Ethical leadership is based on ethical behavior. That begs the question, then, what is ethics? Ethics is doing the right thing. But since everyone has a slightly different definition of what constitutes “right,” it’s almost easier to explain ethics in terms of what it is not. 

Enron hid liabilities from investors and creditors resulting in its downfall in 2001. Before declaring bankruptcy in 2008, Lehman Brothers played a starring role in the subprime mortgage debacles. Most people can agree that these are examples of dodgy corporate ethics. Although everyone thinks about ethical behavior differently, there are generally a handful of common themes. For some people, practicing good ethics means abiding by the golden rule. For others, it’s the law of universality: Would the world be a better place if everyone behaved this way? 

For companies, ethical leadership can create a positive environment in which employees and profitability flourish. Here’s a closer look.

What Is Ethical Leadership?

Of course, we want all leaders to follow a strict moral compass and recognize the direction of true north.  Leaders should know what they stand for and understand their own values lest their organizations become headline news in the next corporate scandal. Ethical leadership, however, consistently demonstrates and promotes behavior that respects the rights of others within the values-based boundaries.

Ethical leadership is not a mutually exclusive style. There are many people who lead and manage governed by ethical principles integrated within another management framework. Ethical leadership theory, in contrast, is keenly focused on setting ethical direction within the organization and directing the organization accordingly. 

Ethical Leadership Examples

There are ethical dilemmas around every corner. And it’s not just in the most obvious sectors like banking and finance. Nor is it limited to common breaches like manipulating statistics, hiding assets or liabilities, or spending company money inappropriately. It can take more subtle forms. Although these subtle forms may go unreported, they are usually not unnoticed, particularly when the offense is committed by managers and leaders. This includes, for example, accepting gifts from vendors, theft of company property, employee favoritism or “harmless” jokes that contribute to a negative culture.

Yet there are many more opportunities to do the right thing. For example, the importance of ethical leadership is evident in many of the world’s leading companies. Here are three:

• Costco’s strategic decision to pay wages well above average industry rates help the company attract the best workers and avoid the high turnover rates that plague other retailers.
• Best Buy, the only U.S. electronics chain still standing, operates Teen Tech Centers, training underserved youth in basic technology skills while creating its next generation of skilled employees.
• Clothing manufacturer Everlane is committed to transparency in its factory and supply chain practices and a champion of its workers’ well-being.

The Value of Ethical Leadership and Its Impacts

Practices maintained by ethical leadership impact companies in a myriad of ways, including:

• Avoidance of costly legal and compliance issues.
• Greater financial stability since ethical practices are less likely to lead to issues that can bankrupt a company.
• Good press and positive public relations.
• Increased profitability.

Both short-term and long-term benefits accrue when organizations are led by highly principled leaders. Ethical leadership matters not only for companies but for their stakeholders and their broader communities. These impacts include:

Culture

Environments that are short on ethics can be toxic. Ethical people like to work for ethical companies. In a more nurturing environment, employees are treated respectfully and are more likely to demonstrate respect for fellow workers and clients. 

Employees

Millennials aren’t the only ones who want to work for values-based companies. There is support among baby boomers, as well. Additionally, people feel proud to work for ethical leaders. Researchers from Robert Half found that proud employees are three times more likely to be happy — and more productive — than those who lacked this emotion.

Investors

Many investors, both individual and institutional, want to put their dollars into ethical organizations that share similar values. Scandals are never a good look for a mutual fund.

Business Partners

Suppliers, vendors and other companies want to work with companies they trust. Their reputations are at stake, as well.

Customers

Research shows that customers are more loyal to companies that follow ethical business practices. Facilitated by social networks, they share their positive feelings with others and they are also less price sensitive than customers who don’t share the same sense of loyalty. Generation Z is already starting to exhibit strong preferences for brands that share their ethical sensibilities. 

Ethical Leadership Characteristics

As mentioned, ethical leadership is not mutually exclusive. An ethical leader’s traits may cross over into, for example, the transformational style. However, here are 10 leadership characteristics that are common among the best ethical leaders:

1. Justice

An ethical leader is fair and just. They have no favorites, and everyone is treated equally. Ethical leadership eliminates biased treatment based on gender, ethnicity, nationality or any other factor.

2. Respect for Others

An ethical leader demonstrates respect for all members of the team by listening compassionately, valuing diverse contributions and considering opposing viewpoints.

3. Transparency

Ethical leaders convey facts transparently, no matter how unpopular the facts may be. These leaders understand that transparency breeds trust, empowering others to make their own decisions with the information they need. 

4. Humane Behavior

Being humane is one of the most revealing traits of a leader who is ethical and moral. Ethical leaders place importance on being kind and act in a manner that is always beneficial to the greater good.

5. Focus on Team Building

Ethical leaders foster a sense of community and team spirit within the organization. When an ethical leader strives to achieve goals, it’s not just about a personal mission. They make genuine efforts to achieve objectives that benefit the entire organization — not just themselves.

6. Values-Driven Decisions

In ethical leadership, decisions are first validated for alignment with the overall organizational values. Only the decisions that meet this criterion are implemented.

7. Encourages Initiative

Under an ethical leader, employees thrive. Employees are rewarded for coming up with innovative ideas and are encouraged to do what it takes to improve the way things are done. Employees are praised for taking the first step rather than waiting for somebody else to do it for them.

8. Leadership by Example

The ethical leader has high expectations for themselves and others. They demonstrate unwavering commitment to their ideals by not just talking the talk, but walking the walk. Leaders also expect others to lead by example.

9. Values Awareness

An ethical leader regularly promotes the high values and expectations they hold. By regularly communicating and discussing values, they ensure that there is consistent understanding and compliance across the company.

10. No Tolerance for Ethical Violations

An ethical leader expects employees to do the right thing at all times, not just when it is convenient for them. They will not overlook or tolerate ethical violations.

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This blog article was updated for clarity in August 2021