Analyzing the role of organizational leadership in encouraging ethical business culture

Keywords: Ethical climate and culture; Leadership in banking; Creating ethical culture, US banking industry

The purpose of this study is to analyze the role of organizational leadership to develop and encourage ethical culture in an organization. The study focuses on the ethical challenges faced by the US banking industry and analyzes how leadership can foster ethical business culture.

Introduction

According to Bolton, Brunnermeier, & Veldkamp (2014), globalization has increased the complexities of the corporate world and today, firms are focused on improving competitiveness and performance. The dynamic and complex business environment has brought into light the role corporate leaders for sustainability of business.

Nevertheless, recent high-profile corporate scandals and business failures have highlighted the unethical behaviors in the corporate world. Since the financial crisis of 2008, in the US, the banking industry has been imposed with fines more than $100 because of rogue trading and unethical practices (Benn, Dunphy, & Griffiths, 2014).

Gebler (2015) described that a perception has been developed that ethical problems in banking sector exist not because of rogue trading only but systematic weakness exists as well as unethical behavior prevails in the industry. This highlights the need for creating and fostering ethical business culture for long-term survival in banks.

Derr (2012) evaluated that the ethical challenges in banking sector emerged because of corporate scandals and global financial crisis has eroded the public trust and confidence. This has increased the importance of ethical business culture in banks. Banking value chain is based on intrinsic factors to provide reliable financial product for customers. Tradition practices in banking exclude the social, ethical and sustainability aspects from the decision-making.

Nevertheless, in today’s modern world value creation is not limited to financial perspective but there is a need to manage human and social aspects. Regulators in the banking sector are concerned with mechanism and control to avoid system breakdown but less emphasis is given towards the human qualities and ethical impulses.

Therefore, there is strong need of ethical culture in banks to align reciprocity and values for consistency of behaviors and deliver expectation of stakeholders (Weiss, 2014).

Schwartz (2013) explained that corporate culture is a valuable intangible asset and it enclosed core beliefs and assumptions to define values and behavioral norms to which members of organization respond. Ethical climate and culture are the subset of corporate culture. Ethical culture highlights how organization elaborates the stance in relation to values whereas ethical climate represent the collective personality of the organization through ethical-related attitude, perception and decision-making processes

Moreover, leadership role is to manage internal and external boundaries and integrate values into strategy. Leadership promotes a sense of responsibility and support the achievement of business goals. Leadership emphasis on the need to integrate values and develops beliefs to set behavior norms and transparency in organization. Leadership establishes culture to accept as well as recognize ‘Code of Ethics’ for decision-making (Bolton, Brunnermeier, & Veldkamp, 2015).

Literature review

Schein (2014) stated that culture is known as acceptable standards of behaviors pertain to a specific group based on the pattern of shared principles, traditions and learned beliefs. According to Schein, organizational culture is developed from learned responses in which belief and assumption are shared among the members of the organization. It encloses core beliefs and assumptions to define values and behavioral norms to which members respond. Organizational culture is based on the complex combination of formal as well as informal processes, systems, and interactions.

Schneider, Ehrhart, & Macey (2013) added that organization culture formal perspective enclosed leadership, policies and decision-making process. On the other hand, informal culture incorporates contained behavior norms, anecdotes, and rituals. The values and norms are influenced by the actions and choices of leadership and thus, develop the view of the organization and its environment. Consequently, organizational culture constructs and maintains shared practices, values, expectations and normative behavior in an organization.

Ethical culture elaborates how organization establishes its stance in relation to ethical value. In addition, ethical culture focuses on teaching the importance of doing right things. Ethical culture is the key component of the organization to ensure compliance and manage business risk. On the other hand, ethical climate is concerned with collective programming of organization to develop attitudes, perception, and decision-making in an organization (Segon & Booth, 2016).

Craft (2013) elaborated that ethical climate investigates various dimensions such as efficiency, self-interest, social responsibility, rules and professional codes. Furthermore, ethical culture and climate are part of organization culture and formed through two elements.

The first is belief and actions of organization leaders and second is formal as well as informal mechanism of organization. Organization culture enables to sustain and compliance with ethical principles and policies through providing common set of values (Arnaud & Schminke, 2012).

Weaver (2014) analsyed that formal ethics in an organization is comprised of the system based on moral principles and set of rules recognized for a particular group or human actions. It provides structure for shared accountability and distributed authority within an organization. Formal ethical culture enclosed ethical values and code of conduct clearly communicated to set and define practices and procedure for members of the organization.

Paesen, Maesschalck, & Wouters (2013) added that the code of ethics promotes accomplishment of non-economic goals as well as elaborates socialization process to reinforce values and behaviors related to internal and external stakeholders. The coincide perspectives of formal ethical culture is that it develops the perception of employees for fairness and justice and encourage ethical decision-making processes within an organization.

Informal ethics stance is less tangible and consists of ethical standards for decision-making. These behaviors and norms set the basis of strong ethical culture that is appropriate and understood by each member of an organization. Informal culture communicates values, beliefs, myths and stories to inspire other members to behave in an ethical manner. Code of ethics address ethical challenges and facilitate decision-making through creating awareness and trust (Goebel & Weibenberger, 2015).

To summarize, ethical culture focuses on formal and informal control system to influence behaviors through ethics and code of professionals. On the other hand, ethical climate examines impact of organization personality to develop collective perceptions, values, and attitude for decision-making criterion.

Northouse (2015) stated that leadership is a process of social interaction between follower and leader. The words, action and decision of leaders define and develop the tone of organization. Leaders approach decision-making impact the organization in both implicit and explicit manner. The action of leaders set norms, procedures, and values to set underlying assumption of organization. Leadership climate defines the beliefs and perception of members of organization developed from actions and culture embedding by the leaders.

According to John & Taylor (2014), leadership climate elaborates the focus of leaders, approach, and reaction to incident, efficiency of resource distribution, mentorship and reward mechanism. The positive leadership climate indicators in an organization highlight the level of trust, teamwork, information sharing, fair play, communication and satisfaction of internal and external stakeholders. To establish positive leadership climate, leadership needs to identify areas wants to influence and set clear goals through communicating sense of vision.

To summarize, attitudes, actions, and choices of leaders have direct influence to foster ethical culture in organization.

Derr (2012) stated that leadership defines and communicates the vision of organization and articulate support for the subordinates to exploit opportunities and overcome obstacle in attaining company goals. Organization culture depicts the values of leaders and leadership is backbone of organization ethical culture. The ethical values and standards of leadership establish and implement policies and goals and thus, plays critical role in developing ethical culture and climate in organization.

Armenakis, & Burnes (2015) elaborated that the ethical climate is based on the personal values leaders. Leaders who develop and support ethical standards focus beyond economic issues as well as maintain long-term relationship with internal and external stakeholders. Leadership fosters ethical culture through behaving consistently in an ethical manner and encourages other to behave in such manner.

Formal and informal system managed by leadership shape ethical culture and climate through communicating decision, behavior and attitudes. Formal control enforces ethical codes and informal control influence stakeholder perception (Schaubroeck, et al., 2015).

The figure 1 below shows how leadership encourages and creates ethical culture in an organization.

ethical business culture
ethical business culture

Arnaud & Schminke (2012) explained that financial stability in an organization is concerned with survival and leadership exercise excessive control to achieve financial outcomes. Unethical conducted needs to restructure but it is important that leader confines them to clear ethical boundaries. Besides, communication involves creating sense of belonging and connections among the internal and external stakeholders. The goal of communication is to overcome problems of fragmentation, disloyalty and disagreement.

Furthermore, system and processes enclosed the adoption of best practices and implement these actions through clear code of conduct. The strict rules and policies may limit the application of code because of attitude such as doing what it takes to achieve results (Gebler, 2016).

Glaser & Strauss (2014) highlighted that leadership through accountability takes responsibility for their actions. Ethical culture is foster and flourishes in an organization through integration, participation, and integrity. The alignment involves setting shared vision and code of ethics to develop unified purpose and direction for the member of the organization. Leadership ensures that values and behaviors reflected in system and processes and climate of trust are developed.

Social responsibility foster relationship between stakeholders to manage challenges and crisis and leadership ensures organization acts as responsible citizens. Finally, organization achieves sustainability through embracing high level of ethical standards to manage relationship and interaction with all internal and external stakeholders. Leadership considers the impact of actions and long-term decisions (Gebler, 2016).

To summarize, literature has highlighted that leadership encourages ethical business culture through alignment of formal processes, structure and policies and informal recognition which are consistent with the ethical behavior of leadership.

The actions, choices, and attitudes of leaders create ethical climate and culture of the organization to understand ‘what is right as priority’ for the organization. The important construct of culture enables the leadership to create ethical culture through moving from the financial perspective and achieving resilience to sustainability.

Hence, the research question is to analyze the behavior of leadership in the US banking sector to foster and encourage ethical business cultures.

 

Research design and strategy

The research design of this study is based on grounded theory which aims to discover or generate a theory. According to Glaser & Strauss (2009) grounded theory involves a systematic analysis of data to discover the theory. The useful of grounded theory is that it allows exploring integrated social behaviors and relationships of groups. In grounded theory, researcher explores a framework or theory through the description of phenomenon.

Birks & Mills (2010) highlighted that grounded theory is useful to formulate new phenomenon through examining patterns emerge from data but does not test the hypothesis or develop proposition.

Grounded theory is useful for this study to explore the social relationships and researcher preconception of underlying processes to understand the norms and behaviors of leadership in banks. The grounded theory provides the research framework for interpreting and analysis qualitative secondary data.

Yin (2013) stated that case study method is useful to explore multiple sources of information and present holistic perceptive of social event. The usefulness of case study is the flexibility it offers to the researcher to examine problem from multiple perspectives to develop description of scenario.

A case study is useful when research boundaries are blurred and multiple sources of information are available to analyze the problem. Cases study is useful for this study to conduct preliminary study and analyze the behavior of leadership in the US banking sector. The overall research strategy for this study combines case study and grounded theory (Yin, 2013).

The lack of systematic research into leadership and ethical culture in banking context justifies the use of both approaches. The combination offers explanation and enables theory building. A case study is useful to answer the how to question whereas grounded theory is useful for descriptive phase of research (Mora, 2012, p.257).

The data sample for this study was based on qualitative secondary data. Secondary data is a data which exist independent of study and collected for other purposes. Secondary data analysis involves a systematic process to interpret the information collected to answer the research question. The benefit of qualitative secondary data analysis is that researcher can analyze large volume of information in cost effective and timely manner (Goodwin, 2015).

The useful of qualitative secondary data for this study is the narratives offered to develop an insight on the role of leadership and ethical culture in US banking sector.

Moreover, document analysis is useful to evaluate the information from multiple sources of information which researcher intended to explore. Document analysis enables the researcher to investigate the existing sources of information and interpret the information to develop different narratives compare to original research (Rapley, 2015).

Findings and discussions

Business leaders have fiduciary responsibility towards wider stakeholder context. According to Friedman (1970), the only responsibility of business leaders is to increase profitability. However, this perspective has changed towards ‘fair compensation and respectful treatment’. The balance of interest of multiple stakeholders is important to avoid conflict because the focus on the interest of single stakeholder creates imbalance and distortion.

For financial stability, leadership focus on product innovation and new asset classes explored to transfer risk. For example, investment banking in the US promotes financial innovation and high degree of growth. Corporate culture is important to manage risk but poor culture in banks focus on short-term profits as well as rapid growth at expense of customers. In banking force sales culture has raised challenges payment protection insurance (PPI) which has produced significant profit for banks through customer paid high premiums for worthless insurance (Segon & Booth, 2015).

PPI scandals have highlighted the malpractices and highlight dysfunctional behavior. Financial stability of organization is concerned with survival and leadership exercise excessive control to achieve financial outcomes. Banks were interested in short-term profitability and fail to consider the interest of customers. Moreover, unacceptable practices such as interest rate swaps, mortgage endowments as well as high overdraft charges.

Unethical conducted needs to restructure but it is important that leaders confine them to clear ethical boundaries to manage risk by setting standard and minimizing the regulatory challenges. Leadership needs to review targets, promotion criteria, and bonus to avoid wrong sales of product customers do not require. To promote ethical culture banks changed operating model such as commission and fee structure (Bolton, Brunnermeier, & Veldkamp, 2015).

Communication involves creating a sense of belonging and connections among the internal and external stakeholders. Cultural disparities result in disagreement in decision-making and i.e. higher agency cost. Leadership role is to embed ethical stance in organization values and communicate ethical stance among employees and other stakeholders.

For example, Bank of America has been in the news for poor treatment of interns for working around the clock. Leaders need to clearly manage and communicate performance, compensation, decision on resources as well as values and behavior. In retail banking, banks communicate ‘free banking’ for the customer and no charges on operating current accounts. However, the culture of unethical practices prevails through charging with high fees and penalties on the transaction such as bounced cheque and overdrafts (Craft, 2015).

There is need to communicate the information related to product information such as risk associated with products. In an ethical organization, leader effectiveness set direction because culture starts at top of organization and conveyed by setting the examples. Leadership communicates gathered facts and takes action at every level of organization. Leadership introduced induction processes to integrate new employee and communicate values to streamline behaviors.

Ethical climate evolves on personal integrity and ownership of senior management to act as role model. Ethical culture in banks needs to encourage coordination and accountability through controlling behaviors and achieves desired outcomes. Leadership communication needs to aims is to overcome problems of fragmentation, disloyalty, and disagreement (Rapley, 2014).

System and processes enclosed the adoption of best practices and implement these actions through the clear code of conduct. Process integrity involves the internalization of company behavior and processes. The functional units of corporate involve hiring, compensating and evaluation of the system. Credit culture in the US has created a competitive marketplace and biggest challenge in the banking sector is a lack of trust among the members of organization.

The strict rules and policies may limit the application of code because of attitude such as doing what it takes to achieve results. Leadership needs to focus on achieving collaboration and control through promoting fairness and integrity. Ethical climate mediates conflict and encourages transparency in decision-making.

In the US, FRB highlighted that the number of complaints for poor customer service increase in 2015. The investigation highlighted that bank has not embedded a culture of which focus on delivering the fair outcome for register complaints (Schaubroeck, et al., 2016).

Leadership in an organization focuses on establishing standards as well as alignment of system and behaviors. Processes are important in an organization because excessive check and balance for resource represent red tape and employees are less likely to pursuit innovation of new product and services. Ethical climate and processes promote equality and fairness among stakeholders, product and processes.

LIBOR is important for banks as it decide the amount of paid on borrowing as well as used as basis of interest-rated products. LIBOR is managed based on the information provided by the world 15 largest banks. However, US future trading commission estimated that LIBOR rigging through false reports has increased the interest rates. The focus of such false reporting was short-term profitability and management was involved in such activities. The problem is raised from lack of procedures, poor incentive scheme and failure of management engagement (Paesen, Maesschalck, & Wouters, 2016).

Leadership achieves long-term vision through alignment of interest of shareholders and acting in the interest of stakeholders. Leaders in organization ensure respectful and fair treatment through the aligning role with environment. Subcultures emerge in different units of banks with result in competition and thus, odd to bank preferred culture. In such context, identity of the employee is managed in a positive way and informal ethical induces desired behavior without high incentives.

Leadership promotes ethical culture in the US through focusing on customer and clients interest rather driving on shareholder value as guiding principles. The embedment of professional code of ethics could shape the behavior of employees rather focusing short-term benefits.

There is strong need of fair and equitable treatment of customer through professionalism code to encourage integrity and honesty for behaviors. Ethical culture in banks encourages coordination and accountability through controlling behaviors and achieves desired outcomes (Birks & Mills, 2017).

Leadership needs to address ethical climate to improve capabilities to deter the abusive conduct and cultural change is needed to held employee accountable. Leadership needs interventions to manage unethical behaviors through empowering the employees to take personal accountability for effectiveness and outcomes of their behaviors.

Leadership ensures that values and behaviors reflected in system and processes and climate of trust is developed. Tax avoidance scheme by banks involves minimization of the tax payments for wealthy individual.

In the US, investment banks believe to make large profits for complex tax avoidance scheme. Banks have marketed tax avoidance scheme for tax arbitrage scheme which highlights the short-term profitability and greed in banking practices. Leadership needs to the emphasis on the need of public confidence in banking sector for long-term sustainability. Social responsibility foster relationship between stakeholders to manage challenges and crisis and leadership ensures organization acts as responsible citizens.

The problem in banking industry is that employees are linked with concept of money which triggers selfish behavior. The norms in banking industry are intrinsically linked with money which results in dishonesty among the employee of bank. The prevailing culture of dishonest behavior has resulted in loss of reputation.

Communication of product information is needed to clearly the misconception for the customer through communicating terms and conditions. The money laundering scandal of HSBC in has involved in rogue trading through transferring billions of dollars aboard. Unlawful transfers highlight the short-term perspective of profitability as well as violating the social and economic right of public.

Leadership through accountability takes responsibility for their actions. Ethical culture flourishes in an organization through integration, participation, and integrity. The alignment involves setting shared vision and code of ethics to develop unified purpose and direction for the member of the organization. For example, JP Morgan was involved in wrong practices through unfair billing for its add-on products and charging for monitoring of credit which customers never received.

Leadership needs to eliminate ‘Nash equilibrium’ and set the direction for employee to behave in ethical manner which is difficult to achieve through formal contract. Leadership needs to take responsibility for what happen in the firm. In the US, banker leaving firm in case of violating the code of conduct are listed on central database.

Leadership defines statement of responsibility at all level to highlight roles and responsibilities. Leadership in banking needs to engage in open dialogue with stakeholders to manage risk, values, and behaviors to ensure professionalism and compliance (Derr, 2015).

The figure 2 below enclosed the proposed framework for leadership by researcher to create strong ethical culture in the banks.

Proposed Framework for ethical climate and culture in US banking sector

ethical climate and culture framework
ethical climate and culture

Conclusion

Sustainability is achieved through embracing the high level of ethical culture to manage relationship and interaction with all internal and external stakeholders. There is need of change in norms to shift focus from short-term benefits through financial rewards and encourage the environment which promotes right decision for sustainable ethical culture.

Ethical culture involves alignment of individual and organizational values to eliminate ethical lapse through linking growth and purpose. Leadership in banking needs to engage in open dialogue with stakeholders to manage risk, values, and behaviors to ensure professionalism and compliance.

Leadership must consider the impact of actions and long-term decisions. It is important that leadership set the tone through developing effective value statement.

Ethical culture institutionalized ethical values and behavior through alignment of processes and environment over the long period of time. Ethical culture needs to integrate value and behavior in all aspect of growth strategy and decision making. This reduces the risk of unethical activities and employees are accepting personal responsibility for the pride and culture of bank and thus, will increase the sustainability.

Ethical culture is concerned with credit culture, employee management, resource allocation, exploitation of opportunities and mitigation based on values and behavior must embed by leadership in the strategy. Leadership effectiveness focuses on the alignment of social responsibility, accountability, and financial stability to ensure long-term sustainability of organization.

 

 

Copyright © Assignment-Ease.com 2018

Academic assignment writing service UK, Cheap assignment writing service, Professional assignment writing service, Best essay writing service, cheap essay writing service, University assignment writing services, best assignment writing services

 

 


Assignment-Ease is a renowned academic writing service provider offering academic services in a vast academic fortes. We like to inform our customers that all the content provided by us is only for assistance purpose, which cannot be used likewise.

© 2017. All Rights Reserved