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Relationship between Ethical Leadership and Sustainability in Small
Businesses
David Christopher Amisano
Walden University
Peter Anthony
Walden University
Since the 2008 financial crisis, business leaders have faced uncertainty regarding the impact of ethical
leadership behaviors. Because small business leadership involves multiple facets of behavior and
decision-making, small business leaders may have an insufficient understanding of the impact of ethical
leadership behaviors on sustainability. The purpose of this study was to examine the relationship between
ethical leadership and financial, social, and environmental sustainability in small businesses. The
participants were 80 members of a Miami, Florida chamber of commerce. Correlation analysis and
Bonferroni corrected calculation indicated significant relationships (p < .001) between ethical leadership
behaviors and social and environmental sustainability.
INTRODUCTION
As universities created business schools in the early 20th century, business ethics as a discipline
began to move into the forefront of education and practice (Abend, 2013). Between 2008 and 2009, the
Association of Certified Fraud Examiners found 1,843 fraud cases in the United States that cost
businesses nearly 5% of their annual revenue (Austill, 2011). The causes of the 2008 U.S. market collapse
are numerous, including a lack of ethical behavior on the part of financial institution leaders through
secondary mortgage markets, derivatives, and unprincipled groupthink (Austill, 2011); increased risktaking, even in conservative companies (Adelson, 2013); and perhaps decision-making under anxiety
about the future in a speculative market (Parguez & Thabet, 2013). Companies involved in all of these
events relied on their leaders to conduct business ethically while maintaining stakeholder interests and
also to ensure the environmental, social, and financial well-being of the firm.
Recessions, such as the U.S. one that began in 2008, tend to generate more careful, more focused, and
more price-concerned consumer behaviors (Hampson & McGoldrick, 2013). By the end of 2008, U.S.
consumers brought spending on durable goods down by over $200 billion as compared to the previous
year (Bureau of Labor Statistics, 2014). However, reduced spending is not the only customer issue that
businesses face in the wake of the 2008 recession. A greater perception of unethical business practice is
problematic because it may lead to lower levels of consumer trust in a company (Leonidou et al., 2013).
Trust in a company has a positive impact on both intent to purchase and word of mouth behaviors in
consumers, and the perception of transparency can affect consumer trust (Kang & Hustvedt, 2014). If the
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Journal of Leadership, Accountability and Ethics Vol. 14(3) 2017
public cannot trust businesses, and by implication their leaders, and continues to reduce spending because
of lack of trust, transparency, and income, businesses may face a long recovery from a recession.
Since the 2008 U.S. economic crisis, business leaders ethical behavior has also been under scrutiny.
However, business leaders face uncertainty about their ethical actions and responsibilities because few
ethical leadership norms establish appropriate ways in which to act (Eisenbeiss, 2012). Recent studies
have attempted to define ethical behaviors by classifying leader actions according to their own
descriptions (Eisenbeiss, 2012). Bagdasarov et al. (2016) suggested adding a sensemaking dimension to
existing ethical decision-making models to enable leaders to fine-tune ethical decisions. In addition,
researchers linked supervisory failure to unethical management behaviors (Ladany, 2014). However, to
augment ethical decision-making and unethical behaviors, researchers measured the relationship between
ethical leadership and employee and organizational performance, including impacts on supervisory-rated
performance (Walumbwa et al., 2010). Researchers have also investigated influences on employee
satisfaction, commitment, and organizational citizenship (Ruiz et al., 2011). Other studies have linked
employee perception of ethical leadership to their perception of strategy (Tutar et al., 2011) as well as
ethical leadership to corporate social responsibility (Zhu et al., 2014).
Because of the connections between ethics and sustainability, as well as the impact of the unethical
practice upon consumer behavior, an unethical culture could influence business sustainability. Small
business leaders may be in a position to shape ethical culture and sustainability. However, some small
business managers and owners lack an understanding of the correlation between ethical leadership
behaviors and businesses financial, social, and environmental sustainability.
LITERATURE REVIEW
The literature regarding ethical leadership and financial, social, and environmental responsibility
facilitates the examination of the relationship between ethical leadership and sustainability. The primary
themes in the literature are individual and organizational outcomes of ethical leadership, as well as
leadership influences upon the three sustainability factors. The literature themes also include ethical
practices and their influences.
Individual and Behavioral Influences of Ethical Leadership
The influences of ethical leadership are present in organizations via leader orientations to ethics,
ethical decision-making, and individual behaviors in the workplace. Eisenbeiss (2012) identified four
ethical leadership orientations through qualitative studies of organizational leaders. The four orientations
were humane, justice, responsibility and sustainability, and moderation (Eisenbeiss, 2012). Eisenbeiss
also suggested that moderation could be one of the key orientations, and that future research should focus
on a contingency orientation. Brown et al. (2005) developed a measurement for ethical leadership through
seven studies of MBA and doctoral students, employees, and employee groups in a financial firm.
According to the Brown et al. (2005) measurement instrument, ethical leadership arose out of the
perception that leaders measured success by its means and not solely the outcome, were fair in decisionmaking, were trustworthy, and acted with employee best interest in mind. Kalshoven et al. (2011)
developed an ethical leadership at work instrument and determined that ethical leaders had orientations to
people, fairness, sustainability, and integrity, while being open to sharing power and providing clear
ethical guidance.
Individual behavioral outcomes of ethical leadership expand to employee perceptions and intellectual
capital (Mete, 2013; Tu & Lu, 2013; Zoghbi-Manrique-de-Lara & Suárez-Acosta, 2014). In a study of
Spanish hotel workers, perceptions of ethical leadership had a positive relationship with interactional
justice towards peers, or perceptions of employee mistreatment (Zoghbi-Manrique-de-Lara & SuárezAcosta, 2014). In relation to intellectual elements, Bouckenooghe et al. (2015) determined that supervisor
ethical leadership had a positive relationship with follower psychological capital, including hope,
resilience, self-efficacy, and optimism. For employees in a Turkish aviation firm, ethical leadership had a
positive relationship with employee perceptions of organizational justice, and organizational justice was a
Journal of Leadership, Accountability and Ethics Vol. 14(3) 2017
77
partial mediator between ethical leadership and organizational misbehavior (Demirtas, 2015). With front
line workers in a Chinese auto manufacturer and technology company, ethical leadership had a positive
relationship with innovative behaviors on the job (Tu & Lu, 2013). The indication from these studies is
that ethical leadership behaviors can reduce cynicism and increase feelings of ownership, satisfaction, and
innovation.
Organizational Performance Outcomes of Ethical Leadership
The literature indicates that ethical leadership has an influence on (a) job satisfaction, (b)
organizational commitment, (c) organizational citizenship, (d) turnover intent, and (e) stress (Çelik et al.,
2015; Demirtas & Akdogan, 2015; Shin et al., 2015; Walumbwa et al., 2010; Yang, 2014). In a study of
supervisors and their direct reports in a Chinese pharmaceutical company, ethical leadership had a
positive relationship with performance (Walumbwa et al., 2010). Simultaneously, leader-member
exchange, self-efficacy, and organizational identification were facilitators of the ethical leadership and
supervisory-rated performance relationship (Walumbwa et al., 2010). In a study across Korean industries,
management ethical leadership was a predictor of ethical and procedural justice climates, which were then
mediators on organizational citizenship behavior at the firm level as well as firm financial performance
(Shin et al., 2015). At the organizational level, ethical leadership behaviors may influence employee
identification as well as performance.
In a related study of Romanian workers in construction and metal products companies, ethical
leadership had a positive relationship with followers relational identification with both leader and
organization (Zhu et al., 2015). Relational identification was a mediator between ethical leadership and
follower voice behavior, while identification with the organization was a mediator between ethical
leadership and follower voice behavior, that is, follower willingness to speak up for the benefit of the
organization (Zhu et al., 2015). Followers identification with organization and identification with their
relationship with the leader served as mediators between ethical leadership and job performance (Zhu et
al., 2015). The literature on performance and ethical leadership indicate that ethical leadership may be a
conduit between multiple factors and eventual performance and organizational behavior outcomes. In
addition, ethical leadership in supervisors seems to lead to highly rated employee performance.
The literature also highlights links between ethical leadership and behavioral factors that could
influence organizational performance, including job satisfaction, commitment, organizational citizenship,
turnover, and stress. In a study of 391 Turkish hotel workers, ethical leadership had a positive relationship
with job satisfaction and with employees level of organizational commitment (Çelik et al., 2015). As a
mediator, organizational commitment had a positive relationship with job satisfaction (Çelik et al., 2015).
As a connection to previous studies, ethical leadership relates positively to organizational outcomes such
as satisfaction and turnover.
Ethical leadership may increase satisfaction and commitment and reduce turnover and conflict. In the
Spanish banking and insurance industries, ethical leadership at supervisory and executive levels had
positive relationships with employee job satisfaction, organizational commitment, and organizational
citizenship (Ruiz et al., 2011). Both ethical leadership levels had negative relationships with the intent to
leave (Ruiz et al., 2011). However, supervisory ethical leadership was an intermediary between executive
ethical leadership and the job-related factors (Ruiz et al., 2011). At another level of influence, Zhou and
Shi (2014) found that ethical leadership was a moderator between leader-member exchange
differentiation and team conflict. A stronger moderation relationship existed when ethical leadership was
low (Zhou & Shi, 2014). The influence of ethical leadership seems to reduce conflict and potential
turnover, but at the same time may make employees more committed to the organization. Although some
links between ethical leadership and performance outcomes are indirect or moderated, the impact to
organizational performance appears to be strong.
Influences on the Integration of Environmental and Corporate Social Responsibility
Financial benefits may be one reason behind why firms adopt environmental sustainability programs.
In a study of 51 U.S. manufacturing firms on the Dow Jones Sustainability Index (DJSI), on the average,
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Journal of Leadership, Accountability and Ethics Vol. 14(3) 2017
the financial payoff from high order sustainability initiatives was better than the payoff from low order
sustainability initiatives, where high order initiatives generated new products or processes and low order
initiatives only changed current products and processes (Kurapatskie & Darnall, 2013). In an analysis of
corporate environmental and corporate financial performance reporting from 1970 to 2009, smaller firms
received as much financial benefit as larger firms regarding environmental responsibility (Dixon-Fowler
et al., 2013). In addition, the environmental performance element had the most consistent influence on
financial performance, as measured by both short- and long-term indicators such as stock price, return on
assets (ROA), and return on equity (ROE) (Dixon-Fowler et al., 2013).
Another element in the generation of environmental sustainability from the literature is the
nonleadership rationale behind the integration of the environment into business practice. In a study of
large German companies, Windolph et al. (2014) analyzed the company functional areas requiring
increased sustainability management to determine the overall motivation for the implementation of
sustainable practices. Key motivators were the creation of legitimacy and market success, while a less
important motivator was the desire to improve internal functions (Windolph et al., 2014). This research
indicates that some leaders view sustainability as an appropriate choice based largely on external factors
as opposed to internal.
Other reasons for environmental sustainability seem to be less altruistic. At the organizational level,
Zaman (2013) asserted that a reason for commitment to the environment other than altruism was due to
the specific environmental risks of doing business. Risks included those related to general health, such as
factory emissions, synthetic pesticides, and carbon monoxide (Zaman, 2013). Additional reasons included
ecological risks that stemmed from the use of nonrenewable energy sources and land transformation, as
well as economic risks caused by damage to people and physical property due to the health and ecological
risks present in business processes (Zaman, 2013). Delmas and Pekovic (2013) determined that
organizations with environmental practices in place had higher labor productivity as well as effective
training and communication. However, in a study of Canadian manufacturing firms, managers personal
environmental values had a positive relationship with their organizational citizenship behaviors for the
environment (Boiral et al., 2015). In this sense, environmental sustainability may arise from risk,
compliance, and productivity concerns and not necessarily from altruism.
Corporate social responsibility appears in the literature as related to leadership, business processes,
and even values. After a meta-analysis of the literature related to the connections between leadership and
CSR, Christensen et al. (2014) contended that servant leadership was an important facet of the
connections between leadership and CSR. Under this framework, leaders engender trust that can generate
ethics and value creation, which are antecedents to CSR (Christensen et al., 2014). Follower rating of
transformational leadership had a positive relationship with leader CSR values and follower stakeholder
CSR values (Groves, 2014). The values of leader stakeholders were also moderators between
transformational leadership and follower stakeholder values (Groves, 2014). Among 122 organizational
leaders and 458 subordinates, the leadership style and thus a relationship with CSR was dependent on the
perception of leader ethics (Groves & La Rocca, 2011). Subordinates rated their leaders as
transformational if they perceived them as moral altruists but as transactional if they perceived the leader
as utilitarian in ethical approach (Groves & La Rocca, 2011). In line with this conclusion, the study
indicated that transformational leadership had a positive relationship with the value subordinates placed
on CSR (Groves & La Rocca, 2011). From this perspective, transformational and transactional leadership
influence CSR and its value, but leader ethics may also have an effect on that relationship.
A final element in the literature relates to the integration of business processes and frameworks as a
support for CSR. Godkin (2015) proposed that mid-level managers should begin to recognize employee
engagement behaviors and channel that engagement into long-term CSR. Under this model, mid-level
managers should become aware of employees who are ethical champions or employees who simply tell
the truth (Godkin, 2015). In a content analysis of the top 50 companies on the Australian Securities
Exchange, Klettner et al. (2014) examined annual and sustainability reports as well as company websites
and asserted that these companies were in the process of integrating CSR into core business strategy. This
assertion arose from the fact that 36 of the top 50 included sustainability information as part of the annual
Journal of Leadership, Accountability and Ethics Vol. 14(3) 2017
79
report and 27 issued a separate sustainability report, as well as from evidence that 22 companies had
identified a board committee on sustainability (Klettner et al., 2014). Hahn et al. (2015) proposed an
integration and understanding of the organizational, economic, and social tensions that arise due to CSR.
Under the framework, business leaders can identify the tensions, define the rationale underlying the
tensions, and generate solution strategies (Hahn et al., 2015).
Influences on Firm Financial Performance
As with environmental sustainability, the discussion of the literature on ethics, ethical leadership, and
financial performance involves the reasoning and subsequent impacts of unethical or illegal behavior on
firm performance. Executives who displayed overconfident behaviors were more likely to be involved in
manipulation of financial reporting (Plöckinger et al., 2016). An executives age, length of service and
education reduced tolerance for risk in financial reporting, although one executive with concentrated
power appeared to generate lower quality reporting (Plöckinger et al., 2016). In 128 banks with 164 legal
violations between them, legal violations had a negative impact on financial performance and that the
negative effect increased with the level of violation seriousness (Zeidan, 2013). In addition, multiple
violations had a higher negative impact on financial performance (Zeidan, 2013). Although an earnings
restatement is not necessarily illegal or unethical, nor do legal violations have a proven link to unethical
behavior, they do have potentially negative impacts on firm financial performance.
Ethics also has links to financial reporting. Chief Financial Officers (CFOs) with a low level of
earnings management ethics were more likely to report larger discretionary expense accruals when an
individual financial incentive conflicted with an organizational incentive (Beaudoin et al., 2015). In fact,
the conflict in incentives was a moderator between the CFOs tendency to become morally disengaged
and decisions regarding discretionary accruals (Beaudoin et al., 2015). Working professionals and
accountants were more likely to view questionable practices that affected reporting outcomes from an
ethically situational perspective as opposed to an organizational outcome perspective (Walker &
Fleischman, 2013). In the same study, ethical behaviors had a positive relationship with ethical judgment
(Walker & Fleischman, 2013). The presence of audit functions as well as situational thinking and
judgment could bring ethics into financial reporting decisions.
METHODOLOGY
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