Chapter 15 Ethical Leadership.pdf

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Ethical LeadershipEthical Leadership

Ethical behavior is a key characteristic of the global leader of the future. Youngleaders place great value on ethics, think they are sorely lacking in current lead-ers, and feel that ethical behavior will become the most important characteristicof future leaders. This is not surprising in a time when shredding documents, cre-ative accounting, and ruthless tactics come to light in the media on a fairly regu-lar basis.

—Goldsmith, Greenberg, Robertson, and Hu-Chan (2003, p. 217)

This chapter presents a guide to ethical decision making in situations that will confrontyou as a leader and discusses several ethical perspectives that should help you makeethical decisions. There is constant debate as to where a chapter on ethics should

appear in any book (e.g., textbooks, casebooks). In this book, we decided to place it last.Wedo this for one very specific reason. We want ethics and its intersection with leadership tobe the last thing you read and consider as you finish your course on leadership. In our ownteaching and research, we are struck by the number of times that what seem to be innocu-ous decisions can turn into very dicey ethical situations. In the first author’s previous life asan officer in the Canadian Navy, he was often presented with situations that required himto think through several ethical dimensions before making a decision. Consequently, wehope and expect that this chapter will be one you return to many times as you develop as aleader in the organization you join after you finish your current degree.

Concern regarding leaders and their ethics has been central to everyday lifethroughout our history. Unfortunately, it is also a very messy topic to research.Consequently, research regarding leaders and their ethics is very sparse (Yukl, 2006).Recent research (Ciulla, 1998; Phillips, 2006) has begun to delve into these issues.Ciulla (1998) discusses how leadership theory and practices may lead to a more just

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440 CASES IN LEADERSHIP

and caring society. Phillips (2006) defines CEO moral capital and presents a more formaldefinition of moral capital.

CEO moral capital is the belief that the CEO justly balances the disparate interests ofindividual and group stakeholders to achieve positive returns that benefit the firm, itsstakeholders, and the CEO.

Moral capital is the belief that an individual, organization, or cause justly balances thedisparate interests of stakeholders to achieve positive returns that benefit their col-lective and individual purposes.

These definitions describe how CEOs and other individuals are viewed by their fol-lowers, peers, and superiors and, as Phillips (2006) argues, are based on their perceptionof the CEO’s (or an individual’s) character and behavior.

A Definition of Ethics

In the Western world, the definition of ethics dates back to Plato and Aristotle. Ethicscomes from ethos, a Greek word meaning character, conduct, and/or customs. It is aboutwhat morals and values are found appropriate by members of society and individualsthemselves. Ethics helps us decide what is right and good or wrong and bad in any givensituation.With respect to leadership, ethics is about who leaders are—their character andwhat they do, their actions and behaviors.

Ethical Theories

As suggested above, ethical theories fall into two broad categories: those theories relatedto leaders’ conduct, actions, and/or behavior and those related to leaders’ character. Forthose theories related to conduct, there are two types: those that relate to leaders’ con-duct and their consequences and those that relate to the rules or duty that prescribeleaders’ conduct.

Those theories related to consequences are called teleological theories (telos being aGreek word for purposes or ends). These theories emphasize whether a leader’s actions,behavior, and/or conduct have positive outcomes. This means that the outcomes relatedto a person’s behavior establish whether the behavior was ethical or unethical.

Those theories related to duty or rules are called deontological theories (deos being aGreek word for duty). These theories focus on the actions that lead to consequences andwhether the actions are good or bad. Those theories related to character are described asvirtue-based approaches.

Teleological Approaches

There are three approaches to assessing outcomes and whether they are viewed as ethical.First, ethical egoism describes the actions of a leader designed to obtain the greatest goodfor the leader. Second, utilitarianism refers to the actions of leaders that obtain the great-est good for the largest number of people. Third, altruism is a perspective that argues thata leader’s conduct is ethical if he or she demonstrates concern for others’ interests, even ifthese interests are contrary to the leader’s self-interests.

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Chapter 15: Ethical Leadership 441

Deontological Approach

This approach is derived from deos, a Greek word meaning duty. It argues that whether ornot an action is ethical depends not only on its outcome but also on whether the action,behavior, or conduct is itself inherently good. Examples of actions and behaviors that areintrinsically good, irrespective of the outcomes, are “telling the truth, keeping promises,being fair, and respecting others” (Northouse, 2010). This approach emphasizes the actionsof leaders and their ethical responsibility to do what is right.

Virtue-Based Approach

Virtue-based theories are related to leaders and who they are and are grounded in theleader’s heart and character. In addition, these virtues can be learned and retained throughexperience and practice. This learning occurs in an individual’s family and the variouscommunities with which an individual interacts throughout his or her lifetime. This per-spective can be traced back to Plato and Aristotle. Aristotle believed that individuals couldbe helped to become more virtuous and that more attention should be given to tellingindividuals what to be as opposed to telling them what to do (Velasquez, 1992). Aristotlesuggested the following virtues as exemplars of an ethical person: generosity, courage, tem-perance, sociability, self-control, honesty, fairness, modesty, and justice (Velasquez, 1992).Velasquez (1992) argued that organizational managers should learn and retain virtues“such as perseverance, public-spiritedness, integrity, truthfulness, fidelity, benevolence,and humility” (Northouse, 2010).

The Centrality of Ethics to Leadership

Ethics is central to leadership because of the nature of the relationship between leaders andfollowers. Leaders influence followers—this means they affect followers’ lives either nega-tively or positively (Yukl, 2006). The nature of the influence depends on the leaders’ char-acter and behavior (particularly the nature and outcome of behaviors). Leaders have morepower—interpersonal and/or formal hierarchical power—and therefore have a greaterresponsibility with respect to their impact on their followers. Leaders influence followersin the pursuit and achievement of common goals. It is in these situations that leaders needto respect their followers and treat them with dignity—in other words, as individuals withdistinctive identities. Finally, leaders are instrumental in developing and establishing orga-nizational values. Their own personal values determine what kind of ethical climate willdevelop in their organizations.

Ethical Leadership: The Perspectives of Several Leadership Scholars

In this section, we review the perspectives of three prominent leadership scholars as theseperspectives relate to leadership and ethics. We focus on Heifetz (1994), Burns (1978),and Greenleaf (1970, 1977).

Heifetz and Ethical Leadership

Heifetz (1994) emphasized conflict and the responsibility of leaders to assist followers indealing with conflict and effecting changes that come from conflict.He focused on the values offollowers, the values of the organizations in which they work, and the values of the communities


in which they live. For Heifetz (1994), the paramount responsibility of leaders is to create awork atmosphere characterized by empathy, trust, and nurturance and to help followers tochange and grow when faced with difficult situations (Northouse, 2010; Yukl, 2006).

Burns and Ethical Leadership

Like Heifetz (1994), Burns (1978) argued that leadership (especially transformationalleadership, as described in Chapter 9) is about helping followers achieve higher ethicalstandards when differing values conflict—especially when conflict is confronted duringdifficult situations. He argued that the interaction of leaders and followers should raisethe ethical behavior and character of both. Leaders would do this by assisting followers toemphasize values such as equality, justice, and liberty (Burns, 1978; Ciulla, 1998).

Greenleaf and Ethical Leadership

Greenleaf (1970, 1977) espoused servant leadership. This perspective comes closest toaltruism, described earlier. The underlying tenants of servant leadership are as follows:Leaders need to be aware of followers’ concerns and needs, attend to followers’ needs andconcerns, empathize with followers, nurture and support followers, and look after follow-ers. Servant leaders make others better by their presence. Through serving their followers,servant leaders encourage followers to gain more knowledge, freedom, and autonomy andto develop as servant leaders themselves. In addition, Greenleaf believed that servant lead-ers have a broader responsibility to society to accept the “have-nots” and to set rightinequalities and social injustices (Graham, 1991; Northouse, 2010; Yukl, 2006).

All three perspectives emphasize the relationship between leaders and followers andargue that this relationship is at the heart of ethical leadership. The ideas presented bythese three scholars are similar to and in agreement with Gilligan’s (1982) ethic of caring.This has become a central principle in ethical leadership research and is considered ofparamount importance to organizations because it is of critical importance in develop-ing collaboration and trust among leaders and followers (Brady, 1999).

Ethical Leadership Principles

In this section, we present five principles that are believed to lead to the development ofethical leadership. These are respect for others, service to others, justice for others, honestytoward others, and building community with others (Dubrin, 2007; Northouse, 2010).

Respect for Others

Ethical leaders treat others with dignity and respect. This means that we treat people asends in themselves rather than as means to our own ends. This form of respect recognizesthat followers have goals and ambitions and confirms followers as human beings whohave worth and value to the organization. In addition, it leads to empathy, active listen-ing, and tolerance for conflicting viewpoints.

Service to Others

Ethical leaders serve others. They behave in an altruistic fashion as opposed to behaving in away that is based on ethical egoism. These leaders put followers first—their prime reason for



Chapter 15: Ethical Leadership 443

being is to support and nurture subordinates. Service to others is exemplified through behav-iors such as mentoring, building teams, and empowering (Kanungo &Mendonca, 1996).

Justice for Others

Ethical leaders ensure that justice and fairness are central parts of their decision making.This means treating all subordinates in very similar ways, except when there is a very clearneed for differential treatment and there is transparency about why this need exists. Inaddition to being transparent, the logic for differential treatment should be morally soundand reasonable.

Honesty Toward Others

Ethical leadership requires honesty. Dishonesty destroys trust—a critical characteristic ofany leader–follower relationship. On the other hand, honesty increases trust and buildsthe leader–follower relationship. Honesty means openness with others in that we expressour thinking and our reality as fully as we can. This means balancing openness with dis-closing only what is appropriate in a given scenario. Dalla Costa (1998) says that honestyfor leaders means the following:

Do not promise what you can’t deliver, do not misrepresent, do not hide behindspin-doctored evasions, do not suppress obligations, do not evade accountabil-ity, do not accept that the “survival of the fittest” pressures of business release anyof us from the responsibility to respect another’s dignity and humanity. (p. 164)

We would argue that leaders need to ensure that what they believe, what they think,what they say, and what they do are internally consistent. This internal consistency, alongwith openness, will build trust among followers toward the leader.

Building Community With Others

Ethical leaders build community with others. This is crucial because leadership is aboutinfluencing others to achieve a communal goal. This means that leaders develop organi-zational or team goals that are appropriate for the leader and his or her followers. Thesegoals need to excite as many people as possible, and ethical leaders achieve this by takinginto account the goals of everyone in the team or organization.

How Does Ethical Leadership Work?

We are hoping that this chapter will enable you to better understand yourself as youdevelop your leadership skills, knowledge, and abilities. Use the thinking on ethical lead-ership in this chapter as a guide in making your decisions. Remember that the relation-ship between you and your followers is at the heart of ethical leadership and requires thatyou show sensitivity to others’ needs, treat others in a just manner, and have a caring atti-tude toward others. Being an ethical leader will be easier if you entrench the followingquestions into your thinking (Northouse, 2010):

• Is this the right and fair thing to do?• Is this what a good person would do?


• Am I respectful to others?• Do I treat others generously?• Am I honest toward others?• Am I serving the community?

Ethical leaders must be concerned with more than running their businesses. Theymust be concerned with their employees, their customers, their suppliers, their commu-nities, their shareholders, and themselves. Leadership is influencing people to achievecommunal goals; ethical leadership is achieving those goals in a way that is fair and justto your employees, your customers, your suppliers, your communities, your shareholders,and yourselves (Daft, 2005; Phillips, 2006).

yy ReferencesBrady, F. N. (1999). A systematic approach to teaching ethics in business. Journal of Business Ethics, 19(3),

309–319.Burns, J. M. (1978). Leadership. New York: Harper & Row.Ciulla, J. B. (1998). Ethics, the heart of leadership.Westport, CT: Greenwood.Daft, R. L. (2005). The leadership experience (3rd ed.). Mason, OH: Thomson, South-Western.Dalla Costa, J. (1998). The ethical imperative: Why moral leadership is good business. Reading, MA:

Addison-Wesley.Dubrin, A. (2007). Leadership: Research findings, practice, and skills. New York: Houghton Mifflin.Gilligan, C. (1982). In a different voice: Psychological theory and women’s development. Cambridge, MA:

Harvard University Press.Goldsmith, M., Greenberg, C. L., Robertson, A., & Hu-Chan, M. (2003). Global leadership: The next gen-

eration. Upper Saddle River, NJ: Financial Times Prentice Hall.Graham, J. W. (1991). Servant-leadership in organizations: Inspirational and moral. Leadership Quarterly,

2(2), 105–119.Greenleaf, R. K. (1970). The servant as leader. Newton Centre, MA: Robert K. Greenleaf Center.Greenleaf, R. K. (1977). Servant leadership: A journey into the nature of legitimate power and greatness.

New York: Paulist.Heifetz, R. A. (1994). Leadership without easy answers. Cambridge, MA: Harvard University Press.Kanungo, R. N., & Mendonca, M. (1996). Ethical dimensions of leadership. Thousand Oaks, CA: Sage.Northouse, P. G. (2010). Leadership: Theory and practice (5th ed.). Thousand Oaks, CA: Sage.Phillips, J. R. (2006). CEO moral capital.Unpublished doctoral manuscript, University of Western Ontario.Velasquez, M. G. (1992). Business ethics: Concepts and cases (3rd ed.). Englewood Cliffs, NJ: Prentice Hall.Yukl, G. (2006). Leadership in organizations (6th ed.). Upper Saddle River, NJ: Pearson/Prentice Hall.

yy The Cases

Lee and Li, Attorneys-at-Law, and theEmbezzlement of NT$3 Billion by Eddie Liu (A)

Dr. C. V. Chen received news that one of Lee and Li’s senior assistants had found a loop-hole in a power of attorney from one of the firm’s clients, SanDisk Corporation (SanDisk),that had allowed him to illegally sell the client’s shares in a Taiwanese company and tosneak out of Taiwan with more than NT$3 billion. Unfortunately, Lee and Li had no insur-ance to cover this embezzlement. Chen knew that the three senior partners needed to



Lee and Li, Attorneys-at-Law, and the Embezzlement of NT$3 Billion 445

develop a plan of action to save the law firm, take care of the lawyers and other employees,maintain the reputation of the firm within Taiwan and abroad, do what was best forSanDisk and Lee and Li, and keep the more than 12,000 clients from deserting the firm.

Pembina Pipeline Corporation

Pembina Pipeline Corporation transports light crude oil and natural gas liquids inWestern Canada. The president of the company is abruptly awakened one night by aphone call from his operations manager. He is informed that one of Pembina’s pipelineshas burst and is spilling thousands of barrels of crude oil into a nearby river. Emergencycrews have responded to the disaster, but more help is needed. The president has to decidethe best way to handle this situation with the media and plan a strategy for the companyin containing the spill.

yy The Reading

Principled Leadership: Taking the Hard Right

What makes a leader the most principled is a certain solidity at the core, a solidityfounded on principles that are, essentially, points on a moral compass. Those principlesare visible in the actions of some leaders, while other leaders act according to convenience.These authors lay down a blueprint that will allow a leader to be guided by principles.

Lee and Li, Attorneys-at-Law, and the Embezzlement of NT$3 Billion by Eddie Liu (A)

Prepared by Yeong-Yuh Chiang and W. Glenn Rowe

AUTHORS’ NOTE: This case has been written on the basis of public sources. Consequently, the interpretation and perspec-tives presented in this case are not necessarily those of Lee and Li or any of its partners and employees.

Copyright © 2008, College of Commerce National Chengchi University and Ivey Management Services Version: (A) 2009-01-16

Dr. C.V. Chen was shocked and speechless.Paul Hsu, one of Lee and Li’s most seniorpartners, had just briefed him and Kwan-TaoLi about the actions of Eddie Liu, one of thefirm’s senior assistants. Liu had found aloophole in a power of attorney from one ofthe firm’s clients that had allowed him toillegally sell the client’s shares in a Taiwanesecompany and to sneak out of Taiwan withNT$3.09 billion (approximately US$92 million).

Unfortunately, Lee and Li had no insuranceto cover this embezzlement.

Many questions raced through Chen’smind: What about the firm? How would thisaction affect the more than 550 lawyers andemployees? How would other clients react tothe news of this crime? Would this breach oftrust ruin the firm’s reputation in Taiwan andabroad? Would the firm survive and remainfinancially stable? What should the firm do for


the client whose shares had been used to per-petuate the fraud and theft by Liu?

Chen knew that action had to be takenquickly. The questions whirled in his head ashe considered what he, Hsu and Kwan-Tao Li,the three most senior partners at Lee and Li,needed to do today, tomorrow, next week andover the next several months.

October 13, 2003 would forever be searedinto Chen’s memory.

yy The Firm: Lee and Li,Attorneys-at-Law

The firm that later became Lee and Li had beenfounded in Shanghai, China, in the mid-1940s.James Lee, one of the two founders, had com-menced practicing law with Allman and Kopps,and, in 1948, the firm was named Allman,Kopps and Lee. Dr. C. N. Li, the other foundingpartner, had also practiced in Shanghai duringthe 1940s. Both James Lee and C. N. Li werespecialists in international legal matters.

In 1953, James Lee established his own lawoffice in Taipei, Taiwan, and, in 1965, he wasjoined by C. N. Li. James Lee died in 1970, andLi renamed the firm Lee and Li. After C. N. Lidied in 1973, Paul Hsu, Kwan-Tao Li (C. N. Li’sson) and C. V. Chen, together with other seniorpartners, led the firm through extraordinarygrowth to become one of the largest law firms inAsia and the largest in Taiwan. Considered bymany to be the top law firm in that country,1 Leeand Li had offices in the cities of Taipei,Taichung, Hsinchu, Tainan and Kaohsiung.

Lee and Li’s core values encompassed threeprinciples: caring for people, excellence in qualityand client service. A core goal was “doing well bydoing good.” The firm’s motto “we care, we serve,we excel” was prominently displayed at theentrance to the firm’s head office in Taipei. Thepartners and staff believed that adherence tothese principles had made the firm a leader in

each of its 28 practice areas. The firm wasinvolved in the development of public policiesand in promoting the rule of law in Taiwan andelsewhere, particularly in China. The firm hadadvised Taiwan’s government on vital social andeconomic policies, and several firm membershad helped draft new governmental legislation.Lee and Li lawyers had been involved in judicialreform and constitutional litigation work thatwere considered landmarks. Their work on probono cases had won them a reputation for “beinga leader in public interest work in Taiwan.” In1999, the firm established the Lee and LiFoundation, a not-for-profit organization dedi-cated to promoting education and rule of law.

Lee and Li had several thousand clients,many of whom had been with the firm fordecades. One-third of these clients were head-quartered in Taiwan, and the rest were foreignfirms. Companies from the United States,Europe and Japan had utilized Lee and Li’s ser-vices. The firm’s client list included interna-tionally well-known firms, such as GeneralElectric, Ford, 3M, Bank of America, City Bank,IBM, Sony, McDonald’s and Siemens. Over theyears, Lee and Li had represented almost all ofthe Fortune 500 firms and the multinationalbanks that were doing business in Taiwan.

Lee and Li’s attorneys were globally con-nected, and several were fluent in English orJapanese in addition to their native tongue,Chinese. They were graduates of top lawschools in countries such as Taiwan, the UnitedStates, and Japan (see Exhibit 1 for briefrésumés for Chen and Li). Lee and Li’s attor-neys enjoyed long-standing relationships withlaw firms in North America, Asia and Europe.Collaboration on cross-border deals withother law firms was routine for Lee and Liattorneys. To better serve clients operating inthe Greater China region, Lee and Li hadestablished strategic alliances with Lee and LiBusiness Consultants (Shanghai) Ltd. and Leeand Li—Leaven IPR Agency Ltd. in Beijing.

446 CHAPTER 15: ETHICAL LEADERSHIP

1“Plugging the Loopholes,” editorial, Taipei Times, October 18, 2003, p. 8; Jimmy Chuang, “Fugitive Liu Wanted in Hong Kong,Taipei Times, June 24, 2004, p. 1.



Exhibit 1 Brief Résumés for C. V. Chen and Kwan-Tao Li

(Continued)

C. V. Chen

Place of Birth: Yunan, China.Nationality: Republic of China (on Taiwan).

Education

S.J.D., Harvard (1972); LL.M., Harvard (1970); LL.M., University of British Columbia (1969);LL.B., National Taiwan University (1967).

Experience

Professional: Chairman and Managing Partner, Lee and Li Attorneys-at-Law, Taipei, Taiwan;Adjunct Professor of Law, National Chengchi University Graduate School of Law, Taiwan,(1972–present); Lecture Professor of Law, Guanghua School of Management, PekingUniversity, China; Lecture Professor of Law, School of Law, Tsinghua University, China;Chairman of Guanghua Law School Council, Zhejiang University, China; Lecturer, theTraining Institute for Judges and Prosecutors, the Ministry of Justice of the Republic of China.

Pro Bono: President, The Red Cross Society of the Republic of China (April 2000–present);Chairman, Taipei European School Foundation, Taiwan, the Republic of China (1994–present);Director, Lee and Li Foundation; Managing Director, Chinese (Taiwan) Society of InternationalLaw (Jan. 2004–present).

Honors

Honorary President, Harvard Club of Republic of China on Taiwan (1989–present); Recipientof the Order of Resplendent Banner with Special Cravat from the President of the Republic ofChina in 1989 for contribution to the upgrading of legal education and establishment ofprocurement system in the armed forces; Recipient of other medals and awards from thegovernment of the Republic of China on Taiwan.

Publications

Numerous articles on transnational legal problems

Kwan-Tao Li

Place of Birth: Shanghai, China.Nationality: Republic of China (on Taiwan).

Education

MBA, Kellogg-HKUST; LL.M., New York University Law School, Graduate Division; LL.B.,National Taiwan University.

Experience

Chief Counsellor, Lee and Li, Attorneys-at-law; Chairman, Lee and Li Foundation; Chairman,Lee and Li Business Consultants (Shanghai), Ltd; Director, Far Eastern Medical Foundation;


Lee and Li had achieved a stellar reputa-tion and received many awards for its out-standing work in the areas other thanintellectual property. The firm had received

several awards for its work in “managing intel-lectual property” (see Exhibit 2 for a list ofawards, honors and recognition for Lee and Lifrom 1998 to 2002).


SOURCE: http://www.leeandli.com/web/e/default.htm, accessed June 8, 2008.

Director, Yen Tjing Ling Medical Foundation; Director, Far Eastern Y.Z. Hsu Science andTechnology Memorial Foundation; Director, Asia Cement Corporation; Director, Far EasternTextile Ltd; Director, Tai Yuen Textile Co., Ltd.; Supervisor, Yulon Nissan Motor Co., Ltd.;Associate Professor of Law, Chinese Culture University (1985–1998); Lecturer of Law, SoochowUniversity Law School (1969–1999); Lecturer of Law, Soochow University Graduate Law School(1972–1985); Lecturer of Law, National Taiwan Institute of Technology (1975–1979); Lecturerof Law, Fu Jen Catholic University (1969–1971); Director, Yuan Ze University (1987–1999).

Member

Member, State Bar of New York.

Languages

Mandarin, English, Cantonese, Shanghainese

Practice Area

Corporate; Entertainment; Fair Trade; Intellectual Property Rights; International Mergers andAcquisitions; Labour; Maritime; Trademarks.

Coauthor

Coauthor of “A Study on Economic Contract Law of Mainland China,” published by ChineseCulture University; Contributor to Trade and Investment in Taiwan: The Legal and EconomicEnvironment in the R.O.C., Published by University of Washington.

Exhibit 1 (Continued)

Exhibit 2 Awards, Honors, and Recognition for Lee and Li

Managing Intellectual Property

1998 Voted No.1 Firm for Non-patent Work in Taiwan 1997

1999 Voted No.1 Firm for Trade Mark and Copyright Work in Taiwan 1998

2000 Voted No.1 Firm for Patent in Taiwan 1999

2000 Voted No.1 Firm for Trade Mark/Copyright in Taiwan 1999



From its beginnings, the firm had devel-oped the largest intellectual property practicein Taiwan, and, in the 1970s, had been exten-sively involved in foreign direct investmentgrowth into Taiwan. The firm pioneered thedevelopment of the banking and capital mar-kets practice in the 1980s and had been pivotalin the establishment of the technology and lawpractice in the 1990s. Lee and Li was struc-tured into four departments (corporate, bank-ing and capital markets, trademark andcopyright, and patent and technology) withHsu, Chen and Li jointly managing the opera-tions. Although the associate partners and staffworked almost exclusively for one of the fourdepartments, they would, as a rule, engage incross-fertilization with their colleagues in theother departments.

yy The Client:SanDisk Corporation(NASDAQ: SNDK)

SanDisk Corporation (SanDisk) was founded in1988 by Dr. Eli Harari, a world-renownedauthority on non-volatile memory technology.Based in Sunnyvale, California, the companywas the world’s largest supplier of flash memorydata storage card products. It designed, manu-factured and marketed “industry-standard,solid-state data, digital imaging and audio stor-age products using its patented, high densityflash memory and controller technology.”2

SanDisk was the only company that had therights to manufacture and sell every majorflash card format, including CF, SD, miniSD,

SOURCE: http://www.leeandli.com/web/e/default.htm, accessed June 8, 2008.







International Financial Law Review

2001 Law Firm of the Year

2001 Pro Bono Award

2002 Regional Law Firm of the Year

2003 National Law Firm of the Year

Global Competition Review

2002 The GCR 100: A Survey of the World’s Leading Competition Law Practices and Economists

2“SanDisk . . . Its Taiwan Law Firm,” Business Wire, November 15, 2003, p. 1.


SmartMedia, FlashDisk, MMC, MemoryStickPro, xD-Picture cards and USB flash drives. Thecompany did not operate fabrication facilities,but used a multiple-sources strategy to fluctuateits supply with changes in demand. SanDiskcontrolled a significant portion of its flash mem-ory wafer manufacturing through its joint ven-ture, FlashVision, and many other strategicarrangements with fabrication facility owners.These strategic and contractual partnersincluded Toshiba, Samsung, Renasas Technology,United Microelectronic Inc. (UMC) and TowerSemiconductor Ltd. Such a multiple-sourcesstrategy enabled SanDisk to concentrate onproduct designs and development of its corecompetency. SanDisk received a majority of itsrevenue from direct sales to retailers.

On September 30, 2003, SanDisk owned147.8 million shares in UMC, one of its con-tractual partners in Taiwan. Twenty millionof these shares were held by SanDisk with

the remaining 127.8 million shares underthe control of Lee and Li. SanDisk had sold35 million UMC shares during the month ofSeptember for approximately US$30 mil-lion. The 127.8 million UMC shares con-trolled by Lee and Li were valued at US$83.3million, based on cost, and were worthUS$106.6 million based on trading price onthe Taiwan Stock Exchange on September 30,2003.

At SanDisk’s previous fiscal year end onDecember 29, 2002, it reported revenuesof US$541,273,000 with net income ofUS$36,240,000. Its diluted net income per sharewas US$0.26. SanDisk had working capital ofUS$584,450,000, total assets of US$973,579,000,long-term debt of US$150,000,000 and stock-holders’ equity of US$627,720,000. The com-pany was doing well financially and was on anupward trajectory (see Exhibit 3 for the quar-terly financial data as of September 28, 2003).


SOURCE: 2003, SanDisk Corporation’s Annual Report on Form 10-K, 20.

Exhibit 3 SanDisk Corporation 2003 Supplementary Quarterly Data (in thousands, except per share data)

Quarters Ended

March 30 June 29 September 28

Revenues

Product $155,448 $214,044 $259,446

License and royalty $19,032 $20,582 $21,954

Total revenues $174,480 $234,626 $281,400

Gross profits $71,591 $88,772 $113,635

Operating income $34,686 $46,659 $66,803

Net income $24,925 $41,326 $14,770

Net income per share

Basic % $0.18 $0.30 $0.11

Diluted % $0.17 $0.26 $0.09



yy The Senior Partners:Hsu, Chen, and Li

Paul Hsu, C. V. Chen, and Kwan-Tao Li,together with other senior partners who hadretired before the turn of the century, had ledthe firm since the deaths of the founders, JamesLee and C. N. Li. Kwan-Tao Li joined the firmin August 1969. In addition, he started teachingat Soochow University Law School and Fu JenCatholic University that same year. Li had grad-uated from New York University Law Schoolwith his master’s degree of law and had amaster’s of business administration fromKellogg/Hong Kong University of Science andTechnology. Hsu had joined the firm inSeptember 1969, preceding Chen by about fouryears. Chen joined in 1973 after having receivedhis SJD (doctorate in law) from the HarvardLaw School in 1972 and having taught atNational Chengchi University Graduate Schoolof Law. Together, Hsu, Chen and Li had beenwith Lee and Li for a combined 98 years.

yy The Perpetrator: Eddie Liu

Liu had graduated from National ChunghsingUniversity with his bachelor’s of law degree.He joined Lee and Li in December 1989 as alegal assistant. Liu handled non-litigation casesin the firm’s corporate and investing depart-ment and was responsible for investing andmergers and acquisitions. He performed welland was considered a capable assistant.Although he was a law school graduate and acapable assistant, Liu had failed to pass theTaiwanese bar exam. On August 1, 2003, heapproached the management of the firm andasked for a 12 month’s leave without pay toprepare for the bar exam. Managementapproved his request on October 1 because the41-year-old Liu was a trusted employee.

yy The Embezzlement:NT$3 Billion3

In 2002, SanDisk authorized Lee and Li to filean investment application with the Taiwanesegovernment. This application was required toallow the remittance of the return on invest-ment (the dividend) and the principle in thecase of divestment to SanDisk because of theTaiwanese government’s foreign exchange con-trol. This arrangement required that SanDiskgive Lee and Li a power of attorney. The powerof attorney should have empowered Lee and Lionly to interact with the government onSanDisk’s behalf. However, it contained aclause that allowed Lee and Li to deal with thebrokerage house holding SanDisk’s shares inUMC. This clause meant that Lee and Li’s rep-resentative could talk to the brokerage houseon behalf of SanDisk. For this clause to havebeen included in the power of attorney wasvery unusual. The inclusion of the clauseshould have been noted by Lee and Li anddeleted. The power of attorney authorized Leeand Li to make chops (signets) for SanDisk, andany transaction involving SanDisk requiredboth these chops and those containing thename of Hsu, all of which were secured in avault at Lee and Li.

In July 2002, Lee and Li, in its role repre-senting SanDisk, opened a trading accountin the investment firm KGI and a depositaccount in Chang Hwa Bank. The proceedsfrom the sale of any shares acquired bySanDisk in Taiwanese firms were to be used toinvest in mainland China and in Taiwan.Because of the flawed clause in the power ofattorney and because of his position in thefirm, Liu gained unauthorized access to thepassbooks and chops for both accounts andcould transact business through both accountswithout any “actual” permission and/or super-vision. He was not legally authorized to make

3Sheree Shiow-Ru Ma and Mei-Cyue Lee, “Internal Control and Employee’s Fraudulent Behaviors,” Accounting ResearchMonthly, No. 218, January 1, 2004.


any transactions but he had access to the toolsthat allowed him to do so.

In July 2003, SanDisk deposited 183 millionUMC shares in the KGI account. Liu applied fora leave of absence on August 1 to prepare for hisbar examination and immediately moved into afive-star hotel, having left his Peitou Districtresidence in Taipei. During August, he privatelyopened several accounts for SanDisk at AsiaSecurities, United World Chinese CommercialBank (a branch in Taiwan and a branch in HongKong), Taipei Bank, Hwatai Bank, ShanghaiCommercial and Savings Bank, and Chang HwaBank. All accounts were under the name ofSanDisk Corporation except for the bankaccount in the Hong Kong branch of the UnitedWorld Chinese Commercial Bank, which wasopened in the name of “SanDisk InvestingCorporation.”

From August 2 to 9, Liu, having forged theauthorization document required, had trans-ferred 120.3 million UMC shares from the KGIaccount to the Asia Securities account. He thenconspired with private investment consultingfirms to bid up the price of the UMC stock.From August 6 to 28, he sold the shares andobtained NT$3.09 billion (US$92 million).During August and September, to eliminate anytrace of the NT$3.09 billion, he laundered themoney by buying diamonds and travelers’checks with the money he had remitted to theHong Kong account.

During September, the Money LaunderingPrevention Center (MLPC) of the Taiwanesegovernment was informed of the huge amountof funds transfers but the information indicatedthat it was a routine notification of a “hugeamount transfer” in excess of NT$1 million.The transaction did not appear to be illegal fortwo reasons: First, the information MLPCreceived said that “SanDisk Corporation” hadtransferred earnings from the sale of UMC’sstock to “SanDisk Investing Corporation” inHong Kong, not to another company or indi-vidual; second, it appeared that Liu was fullyauthorized by both SanDisk and Lee and Li tosell the shares and transfer the earnings.

Therefore, the transaction was judged a legaltransfer by the MLPC.

Around the end of September and begin-ning of October, Liu handed over his files tohis colleagues, ostensibly in preparation for hisleave without pay, and he intentionally with-held any files related to SanDisk. On October 1,Liu’s leave without pay was approved; however,he continued to go to the office until Thursday,October 9. At 2:00 p.m. on October 9, Liu leftLee and Li and proceeded directly to the air-port. He bought his ticket at the airlinecounter using as his travel documents both hisroommate’s passport and his Tai Bao Zheng (atravel document required for people fromTaiwan to legally enter mainland China). Hethen flew to Hong Kong from where it wasmuch easier to transfer the diamonds and trav-elers’ checks to a bank in a city within main-land China, such as Shanghai.

yy Lee and Li’s Dilemma:What to Do?

Chen was informed of Liu’s embezzlement onMonday, October 13. October 10 had been anational holiday and October 11 and 12 wasthe weekend. Liu’s colleagues had reconciledhis files early on Monday and noticed the dis-crepancy. This finding led to the discovery ofLiu’s malfeasance, which was reported to PaulHsu, who immediately briefed C.V. Chen andKwan-Tao Li. The embezzlement left all of thepartners in jeopardy because Lee and Li had noinsurance to cover the NT$3 billion. In Taiwan,the partners in law firms shared unlimited lia-bility, which meant that all of Lee and Li’spartners faced the possibility of losing all oftheir personal possessions as well as their pro-fessional livelihood and standing.

Chen knew that, as the senior partners, thethree of them needed to develop a plan ofaction that would save Lee and Li; take care ofthe lawyers and other employees, as well astheir families; keep Lee and Li’s reputationwithin Taiwan and abroad intact; do what was



Pembina Pipeline Corporation 453

best for SanDisk and Lee and Li; and keep themore than 12,000 clients from deserting thefirm. Chen knew that he, Hsu and Li had to act

quickly and decisively. Liu’s embezzlementwould become public knowledge within hours,or the next day at the latest.

AUTHOR’S NOTE: This case was written with public sources and the permission of Pembina Pipeline Corporation. Some factshave been altered.

Copyright © 2001, Ivey Management Services Version: (A) 2001-07-06

yy Introduction

Patrick Walsh, president of Pembina PipelineCorporation, was abruptly awakened by a tele-phone call from Jim Thomas, his operationsmanager. It was 4:30 a.m. on August 2, 2000, indowntown Calgary, Alberta, and Thomas hadno time for pleasantries:

Walsh, I just heard from one of ourpipeline operators that our newTaylor-Prince George pipeline burstopen this morning! Get up! We’releaking thousands of barrels of crudeinto a pristine salmon river. Ouremergency response crews havestarted containment efforts but we’regoing to need much more help. Whatare we going to do next?

A wave of panic shook Walsh awake.Grabbing his car keys and the cellular phone,he scrambled into his Ford Explorer and begandriving to Pembina’s Calgary head office.Negotiating corners with one hand on thesteering wheel, Walsh kept Thomas on the line:

I want to know all the details of the spillnow! Our first concern will be to con-tain the oil! I’ll join you in a few min-utes at the office and we’d better come

up with something. Damn it, Thomas,we don’t even have media relationspeople, much less a PR agency!

yy Pembina PipelineCorporation

Involved in the transportation of light crudeoil, condensate and natural gas liquids in west-ern Canada, Pembina Pipeline Corporationowned the Pembina Pipeline Income Fund(the Fund), a publicly traded Canadian incomefund. This fund was established in 1997 to givethe investing public the opportunity to partic-ipate in a stable, well-managed pipeline trans-portation entity that had provided highquality, reliable service to the Canadian oil andgas industry since the mid-1950s. The Fundwas intended to provide unitholders withattractive long-term returns through its invest-ment in Pembina, which had a mandate to effi-ciently operate its pipeline systems and activelyseek expansion opportunities. The Fund paidcash distributions to unitholders on a monthlybasis. The trust units traded on the TorontoStock Exchange under the symbol PIF.UN.

Pembina’s pipeline systems served a largegeographic area with 7,500 kilometres of pipelineand related pumping and storage facilities. Thesystems were well positioned in the heart of

Pembina Pipeline Corporation

Prepared by Ken Mark under the supervision of Alexandra Hurst


western Canada’s oil and natural gas productionareas. There were four systems in total:

• Peace Pipeline System—Central NorthwestAlberta

• Pembina Pipeline System—CentralSouthwest Alberta

• Bonnie Glen Pipeline System—CentralSouth Alberta

• Wabasca Pipeline System—NorthernAlberta

Collectively, Pembina’s pipeline systemstransported over 40 per cent of conventionallight crude oil production in Western Canada.

yy Operations

Pembina’s pipeline systems were maintainedand operated by a dedicated group of fieldemployees located in 10 field offices. Pembina’scorporate head office was located in Calgary,Alberta where technical and administrative staffsupported the pipeline operations. Through itspipeline, Pembina transported light crude oil,condensate and natural gas liquids. Virtuallyno heavy oil was transported on any of thePembina systems, nor was Pembina a naturalgas carrier. The company did not own the prod-uct it transported but, similar to a truckingcompany, it took custody of the product fromwhen it entered the pipeline until it was deliv-ered to the owners.

Pipelines and the materials used inthem were designed, built and tested to highstandards. When pipelines were properlymaintained failures due to pipe breakdownwere rare. Pembina had several maintenanceprograms in place to ensure line integrity.These were:

Internal Inspection Program

Internal inspection tools were designed toallow pipeline operators to measure the wallthickness along the pipe so that areas of metal

loss could be located and repaired. These toolshad been incorporated into Pembina’s moni-toring program, and pipeline systems wereinspected on a rotating seven-to-eight-year-cycle. Pembina’s pipeline systems, with theexception of the recently purchased Federatedsystem, were last checked in 1998.

Hydrostatic Testing

Government regulations required new pipelinesbe filled with water and pressure tested to 125 percent of their licensed maximum operatingpressure before the lines could be put into service. The hydrotest was designed to revealany structural weakness in the pipe or welds.Although not a regulatory requirement, all ofthe major pipelines in the Peace and PembinaSystem (built prior to 1970) had been hydrosta-tically retested. The first two phases of hydrosta-tic testing of the 16-inch mainline had beencompleted and confirmed the strength andquality of the pipe tested.

Bacterial Monitoring and Treatment

Pembina’s pipeline systems employed pro-grams of regular product sampling and testingfor bacteria. Producers with excessive bacteriawere required to treat their tanks with a bio-cide to kill the bacteria. Similarly, biocide wasperiodically shipped through pipelines to con-trol and kill bacteria.

Cathodic Protection

Cathodic protection systems were used on steelpipelines to impress a small voltage on the pipeto help protect it from external corrosion. Everymonth, readings were taken on Pembina’spipelines to ensure that these systems wereoperating at effective levels. A complete cathodicprotection survey was done annually in compli-ance with regulatory requirements and anynecessary repairs or adjustments to the systemswere made. Evaluation of the survey results



Pembina Pipeline Corporation 455

provided important information on the condi-tion of the pipeline coatings.

yy Expansion

Pembina intended to continue to expand itsservice through new battery and facilities con-nections, tie-ins to third-party pipelines, andexpansion of Pembina’s existing systems to ser-vice new oil- and gas-producing areas. Ongoingexploration and development activity by theproducer community was expected to continueto fuel demand for pipeline service in theregions served by Pembina’s pipeline systems,particularly on the Continental System operat-ing in northwestern Oregon and northeasternWashington.

The most significant increase in through-puts on the Pembina System could potentiallycome from technology developments toimprove the recovery of crude oil in the oilfields. It was estimated that only 21 per cent ofinitial crude oil in place was recoverable usingpresent technology.

Pembina’s management was actively review-ing potential acquisitions and believed thatPembina was very well positioned to take advan-tage of any favorable opportunities to acquire orotherwise expand Pembina’s business.

yy Incident ControlMechanisms

While environmental incidents had neveroccurred on Pembina’s pipeline systems,Pembina maintained insurance to provide cov-erage in relation to the ownership and opera-tion of its pipeline assets. Property insurancecoverage provided coverage on the propertyand equipment that was above-ground or thatfacilitated river crossings, with recovery basedupon replacement costs. Business interruption

insurance covered loss of income arising fromspecific property damage. The comprehensivegeneral liability coverage provided coverage inactions by third parties. The latter coverageincluded Pembina’s sudden and accidental pol-lution coverage, which specifically insuredagainst certain claims for damage from pipelineleaks or spills.

yy The Pipeline Break

Thomas continued to feed more informationto Walsh:

At about 1:20 this morning, thepipeline break and subsequent spill ofcrude oil occurred at mile post 102.5of the Federated Western Pipeline—the same pipeline company that webought 12 hours ago.4 The breakreleased crude oil into the Pine Riverjust upstream of Chetwynd, B.C.Our emergency response field team

set up a control site half a mile down-stream from the spill. A second con-trol site was set further downstream atthe creek’s entry into the Pine as aprecautionary measure, and a thirdcontrol site beyond the town ofChetwynd is to be set up today.

When he heard that the spill had occurrednear a small town and could threaten its watersupply, Walsh knew that there was no stoppingimmediate media coverage. He let Thomascontinue uninterrupted.

We’ve set up vacuum facilities at eachcontrol site which are being mannedright now, removing oil from the river.My guys are telling me that we’ll lose asmuch as 6,300 barrels.5 In the next hour,I’m going to set up a mobile lab to

4The deal to purchase Federated was completed on July 31, 2000—see Exhibit 1.

5This amount (6,300 barrels) was equivalent to one million cubic metres of oil.



NEWS RELEASEAttention Business Editors:

Pembina Pipeline Corporation Completes Purchase of Federated Pipe Lines Ltd.

Exhibit 1 The Purchase of Federated Western Pipelines

Not for distribution to United StatesNewswire Services or dissemination in theUnited States.

CALGARY, July 31/CNW/—PembinaPipeline Income Fund (TSE-PIF.UN)announced today that its wholly owned sub-sidiary Pembina Pipeline Corporation hassuccessfully completed its purchase of 100%of the shares of Federated Pipe Lines Ltd. fromAnderson Exploration Ltd.’s subsidiary, HomeOil Company Limited, and Imperial OilLimited. In a related transaction, Pembinaclosed the purchase of the Cynthia Pipelinefrom Imperial on the same date.Following the completion of this transac-

tion, Pembina’s combined pipeline networkcomprises roughly 7,000 kilometres of pipelineand related pumping and storage facilities andin 1999 transported 548,400 barrels per day ofcrude oil, condensate and natural gas liquids.The Federated acquisition entrenches Pembina’sposition as Canada’s leading feeder pipelinetransportation business. Total considerationpaid by Pembina for the Federated shares was$340-million, including the assumption ofFederated debt. A further $9-million was paidfor the Cynthia pipeline.The transactions werefinanced utilizing a new $420-million syndi-cated credit facility arranged with a Canadianchartered bank.Pembina is working toward the timely and

orderly integration of the Pembina andFederated pipeline networks, and expects aseamless transition during the consolidationprocess.The combination of these considerablepipeline operations is expected to producesignificant synergies and operating efficiencies

which will provide substantial value forPembina’s customers and Unitholders of theFund. Incremental cash flow generated by theacquired assets is expected to be sufficient toservice the acquisition debt as well as fund anincrease in the distribution payments toUnitholders of the Fund once the pipelineshave been successfully integrated.Pembina’s purchase of the pipeline assets

of the Western Facilities Fund for $40.3 mil-lion is scheduled to close in late August 2000following approval by the Unitholders ofWestern.The Pembina Pipeline Income Fund is a

Canadian income fund engaged, through itswholly owned subsidiary Pembina PipelineCorporation, in the transportation of crude oil,condensate and natural gas liquids in WesternCanada. Trust Units of the Fund trade on theToronto Stock Exchange under the symbolPIF.UN.This news release contains forward-look-

ing statements that involve risks and uncer-tainties. Such information, although consideredreasonable by Pembina at the time of prepa-ration, may prove to be incorrect and actualresults may differ materially from those antic-ipated in the statements made. For this pur-pose, any statements that are containedherein that are not statements of historicalfact may be deemed to be forward-lookingstatements.Such risks and uncertainties include, but are

not limited to risks associated with operations,such as loss of market, regulatory matters, envi-ronmental risks, industry competition, andability to access sufficient capital from internaland external sources.


Principled Leadership 457

continuously test the water upstreamfrom Chetwynd. I’ll also contact districtofficials to inform residents along thePine River of the situation and to put inguidelines to restrict their water usage.

yy At Pembina’s Head Office

Walsh parked his car and ran up two flights ofstairs to the office. Thomas and the crew ofpipeline monitors were hovering over a com-puter screen detailing Pembina’s network ofpipelines. Walsh knew that he would need helpin dealing with the media. Even if he were ableto contact and retain a media relations firm, herealized that the initial press release would behis responsibility. Thomas exclaimed:

We still do not know what caused thepipeline break, but I can tell you thatwe have between 70 to 80 peoplealready onsite, beginning clean-upactivities. They’re using oil booms tostop the flow of oil and sponges tosoak up what they can.

A map of the area was laid out on thetable. Walsh could now clearly see the prox-imity of the town of Chetwynd to the spill.He knew that the health of the town andsurrounding area would have to be his firstpriority. First, Pembina had to contain theoil spill.

It was 5 a.m., and daylight would breakwithin the next two hours.

This news release shall not constitute anoffer to sell or the solicitation of an offer tobuy securities in any jurisdiction. Nosecurities of Pembina Pipeline Income Fundhave been registered under the United States

Securities Act of 1933, as amended, and suchsecurities may not be offered or sold in theUnited States absent registration, or anapplicable exemption from the registrationrequirements of such Act.

SOURCE: www.pembina.com, December 29, 2000.

Copyright © 2007, Ivey Management Services

Principled Leadership

Taking the Hard Right

By Gerard H. Seijts and Hon. David Kilgour

What makes a leader the most is acertain solidity at the core, a solidityfounded on principles that are, essen-tially, points on a moral compass.Those principles are visible in the

actions of some leaders, while otherleaders act according to convenience.These authors lay down a blueprintthat will allow a leader to be guidedby principles.


On August 30, 2004, former New York Citymayor Rudolph Giuliani delivered a rivetingspeech at the Republican National Convention.“They [the media] ridiculed Winston Churchill.They belittled Ronald Reagan,” Giuliani said.“But like President Bush, they were optimists,and leaders must be optimists. Their vision wasbeyond the present and set on a future of realpeace and true freedom. Some call it stubborn-ness. I call it principled leadership.”

Unfortunately, in the recent (and not sorecent) past, we have seen too many leadershipfailures—too many examples of individuals inleadership positions who were unable to dealwith the “great responsibility” that they weregiven. More specifically, too many so-called“leaders” did not exercise principled leader-ship. For example:

Harry Stonecipher came out of retirementin 2003 to help restore Boeing’s reputation afteran ethics scandal. Stonecipher helped write anew code of conduct that, he indicated, wouldapply to all people in the Boeing organization.Yet Stonecipher violated that very code whenhe began an affair with a female Boeing execu-tive. The board asked him to resign.

WestJet Airlines admitted that its “highestmanagement levels” were behind an elaboratescheme to steal commercially sensitive infor-mation from arch-rival Air Canada. A courtcase resulted in which WestJet admitted towrongdoing and agreed to pay $5.5 million ininvestigation and legal bills, plus a $10 milliondonation to charity. On its web site, WestJetidentifies 9 “legendary values,” among them:“we are honest, open, and keep our commit-ments,” and “we treat everyone with respect.”Did the actions of the senior leadership put adent in the values on which WestJet was built?

Several members of Hewlett-Packard’s exec-utive team employed a series of “disturbing” tac-tics (e.g., obtaining private phone record usingfalse pretenses) in an effort to trace those boardleaks. This led to the resignation of ChairmanPatricia Dunn, and state and federal investiga-tions. CEO Mark Hurd stated that the “tactics do

not reflect the values of H-P.” Hewlett-Packard’score values include “we conduct our businesswith uncompromising integrity” and “we havetrust and respect for individuals.”

Leadership today is about winning thetrust and respect of constituents, including cit-izens, shareholders, employees, and customers.But should these constituents place their trust(and money) in a leader’s hands? Constituentstake the time to evaluate the character, compe-tence and commitment of those that are (oraspire to be) in leadership positions. And any-time there is a gap between what the leadersays and does the credibility of that leader willsuffer. Therefore, it is no surprise that individ-uals get disillusioned when their leaders provethemselves to be only mere images of the val-ues that they espouse. It is under such condi-tions that people believe that their “leaders” donot show principled leadership. As a result, thedynamic currency of leadership depreciates,compromising the leader’s ability to lead. Inthis article, we describe principled leadershipand how it keeps leaders on the right course.

yy What Is PrincipledLeadership?

Alan Yuspah, senior Vice President, Ethics,Compliance and Corporate Responsibility, theHospital Corporation of America Inc., identifiedthree essential elements of principled leadership.

1. The articulation of certain principles or val-ues. Leaders need to decide what their personalor organizational values are and provide lead-ership consistent with these espoused or inter-nalized values. Does the leader “live” the valuesin the business decisions that he or she has tomake? Does the leader stick with his or herstated values no matter how difficult the busi-ness challenges prove to be? Consider the chal-lenge that Ed Clark, the President and CEO,TD Bank Financial Group, recalled in a recentpresentation to MBAs. To paraphrase him: We




are trying to be an inclusive workplace, and webelieve in diversity of all kinds: women, visibleminorities, gays, and so forth. We are support-ive of the gay community; we sponsor thePride parade. However, I get letters from cus-tomers, that state: If you want to defy God’swill then I don’t want to bank with you. Clarkand the TD Bank Financial Group remaincommitted to their diversity initiatives.

2. The principled leader is able to make toughdecisions. Principled leaders make a conscien-tious effort to get all the relevant information tomake an informed decision and to see that theirdecisions are consistent with their values andthose of the organization. The leadership ofFlight Director Eugene Kranz during the Apollo13 crisis is a compelling example. For years, hehad championed a strong set of values: disci-pline, morale or confidence, toughness, compe-tence, commitment, and teamwork. Observersof the space program have said that it was thesecharacteristics that formed the culture thatwould keep Kranz’s team together both in goodtimes and, in particular, in bad times. In busi-ness settings, good leaders must be principledbut also pragmatic—their principles cannotparalyze them from taking action. The princi-pled person nearly always feels guilty that s/hecannot live up to his/her finest aspirations.

3. Principled leadership is reflected in how leadersdeal with other people. Those individuals inleadership positions should never forget thatthe “how” is as important as the “what.” Forexample, humility and integrity should be partof a principled leader’s behavioral repertoire.Manuel London, a management scholar andpractitioner, and Director of the Center ofHuman Resource Management, at the StateUniversity of New York, indicates that princi-pled leaders always try to understand the vari-ous points of view and reach common groundwithout hostility, and without working over,around, or through other people. This is a keymessage that leaders such as Ed Clark, George

Cope (President and COO, Bell Canada),Michael McCain (President and CEO, MapleLeaf Foods), and Lt.-Gen. (ret.) Romeo Dallairekeep telling our MBA students. But, as Londonexplained, principled leaders do not ignore thetough realities of business; they have masteredthe art of business diplomacy. In his words,“They work together to enhance interpersonalwork relationships and are particularly valuablein making tough decisions, resolving emotionalconflicts, and negotiating sensitive issues.”

The 16th President of the United States,Abraham Lincoln, can inspire all of us in ourown careers. For example, in Team of Rivals: ThePolitical Genius of Abraham Lincoln, author DorisKearns Goodwin writes that Lincoln was able todefeat more privileged and accomplished rivalsfor the Republican nomination in 1860 becausehis life experience had forged a character thatallowed him to put himself in the place of otherpersons, to know what they were feeling and tounderstand their fears, motives and desires. Thissame character allowed him to bring his rivalsinto his cabinet and marshal their talents to pre-serve the Union and win the war. Goodwinwrote that Lincoln was “plain and complex, shrewdand transparent, tender and iron-willed. . . . Hissuccess in dealing with the strong egos of themen in his cabinet suggests that in the hands ofa truly great politician the qualities we generallyassociate with decency—kindness, sensitivity,compassion, honesty and empathy—can also beimpressive political resources.”

yy How to “Get”Principled Leadership

It is foolish to believe that there is a single mostimportant determinant of principled leader-ship. There are actually four determinants, andthey come in to play at the individual, group,and organizational levels. We list examples inthis particular order. We do not assume thatour list is complete.


1. Upbringing and Life Experiences

Retired Lieutenant-General Romeo Dallaire isthe former head of the United NationsPeacekeeping Force in Rwanda. He witnessedgenocide. Dallaire shared the following anec-dote with a group of MBAs enrolled in a lead-ership course. A young lieutenant and hisplatoon enter a small village which had beenthe scene of a massacre. The troops notice aditch with women and children, several whoare hacked to pieces; others are bleeding todeath. There is no doubt that these people aregoing to die. It is hard for the soldiers to juststand by and be a witness to these peopledying. What should they do? The reader shouldknow that, before the war, over 30 per cent ofRwandans were infected with HIV or hadAIDS. Soldiers do not run around with pro-tective gear, such as rubber gloves, and havescrapes, cuts, bruises, and wounds due to the nature of their business. What should theyoung lieutenant order the soldiers to do?Should he order the troops not to help and tomarch on because of the risk of contractingthe devastating disease? Or should he orderthe troops to console and help the womenand children? The Lieutenant figures thatpeople are dying and that the soldiers have amoral or ethical duty to assist these people inany possible way. Dallaire went to his 26 com-manders and explained the dilemma. Hefound out that 23 commanders would orderthe troops not to go in and help; three wouldassist, including the Canadians. The questionthen is, “For what reasons do some troops getin the ditch and assist the women and chil-dren, even with the risk involved, whereasothers do not?” Dallaire believes that traininghas something to do with this. But perhapsmore important, he articulated, it is theupbringing and the fundamental beliefs orvalues that Canadians espouse. Two of thesebeliefs are that human rights are important,and that every human is human . . . one per-son is not more human than the other.

2. Reflection

The development of one’s leadership skillsrequires actual leadership actions, followed byreflection or debriefing. As a principled leader, dowe take the time to pause and think about howwe are doing in terms of the goals we have set forourselves? Leaders are often under intense pres-sure to produce results. This is a plus when theleader has mastered important skills or perfor-mance routines. But what about those behaviorsthat require our continued attention becausethe objective is to develop these behaviors?Sometimes we need to be in a learning mode. Forexample, leaders can focus on several questionsor “tests,” including a hypothetical Globe andMail headline. Would they like to see the actionthey were contemplating on tomorrow’s frontpage? Could they live with the headline? Couldthey explain their actions to their 10-year oldchild? Seeking the advice of an executive coachwho can help develop skills is becoming increas-ingly common for business executives.

3. Role Models

Gandhi considered modeling the moral exam-ple as the prime duty of a ruler, including thehead of a family or the owner of a business.Studies have shown that people’s behavior isshaped, in part, by their observation of others.For example, Albert Bandura, the David StarrJordan Professor of Social Science in Psychologyat Stanford University, and famous for his workon social learning, wrote:

Learning would be exceedingly labori-ous, not to mention hazardous, if peo-ple had to rely solely on the effects oftheir own actions to inform them whatto do. Fortunately, most human behav-ior is learned through modeling: fromobserving others one forms an idea ofhow new behaviors are manifested andperform; on later occasions this codedinformation serves as a guide for action.




Mentoring is consistent with Bandura’ssocial learning theory; it involves learning in asocial situation whereby a person models thebehavior of a more experienced teacher orcolleague. Seymour Schulich, a successfulCanadian businessman and philanthropist,recently observed that, “I live the axiom that100 years from now, it won’t matter howmuch money you had, how big a house youlived in or what kind of car you drove. But ifyou are important in the life of a young per-son, you might make a difference. So I maketime for young people and try to act as a men-tor.” We know that without the modeling ofleadership behaviors, standards of principledleadership will be more difficult to achieve.This is because leaders help to set the tone ofbehavioral norms and organizational culture.

4. Code of Ethicsand Communication

Organizations should have a code of ethics or aset of guiding values. Leaders should assessdecisions or actions against that code. This ishow the Johnson & Johnson organization wasso successful in dealing with the Tylenol crisis.This is why organizations such as GeneralElectric, Maple Leaf Foods, and TD BankFinancial Group are spending a lot of time ondefining their core values and how to “live”those values. The events at Boeing discussedearlier show that a code of ethics can be effec-tive. But a willingness to act on the code isrequired. One of the main purposes of a codeof ethics is to provide guidelines that help peo-ple decide what actions to take from an ethicalor organizational culture point of view. Theimportance of values and a code of ethics mustbe conveyed from the top of the organization—the CEO and his or her leadership team. Theleader should make values a salient aspect ofthe leadership agenda so that the significanceof these values does in fact reach those individ-uals in lower-level positions.

For example, leaders can explain how a set ofvalues guided the decision making process.Consider the following actual event. Roy Vagelos,a former senior vice-president of research atMerck, and CEO, decided to give away a drug thatprevented river blindness to all those who need itand who could not afford it. Former chairman ofMerck, George W. Merck, explained, “We trynever to forget that medicine is for the people. Itis not for the profits. . . . The profits follow, and ifwe have remembered that, they have never failedto appear. The better we have remembered it, thelarger they have been.” The message? Values orguiding principles are important in makingtough business decisions. Vagelos was later askedwhether he would have committed his companyto the costly program even without the benefitsof strengthening its reputation, bolstering itsrecruiting, and the creation of shareholder value.He explained that he had no choice as his wholelife had been dedicated to helping people.

yy The Challenges ofPrincipled Leadership

There can be challenges to “living the values”and a leader’s principled approach to decisionmaking. For example, an activist group wentafter Ford Motor Co. and Walt Disney Co.because it believed the two companies weredestroying traditional American values by sup-porting gay and lesbian rights. In his 2002 bookLeadership, Giuliani recounts the events thattook place in October 1995, the year in whichthe United Nations celebrated its 50th anniver-sary. The New York City Host Committee hadraised money to sponsor several events, includ-ing a concert at Lincoln Center’s Avery FisherHall. Who showed up? Yasser Arafat. Giulianihad specifically excluded the Palestinian dele-gation, as well as delegations from Cuba, Iraq,Iran, Libya, North Korea, Somalia, andYugoslavia. Giuliani had special contempt forArafat and so he had him thrown out. An inter-national scandal was born. The New York Times


and the Clinton administration condemnedGiuliani’s action. But Giuliani was convincedthat he was on the right side; his core set ofprinciples, and Arafat’s ongoing terrorist activi-ties, drove his behavior. In his words, “SomeAmericans are unable to face up to the fact thatthere really are evil people.”

Sooner or later, therefore, leaders face thechallenge of how to remain true to their princi-ples, in particular, when other people put pres-sure on them. Most leaders operate in afast-paced and complex world, where principlesoften collide. It is sometimes very difficult to do“the right thing” for both employees and share-holders, for customers and employees, for tax-payers and clients of the social welfare system.We conclude this article with five prescriptionsthat, we believe, will make people more recep-tive to principled leadership. These are thethings that leaders can do to continue to “walkon water” as opposed to swimming or sinking.

1. Executives ShouldBe Model Citizens

John Edward Poole of Edmonton, who diedrecently at the age of ninety, is a hard-to-beatexemplar. On retiring as CEO of PooleConstruction Ltd. (now PCL Construction Ltd.) in1977, he and his brother George sold their major-ity stake to the organization’s employees ratherthan accept the highest offer. (Today, the organiza-tion remains 100 percent owned by employees.)During the next three decades, he and his wife,Barbara, gave tens of millions of dollars, often on asustained endowment basis, to a host of cultural,educational, social and environmental institutionsin their city. The couple also led fund-raising cam-paigns for many good causes. Edmonton Journalcolumnist, Paula Simons, noted in a tribute, “[JohnPoole] believed that every man owed a duty to hisfellow citizens. He understood that living in a cityisn’t just about occupying space—it’s about partic-ipating in the life of a community. It’s about takingresponsibility for the future.”

2. Stick to What You’re Good At

How many businesses in Canada and elsewherehave been harmed or ruined by a senior leader-ship team that ventures into new activities ormarkets without enough advance study ofconditions or an inadequate understanding ofits own circle of competence? For example,Southwest Airlines’ returns to shareholders overthree decades have outdone even those ofWarren Buffett’s legendary Berkshire Hathaway.Southwest has no hotels, no travel businesses orreal estate speculations. Both management andemployees know what the airline is good at andstick to it: low-cost reliable air transportation.In an industry where profits rarely seem to lastmore than a year or two, Southwest continues toflourish. Contrast this approach with organiza-tions such as K-Mart, ASDA, and Nortel that atsome point struggled with strategic drift, unableto provide a clear direction in their activities.The implications for personal leadership? It isimportant to have a core set of convictions, orfocus; without it, leaders yield to all kinds ofpressures, and little gets achieved. Senator andformer Democratic nominee for U.S. PresidentJohn F. Kerry was seen as a mess of contradic-tions on various issues important to theAmerican public. People perceived him as a flip-flopper; he lacked a clear focus. Bush won re-election in part because Americans wanted clearand consistent leadership.

3. An Inclusive Corporate Culture

Nucor Corporation, the out-performer in theAmerican steel industry for many years, andone of America’s most-admired organizations,is a good case study here. Its former CEO, F. Kenneth Iverson, is quoted in Jeremy J. Siegal’sexcellent book The Future for Investors asattributing most of the company’s success to“the consistency of our company and our abil-ity to project its philosophies throughout thewhole organization, enabled by our lack of layersand bureaucracy.” The philosophy of “no




favourites” among all members of the corpo-rate team is demonstrated in myriad ways.Distinctions between executives and otheremployees are even difficult to detect. Forexample, there is no executive dining room atNucor’s head office. All employees of the com-pany are listed alphabetically in the annualreport, with no distinctions for titles. There areno company vehicles or aircraft and no assignedparking places. All employees receive the sameamount of vacation time and insurance cover-age. Ideas won’t get buried in bureaucracy; thefreedom to try out ideas gives Nucor a distinctadvantage over other companies: a creative, get-it-done workforce. Every employee is a memberof the same winning team.

4. Have SoundWhistleblower Protection orProcesses for Information Flow

Sherron Watkins, the ex-Enron executive whofirst confronted former CEO Kenneth Layabout her suspicions of accounting impropri-eties, became a national “hero” when hermemos to Lay were leaked to the Americanmedia. She had attempted, without success, toprotest Enron’s accounting practices to otherexecutives as early as 1996, but got nowhere.The then-CFO of Enron, Andrew Fastow,wanted her fired, but senior managementcould find no reasonable cause.

Every organization should have policies inplace to protect the Sherron Watkinses of theworld and to ensure that valid concerns are actedupon with deliberate speed. “Information patri-ots”, as Canadian whistleblowers now often pre-fer to be called, are still usually forced to give uptheir careers in the offices where they encoun-tered and confronted wrongdoing. Consider, forexample, the fate of Joseph Darby, the U.S. ArmySpecialist who turned in the pictures of prisonerabuse at Abu Ghraib. He was a hero to some;Caroline Kennedy and Senator Ted Kennedygave him a Profile In Courage award in honor of

President John F. Kennedy. But Darby could notreturn to his home because he had been threat-ened. Darby was supposed to remain anony-mous, but former Secretary of Defense DonaldRumsfeld identified him without warning onnational television, a gesture that some say wasmore about payback than an attempt to honorthe whistleblower. There are scores of whistle-blowers or information patriots that have paid asteep price for their courage to speak up.Responsible CEOs should ensure that peoplelike Watkins and Darby are regarded as rolemodels for all employees.

CEOs should appreciate the eyes and ears oftheir employees. Transparency is important;some even consider it an outright competitiveweapon. Former U.S. Supreme Court JusticeLouis Brandeis once said, “Sunlight is the bestdisinfectant.” The quote refers to the benefits ofopenness and transparency. Some well-knownorganizations have made it their objective tooperate in an atmosphere of avowed openness.Their leadership opines that individuals who feela discomfort under the bright light of scrutinymay have something to hide. Those in leadershippositions cannot solve problems if they don’tknow about them. Leaders are well-advised tocreate routes for their employees to express theirviews, so that maximum, not minimum, infor-mation is used in their decision making.

5. Boards of Directors ShouldEncourage CEOs to Speak OutResponsibly on Public Issues

How many of our business leaders have had thecourage to speak out from a responsible per-spective against income trusts? Or take climatechange, the very inconvenient and doubtlessmost important issue facing humanity today.Recently, the Intergovernmental Panel onClimate Change, drawing on the work of thou-sands of scientists around the world, reportedthat all of us on the planet have only a decadeto reverse surging greenhouse gas emissions or


risk severe climate change that would rendernumerous regions of the world uninhabitable.A cover story in a recent Economist, “TheGreening of America”, indicated that corporateAmerica is now among the loudest voices call-ing for emission controls and other measuresdesigned to reduce the output of carbon diox-ide and greenhouse gasses. For example, theCEO of Duke Energy, James Rogers, said aboutreductions, “It must be mandatory, so thatthere is no doubt about our actions. . . . Thescience of global warming is clear. We knowenough to act now. We must act now.” Notenough business voices appear yet have joinedthe parade on the issue in our own country.And for CEOs and the senior leadership teamto do so effectively, they need the support oftheir board of directors; organizations shouldspeak with one voice.

In her 2006 memoir titled Tough Choices,former Hewlett-Packard CEO Carly Fiorinawrites about success and the importance ofcharacter. “Character was everything, and char-acter was defined as candour, integrity, andauthenticity. Candour was about speaking thetruth, and about speaking up and speaking out.Integrity was about preserving your principles

and action on them. Authenticity was aboutknowing what you believed, being who youwere, and standing up for both.” Fiorinaexplains that leaders can always choose tobecome something more. We suggest they can(and should) choose to work on their princi-pled leadership, as it appears there is consider-able room for improvement. A recent poll of1,000 Canadians found that 93 per cent ofrespondents rated firefighters as trustworthy.In contrast, CEOs were considered trustworthyby just 21 per cent of the adult Canadians whowere polled by Ipsos Reid; this number is vir-tually unchanged since 2002. Only union lead-ers (19 per cent), local politicians (12 per cent),national politicians and car salespeople(both at 7 per cent) ranked below CEOs in the“whom do we trust” survey. When asked whatcriteria they considered in rating the trustwor-thiness of people, the respondents indicatedthey used factors such as integrity, reliability,and commitment to promises in their ratings.These factors, of course, characterize the prin-cipled leader. But we also note that principledpeople sometimes cross the barrier betweenbeing right and being righteous. The first isadmirable the second just alienates people.



Documents

Chapter 15 Ethical Leadership.pdf