How will ethical issues affect leadership in a business
Contemporary and Pervasive Issues
“How will ethical issues affect leadership in a business?”
Name: Lauren Canning
Student no: 15010789
Tutor: Christine Gilligan
Word Count: 5671
In this essay I am going to discuss how ethical issues can affect leadership in a business. In order to answer this question the essay will start by giving a brief introduction into the two topics; leadership and business ethics. I will then aim to successfully link them by considering the argument of whether leaders should concern themselves with ethical issues or whether making as much money as possible should be their main consideration.
Leadership has many different meanings and there have been numerous different classification systems used to define the dimensions of leadership. Infact as Stogdill (1974) pointed out, “there are almost as many different definitions of leadership as there are people who have tried to define it.”
One popular definition used for this subject is that “leadership may be considered as the process (act) of influencing the activities of an organized group in its efforts toward goal setting and goal achievement”(Stogdill, 1974). This definition suggests that it is not a characteristic but is an event that takes place between a leader and his or her followers and that there are three aspects to leadership. Firstly, it involves influence in that leaders induce their followers to behave in a certain way. The second aspect is that leadership occurs in a group context and finally that leadership includes attention to goals, which a leader must direct their followers to achieve.
Over the years there have been many studies and theories formed on leadership. The first, which dominated until the late 1940’s, was the Trait Approach, which focused on leaders and not followers. It assumed that leaders had certain traits, such as intelligence and integrity and that they are born and not made. However, this approach failed to take situations into account and recent research has proven that traits alone cannot account for effectiveness. Following this was the style approach, which focuses on what leaders do and how they act towards subordinates rather than characteristics. This era defines leadership styles as either Autocratic, democratic or laissez faire. However, this approach fails to find which of these leadership styles is most effective in every situation.
Following this was the situational and contingency theories, which assume that different situations demand different types of leadership. However it assumes that people can learn to become effective leaders and does not adequately explain the link between styles and situation. The Situational theory ‘relates four leadership styles; Directing, Coaching, Supporting and delegating to followers readiness for them” (Gill, 2006:48). However, the model assumes both flexibility of style and the ability to diagnose the situation and the style that is needed.
In 1980’s the New Leadership approach was introduced, which compromises visionary, charismatic and transformational leadership theories. “Transformational leadership occurs when leaders raise peoples motivation to act and create a sense of higher purpose” (Gill, 2006:36). Similarly and published around the same time was the theory of Charismatic leadership, who act in unique ways that have specific charismatic effects on their followers. This stage provides a broader view of leadership that augments other models and places a strong emphasis on leaders needs, values and morals. However, “due to the wide range that it covers it lacks conceptual clarity and it is difficult to define the parameters of transformational leadership” (Northouse, 2004:185). Finally, in the late 1990’s Post-charismatic and Post-transformational theories emerged, which focuses on leadership as a community and both leaders and followers working together.
Leadership is a process that is similar to management in many ways and many of the functions of management are included in the definition of leadership. This was argued by Yukl (1989), who said “when managers are involved in influencing a group to meet its goals, they are involved in leadership. When leaders are involved in planning, organizing, staffing and controlling, they re involved in management. Both processes involve influencing a group of individuals toward a goal attainment.” Both management and leadership involve influence, working with people, meeting goals and many other similar functions. However, there is a distinct difference between leadership and management and the main functions of the two are quite dissimilar. It was argued by Kotter (1990) that the “function of management is to provide order and consistency to organizations, whereas the primary function of leadership is to produce change and movement.” Whilst managers plan and budget, a leader creates a vision and sets strategies, instead of controlling and problem solving a leader motivates and inspires his followers. In addition to this, Bennis and Nanus (1985) made the distinction very clear, “managers are people who do things right and leaders are people who do the right things.”
Although it argued that the two are very different it is for this reason that both are needed for an organization to be a success. Without management outcomes can be meaningless or misdirected and without leadership the outcome can be stifling and bureaucratic. This was the opinion of Warner Burke (1986:68), who said that “For clarity of goals and direction, managers need leaders. For indispensable help in reaching goals, leaders need managers.”
A further question that is often raised on the topic of leadership is whether leaders are born or made? Whilst some would argue that “It is not a matter of whether leaders are born or made.” They are born and made” (Conger 2004), it is a topic that has caused great debate. Many would argue that leadership is innate (inborn) and that the character, style and competence needed to be a leader is infact genetic and it cannot be developed. However, others have argued that leadership is not down to genetics alone but that it can infact be developed over a period of time through environment and experiences. This is the opinion argued by Winston (Winston 2003), who says that “we are not merely the product of our genes: environment has a huge impact but in a mysterious way.” A further aspect to this question is whether leadership can be taught. There are many opinions on this matter but the “tendency is towards agreeing that, while little if anything can be taught, it can be learnt through development, growth and practise” (Gill, 2006:272).
A business operates according to the vision and values of its leader. A leader has many roles within an organization, which can be key to its long-term success. The first of these is to provide an overall direction by “defining and communicating a meaningful and attractive vision of the future and a mission through which the organization will pursue it” (Gill, 2006:96). This direction which may stem a long way into the future will need to consider competitors, changes in tastes and current standing in the market. In relation to this it is a leader's responsibility to create a strong and positive organizational culture with its followers having shared vision and values, which can result in an effective organization.
A further role of a leader is to “develop, get commitment to and ensure the successful implementation of strategies” (Gill, 2006:176). This is one of the most important roles for a leader and involves them planning where they want to be in the future and how they are going to get there, for example by acquisitions or moving into new geographical markets.
Another role of a leader in business is to empower employees to be able to do what needs to be done. In order to do this a leader must give them the knowledge, skills, authority and freedom to manage themselves and be accountable for their behavior. If a leader successfully empowers his employs it can lead to both job satisfaction and enhanced organizational performance in many ways. Similarly it is an important role of a leader to influence, motivate and inspire employees to reach the companies goals. One of the key factors that will determines whether it is achieved or falters will be the ability of the leader in these three areas.
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Finally if an organization is to continue to prosper, people development must be high on a leader's agenda, by identifying the most talented people coming through and making sure that they are developed for major roles in the future. Ensuring that there is a continued stream of talent developed is a key factor in sustainable progress and achievement. An effective leader has the ability to successfully carry out all of these roles.
The second topic that this essay involves is business ethics, which has been described by some as ‘a passing fashion which will come and go and can therefore be safely ignored or dismissed” (Vallance, 1995: 4) However, business scandals of the late 1980’s such as Guiness and Blue Arrow and the results of these have made businesses aware of the importance of their reputation and the need to think seriously about ethical issues.
There have been numerous definitions of ethics, which involves systemizing, defending and recommending concepts of right and wrong behaviour and includes principles and values of what is fair or unfair and proper or improper. It has been argued that “there is only one ethics, one set of rules of morality, one code that of individual behaviour in which the same rules apply to everyone alike” (Drucker 2007). A popular definitions is that “Ethics deals with values, with good and bad with right and wrong, we cannot avoid involvement in ethics, for what we do-and what we don’t do- is always a possible subject of ethical evaluation” (Singer, 1993: v).
There are various theories and approaches to ethics and ethical decision-making but the two major view points that appear are consequentailism and non-consequentialism. Consequentialism is where “ethical decisions are based primarily on calculating the good in terms of consequences” (Preston, 2007: 36). The most widely accepted form of this is Utilitarianism, which was introduced by Jeremy Bentham in the late 19th century. This theory emphasises happiness or utility as a desirable goal for human choice or action and argues that moral rules should seek to secure “the greatest good for the greatest number of people” (Preston, 2007: 36). However, there have been some objections to this theory and the question as to how happiness and utility can be measured. It also works against the interests of “minorities and groups that do not measure up to the criteria of usefulness and can justify the violation of human rights” (Preston, 2007: 36). An example of this is the exclusion of a disabled child from a school as they are disruptive. This would be justified on utilitarian grounds as to leave such a disruptive child in the class would not be beneficial to the majority of students.
The second of these points that occurs in ethical theory is non-consequential. This “enjoins us to do the right thing, simply because it is the right thing, intrinsically” (Preston, 2007: 40). The most influential figure promoting this view was Immanuel Kant. He argued that as “individuals we intuitively know what is right or wrong, through the categorical imperatives, which are:
- Act so that you treat humanity, whether in your own person or that of another, always as an end and never as a means only
- Act only on the maxim through which you can at the same time will that it be a universal law.
- Act only so that the will through its maxims could regard itself at the same time as universally law giving – reference” (Preston 2007:41)
This Kantian theory has been very influential, especially concerning the debate of rights and justice due to the importance that it places on every individual and because it is not open to persuasion by pragmatic considerations. However, there have been some criticisms to Kants approach as he places too much reliance on human rationality. Furthermore, it does not provide an answer to the problem of how to decide between two conflicting duties and how to obey different bur equally absolute rules. For example, ‘do not break promises’ and ‘do not kill’ are absolute rules, however it is possible for a situation to occur where these rules conflict and that by not breaking a promise, someone is killed.
The focus of this essay is on Business ethics in particular. Though the theories that have been mentioned are relevant, they are “concerned primarily with personal ethics and do not address directly the kind of ethical problems that arise within a business context” (Vallance, 1995:4). Within an organisation, ethics is seen as everyone’s business and can be complex and have more than one meaning. Firstly, it is the application of general ethical rules to business behaviour and secondly, it can be the rules of business by which business activities are judged. Business Ethics can be defined as “coming to know what is right or wrong in the workplace and doing what is right – this is in regards to effects of products/services and in relationship with stakeholders’’ (McNamara, 2006:7) and can cover a wide range of aspects from quality and treatment of employees to pricing.
When it comes to business having an ethical responsibility, many would argue that this is not the case. Indeed Milton Friedman (Friedman, 1970) said “only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense”. With this in mind, it would also be argued that it is of little importance for leaders to consider ethical issues when making decisions. Infact, leaders who have ethical consciences have been described as “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades” (Friedman, 1970).
This argument is that a business and therefore its leaders have one purpose, and that is to make as much profit as possible, with everything else being secondary. Freidman said, “He (the executive) is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom” (Friedman, 1970). He believed that this was the case for all businesses with the only exceptions being schools and hospitals where a leader's objective would be the rendering of services.
One of the beliefs of this argument is that “ethical responsibility as preached and practised by many marks an acceptance and endorsement of views and demands mostly presented by anti business groups that are hostile to the market economy and are far from representing the general view of the average consumer” (Andersen, 2004: 22). In addition to this fact a further problem is that in order for a leader to have an ethical conscience it usually comes at some cost to the business and therefore is not in the interest of the owners of the organization. An example of this is that a leader would refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would benefit both the corporation and its owners. A similar example is that may leaders use great amounts of money and resources to reduce pollution beyond the amount that is required by law in order to meet its responsibility to the environment and gain a reputation as being an environmentally friendly company. This was a measure taken by Satellite broadcaster BSkyB who have been carbon neutral since May 2006 through a combination of using renewable energy and offsetting its remaining emissions, but at a cost to the company.
In each of these examples and in the case of other ethical activities a great amount of money is either spent or compromised. Many would argue that by doing this a leader is spending other people’s money for a general social interest, which could be viewed as extremely unethical. For example, carrying out an ethical activity that would have a high cost, such as reducing emission would reduce profits and therefore stockholder would see a reduce in their returns on investments. In addition to this if a leaders ethical actions raise the price to customers, he is spending the customers' money and if the cost of the leader's actions have to result in lowering the wages of some employees, he is spending their money. In these cases it would be fair to say that not only would it be having a detrimental effect on the company profits but would also have a negative and unethical effect on both internal and external stakeholders, who may desert the company for a competitor that less scrupulous in exercising their social responsibilities. In addition to this it means that a leader in effect becomes a public employee even though he remains in reality an employee of a private company.
There is a further problem with leaders deciding that a company is to become more ethically aware as it involves great change in the way a company practices, its values and its organizational culture. Many of these actions that need to be taken to implement an ethical practice can incur increased costs that may not be recouped through increased sales and have no guarantee of returns. Furthermore, some decisions and choices made with an ethical conscience can result in short term negative impacts such as a decrease in sales, revenue and profit, increased cost for employee welfare and a decrease in stock prices. Moreover, “the vast majority of companies are still failing to get their message across” (The Guardian, 2004). With these costs in mind, especially in the current economic climate, the importance of a leader implementing an ethical culture to a business could be questioned.
In addition to this leading a business ethically may involve “compromising short term wins for the sake of a more long term view” (Andersen, 2004: 22). This is not beneficial for a leader who is responsible for immediate results, particularly if the short-term wins that are compromised due to ethical issues risk financial loss or even immediate failure. This may mean that a leader may have to accept higher prices on goods, parts and manufacturing in order to remain ethical. An example of this is that Tesco, the UK’s largest supermarket was using an Indian sweatshop to produce its clothes, which was paying its workers just 16p an hour. This supplier was changed in order for the company to appear more ethical and inturn cost Tesco money. This can be particularly hard in a market where there is a large amount of competition at both a national and international level. In order to compete a company needs to be able to offer the lowest price possible to its consumers but in order to keep its ethical stance a company can not compromise on its quality of suppliers and raw materials and therefore sees increased costs.
Another consideration is that “when the corporation grows beyond the direct influence of its leader, we must reckon with the ethical consequence of size and geographical deployment. The control and employment of all policies, but especially that established for corporate ethics, becomes difficult” (Andrews, 1989: 7). This demonstrates that as long as an organisation remains small enough to be directly influenced by the chief executives leadership, certain results, such as ethical approach can be traced to his determination that they occur. However, as the “organisation grows and becomes decentralised with worldwide operations the power and influence that the Chief Executive has is reinterpreted and diffused” (Andrews, 1989: 260). As a result leaders of have to be appointed in each location and these persons may not share the determination and beliefs of their chief executive on ethical matters. As a result it is hard to standardise a whole company's ethical approach. In relation to this cultural differences and different business practices around the world can present challenges for businesses that are trying to be ethical.
Having considered the above argument there are some flaws to Friedman’s approach. He suggests that a leader should concentrate on profit alone as long as it is within the law. However, the law does not define what is morally right and what is legal may be unethical. Many people would argue that this is an important point as ‘good business ethics promotes good business.’ This was the findings of some well-known authorities such as Baumhart, Brener and Molander, who believed that only those businesses that conduct activities on ethical grounds can develop on a long-term basis. This is also the stakeholder view that businesses will not make money if they do not take heed of their stakeholders; CSR is looking after your stake holders and is good business practice. This is the reason why it is important that leaders are not merely concerned with profit but also with promoting an ethical practise.
Firstly, “leaders who follow the principles of ethics in the conduct of business, motivates others also to follow the same principles” (Paliwal, 2006: 10). This can improve both employees and the organizations motivation and morale, which was discussed earlier as one of the main roles of a leader. This is because conducting business in an ethical manner can produce a feeling of ‘doing things right’ and this can “become an almost tangible positive ambience within the organisation and can create a culture with a sense of community and belonging for employees,” (Andersen, 2004: 7). The result of this is increased loyalty and productivity, which can result in an improved in competitive advantage. An example of a company that treats its employees well and is benefited in return is John Lewis. All 69,000 employees of the company have a share in it and despite seeing pre tax profits fall by 26% this year they still paid their employees bonuses worth 13% of their salaries.
In addition to this if a leader and a company demonstrates that it is unwilling to compromise its ethical values then they are regarded as trustworthy by both customers and their employees and this can promote productivity, innovation, employee development and increase employee attraction, which are again some of the main roles of a leader. This is vital to leaders as a study by Covey discovered that “the average corporation loses half its employees within four years, and the cost of recruiting, training and getting new ones up to speed can be detrimental to an organisation.” (Andersen, 2004: 9).
Also it is the “leaders of a company that are responsible for its conduct and it is their actions that determine the company's ethical standards” (Andrews, 1989: 72). If a leader's strategy is to define and communicate ethical position then it can act as a competitive advantage as it is an effective way of ensuring customer loyalty and also the company’s ability to attract new customers. Customers are now more discerning and better educated than ever and want a product that not only serves its purpose but also is produced by an environmentally responsible company. If a consumer understands and sees tangible evidence that they are contributing to something beyond the profits a company and its owner, it is a strong motivator for both their custom and their loyalty. An example of a leader who understood the importance of an ethical company and an ethical product was Dame Anita Roddick, founder of The Body Shop. The company was one of the first to prohibit the use of ingredients tested on animals, promote fair trade and also channelled a share of the cost of the product back to the original producer of the raw material. By doing this she created a unique selling point as an ethical company and therefore a company that consumers are proud to buy from.
Furthermore, if an organisation is known to be ethical it gives the impression to the customer that they too will be fairly treated as “when ethical conduct is displayed it puts some kind of trust and confidence in relationship” (Paliwal, 2006: 9). An example of this is that prices reflect the real value of what is being bought. As previously mention, being ethical can also help to attract new customer, who will hopefully become loyal in time. This is because customers are exposed to so many marketing campaigns that they are wary of which they should trust. However, if a leader has successfully managed to position an organisation with having ethical values and integrity then customers uncertainty is reduced, they are more trusting of the company and less afraid of purchasing its products, which meets leaders objectives. This was proved in a survey conducted in New York in 1995, which indicated, “when quality, service and price are equal, 90% claimed that the best reputation for social responsibility would determine their decision to buy.” (Andersen, 2004: 12). Therefore an ethical company should see an increase in sales, which is always part of a leader's strategy.
A further factor for leaders to consider is that studies have shown a “positive link between being ethical and improved financial performance (Maignan, 1987)”, which is ultimately the main aim of an organisation. Ethics in business can be related to quality of management, quality of products, innovativeness and good responsibility towards the community, all of which lead to admiration, good will and a good reputation for the company. An example of leaders who saw the importance of a good ethical reputation are Ben Cohen and Jerry Greenfield, founders of Ben & Jerry's, who set up the sustainable Caring Dairy initiative to helps farmers and also took measures to reduce energy use. According to Ferrell, Maignan and Loe “companies that are perceived positively in the market place perform better than others.” (Andersen, 2004: 13). Although this statement and other studies could be questioned as to what extent admiration is due to ethics, it can be said that an ethical approach to business is what contributes to a positive perception and reputation and can therefore be linked with financial improvements. A further example of this is that IAG (Insurance Australia Group Ltd), who work with neighborhoods to improve their facilities and reduce crime. This not only gives them a good reputation as a company that cares about the environment but also benefits them in a second way as it reduces insurance claims and therefore reduces their payouts and equally benefits both the community and the company.
Finally, leaders need to consider being a company with ethical values because investor’s and shareholders are now using a company’s ethical stance as criteria to evaluate investments and stocks. An example of this is the “specifically designed sub index of the London Stock Exchange, the FTSE4Good (FTSE - Financial Times Stock Exchange).” (Andersen, 2004: 19). To be included in this index, constituents must be screened according to the criteria of the FTSE4Good, which covers environmental sustainability, social issues and stakeholder relations and human rights. Therefore having a favourable ethical profile can attract investors and not having one can deter them. In addition to this, for the government ethical standards of a business are now a key factor in the procurement of grants and influence.
Having looked at these benefits, a leader also needs to consider the strength of being ethical by looking at the dangers and probable penalties of unethical business behaviour. As a society we have access to a wide variety of information on organisations. As a result, there are constantly court cases against companies for unethical behaviour, for example in 2007 cruise company Carnival was being sued over several cases of mistreatment of workers and the covering up of environmental damage. Settling these claims can cost billions of pounds, can lead to bankruptcy and the damage to reputation can be irreparable. A further example of this is that if a customer is treated unfairly then this bad reputation will be passed on by word of mouth.
In relation to this a further factor that leaders need to consider when creating a business strategy is that unethical behaviour in manufacturing can lead to bad reputation. An example of this is the recent case with Primark, who were discovered to be using suppliers in Southern India who were using child labour. Although they claimed that they were unaware of this situation it still created a great deal of bad publicity for the company. Negative publicity can equate to decreased competitive advantage, increased costs as companies have to increase public relations and advertising. It can also have effects on sales, profits, morale and the day to day running of the business. In addition to this a bad reputation cannot be easily changed and it consumers suspicion of a company’s intentions and future actions. In relation to this “journalists writing about companies tend to fall victim of the so called Halo effect” (Andersen, 2004: 19), which means that a company that has a bad reputation tend to be seen negatively whatever they do. As the media have the power to make or break companies it is essential that leaders ensure that they are ethical and that there reputations remain intact. In this sense ethical behavior can be seen as a form of insurance against regulatory acts. An example of a company that have taken this on board is Mark’s and Spencer, who have recently launched a new Per Una lingerie range that is “carbon neutral” and is produced in an eco-factory as they become more successful in listening to what their customers want.
A final problem to leaders of having an unethical approach is that there are always pressure groups and special interest group such as Greenpeace waiting to launch global campaigns against companies that act unethically, which can affect both the organisation and its chances of survival. An example of this is that in 2003 the Barclay twins, who were the two new leaders of Littlewoods mail order and clothing store, withdrew the companies membership of the Ethical Trading Initiative (ETI), which was put in place to stop companies from using child or forced labor. This not only resulted in the sacking employees but was also provoked large volumes of criticism for charities, unions and government ministers all of which impacted on the company's reputation. This increased government interest can also lead to regulations that create rigid trade and less freedom.
Having looked at the two topics: leadership and business ethics in some detail, it is clear to see that there is an important link between the two. A business operates according to the visions and values of its leader and whilst some may see business ethics as a fad leaders need to be aware that there is a high demand for ethical behaviour in our society today.
It is fair to say that the objective of most companies, as Friedman said is to earn as much money as possible. Therefore, as a leader, that person is an employee of the owners of the business and so has a primary responsibility to them to conduct the business in line with their wishes. In addition to this there is a strong argument as to why a leader should not consider ethical issues as a vital part of their job. Many people share the skepticisms of Milton Friedman and Adam Smith's about the benefits that can be expected from "those who affected to trade for the public good." This is a fact that has been discussed in the essay and the implementing a practicing ethical business can cost a company, for example, spending money on reducing pollution costs and choosing more expensive but ethical suppliers. In Friedman’s book Capitalism and Freedom, he sums up this argument by saying that "there is one and only one ethical responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud" (Friedman, 1970).
However, the other side of this argument is that in order for organization to survive in a competitive and changing environment, leaders must develop strong ethical standards and successfully implement them throughout the company. By trading in an ethical manner a leader will see a wide variety of benefits and effects on business practices, such as increasing sales, retaining employees, reducing litigation and in some cases increasing a company's profit. In addition to this, another “testament to its viability is that despite being describes as a passing phase, business ethics which emerged in the 1970’s has constantly gained more and more awareness and support, making it one of the longest surviving management fads” (Andersen, 2004: 24). Having considered this fact and all of the benefits, it is a hard for a leader to argue against the merits of an ethical approach to business.
Overall, I believe that in order to remain competitive and to insure the survival of a business an organization must respect and regard their social and ethical responsibility as well as maintaining profitability as a central goal. It is fair to say that good ethics is good business since nowadays it can be directly linked to the company's success. Moreover, good ethics is good business because business partners, suppliers and customers expect and presevere business relationships that are upright and responsible. This is a factor that is going to become increasingly more important as consumers become more aware of ethical issues and the need for them to be considered, e.g. the increase in consumer awareness of carbon footprint. Therefore an ethical reputation will be important to the success of a company and it is a leader's job to ensure that ethics is part of a companies strategy and is successfully implemented.
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