People, Culture & Leadership: Ethical Leadership in Financial Crisis

This report examines the application of ethical leadership in the context of financial crises. It begins by defining financial and economic crises, outlining their major causes, such as increased uncertainty, rising interest rates, government financial problems, changes in balance sheets, and banking problems. The report then details the consequences of such crises, including unemployment and reduced output, and reduced government finances. The core of the report analyzes the advantages of ethical leadership in addressing these crises, such as improved problem-solving and enhanced collaboration, while also acknowledging its disadvantages, including the dependence on leader's ethical framework, potential tensions with different ethical standards, and the challenges in maintaining ethical standards. Recommendations are provided to overcome these disadvantages, such as promoting transparent decision-making and open communication. Finally, the report concludes with suggestions for government intervention during financial crises, including bank assistance through asset subsidization, liability guarantees, and recapitalization, alongside bank liquidation for small banks to mitigate contagion concerns. The report references relevant literature to support its analysis.

People, culture and contemporary leadership
The financial crisis has affected the functions of leadership practices in financial institutions, this
has led to changes in the practice of leadership in not just banks but also businesses and other
industries.
Ethical leadership is a style of leadership that values ethical values and beliefs, it is highly
directed by respect and dignity and rights of other people. Its major concepts are honesty, trust
and fairness.
Financial and economic crisis
This is a situation whereby prices of assets reduces in value and businesses and consumers are
unable to pay their debts and financial institutions faces liquidity shortages. In this situation
investors are tempted to sell off their assets and withdraw their savings for fear of a drop in value
of those assets. Economic crisis on the other hand is a situation whereby a state’s economy faces
downturn causes by a financial crisis. These crises results when financial and other market
intermediaries are no longer functional effectively.
The following factors are the major causes of financial crisis
Increased uncertainty level
When organizations fail to plan for the future and investors fail to estimate future interests are
rates they hold cash instead of investing in new equipment which leads to a reduced economic
activity.
Increase in interest rates.
High interest rates discourages borrowers and makes projects reduce their profitability and thus
reducing countries’ gross domestic products.
Government financial problems. When government spends more than its revenue, it results into
more borrowing making it harder to service their loans leading to a decrease in market price of
bonds. This further causes a crisis in the exchange rates and investors that borrowed in foreign
currencies may pay more for their loans than expected.

Changes in balance sheet. Balance sheet reduces assets value reduces or when liabilities
increases. This may lead to risks because company employees earn low bonuses and various
stock option reduces in value. This increases theft cases in the company and thus reduced
profitability.
Banking problems and panics. If the bank has a high number of defaulters its likely to reduce it’s
lending to avoid bankruptcy. Banks are the major source of external finances. This means the
money flow in the economy is highly reduced between investors and even the consumers.
Consequences of economic and financial crises include:
Unemployment and reduced output- This is as a result of a decrease in the GDP and per capita
income. The level of investment is highly reduced which discourages creation of employment
opportunities.
Government finances reduces because of reduced tax revenues. This is because economic
conditions are highly affected
Advantages of ethical leadership in solving financial crisis.
 Improved response to problems- this is because employees report issues quicker.
 It provides collaborative benefits to firms- this leads to collaboration among
organizations, which helps in joint problem solving and innovation among companies.
 It also results in reduced errors because of a decrease in business liability.
Disadvantages of ethical leadership.
It requires leader’s ethical framework to be in line with company vision this means that low level
workers may not be able to work in such ethical environment because ethical behavior depends
on personality and training. Different ethical standards can cause tension among different firms.
Ethical leadership depends on leader’s ability to influence. People may follow the leader and fail
to see any mistakes or problems. This may influence firm’s decision making.

Ethical standards are not easy to approach. People pay much attention to policies thus clarity and
consistency becomes complicated.
Ethical leadership is hard to maintain because stepping out of the framework once could lead to
damage of the earned respect with other stakeholders and workers.
Recommendations on how to overcome these disadvantages
To promote ethical behavior leaders should always try to develop transparent culture in decision
making among workers and stakeholders of the organization, encourage open communication so
as not to restrict employee’s thoughts and ideas; ensure organizations information is available to
anyone who needs it.
In conclusion, to solve financial crisis the government should encourage bank assistance to allow
firms to survive, this can be done in form of subsidizing assets as well as reduced asset
guarantees, liability guarantees- this needs to be done together with recapitalization by the
relevant authorities and bank liquidation while paying insured depositors- Especially for small
banks due to contagion concerns.

References
Chen, A.S.Y. and Hou, Y.H., 2016. The effects of ethical leadership, voice behavior and climates for
innovation on creativity: A moderated mediation examination. The Leadership Quarterly, 27(1), pp.1-13.
Ivashina, V. and Scharfstein, D., 2010. Bank lending during the financial crisis of 2008. Journal of
Financial economics, 97(3), pp.319-338.