Chapter 12 Ethical Leadership Rev2

SESSION 12 Emphasizing Ethical Leadership Practices Prepared by Tawil Wiryadi (17/421958/PEK/23535) Johanes A. Situmorang (17/422812/PEK/23658) Dyna Yota Damanik (17/422804/PEK/23650)

STRATEGIC LEADERSHIP

Table of Content CASE:

Accuform : Ethical Leadership And Its Challenges in the Era of Globalization

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Ethical Leadership and the Psychology of Decision Making

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Moral Person and moral manager How executives Develop a Reputation for Ethical Leadership

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Taboo scenarios : How to think about the unthinkable

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Leadership in the age of Transparency

Strategic leadership of ethical behavior in business

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www.youtube.com/c/powerupwithpowerpoint

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Ta b o o S c e n a r i o s The first appearance of the English word “taboo” can be precisely dated. In 1777, Captain Cook’s book Voyage to the Pacific Ocean recounts how Polynesians use the Tongan word “tabu” to describe anything “consecrated, inviolable, forbidden, unclean or cursed.” The term could refer to fruits or meats that should not be eaten, improper sexual relationships, or theft and murder within the tribe. Taboo examples include: sanctioning an economic market for human organs, selling unwanted children to the highest bidder, or, for some, even creating an incentive-based market for pollution credits. These controversial ideas imply “taboo trade-offs” that put a finite value on things that, according to our reflexive moral intuitions, we deem of infinite importance. Organizational taboos also involve deeply embedded beliefs and values that restrict what is considered appropriate thought, discussion, and action. Most organizations claim to prize creativity and open-minded inquiry and putatively encourage managers to explore a wide range of options. Nonetheless, most organizational cultures also harbor unspoken taboos that limit what managers can think, say, or do. Such taboos can vary from company to company, and even within different areas of an organization itself.

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Public Reactions to Taboo Violations : • Moral Outrage: punitive character attributions, as well as contempt, anger, and disgust; • Sanctions: any and all forms of punishment/public humiliation, such as fines, demotion, loss of job, loss of freedom, flogging, and execution; and • Calls for Moral Cleansing: public hunger to see violators and their associates recommit to sacred values through symbolic sacrificial acts—such as volunteerism, establishing foundations, tithes, denouncing other violators, public flogging, or street clean-up by convicts.

As categorical as most taboos sound, many permit exceptions. For example, killing another human may be acceptable in selfdefense, in the heat of war, in prisons via execution, or in hospitals through passive euthanasia. Such exceptions are useful and allow taboos to shift over time. Longstanding taboos may need to be recalibrated due to innovation, technological advance, or just new ways of thinking.

Taboos and the Power of Framing Example 1 In one experiment, Participants were told about a thinly fictionalized government program charged with cleaning up waste sites to eliminate public health risks. The Danner Commission, a group of community, business, and government leaders dedicated to improving efficiency in public services, investigated the program and recommended reforms. If these reforms are followed, the program could save 200 lives, at a cost of only $100 million. If the program continues at the previous year’s budget of $200 million, 400 lives could be saved. The Commission, however, recommends redirecting the saving of $100 million to other uses, including reducing the deficit and lowering taxes. The experiment assessed participants’ reaction to both the naked recommendation, and the rhetorical framing of the recommendation. 1. For two groups of participants, the Commission offered a vague smokescreen rationale 2. For a third group, the decision process was made transparent: people learned that the Commission decided that the cost of saving the additional 200 lives is too high given other priorities. For the first two groups, approval for the recommendation hovered at 72%. In the third group, for whom the trade-off had been made explicit, approval plummeted to 35%. This suggests the advantages of obfuscation: vacuous moralistic rationales are less likely to meet resistance than clearly articulated trade-offs that specify a dollar valuation for human life.

Taboos and the Power of Framing Example 2 In 1997, Republicans exposed Bill Clinton’s practice of allowing big campaign donors to sleep in the Lincoln bedroom. The implication was that Clinton was buying and selling access to a sacred site. The White House reframed the issue—the Clintons were not violating a taboo by allowing a sacred site to have a market price, but rather protecting and affirming a different value—that of reciprocity and friendship.

In another experiment, Tetlock et al. asked people to judge the ethics of “Robert,” a hospital administrator confronted with a decision that might save the life of a 5 year old boy named Johnny.

Coping with Taboo Below are seven suggestions that to help organization cope with taboo: • List relevant business issues that employees prefer to avoid, engender shame, or are off limits • Assess the source of the misgivings about these subjects. • Score the relevance of each taboo subject in terms of its potential for damage to the company’s well-being as well as the probability of this happening. • If several taboo issues are interconnected and surrounded by uncertainty, develop scenarios that illustrate the full of range of issues, including taboo scenarios, and how they might play out. • Motivate the development of taboo scenarios by pointing out how common they are, and that no organization is immune. • If opposition is especially high to an important taboo view, create an organizational unit that is tasked with challenging the received wisdom. • Consider using shock therapy in strategy workshops by asking why and how the company may be out of existence in 5 years (pre-mortems) or why some executives might be in prison. In some cases, circumstances suggest a Machiavellian solution: obfuscate the tradeoffs by embracing a vague public-decision posture that does two things: covertly takes into account the taboo and permits plausible deniability. To survive, many organizations may have to institutionalize hypocrisy in at least some of their decision processes.

Leadership in the age of Transparency

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Externalities Externalities is the term economists use when they talk about the side effects, or in the positive case, the spillover effects of a business’s operations. They’re the impacts that a business has on its broader milieu, either directly or indirectly, but is not obliged to pay for or otherwise take into account in its decision making. Trends in three areas cause the demands to operate responsibly are dramatically increasing: 1. the growing scale of companies and their impacts 2. improvements in sensors that measure impacts 3. heightened sensibilities of stakeholders Stakeholders regard a company as responsible when they perceive that it is steadily internalizing externalities—that is, using sensing capabilities to measure and manage its impacts on society.

To think about how to embrace externalities, we can use ripples of responsibility diagram. At the center of this simple diagram is the business you run today: the domain that you actively manage and the key performance indicators you track. • If a problem is directly attributable to you (like emissions levels), it falls within your first ring and the onus will be on you, not some other company or organization, to make up for it. • If a problem is one you contribute to, but to which your direct accountability can’t be measured it is in the second ring. You need not take ownership of it, but given your competence and its relevance, you should take action. • The third ring consists of more distant ripple effects, in which you should at least take an interest—and a visible one. You do not have particular competence on this front, but relevance still applies.

Ethical Change Based on : Strategic Leadership of Ethical Behavior in Business

Terry Thomas, John R. Schermerhorn and John W. Dienhart

Structure Framework

Adoption

Action

Create sense of urgency

It must be done

Create urgency in company by calculate cost of unethical action

Action to center momentum to change

It can be done

Achieve ethics mindfulness through leadership that influence employee

Anchor change so it sustainable

It is sustainable

Strive to virtuous and anchor change by building corporate control

IT MUST BE DONE ETHICAL COST LIMITATION OF REGULATOR CHANGE URGENCY

IT CAN BE DONE

CULTURE

Self Regulatory

Role Model Influence Social Context

Social

Ethics Mindfulness

Personal

I T I S S U S TA I N A B L E LEADERS ACTION

I T I S S U S TA I N A B L E INTEGRITY PROGRAM

COMPLIANCE PROGRAM

Excellence

Laws, Regulation and Rules

Self governance to self chosen standard Encourage shared commitment

Conformity to external standard

Management driven

Lawyer driven

Prevent criminal

Evidence : Behavior, issues, decision making, commitment and willingness

LEADER’S RESPONSIBILITY Become a public and vocal ethical role model not out of fear but out of freedom, success and self confirmation

- Vocalize clear and consistent positive ethics message from the top - Create and embrace opportunity for everyone in community to communicate ethic value and practice - Ensure consequences of ethical & non ethical conduct

LEADERSHIP MORAL PERSON AND MORAL MANAGER By: Linda Klebe Trevino, Laura Pincus Hartman, Michael Brown

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Leadership Requirement 1

2 Moral Person : Conforming complex code of morals

3 Moral Manager : Creating moral codes for others

A reputation for ethical leadership

Moral Manager Trait • Integrity • Trustworthy • Honesty

Behavior • Do the right thing • Show concern for people • Being open • Have personal morality

Decision Making • Hold to values • Objective/Fair • Concern for society • Follow ethical decision rules

Moral Manager

Role modeling through visible action Communicating about ethics and values The reward system

WHERE ARE US?

What can we do?

SHARE

BECOME

Share your values : who you are as an ethical person

Assume the role of moral manager : chief ethic officer in your organization

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LEADERSHIP Ethical Leadership and the Psychology of Decision Making David M. Messick – Max H. Bazerman

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C H A N G E S I N TO D AY ’ S BUSINESS U N E T H I C A L B U S I N E S S D E C I S I O N S M AY STEM FROM PSYCHOLOGICAL TENDENCIES T H AT F O S T E R P O O R D E C I S I O N M A K I N G

Estimating Risk and Likehood

Biases when Seeking Information

Outside Influances

IDENTIFYING AND CONFRONTING THESE TENDENCIES WILL INCRASE THE ETHICALITY AND SUCCESS OF EXECUTIVE DECISION MAKING

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Three Types of Theories 1

2 THEORIES ABOUT OTHER PEOPLE

THEORIES ABOUT THE WORLD

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Beliefs we hold about how the world works

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Nature of the causal network in which we live

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Our organized beliefs about how “we” are different from “they” Includes ethnocentrism and stereotypes

THEORIES ABOUT O U R S E LV E S

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Beliefs we are unique individuals

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Lead us to unrealistic beliefs about ourselves

Wa y s i n w h i c h o u r decision influence the world

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THEORIES A B O U T

T H E

W O R L D

There are 3 components to this theories

The Consideration of possible consequences

The Judgment of risk

The Perception of Causes

• Ignoring Low-Probability Events

• Risk Trade Offs

• Focus on People

• Limiting the Search for Stakeholders

• Risk Framing

• Different Events

• Ignoring the Possibility That the Public Will “Find Out” • Discounting the future • Undervaluing Collective Outcomes

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THEORIES ABOUT OTHER PEOPLE

ETHNOCENTRISM

STEREOTYPES

Perception that “our way” is normal and preferred and that other way are somehow inferior

• Exist about different nationalities, sexes, racial group and occupations

Ex : Pearl Harbor

• Risk making unfair, incorrect and possibly illegal judgements

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THEORIES ABOUT OURSELVES The illusion of superiority

People view themselves positively Identified 3 such illusions

1) Illusion of Favorability 2) Illusion of Optimism 3) Illusion of Control

Self Serving Fairnes Biases

Conflict between fairness and the desires outcome

Overconfidence

Most people are erroneously confident in their knowledge

Improving Ethical Decision Making QUALITY Executives who make higher quality decisions will tend to avoid ethical mistakes

BREADTH Assesment of the full range of consequences that policies entail

HONESTY A policy of opened does not require executives to tell all

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ACCUFORM: ETHICAL LEADERSHIP AND ITS CHALLENGES IN T H E E R A O F G L O B A L I S AT I O N AMY LAU - RAYMOND WONG

FA B R I C C O AT I N G

High Tech coating technology for garments involved attaching a layer protective coating on the surface of fabrics and also around the fibres so as enhance the functional value of garments, such as wrinkle resistance, soil release, stain repellence, flame retardance etc. The use of precise quantities and mixtures of chemical properties in the coating production was important as the smallest changes could lead to health risk such as allergies which would result from skin contact.

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INDUSTRY GROWTH AND GLOBAL TRENDS

The use of high end technology to make garments was gaining wider popularity globally

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ONE Fuelled by the emergence of new fibres, new fabrics and innovative technologies, performance apparel became one of the fastest growing sectors of the international textile and clothing industry

TWO Global market players believed China’s Apparel market had a great potential (growth 19,6%)

THREE

INDUSTRY S TA N D A R D S  The standard for application of substances to fabric and fibre varies between countries  Several industry standards had been introduced by non-profits associations as guidelines for textile and related industry practice.

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background AccuForm • Held 16% of total market share (2nd) garment coating industry within the Asia Region • A lack of advantage in manufacturing cost, poorly skilled local labour and R&D talent

• Expensive raw material cost, transportation cost, tariff incurred (From Europe)

CreaseFree

DynaCoat

• Hongkong Company

• Germany Company

• Traditional Chinese culture, adaptable to china’s business environment – guanxi

• Had very strict quality assurance system, to ensure its products worldwide maintained a consistently high standard of safety and quality while protecting the natural environment

• Low awareness of corporate social responsibility

• ISO 9001 (quality), ISO 14001 (professional integrity)

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JOINT VENTURE There are Incorporated in June 2000

DynaCoat

CreaseFree

R&D

Production

Marketing and Purchasing

Management of Company

• Due to higher cost, the company had started to located supplier in Asia • AccuForm coating distributed to mainland China and South East Asian countries • All these manufacturer were required to obtain licenses from AccuForm in order to use its coatings • Every garment manufactured with AccuForm coating had the Accuform label, which was registered trademark in China, attached to the inside as a sign of quality assurance.

REGISTERED TRADEMARK

R AY M O N D K I M – T H E L E A D E R S LEADERSHIP • Had been serving DynaCoat for 25 years. June 2000 appointed as GM for AccuForm. • AccuForm ‘s vision to push forward the company’s position as a market pioneer in advanced high-tech coating industry in Asia Pacific. • 10% revenue will invest in R&D

CORPORATE CULTURE • Charisma and excellent communication skills had allowed him to blend in organization • Expected staff to be highly self-discipline • Different culture by staff that transferred over from CreaseFree (dislike idea of having report on their social and environmental commitment

R&D INITIATIVES • Form a strong R&D team (recruiting chemical engineers, application technicians and project managers) • Bonus Scheme as a way to motivate the R&D workforce, competition become heat in organization and staff had voluntarily chosen to work late and on weekend • Given greater authority and flexibility to access corporate resources and information in order to come up with new ideas and develop new invention. Team leader submit report on monthly basis

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Albert Ching – R&D Manager Referred by CreaseFree Purchasing Manager Albert Ching, son of CreaseFree client, have many connection in garment industry

Had over 8 years experience in managing project on fabric modification

Ching had established good relationship with many of AccuForm client and suppliers in China by adopting the traditional guanxi-building approach

Ching also introduced two of his ex-colleagues to AccuForm as production line supervisors

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The Outbreak of Allergies Oct 20th 2005, eight children in Guangzhou were reported in the news to have developed rare skin rashes caused by the clothes that they newly bought. AccuForm trademark is identified on these children clothes (which were similar to those sold in AccuForm retail outlet in Hong Kong) Kim relentless investigation with the help of a private investigator had somehow managed to unveil “CoralWear”, the manufacturer who made the garments. Kim investigated internal report, found : • 2 production line had recorded extraordinarily higher downtimes (reason : under repair)

Over Utilization ???? The machines in those production lines easily broke down because of an over-utilization to produce extra coatings.

Instead of disposing of those chemical wastes properly; They were used to make defective coatings which were then delivered elsewhere and sold off by Ching for personal gain.

• AccuForm’s production Line were less than four years old and they are regularly serviced • R&D (the team led by Ching) had recorded a higher scrap rate than others.

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GATHERING EVIDENCE Call business allies, to make inquiries about Ching relationship with his previous company

Approach some of plant staffs to find some fact on field/R&D staff (Anything about Ching involvement in the incident) : Ching has indeed discreetly instructed some of his co-worker to ship untested coating to CoralWear during weekend)

Private investigator, that Ching was the founder of CoralWear established on April 2004 (15 month after Ching was recruited) Letter from anonymous sender (suspected R&D worker under Ching’s Group) : Ching had bribed his team member, two line supervisor and other worker on production lines in question to remain silent Asking money (under table) from recruited suppliers

Confrontation Other head department collecting some evidences that confirming

• • • • • •

Ching misconducts. . Invoice from recently recruited suppliers Accounting report Production and productivity reports Waste treatment centre Comparison report from chemical waste collected and reported amount of unsuccessful coatings Whistleblower’s letter

• Photo and document related to CoralWev

Ching Misconduct

Denied that he had demanded a kickback form supplier, but instead they just gave the money to him without him asking, as an accepted norm in China-guanxi culture Denied, about Ching using AccuForm’s name to promote garments produced by his own company, CoralWear Argued : its happen because user not washes the clothes before wearing them

Ching Respond due to the evidence that was collected by Kim

Other Ching acts that are not allowed : • Misappropriation of AccuForm’s Properties • Forming corrupt network within company • Blackmailing AccuForm’s employee

FLOW OF MONEY LAUNDERING

Our Recommendation Compliance Program

Integrity Program

- Fire all employees that involved

- Create an ethic committee that include director from DynaCoat and CreaseFree to align ethical perception in Accuform

- Improve access restriction to RnD area

- Increase accountability of RnD personnel - Establish a whistle blowing system

- Improve ethical awareness by internal program

- Reinforce ethical factor during employee recruitment - If needed, institutionalized the bribery system into some promotional program support 43

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