The importance for top-level management in modern organisations to exhibit and practice ethical leadership has ever increased. Effects of ethical leadership can vary positively and negative on the organisations and the employees.
Ethical leadership though should come from the very top, CEO level.
Effects on individual effectiveness:
Ethical leadership must be displayed rather than just declared (Harris, 2013). By displaying such behaviour, trust worthy and strong relationships are fostered as Harris explains “When trust exists in the workplace, employees will share their perceptions and views of bias, unfairness, or unwanted behaviours with their leaders”.
Trusted relationships within teams will bring effectiveness and efficiency to achieving the corporate goals. A study by Tour & Ofori (2009) found that ethical leadership leads to an increase in an individual job performance and effectiveness in achieving the goals set by management. The study also found that job satisfaction and willingness to put extra effort also increased.
There may also be negative effects of ethical leadership that may not seem as obvious. With greater focus on ethical leadership, CEOs are setting ethical guidelines to which employees must adhere. The greater red tape may affect job performance as employees are required to stick to set rules. Individual creativity is one aspect that may be hindered.
For example, Selfridges’ ban on use selling fur or material from exotic animals may have prevented the buyers from expressing a brand for which this is known. In addition, reactive actions of team may take longer due to the processes that need to be taken which may cause employee dissatisfaction.
Effects on organisation effectiveness:
A CEO displaying ethical leadership puts the company in a low risk position as ethical compliance is met. Increased processes allow for greater effectiveness as fewer mistakes are made that could hinder governance of ethics.
Arel, Beaudoin and Cianci (2011) argue that shareholders who are satisfied with ethical leadership leads to greater company performance.
For example, Internal audit systems have increased effectiveness over decisions on uncertainty as the study showed. The study found that accountants who perceive a greater moral intensity would more likely act positive.
In 2010, the CEO of Marks and spencer who was soon to be stepping down received a 140% increase in salary and bonuses despite poor performance by the company.
This caused relationships with its shareholders to fracture “as the retailer failed to comply with corporate governance guidelines and tested investors’ patience with generous incentive schemes”
It may be argued that this lack of sensitivity will have caused damage to the company’s reputation. Additionally, employees who may have felt that level of reward was unequal would be cause individual effectiveness to drop along with loyalty and commitment to their position.