The Role of Ethical Leadership towards Employee Productivity of

Medium Enterprises: An Indonesia Experience

Sudarmawan Samidi

and Cut Sjahrifa

Sekolah Tinggi Manajemen Ipmi, Jakarta, Indonesia

Keywords: Ethical Leadership, Employee Productivity, Medium Enterprises, Business Ethics, Workplace.

Abstract: This study explores the role of ethical leadership and its impact on employee productivity of medium

enterprises (MEs) in Jakarta, Indonesia. Ethical leadership (EL) is a behaviour conducted and decisions

made by organizational leaders that are legal and align with moral standards and those that impose

processes and structures that promote ethical conduct by followers. It's undoubtedly true that employee

productivity is an important factor to the success of every firm. As proven by lots of companies that the

successful one goes to those that give priority to productivity over revenues and profits of the company.

This study uses personal interview with the selected leaders of MEs in Jakarta, Indonesia. The Corporate

leaders argued that they believed ethical leadership is characterized by integrity, sincerity, honesty,

trustworthiness, good communication skills, discipline, and fairness which contribute to increase employee

productivity in the workplace. Ethical leadership could bring significant employee loyalty and satisfaction,

trust and work engagement, and eliminate immoral behaviour. Furthermore, it could create sustainability of

the enterprises themselves. In conclusion, applying ethical leadership is important and highly recommended

to all the enterprises in their business practices.

1 INTRODUCTION

Nowadays, immorality in leadership has become one

of the main concerns in managerial misconduct

within organizations. In the study conducted by

Wesley et al., (2011), it showed that the most

significant ethical issues to organizations are

bribery, corruption, and facilitation payments,

whistle blowing/speaking up and discrimination,

harassment or bullying. For instance, Texaco in

1996 made a $176 million settlement for racial

discrimination; Mitsubishi Motor Corporation

settled $34 million in 1998 after a government

investigation of pervasive sexual harassment and

Louisana – Pacific Corporation paid a fine of $37

million in 1998 for the customer and environmental

fraud among other unethical practices.

Ethical leaders are thought to be receptive and

open, possess traditional leadership traits such

integrity, honesty, and trustworthiness. Ethical

leadership includes transactional leader behaviours

such as setting ethical standards and holding

followers accountable for ethical conduct (Trevino

et al., 2003). Hundreds of cases regarding unethical

deeds in a workplace have a direct relation to the

productivity of the employees of the related

company.

The previous study has been the negative impact

of supervisor's destructive personality to employee’s

behaviour and emotional stability (Schaubroeck et

al., 2007). Brown and Mitchell (2010) also

mentioned how unethical leadership can lead to

ineffectiveness on organization functionality. The

ineffectiveness includes the absence of employees

and the decrease in productivity rate. Not only that,

as leaders are role models to their followers,

unethical leadership can also influence the employee

in their way of thinking. In addition, Ünal et al.,

(2012) mentioned that the unethical practices in the

company can shape the employees to also behave

the same way. This can result in more employee

theft and sabotage.

According to 1 Green, D. (2010), the insights of

identifying a leader’s unethical behaviour, includes

harming others to make more profit, asking his

subordinates to do unethical deeds for his benefit,

being inconsiderate with the impact of the decision

he made to the stakeholders, discriminating and

lying to the employees, leading to bad behaviour,

take advantage of others, taking personal credit for

Samidi, S. and Sjahrifa, C.

The Role of Ethical Leadership towards Employee Productivity of Medium Enterprises: An Indonesia Experience.

DOI: 10.5220/0008492703310336

In Proceedings of the 7th International Conference on Entrepreneurship and Business Management (ICEBM Untar 2018), pages 331-336

ISBN: 978-989-758-363-6

331

group accomplishments, and not supporting his

employee's growth. Such action is totally unhealthy

for a company, as it will create a distraction to the

employee's work, destroy the working culture and

environment, resulting in employee turnover and

encouraging theft within the company.

Due to this harmful effect which we believe can

trigger the fall of a company, it is truly important to

further give information on how and what kind of

ethical leadership should be applied, instead of

unethical leadership. Also, we should find out why

ethical leadership should be applied in order to

prevent the fall of a company. Therefore, this study

aims to reveal the key factors of ethical leadership

within the current leaders of Indonesian companies

and prove the correlation between ethical leadership

and employee’s productivity. The study gives

qualitative information on how and what kind of

ethical leadership works in increasing the

employee’s productivity. The information is mostly

earned based on the interview with six informants

from various industries. The interview will provide

useful insights on how ethical leadership can

enhance the productivity of the employees.

The main objective of this study is to prove that

ethical leadership is impactful towards increasing an

employee's productivity in a workplace. So, the

company will consider how important ethical

leadership should be implemented in order to

enhance employee's job performance as well. Not

only that, this study will show the kinds of ethical

leadership that should be applied regarding the

employee's productivity. In addition, the study aims

to encourage people especially the leaders who have

a responsibility to stabilize employee performance.

2 LITERATURE REVIEW

2.1 The Concept of Ethical Leadership

Leadership was defined by Drucker, P. (1974) as

lifting a person's vision to high sights, the raising of

a person's performance to a higher standard, the

building of a personality beyond its normal

limitations. In another word, it is an act of

motivating and leading employees to achieve the

organizational goals at the same time monitoring and

educating the subordinates in order for them to

grow. Meanwhile, ethics comes from the Greek

word “ethos” which means custom or character.

In the past, the main goal of leadership has been

to increase production/productivity and profits.

However, in the 21st Century, this view has begun to

slowly diminish as more organizational development

and human resources experts assert that leaders also

have the responsibility for ensuring standards of

moral and ethical conduct. Good leadership then

refers not only to competence but to ethics that

transform organizations and people's lives.

Therefore, ethical leadership is coming into a

community among different people.

Ethical leadership is a leadership that is directed

by respect for ethical values. It is related to concepts

such as trust, honesty, justice, respecting others,

encouraging initiative and willingness to serve.

Ethical leaders are also defined to be people-

oriented, and aware of how their decisions impact

others. Therefore, the implementation of ethical

leadership uses power and authority to serve for the

greater good. Meaning, they create win-win

solutions for employees and organization.

Further characteristics of ethical leaders include

inspiring, stimulating, and other visionary

behaviours that make up transformational

leadership. Ethical leaders also coach a group of

people in gaining a sense of personal and

professional competence that allows them to excel

while being more resilient, loyal, and profitable.

We look up at leaders to lead on ethics and take

responsibility for either good or bad outcome.

Leaders who lead ethically are role models for those

people through communicating about the importance

of the ethical standards. As described previously,

ethical leadership has been generated to cause a host

of positive outcomes.

Ethical leadership makes ethics clear and

consistent through the common standard and model

appropriate behaviour. In making ethical leadership,

we require ethical leaders. If a leader is ethical, it

indirectly affects the ethical practices that are carried

out throughout organization and influence

employees. Ethical leadership must be focused on

how leaders leverage this power in the decisions

they make, actions they engage in and ways they

influence others. Leaders are responsible for

influencing followers to perform actions, complete

tasks, and behave in certain manners.

According to G. Yukl (2006), the criteria

relevant for judging the ethical behaviour of a leader

include individual values, conscious intentions,

freedom of choice, stage of moral development,

types of influence used, and use of ethical as well as

unethical behaviour.

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332

Table 1: The Criteria of Ethical Leadership and Unethical

Leadership.

The Ethical Leadership The Unethical Leadership

Humble Arrogant and self-serving

Concerned for the greater

goo

Excessively promotes self-

interes

Honest and straightforward Practice deception

Fulfils commitments Breaches agreemen

Takes responsibility Shifts blame to others

Shows respect for each

individual

Diminish others’ dignity

Encourages and develops

others

Neglects follower’s

development

Serves others Withholds support and help

Shows courage to stand up

for what is righ

Lack courage to confront unjust

acts

Source: Modified from G. A. Yukl & Yukl, (2002)

Besides those characteristics of ethical leadership

and unethical leadership, here are five values that are

crucial for ethical leadership (Peale and Blanchard,

1996:

● Pride: Ethical leaders demonstrate healthy pride,

not vanity, as the dividing line between them is

thin due to strong ego tendency in human beings

● Patience: In the process of implementing

strategies that enable an organization to reach its

goals, a leader is faced with obstacles from the

internal and external environment.

● Prudence: Prudence is a virtue that refers to

exercising sound judgment in practical affairs. It

is considered as the measure of moral virtues as

it provides a model of ethically good actions.

● Persistence: It refers to leader’s striving for goals

and his continuing quest to take all the necessary

steps to achieve them, even if they involve

sacrifice and personal risk. Persistence lies in

trying to overcome the “practice” of justifying

unethical conducts when one feels overwhelmed

by mounting pressures, because of a sense of

duty to others.

● Perspective: It is understood as the capacity to

perceive what is truly important in any given

situation.

Not only that, ethical leadership must be applied

from the top. Because it creates an environment in

which lower-level ethical leaders can flourish,

ethical leadership at the supervisory level has a huge

impact on followers’ attitudes and behaviour.

Influence skills help leaders get colleagues on board

for change of initiatives, access resources, guide

teams, develop shared goals, reduce resistance,

encourage teamwork beyond functional boundaries,

win support from those with competing agendas,

empower others and sell ideas to the boss.

When leaders harness the power of influence,

they create a shared sense of responsibility, improve

communications, encounter fewer problems with

change-implementation, discover more innovation

and creativity, experience less attrition and less

resistance while gaining access to more information

for better decision making (Hendricks and Payne,

2007; Waldman et al., 2004; Kurmet et al., 2010;

Jaussi and Dionne, 2004; Kaufman, 2011; Dion,

2012; Perrin, 2012).

2.2 Employee Productivity

According to Mayer et al., (2009) and Walumbwa

and Schaubroeck (2009), ethical leadership is also

associated with more helpful behaviour from

employees, probably because ethical leaders’ model

helpful behaviour. Ethical leadership also reduces

unethical behaviour in followers (Mayer et al., 2009;

Mayer et al., 2012). On the other hand, an

employee’s productivity is what measures an

organization’s performance and is often used to

assess the efficiency of the workers. It is defined as

the ability of an employee to utilize his resources in

order to finish their assigned task in an efficient and

effective way with a maximum satisfaction from

both the employer and customer.

Productivity is evaluated through monitoring the

output of an employee in a specific period of time

compared with the average productivity score of the

rest of employees that are doing a similar job.

Employee's productivity is crucial in a company

because the success of the company is deeply

influenced by the productivity of its workforce.

Productivity is even believed to be more

important than the company's profit and revenue.

This is because the profit is related to the end

outcome of a company, while productivity is more

into the increase or decrease in efficiency and

effectiveness of the company's business policies and

processes. The more successful firm is usually the

company which prioritizes productivity over the

profit and revenue. By focusing on the productivity,

a firm can increase and utilize its human resource

capacities. This is why a productivity level of a

company serves as a factor to measure the success or

failure of the company.

Moral leaders who help employees to be more

focused on the process of doing their task helps the

employee to reduce some of the stress. Ethical

leaders are described as more caring about

employee' best interest and thus want to see them

perform well and reach their potential (Brown et al.,

2005). A leader must help employees internalize the

The Role of Ethical Leadership towards Employee Productivity of Medium Enterprises: An Indonesia Experience

333

organization's underlying values. Moreover, in this

case, an employee is attracted to ethical role models

who care about them, treat fairly, and set the high

ethical standard. A good leader should give impacts

to the bottom line. CEOs whose employees gave

them high marks for the character had an average

return on assets of 9.35% over a two-year period.

That's five times as much as what those with low

character ratings had (Kiel, 2015).

In the social exchange theory, employees who

are in a high-quality relationship with their leader

tend to be more effective workers (Sparrowe and

Lidden, 1997). As a result, the high-quality

relationship can boost individual motivation for high

job performance (Chen and Kanfer, 2006).

Supporting those arguments, several prior individual

and meta analytic studies reported positive

relationship between leaders and employee’ job

performance (Bauer et al., 2006; Gerstner and Day,

1997; Walumba et al., 2009; Walumba et al., 2010;

Wang et al., 2005). Meaning, applying standards of

ethics through leadership can affect the employee’s

performances in terms of productivity and make

assets grow more than before.

3 RESEARCH METHODOLOGY

The study uses qualitative method through personal

interviews with six (6) professional leaders from

medium enterprises (MEs) in Jakarta, Indonesia. The

use of qualitative method in this study is done to

obtain a detailed explanation from the leaders which

practiced ethical leadership in their organizations

that leads to their employees’ higher productivity.

The use of qualitative method through personal

interviews is appropriate for the exploratory nature

of studies. Miles and Huberman (1994) argued that

the qualitative method is appropriate to examine

complex and difficult contexts of study because they

can put the situations in question into the right

perspective. In addition, Marshall and Rossman

(1999) recommended the use of qualitative methods

to enable researchers to ask more questions in order

to explore the context of the study in greater detail.

Further, the qualitative method also encourages

the researchers to analyse the complex relationship

between ethical leadership and employee's

productivity. By asking questions personally, the

researchers will get vary of answers that are relevant

to the interview questions. There are many

techniques to compile data using the qualitative

method, such as active or passive participation and

observation, personal interview, content analysis on

various documents, and case study (Patton, 2002;

Lee, 1999; Creswell, 1998).

This study obtained the results through personal

interview that was taken by interviewing six (6)

respondents coming from various leadership

backgrounds. Moreover, the data will be observed

by researchers and the results will be transformed

into clear explanations.

4 FINDINGS AND DISCUSSIONS

This part presents the feedback from personal

interviews with 6 managers of medium enterprises in

Jakarta, Indonesia on the role of ethical leadership

into employee productivity at their organizations.

Table 2 summarizes the profile of the informants.

The informants were asked questions pertaining to

the role of ethical leadership at their organizations

and its impact on their employee productivity.

Table 2: Informants’ Brief Profile.

Code Position Principal Activity

R1 Executive director Business consulting

R2 Managing director Manpower outsourcing

R3 Vice President Corporate banking

R4 General manager Construction

R5 Managing director Entertainment

R6 General manager Tourism

*R: Respondent

R1 pointed out that ethical leadership is a kind of

a prototype of a leadership. The basic of leadership

is integrity besides being professional. Giving a trust

is also important in order to make employees

explore their creativity and be responsible to the

purpose that has been agreed to at the beginning of

the year, which is to achieve the target that has been

set.

R2 contended that ethics is about regulation and

how people distinguish something good from evil. In

a certain condition, a person cannot deny that

offering something whenever someone visits a

friend is a part of Indonesian culture that we call as a

silaturahmi. However, another person might also

relate the offering as bribery. If a person can create

understanding to distinguish good from evil and still

have the same perception about this person, then it

will be ethical. There’s no guideline to be ethical.

R3 believed that in leading a team according to

the moral ethics, a leader needs to be focused on

leading with moral, integrity, and honesty. R3

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believed that if we can't show our moral behaviour,

the other things that we did or contributed will be

pointless. So, moral and integrity are the main

factors to be an ethical leader. Another factor of

ethical leadership is being open with subordinates.

Next factor is discipline. If a leader is disciplined, it

will directly impact to subordinates. It's also

important for a leader to guide and educate the team

about time management and productivity. In giving

a task, a leader should also guide the member using

5W1H (who, what, where, when, why, how). Make

sure they have understood the job description and

the importance of discipline. Letting them explore

means giving trust but at the same time building a

good culture in a team and workplace.

R4 define ethics as every aspect that's not against

the universal moral standard. Simply, when it is not

something bad and is aligned with what people think

is morally accepted, and then it is called ethical. R4

also emphasized that the things people need to

remember in running an ethical leadership are that a

leader works for the organization, not for himself,

the boss, or the shareholders. In addition, R4

mentioned that ethics is important for a leader

because it is something right to do. The main factor

that he categorized as ethical leadership is being

trustworthy.

R5 stated that to implement an ethical attitude

through leadership, there are three factors supporting

that implementation. Those are ethics, attitudes, and

behaviour.

R6 chooses fairness, honesty, simplicity, and

caring as the factors needed to remember in running

an ethical leadership. All those factors are very

substantial, but the most significant factor is

fairness.

From the feedback of the six (6) leaders who are

also our informants, it was proven that ethical

leadership was essential to the employee’s

productivity. Table 3 summarizes the informants’

feedback into key values that are the essential

characters of ethical leadership, namely integrity,

punctuality, communication, trustworthiness,

honesty, good relationship, appreciation, and

fairness.

Table 3: Summary of Informants’ Feedback.

Code Main Points Key Values

Productivity comes from a

leader who acts as a parents,

teacher and best friends and

giving a guideline through each

different role

Integrity

Understanding is the primary

factor that makes employees

have the willingness to be

productive in working a task.

Punctuality

Being open and having a good

relationship with subordinates

are needed in order to get

positive result as higher as

expected.

Communication

Once an employee starts

trusting their leader, they will

make more initiatives in doing

their task.

Being trustworthy

The good relationship gives a

sense of belonging to the

employee and appreciation

motivates an employee to be

more innovative and creative.

Honesty, good

relationship,

appreciation

Fairness is giving the employee

the same opportunity to express

their ideas and making some

progress. Evaluation and

motivation are also crucial to

improve employee's

productivity.

Fairness

In other words, the application of ethical

leadership into organizations that reinforce good

human and organization governance for the sake of

improving productivity in a company. The

informants all believed that their ethical leadership

directly relates to the productivity of their

employees.

5 CONCLUSION

The study found that the most important aspects of

ethical leadership are integrity, punctuality,

communication, trustworthy, honesty, good

relationship, appreciation, and fairness. Ethics is

something right and are based on the universal moral

standard. There is no measure of whether something

is ethical or not. However, once something unethical

was done, people will immediately notice it. Ethical

leadership makes ethics clear and consistent through

the common standard and appropriate behaviour. In

making ethical leadership, we require ethical

leaders. If a leader is ethical, it indirectly affects the

ethical practices that are carried out throughout

organization and influence employees.

The impact of ethical leadership into

organizations is significantly important to increase

the employee productivity and sustain the life of a

company. The ethical leadership increases the

employee’s productivity, in which the employee

becomes more creative, initiative, innovative,

focused, determined, honest, discipline, and

The Role of Ethical Leadership towards Employee Productivity of Medium Enterprises: An Indonesia Experience

335

punctual. With ethics applied to the company’s

leadership, this will create ethical behaviour as the

company’s culture. Hence, this will increase

employee’s satisfaction, trust and work engagement,

lessen the probability of dishonesty within the

company, and increase the productivity of the

employee.

We emphasize for the next researchers that have

a similar topic to deeply search about the importance

of ethical leadership towards job performance itself.

This study only explains about the productivity

which means it is too narrow compared to job

performance. Hence, regarding our findings, we

suggest the next researcher explore the correlation

between ethical leadership and job performance.

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