Ideal Leadership for Addressing Ethics and Corporate Governance in Institutions

Essay , 2023 , 7 Pages

Business economics - Business Ethics, Corporate Ethics

Despite established control and risk management systems overseen by its board of directors, Wells Fargo & Company faced rampant delinquency, as evidenced by the 2016 scandal. This leads to the question: where did things go wrong? The board-commissioned investigation revealed that a toxic corporate culture, a fragmented organizational structure, and weak leadership were responsible. The inquiry showed that much of the unethical behaviour was driven by the pressure to meet unrealistic sales targets tied to dubious incentives. This paper explores the total leadership failure at Wells Fargo, using the scandal as a case study. Additionally, it provides an in-depth review of corporate governance, its role in companies, and why governance alone may not prevent unethical practices if leadership is lacking. Multiple leadership theories are analysed, concluding that Wells Fargo’s downfall resulted from the absence of transformational, authentic, and situational leadership. Gender differences in leadership are also examined, with findings highlighting the role of both men and women in leadership. Finally, recommendations are offered based on lessons from the scandal that could be applied across industries.

Ideal Leadership for Addressing Ethics and Corporate Governance in Institutions

Abstract

Despite established control and risk management systems overseen by its board of directors, Wells Fargo & Company faced rampant delinquency, as evidenced by the 2016 scandal. This leads to the question: where did things go wrong? The board-commissioned investigation revealed that a toxic corporate culture, a fragmented organizational structure, and weak leadership were responsible. The inquiry showed that much of the unethical behaviour was driven by the pressure to meet unrealistic sales targets tied to dubious incentives. This paper explores the total leadership failure at Wells Fargo, using the scandal as a case study. Additionally, it provides an in-depth review of corporate governance, its role in companies, and why governance alone may not prevent unethical practices if leadership is lacking. Multiple leadership theories are analysed, concluding that Wells Fargo’s downfall resulted from the absence of transformational, authentic, and situational leadership. Gender differences in leadership are also examined, with findings highlighting the role of both men and women in leadership. Finally, recommendations are offered based on lessons from the scandal that could be applied across industries.

Introduction

Leadership, as described by Badshah (2012), is a combination of traits and behaviours that foster commitment and engagement within an organization. Northouse (2016) adds that leadership has captivated researchers worldwide, resulting in various interpretations and leadership styles suited to different contexts. Therefore, leadership is not limited by gender—both men and women can possess the characteristics necessary to excel as leaders. Over the years, women have made significant strides in leadership roles across multiple sectors, such as education, health, politics, and administration. This shift has helped challenge the traditional glass ceiling, making room for powerful female leaders like Ngozi Okonjo-Iweala, Oprah Winfrey, and Hillary Clinton.

This paper will discuss key leadership theories and styles, focusing on transformational, authentic, and servant leadership, which could have mitigated the 2016 Wells Fargo scandal. The importance of strong corporate governance and ethical leadership will also be emphasized.

Corporate Governance and Scandals

Corporate governance, as defined by the Chartered Governance Institute UK & Ireland, refers to the system of rules, practices, and processes by which a company is directed and controlled. It identifies who holds decision-making authority and accountability within an organization, ensuring that the interests of stakeholders—employees, shareholders, suppliers, and the community—are balanced.

According to Abid & Ahmed (2014), corporate governance is essential for preventing unethical practices and fostering confidence, necessary for raising capital and maintaining public trust. However, corporate governance alone cannot ensure ethical behaviour if the leadership is flawed. Wells Fargo is a case in point, where robust governance systems failed to prevent widespread misconduct.

The Wells Fargo Scandal

Founded in 1852, Wells Fargo & Company is a financial services conglomerate with assets totalling $1.9 trillion. In 2016, the company was rocked by a scandal involving the unauthorized creation of over one million accounts and the sale of thousands of unnecessary products to unsuspecting customers. The Consumer Financial Protection Bureau fined the company $185 million, followed by additional penalties and legal claims totalling over $1 billion.

Despite having control systems in place, the board's inquiry revealed that a toxic corporate culture, decentralization, and poor leadership were at the heart of the scandal. The pressure to meet unrealistic sales targets, coupled with a focus on rewards, led to unethical practices. Healy & Serafeim (2019) argue that leadership ignored warning signs, particularly between 2000 and 2004 when sales manipulation became rampant. Strong leadership could have averted this crisis, highlighting the need for leadership theories like transformational and authentic leadership, discussed below.

Leadership Theories

Trait Theory

Trait theory, introduced in the 20th century, posits that certain inherent traits distinguish leaders from others (Northouse, 2016). Successful leaders are believed to possess qualities like intelligence, diligence, sound judgment, adaptability, and self-confidence (Fleenor, 2011). The absence of these traits among Wells Fargo leaders contributed to the scandal.

Path-Goal Theory

This theory, developed in the 1970s, suggests that leaders motivate their subordinates by clearing obstacles and setting attainable goals (Northouse, 2016). Effective leadership in this style could have prevented the unethical behaviour at Wells Fargo by setting realistic sales targets and reducing the need for dishonest practices.

Leader-Member Exchange (LMX) Theory

LMX theory focuses on the relationship between leaders and their followers, emphasizing the importance of trust and respect in achieving organizational goals (Bauer & Erdogan, 2014). The decentralized structure at Wells Fargo, which lacked strong leadership relationships, exacerbated the company’s issues.

Transformational Leadership

Transformational leadership inspires employees to achieve shared goals by promoting high ethical standards (Shamir, House & Arthur, 1993). Such leaders foster a culture of motivation and trust. Had Wells Fargo employed transformational leadership, the scandal may have been avoided.

Situational Leadership

Situational leadership involves adapting leadership styles based on the needs of the team (Northouse, 2021). Leaders at Wells Fargo could have utilized this approach to better support their employees in achieving ethical goals rather than pushing them toward unethical behaviour.

Leadership Styles and Group Dynamics

Authentic Leadership

Authentic leadership emphasizes transparency, selflessness, and consistency (Avolio & Gardner, 2005). Employees at Wells Fargo may have been deterred from unethical behaviour had they been guided by authentic leaders who prioritized integrity.

Servant Leadership

First coined by Robert Greenleaf in 1970, servant leadership focuses on serving others before leading (Greenleaf, 1970). A company like Wells Fargo could have benefited from leaders who prioritized empowering their teams and communities rather than focusing solely on profit.

Men versus Women in Leadership

Research indicates that women tend to employ more transformational leadership styles compared to men (Trinidad & Normore, 2005). However, Carrie Tolstedt, the female leader implicated in the Wells Fargo scandal, exhibited laissez-faire leadership, allowing her subordinates to act without proper oversight. This highlights the complexity of gender and leadership, suggesting that further research is needed to determine whether women are more accountable leaders than men.

Leadership in Large Companies

The Wells Fargo scandal illustrates the importance of strong leadership in large corporations. Leaders and their teams must work collaboratively, especially during crises. Authentic, transformational, and situational leadership can help create high-performing teams capable of navigating uncertainty.

Recommendations

To address systemic issues in organizations, it is crucial to replace ineffective leaders with those who have a proven track record of integrity. Companies should also promote transparency and support investigations into unethical behaviour. Leadership development should be integrated into education systems to nurture future leaders. Finally, external consultants should review corporate governance structures to ensure they effectively deter misconduct.

Conclusion

This paper has explored leadership failures at Wells Fargo and examined the role of corporate governance. It concludes that while governance systems are important, strong leadership is essential to preventing unethical behaviour. Transformational, authentic, and situational leadership approaches offer valuable insights for addressing such challenges. The discussion of gender in leadership also highlights the need for further study to determine who makes the best leaders.

References

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• Author: MBA Thembisani Maphosa (Author)
• Publication Year: 2023
• Pages: 7
• Catalog Number: V1506401
• ISBN (PDF): 9783389072301
• Language: English
• Tags: Leadership