Leadership & Management

Are You an Ethical Leader?

Good intentions and gut instinct won’t take you far enough, say two Stanford GSB professors.

October 18, 2018

| by Shana Lynch

Stanford GSB professors Ken Shotts, left, and Neil Malhotra help students understand their values and navigate challenges to them. | Photo by Drew Kelly

When Intel decided it would no longer build chips with materials from conflict zones, it wasn’t a textbook bottom-line business decision. Finding these natural resources — tantalum, tin, tungsten, and gold — from conflict-free countries took significant time and incurred extra costs.

But the “right thing to do,” as Intel’s director of corporate citizenship Gary Niekerk called the move, established the company as a leader in an industry-wide movement, pleased customers and employees, and built relationships with activists and NGOs.

“Ensuring a stable supply chain is always a good thing,” Niekerk said in a Stanford case study. “Ensuring the ability to source from multiple regions of the world is a good thing. It was done because it is the right thing to do, but as you back out, you see additional values.”

But how as a leader do you recognize the right thing to do? And how do you balance your responsibilities to shareholders, customers, employees, and society?

Those are questions Neil Malhotra and Ken Shotts, two political economists at Stanford Graduate School of Business, ask students to grapple with in their class Values-Based Leadership. The course, offered to online LEAD participants, combines human psychology and philosophy to challenge students in examining what they believe in, understanding why others might not believe the same, and articulating companies’ responsibility to the world.

It’s really a critical thinking class, they say. “Anybody can follow a 10-step algorithm,” says Malhotra. “What’s hard is when there’s uncertainty in the world and you have to make a decision where the right answer isn’t obvious.”

Here they define values, discuss common pitfalls, and explain whether a less regulated world means a less ethical one.

First, when we talk values-based leadership, whose values are we talking about?

Shotts: It’s both the values of the people at the top and those within the organization. In any large organization, you have a lot of people with different values who sometimes agree with what the organization is doing and sometimes do not.

How do you stay true to your own values while respecting the values of others in the organization? How do you articulate your organization’s values and how you’re going to live by them? Lots of companies have their statement of values, but then leaders run their organization in a way that sets people up to act opposite those values.

Malhotra: People don’t regularly think about their individual values as part of their jobs. If you don’t think about it, it leads to inconsistency.

Most of us would claim we lead with our values. But we see so many headlines about companies falling short, from Uber to Theranos. Why?

Shotts: When we talk about cases of clear fraud or criminal misdoing, it seems so easy to say, “What was wrong with these evil people?” But when they’re in the moment, they’re saying to themselves, “I have to do things for these investors” or “I have to do things for my employees to keep things going.” It’s the concept of escalation of commitment; at first you had very small things that would get covered up and justified, but then the amount of deception gets bigger and bigger and bigger. Theranos might be a good example of this. The people who founded that company had good intentions, right? They wanted to develop medical testing and products that would benefit the world. They believed in it. And either for the mission, for the long-term viability of the company, or for the employees, you can see how they end up making mistakes and unethical actions even though they began with good intentions.

You caution leaders against relying on gut instinct. Why shouldn’t we trust our gut?

Shotts: We need to use both the gut and analytical approaches to decisions, particularly for high-stakes stuff. And we need to do analysis well. I can come up with a spreadsheet and rig it so it aligns with my gut instincts. One of my best friends did this when he was trying to decide where to go to college. He kept jiggering the spreadsheet until it gave him the answer he wanted.

Malhotra: Very high-functioning people don’t often understand that they use their intellect to rationalize their gut. The story of Supreme Court decisions, for example, is basically extreme intellectual rationalization of gut reactions.

How do we counteract that?

Shotts: Take time. If we have to do something quickly, our gut is the only thing we can use. It’s only possible to use both our gut and reason if we take time. Also, rely on other people. This requires setting up an organizational structure where it’s OK for the person in charge to be disagreed with or criticized. Highly functioning organizations do that well, while dysfunctional organizations penalize people who disagree.

Malhotra: Powerful people typically don’t perceive that other people are agreeing with them because of their role. They have to learn to recognize that.

How can a manager do that?

Malhotra: Rules and institutions are good ways to counteract these psychological biases. For example, ask people to offer suggestions in order of reverse seniority. That’s much better than the CEO saying something and everyone else around the table saying, “Oh, that was a brilliant idea.” Or in the case of whistleblowing, you can have information escrows where if two people blow the whistle on the same thing, they can do it anonymously, or the institution will enable them to coordinate.

Are there tools to help us in the moment when faced with a potentially bad call?

Malhotra: There are phrases that we warn people about. For example, people will do something ethically questionable by using the argument, “Well, every company does this.” We know from decades of psychological research that the people who do such things are the ones most likely to think it’s common practice.

Anybody can follow a 10-step algorithm. What’s hard is when there’s uncertainty in the world and you have to make a decision where the right answer isn’t obvious.
Neil Malhotra

Shotts: Another strategy for difficult situations is planning ahead. I need a plan for what I’m going to do if I get shaken down by some corrupt official. I can’t just think, “I guess I’ll deal with it when it happens.” Because then, I’m much less likely to do things well.

Malhotra: Also, avoid putting yourself in situations like that. Some people know how to deal with a customs official asking for a bribe. Others may need to be self-aware that they can’t handle a situation like that, that it will be too tempting.

In your class, you mention how regulations force companies to abide by societal values. In the U.S., we’re seeing deregulation in everything from the environment to finance. What does that mean for a values-based leader?

Shotts: Deregulation doesn’t occur in a vacuum. It doesn’t occur without the participation of companies. Governments set the rules, and companies influence the rules. First, it’s incumbent upon business leaders to think about whether it’s ethical for them to push for a certain set of rules, and second, whether they should hold themselves as a firm or an industry to some higher standard than what the law requires.

There can be reasons to hold one’s self to a higher standard. They might be the values of the employees within the company. A great example is the pharmaceutical industry, where a lot of people work in the industry because they care about health care. In the industry’s traditional business model, if you get a successful drug, you have to exploit that IP as much as you can. This created a big conflict around 2000 with the global AIDS epidemic, when the pharmaceutical companies charged a fortune for their drugs. They got all this negative flak for it, partially because people within the companies were dissatisfied. They’re like, “We’re trying to improve people’s health. What are we doing with this pricing?”

Some of the time, companies self-regulate because they care about how customers perceive them, and some of the time it’s because they don’t want the government to regulate them. But if some companies hold themselves to a high standard and others don’t, then what happens?

What does happen?

Shotts: If you want to live according to a set of values, that’s a legitimate reason to push for regulation, to say, “You know, we’re going to be at a competitive disadvantage if other firms do bad, unethical practices, and we would like the government to step in.” And if you can’t get the government to do it, maybe approach activist groups and say, “You know, we’re happy to work with you to monitor our competition and shine the light on them if they’re doing stuff wrong.”

When should leaders be especially aware of values?

Shotts: At times of rapid growth. There are three reasons. One, it lays the foundation. It’s much easier to build the structure of values early rather than try to create that structure later. The second reason is that growth is intoxicating. You start feeling like you’re king or queen of the world, and it’s easy to stop paying attention to other things. And third, when you’re growing, you’re adding people, and it can be hard to build and maintain a values-based culture.

What’s one value that all leaders must grapple with?

Shotts: Diversity. There are strong arguments that diversity promotes effectiveness. But I think that has implications that people haven’t really thought through. What about situations where some people believe diversity produces ineffectiveness? That’s not a hypothetical — this has long been the argument against diversity in the military. But there’s a counter-argument rooted in social justice. Do I want to live in a world where people’s outcomes are highly predicted by their gender and by the color of their skin? Leaders really need to think through what they’re going to do about this, what policies they’ll put in place. This is an easy one for small companies to ignore, but it’s important to start thinking about it early on as part of their growth strategy.

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