Ethical Leadership Challenge

MGT 460 Leadership Priorities & Practice

Introduction

Running any organization, whether budding or an established has proven to be a daunting responsibility. There are often challenges arising from every corner from cultural, globalization, changes in the economy, to ethical challenges. The challenges may be as a result of many factors, but a lack of direction within a company is usually the most common. It is the inadequacy in aligning the operations of the organization with its core values and goals that sparks most of the organizational challenges witnessed in businesses of the contemporary world. These forms of organizational problemsare as a result of deficiencies in the leadership of the company.

American International Group Organizational

The American International Group (AIG) is a well-known global insurance company primarily due to the diverse financial services it offers in many countries of the world. The range of financial services the organization provides include retirement products, life insurance, and property casualty insurance to individual and commercial customers (Reinhart & Rogoff, 2008). In other words, the company offers services and products to individuals and businesses to help them manage risks, protect their assets, and also provides them with retirement security services. It primarily deals with consumer insurance and commercial insurance alongside other operations.

The primary stakeholders of the AIG Company consist of the top management, rank and file employees, stockholders, clients, suppliers, correspondents, taxpayers, local businesses and the community. The vision of AIG it to be the world’s first choice provider of insurance and financial services (Reinhart & Rogoff, 2008). This they will do by creating unmatched value for their customers, shareholders, business partners, and colleagues as they contribute to the growth of sustainable, and prosperous communities.

Their core values revolve around people, customer focus, performance, integrity, respect, and entrepreneurship. The key elements covered in their code of ethics involve delivering on AIG commitments, their commitments to each other, commitments in the marketplace, commitments to shareholders, and commitments as corporate citizens.

The Organizational Challenge

The AIG organization, in 2008, suffered a significant financial crisis that almost resulted in its bankruptcy if not for the American government coming through with a bailout. According to Reinhart & Rogoff (2008), the organization used people’s insurance policies money to finance the risks of unregulated products. The primary reason behind this event originated from poor management from the leaders of the organization.

Every individual is heading a department engaged in activities that jeopardized the operations of the company, which mainly includes protecting people’s and commercial assets. The organization was then headed for a sharp downfall as a result. The US government was left with no option but to come in and bail out the company otherwise the country would have witnessed an economic collapse.

The company was facing an ethical challenge as many people in the management engaged in credit default swaps. A keen observation reveals that the leading players in the fiasco were in some form of leadership in the organization (Reinhart & Rogoff, 2008). They failed to practice integrity, follow the rules, and adhere to the values of the organization. How the fiasco began remains a mystery, but one thing that is certain is that it resulted in the loss of billions of dollars.

The cause of this organizational challenge is a common one when compared to other organizations that have experienced the same. AIG is a big company. Hence, the management might have lost sight of the values of the company and began focusing on their goals for profit rather than sticking to the ethical standards.

There is also a possibility that some of the people in top management were not involved in the activities that made the company bankrupt. Consequently, they may not have even been aware that such acts were ongoing since it is almost impossible to keep track of all the activities of employees in such a big company. It was, therefore, difficult to ensure that all employees were excellently adhering to the values, mission, and vision of the company.

How the Leadership of AIG Addressed the Problem

The AIG organizational challenge was a massive one, and so were the consequences that followed. The actions of those engaged in the AIG scandal was bound to cause a financial crisis that would result in devastating effects on the economy of the US. It would lead to a prolonged mortgage foreclosure crisis, a significant decline in gross domestic product, and the unparalleled unemployment of Americans (Castells, Caraça & Cardoso, 2012). Also, the country would have undergone abysmal rating agency performance, disgraceful banking practices, lax financial regulation, excessive leverage, and housing and bond bubble, which all originate from financial crisis and panic.

However, the federal government of the United States came to the rescue of the company. It had to act to save the country from having to resuscitate financial institutions and avoid a global collapse since AIG protected the assets of many of them (Castells, Caraça & Cardoso, 2012). Thus, the AIG scandal dragged many people into their mess giving its leadership a considerable task of addressing the challenge.

The leadership opted to make payments worth millions of dollars to 400 people that were a part of the fiasco. Many consider this as a failure in leadership especially since it is the chief executive officer and the secretary treasury that pushed for the idea (Castells, Caraça & Cardoso, 2012). In their defense, the bonuses were a requirement of the law to retain the workforce that would assist in restoring sanity from the mess they had made. The AIG scandal was big, and everyone expected a better way of solving the problem rather than giving bonuses to people who lacked accountability and nearly led to the downfall of the company.

Addressing the Challenge Effectively

Everyone expects such large corporations to begin by the firing of the individuals responsible for such acts that could have resulted in the financial crisis of an entire nation (Fulmer, 2004). It is required of the leadership to clean up and hold those responsible accountable for the company to earn back the trust of its clients and other stakeholders. This includes the government who was a dominant shareholder and took up the entire responsibility of reviving the company.

It was, therefore, ironical for these two leaders to give bonuses to the workforce and their defense was not convincing enough. This could be interpreted as rewarding people who crippled the company. Instead, they should have been retained without any pay since there is a likelihood that they accumulated much money through their heinous actions.

Keeping them to clean up was an excellent idea but giving them bonuses to do so was somehow an encouragement of their actions. This was not the best idea to solve the organizational challenge. It would have made more sense if they employed new people rather than use more resources to retain a workforce that nearly brought the organization to its knees.

The two leaders employed the situational leadership style because the scenario needed immediate action to salvage the company from going bankrupt especially after the government helped it. This style was the best for the circumstance. However, the leaders’ decision was not the most effective for the situation(McCleskey, 2014). The contingency leadership style requires that the leader choose an employee or colleague that they have least enjoyed working with and rank them on a scale. The higher the total score, the more relationship-oriented the leader is and vice versa.

Retaining these employees and going further to give them bonuses is an indication that the leaders were task-oriented rather than relationship-oriented. Task-Oriented leaders are always incapable of making complex decisions. The case of the two AIG leaders is sufficient proof that people who use this style cannot make effective decisions.

The leaders should have used three factors before making decisions to resolve the situation. These include leader-member relations, task structure, and position power. In this case, they were the most powerful and the rest of the organization’s operations entirely depended on them. After that, they should have identified the leadership style that was most favorable for the situation rather than the style they used.

Alternatively, the leaders should have used the transformational leadership style is that AIG was a different place after the scandal. This style involves leaders helping their followers rise to the desired levels of motivation and morality (Caldwell & Hayes, 2010). However, this would have been more effective with a new workforce. This is because the existing employees already showed a lack of integrity and the morality needed to propel the company onward.

To be a transformational leader, the AIG CEO and Treasurer ought to have been models of integrity and fairness, set clear goals, communicate high expectations, and get people to look beyond personal interests. Nonetheless, this could not have been possible with the same people who had showna lack of integrity and used the company for their gains.

The decision they made was a form of leadership weakness. The reasoning behind this idea was also a sign of leadership deficit that they were probably not aware of. That must have been the same case with the leaders who were at AIG when the credit default swaps were happening.

Leadership is generally involved, and it requires the incorporation of both natural leadership skills and other ways that can help them cover their shortcomings (Caldwell & Hayes, 2010). The abilities of a leader determine the success of the organization. Leaders need to be open to constant improvement for them to positively impact the organization bearing in mind that employees often look up to them and rely on their decisions.

This begins when they acknowledge their deficits and are ready to work towards improving them. The same case applies to the two leaders of AIG. Their decision-making is a setback that is not healthy for an organization that is on a recession. Hence, they ought to have raised their game and employ leadership styles and theories in their operations.

Suggestions for Overcoming the Challenges

Ethical leadership challenges are present in nearly all organizations. However, what matters is whether the leaders understand how to address them or not. A leader that possesses the knowledge of how to overcome these challenges is the best in steering the organization towards maintaining stakeholders and public goodwill. It can help him/her evade severe ethical problems in the future.

The first suggestion for addressing the challenge is for the leaders to embrace consistency. It is the failure of the workforce together with the leader to consistently adhere to the rules that provide leeway for ethical challenges (McCleskey, 2014). A leader, as opposed to those who were managing AIG before the scandal, ought to set their ethical standards for the employees to use as a template.

A leader cannot expect employees to practice integrity and accountability when he/she bends such rules for convenience. This is because employees tend to emulate what they observe in their leaders. Hence, it is advisable for leaders to understand and practice consistency as one way of overcoming organizational ethical challenges.

Consistency alone is not enough to overcome the ethical challenges in organizations. The leaders should also have clear policies because ethics can be complicated at times. For an organization to function effectively, the leadership should have policies that are guided by the company’s practices, rules, regulations, and mission statements among others (Vera & Crossan, 2004). Furthermore, the policies should be in the form of documentation to avoid exploitable loopholes and to act as a point of reference when the challenges emerge.

Leaders can make this possible by referring to the policy documents of other organizations that engage in similar operations especially when they are unsure of where to begin. Consequently, hiring consultants to assist with the process is another way of implementing this strategy.

According to Vera & Crossan (2004), creating an atmosphere that allows employees who observe ethical irregularities to file reports is as well a suggestion that helps overcome the challenge. An organization’s culture and environment may be a challenge to the practice of ethical leadership. For instance, oppressive workplaces are likely to instill fear in employees to the extent they may not speak out about serious ethical problems.

This could be the fear of being terminated or ostracized because of acting as whistle-blowers. Thus, leaders must ensure that the people they recruit as senior or middle managers possess people skills and excellent communication skills to create a free environment. After that, the leaders should emphasize on an open-door policy where employees can report any observations without fear of intimidation.

Lastly, there is a need to address gray areas that usually characterize various parts of an organization. This is because moral grey areas are a significant setback when it comes to ethical leadership. An example is the AIG credit default swaps that appeared harmless until the leaders realized that the organization was headed towards bankruptcy.

Moral grey areas have a characteristic of being less beneficial to the bottom line of the business even when the action appears to be the right thing to do. The outcome is often potential litigation issues emanating from the grey areas (Vera & Crossan, 2004). This means that the leaders have to be up to date with changes in government regulations so that even the equipment or the operations of the organization are updated.

Future leaders have to ensure, therefore, that they try to cover as much of the grey areas as possible. They need to understand that not every ethical challenge in an organization is due to insufficient policies, unfriendly atmospheres or lack of inconsistency. Others are as a result of the leaders not knowing how to address specific issues when they occur because the organization does not have a distinct approach towards them.

Conclusion

Organizational challenges are indeed a result of leadership deficiencies as has been evident in the above argument. Leaders are the steering wheels of organizations hence any challenges that arise from within put their leadership abilities in question. However, the challenges are things that the leaders can avoid depending on the approach of their leadership. Even when they occur, there are numerous effective ways of addressing them and restoring the organization to its original position or moving it forward. Thus, leaders have the responsibility toensure that they are well-conversant with the challenges and the practical techniques of dealing with them.

References

Caldwell, C., & Hayes, L. A. (2010). Leadership, trustworthiness, and ethical stewardship. Journal of Business Ethics, 96(4), 497-512.

Castells, M., Caraça, J., & Cardoso, G. (Eds.). (2012). Aftermath: The cultures of the economic crisis. Oxford University Press.

Fulmer, R. M. (2004). The challenge of ethical leadership. Organizational Dynamics, 33(3), 307-317.

McCleskey, J. A. (2014). Situational, transformational, and transactional leadership and leadership development. Journal of Business Studies Quarterly, 5(4), 117.

Reinhart, C. M., & Rogoff, K. S. (2008). Is the 2007 US sub-prime financial crisis so different? An international historical comparison. American Economic Review, 98(2), 339-44.

Vera, D., & Crossan, M. (2004). Strategic leadership and organizational learning. Academy of management review, 29(2), 222-240.