizations explicitly say how people
create an ethically strong situation will most likely should deal with them when they do occur, in addition to
founder. As one police officer said, they “help people trying to prevent them in the first place. Employees at all
understand why we need to behave, act, do things in a levels then feel more empowered — and obliged — to call

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

out bad behavior, even when doing so may be difficult. The nonprofit’s transcendent cause is to provide care and
For example, employees in the construction company are support for the community; for the police, it is to keep the
required to challenge decisions and actions that could community safe from harm. The construction company’s
compromise the health and safety of employees and ethical vision of sustainability translates into protecting
customers alike. One manager said that the culture the environment as well as safeguarding its employees
around this is so strong that “in extreme circumstances, and customers. As one of its managers told us, “A lot of
people have lost their jobs because they haven’t followed practices in our industry do create harm for the planet,
through on what really is their duty to either challenge it and so we’re trying to reduce our CO2 emissions.”
there and then or report it later to make sure remedial
action can be put in place.” When a company’s mission or vision is unclear or
divorced from ethics, or, as a senior leader at the retail
In ethically weak organizations, challenging people’s organization said, when “the ‘why’ is missing” altogether,
behavior is not the norm. Sometimes employees fear an opportunity to provide guidance is lost and an
retribution, because they do not see others around them ethically weak situation develops. But an overarching
raising questions. Or they may feel that no action will be sense of purpose creates a context within which micro-
taken if they do speak up. 16 Sadly, that assumption isn’t level ethical dilemmas can be resolved.
necessarily unfounded. While some VW employees
apparently did challenge the use of “defeat devices” Conclusion
designed to cheat the emissions tests, their concerns were
Setting the stage for ethical behavior isn’t just a top-down
ignored. 17 So far, the evidence suggests that more than
exercise — though clear direction and positive role-
40 VW employees in different roles and at varying levels modeling from senior executives do help. Organizations
of seniority were implicated in the diesel emissions must also consider the daily ethical dilemmas that their
scandal. 18 Had individuals felt empowered to challenge managers and employees face and give them the tools to
ethical breaches, perhaps the scandal could have been make good choices. This involves regularly checking in to
contained before erupting on such a massive scale. ensure that codes of conduct are clearly articulated and
upheld — and imposing consequences when they are not.
6. Em
Embbrace a hig
highher ccaause. Finally, ethically strong
situations are characterized by the presence of a No company is immune from ethically questionable
transcendent cause that unites the organization behind a decision-making. But by openly acknowledging and
vision and set of values that go beyond self-interest. One carefully managing murky situations that come up again
employee called this “the vision that brings you back and again, organizations become much less susceptible to
tomorrow.” egregious lapses in judgment — and less likely to incur
the associated reputational and financial costs.

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

About the Authors References 8. We draw here on the ideas of W.

Mischel, “Personality and Assessment”
1. R. Parloff, “How VW Paid $25 Billion (New York: Wiley, 1968).
Catherine Bailey is a professor of
for ‘Dieselgate’ — and Got Off Easy,”
work and employment at King’s 9. A.L. Kristof-Brown, R.D. Zimmerman,
Fortune, Feb. 6, 2018.
Business School, King’s College and E.C. Johnson, “Consequences of
London. Amanda Shantz is an 2. “The Wells Fargo Fake Account Scandal Individuals’ Fit at Work: A Meta-Analysis
associate professor in human Just Got a Lot Worse,” Fortune, Aug. 31, of Person-Job, Person-Organization,
2017. Person-Group, and Person-Supervisor Fit,”
resources and organizational
Personnel Psychology 58, no. 2 (June
behavior at Trinity Business School, 3. “Samsung Heir Lee Jae-Yong Jailed for 2005): 281-342.
Trinity College Dublin. Corruption,” Aug. 25, 2017, [Link].
10. M. Motyl, R. Iyer, S. Oishi, S. Trawalter,
Acknowledgments 4. T. Haugh, “The Trouble With Corporate and B.A. Nosek, “How Ideological
Compliance Programs,” MIT Sloan Migration Geographically Segregates
The authors would like to thank the Management Review 59, no. 1 (fall 2017): Groups,” Journal of Experimental Social
55-62. Psychology 51 (2014): 1-14.
Chartered Institute of Personnel and
Development for the funding that 5. D.R. May, Y.K. Chang, and R. Shao, 11. C. Frisch and M. Huppenbauer, “New
supported this research and the “Does Ethical Membership Matter? Moral Insights Into Ethical Leadership: A
Involvement and Participation Identification and Its Organizational Qualitative Investigation of the
Association for its assistance in Implications,” Journal of Applied Experiences of Executive Ethical Leaders,”
Psychology 100, no. 3 (2015): 681-694; Journal of Business Ethics 123, no. 1
gathering data.
and O. Demirtas and A.A. Akdogan, “The (2014): 23-43.
Effect of Ethical Leadership Behaviour on
Ethical Climate, Turnover Intention, and 12. J. Pucic, “Do as I Say (and Do): Ethical
Affective Commitment,” Journal of Leadership Through the Eyes of Lower
Business Ethics 130 (2015): 59-67. Ranks,” Journal of Business Ethics 129, no.
3 (2014): 655-671.
6. T.W. Ng and D.C. Feldman, “Ethical
Leadership: Meta-Analytic Evidence of 13. Parloff, “How VW Paid $25 Billion for
Criterion-Related and Incremental ‘Dieselgate.’”
Validity,” Journal of Applied Psychology
100, no. 3 (2015): 948-965. 14. S.A. Eisenbeiss, D. van Knippenberg,
and C.M. Fahrbach, “Doing Well by Doing
7. C. Bailey, A. Shantz, P. Brione, R. Good? Analyzing the Relationship
Yarlagadda, and K. Zheltoukhova, Between CEO Ethical Leadership and
“Purposeful Leadership: What Is It, What Firm Performance,” Journal of Business
Causes It, and Does It Matter?” technical Ethics 128 (2014): 635-651.
report, Chartered Institute of Personnel
and Development, London, June 2017, 15. T. Haugh, “The Trouble with
[Link]. Corporate Compliance Programs.”

16. J.R. Detert and E.R. Burris, “Can Your

Employees Really Speak Freely?” Harvard

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
 MIT SL
SLO
OAN MANA
MANAGEMEN
GEMENT
T REVIEW
LEADERSHIP

Business Review 94, no. 1 (January- 18. Ibid.

February 2016): 80-87.
i. J. McGregor, “More CEOs Are Getting
17. Parloff, “How VW Paid $25 Billion for Forced Out for Ethics Violations,” The
‘Dieselgate.’” Washington Post, May 15, 2017.

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved. Reprint #60101 [Link]
Reproduced with permission of copyright owner. Further reproduction
prohibited without permission.