Ethics in the Dutch financial services industry : a study into the relationship between ethics training and ethical climate, as moderated by transformational, transactional, passive and ethical leadership and as moderat

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Master Thesis

Ethics in the Dutch financial services industry

A study into the relationship between ethics training and ethical climate, as moderated by transformational, transactional, passive and ethical lead-ership and as moderated by the perceived level of regulatory pressure

Student name: Dennis Kramer

Student number: 11143258

Institution: University of Amsterdam, Amsterdam Business School

Faculty: Business and Economics

Programme: Executive Programme in Management Studies Thesis supervisor: Dr. C.T. Boon

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Preface and acknowledgements

As a manager in a company which is part of the field being researched, i.e. the Dutch finan-cial services industry, being challenged in respect of ethical matters is part of the job. The ethical awareness of myself, my employer and the financial services industry as a whole are regularly questioned due to the nature of the activities, which often have to do with tax planning. Panama Paper, Paradise Papers, LuxLeaks, they have all led to discussions, opinions and (often unsubstan-tiated) views on the ethical climate in the financial services industry in The Netherlands.

This made me want to conduct my research in the field of ethics. More specifically; to which extent does the, often mandatory, ethics training which employees follow actually contribute to the ethical climate in the companies in this industry, to which extent does a specific leadership style moderate this relationship and does it play a role to which extent employees believe the eth-ical standards in their company are only a result of pressure by their regulator. This is in a nutshell the subject of this thesis.

I would like to thank my supervisor Dr. Corine Boon for her continuing support in respect of this thesis, especially for the hands-on help when required and flexibility as to its schedule for finalization and especially for always maintaining trust in its successful finalization despite some work-related delays.

Finally, I would also like to thank Holland Quaestor, quality association for the Dutch cor-porate services industry, for their support in respect of the set-up of the questionnaire and circula-tion to the respondents.

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Statement of originality

This document is written by Dennis Kramer, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Signature:

Dennis Kramer 05-01-2018

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The sample for this study consisted of employees of various companies within the Dutch financial services sector, including corporate service providers, notaries and (tax) lawyers. Results showed four significant relationships between elements of the ethics training and elements of eth-ical climate, although two of these relationships were negative rather positive, as hypothesized. Potential reasons for these differences between findings and hypotheses have been suggested; more research is required as to the specific relationships between these concepts to understand the exact reasons.

Furthermore, while the introduction of various leadership styles did not moderate the direct relationships between ethics training and ethical climate, the introduction of perceived regulatory pressure as moderator showed various effects on the direct relationships; four significant results, all of which did not lead to a supported hypothesis as the relationships worked differently than hypothesized. More research is needed into this concept to better understand how this to research relatively new concept works.

Keywords: ethics training, ethical climate, ethical leadership, transformational leadership, transactional leadership, passive leadership, regulatory pressure

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Master Thesis D. Kramer 2 2. Introduction

2.1 General

Increasingly, ethics and ethical climate are important concepts for businesses. As Martin and Cullen (2006, p. 175) state “More than ever before, firms must provide evidence of their adherence to ethical principles and guidelines.”

Especially since the 2008 financial crisis, this seems to apply even more so to companies active in the finance sector. For instance, huge bonuses earned by bankers, leading to what is re-ferred to as “perverse incentives” to make money in any way possible, have been a topic of heated debate. Various stakeholders criticize companies in the financial sector on the perceived quality of their ethical climate, some directly linked to the company, such as employees or shareholders, but also stakeholders with no direct link to these companies, such as politicians and journalists.

Companies maintain different approaches to this push on ethical climate. Some have the point of view that whatever is legally allowed is the boundary for what they feel is allowed, a point of view that could be regarded as in line with Adam Smith’s theory of egoism, the core of which means that an action is morally right if the decision-maker freely decides in order to pursue either their (short-term) desires or their (long-term) interests (Crane and Matten, 2010).

Other companies do see the importance of doing their business in a more publicly accepted ethical way and wish to stimulate the formation of an ethical climate that will withstand the scrutiny of regulators, media and the general public. But how to do that? Can ethics be trained and if so, does it influence the ethical climate in a company? What is the role of leadership style on the relationship between ethics training and ethical climate? Does the extent to which employees be-lieve ethical standards are only implemented in their organization because of external pressures by regulators influence the relationship between ethics training and ethical climate?

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Master Thesis D. Kramer 3

These are essentially the questions which are the core of this thesis. From a research point of view, the theoretical gap which has been identified can mainly be found in the use of Ethical Cli-mate Questionnaire as the scale for the dependent variable, the study into the moderating effects of the aforementioned leadership styles on the relationship between ethics training and ethical climate, and most importantly, the study into the moderating effect of regulatory pressure on this relation-ship. The latter is described as the most important one as this is a very new construct, which has not been researched in relation to any of the other variables. Moderating effects are hypothesized based on the case at hand combined with existing literature which has shown that the effectiveness of training can depend on external factors (e.g. Treviño et al., 1999).

In this section, more information will be provided on why these questions are considered to be interesting and why answering them could be a relevant addition to literature and practice. First, in section 2.2, the sector in which the research is being conducted shall be elaborated on, explaining why the aforementioned questions are considered important. Subsequently, in section 2.3, ethics in the industry shall explicitly be focused upon, after which in section 2.4 the questions and consid-erations discussed shall be converted to a formal research question and research model.

2.2 Industry

A specific part of the financial sector is the financial services sector. The term financial ser-vices is used in many different ways. In the context of this thesis, it should be read as referring to lawyers, notaries, tax lawyers, accountants, and so-called trust companies or corporate service pro-viders. While for most of the aforementioned company types it will be relatively clear what their activities are, the nature of the business of corporate service providers may require some elabora-tion.

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Corporate service providers are companies that provide various services to entities which are usually part of a greater international structure. For various reasons, they wish to set up an entity in a certain country, but the size of their activities in that country does not support maintaining a full-fledged office. This is where the corporate service providers come in. Various services are outsourced to a corporate service provider, more specifically management, providing an office ad-dress, (tax) accounting and company secretarial services, i.e. ensuring compliance to all legal re-quirements.

Part of the companies which make use of the services of corporate service providers have the entity being serviced in place for tax planning purposes. This means that for the corporate industry to work in a certain country, that country must have an internationally oriented fiscal climate and an extensive tax treaty network. Other factors such as education level of the population, language skills and general infrastructure are important as well, especially because entities serviced by cor-porate service providers are also set up for other reasons than tax, for instance in case of companies setting up local headquarters on another continent.

The tax planning element which is part of the business model of corporate service providers means they are subjected frequently to criticism in respect of their ethical standards and behaviour, which makes the sector particularly interesting for research into ethical climate.

In the context of this thesis, the aforementioned companies active in financial services, i.e. lawyers, notaries, tax lawyers, accountants and corporate service providers, shall be referred to as

financial service providers.

2.3 Ethics in tax structuring

So what is the importance of ethics for financial service providers? Ethical behaviour has become an increasingly important topic for these companies over the last decades. All financial

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service providers have ethical obligations, either derived from law, regulatory requirements or in-dustry organization rules and regulations such as a quality seal.

All financial service providers are governed by the Dutch civil code and various additional legislation, such as the Act to prevent money laundering and terrorism funding (Wet ter voorkoming

van witwassen en financieren van terrorisme). Notaries are specifically governed by the Act on the

Notarial Profession (Wet op het Notarisambt). Corporate service providers became regulated in 2004 by the introduction of the Act on the Supervision of Trust Offices (Wet Toezicht

Trustkan-toren).

In addition, there has been increasing attention to the sector by politicians, media and the general public. The way tax planning is done is quite technical and sparks some “gut feeling” re-sponses, often depending on people’s political preferences and understanding of the level of legal-ity of the business (while legallegal-ity is an absolute prerequisite for financial service providers).

Over the last years, all regulations have increasingly become stricter, and ethical behaviour has come into play more and more. Where in the past essentially the only criterion was whether or not a tax planning structure was legal, nowadays financial service providers must answer the ques-tion of whether or not the structures they are advising or are otherwise involved in are ethical.

Another important factor seems to be more awareness amongst financial service providers that ethics are an important factor to take into account. While some financial service providers might still adhere to considerations in line with Adam Smith’s egoism theory, e.g. “as long as it is legal I can do it”, most financial service providers have realized that some business, although legal, should not be done because of ethical reasons and develop internal limitations on their activities, essentially guided by ethical boundaries.

Dutch industry organizations such as The Netherlands Bar (lawyers) The Dutch Association of Tax Advisers (tax lawyers), the Royal Dutch Association of Civil-law Notaries (notaries) and

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Holland Quaestor (corporate service providers) are also very much interested in increasing positive ethical behaviour and a positive ethical climate within their respective industries. The research to be done in the context of this thesis is being executed amongst current members of the above in-dustry organizations and has been developed together with, and is especially supported by, the industry organization of corporate service providers; Holland Quaestor.

2.4 Research question and research model

All industry organizations as mentioned in the previous paragraph require their members’ staff to pay attention to ethics and have requirements in terms of training in respect of ethics. Most develop internal ethics codes which their employees are expected to adhere to. The question could be raised to which extent ethics training and ethics codes are actually effective; does a relationship in fact exist between ethics training and ethics codes on the one hand and the ethical climate in an organization on the other hand? And why is this question even important?

To start with the latter question, the importance of a positive ethical climate has been ascer-tain in various studies. For instance, in relation to sales ethics, Ingram et al. (2007) found that there were commercial benefits in cases that sales ethics were high. Demirtas & Akdogan (2015) note the importance of corporate social responsibility and corporate image for organizational outcomes.

Having established the importance of ethical climate in companies, the question can be raised what creates and increases it. This is where ethical training comes in. For instance, Delaney and Sockell (1992) found results which suggested that training indeed had a positive effect on ethical behaviour. Also, Weber (2015) found some effective aspects of ethics training. Treviño et al. (1999) noted that the extent of success of ethics training largely depended on who gave the training, whereby training by leaders was deemed most effective.

Valentine and Fleishman (2004) found significant statistical support for the notion that busi-nesspersons employed in organizations that have formalized ethics training programs had more

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positive perceptions of their companies' ethical context than do individuals employed in organiza-tions that do not. Finally, Valentine (2009) studied the relationship between ethics training and employee satisfaction as mediated by ethical context and indeed found such mediating relation, based on the number of hours of ethics training they had received in the year leading up to the research.

Furthermore, the question can be raised if the relationship between ethics training and ethical climate impacted by other factors, such as leadership style and the extent employees of financial service providers feel their employers are forced to uphold ethical standards, for instance by regu-lators or the industry organizations, rather than believing in these standards themselves?

Leadership style was chosen as it has indeed been linked to ethical climate, e.g. Sagnac (2010), who found several significant effects in the direct relationship between transformational leadership and ethical climate. In addition, Demirtas & Akdogan (2015) found an indirect effect of ethical leadership on ethical climate, which led to greater affective organizational commitment and less turnover intention.

Regulatory pressure, on the other hand, has not yet been researched explicitly in relation to ethics training or ethical climate. There is some support for assumption of a relationship between regulatory pressure and ethics in general, e.g. Treviño et al. (1999) who found that employees sometimes view ethics/compliance programs as mere window dressing, implemented to respond to external pressure while leaving decision processes unchanged. A question raised in the context of this thesis is whether or not this perceived window dressing if it exists impacts the relationship between ethics training and ethical climate, in the sense that if staff following ethics training believe they only need to do the training because an external regulator demands it, will they still take it seriously?

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Master Thesis D. Kramer 8 2.4.1 Research question

The aforementioned general questions have led to the following research question, which is the basis of the research that has been conducted in the context of this thesis: “What is the relation-ship between ethics training on ethical climate, to which extent is the relationrelation-ship between ethics training on ethical climate moderated by transformational, transactional leadership, passive and ethical leadership, and to which extent does the perceived level of regulatory pressure on ethics moderate the relationship between ethics training and ethical climate?”

2.4.2 Research model

Figure 1 shows the research model which can be derived from the research question as de-scribed in the previous paragraph. The details as mentioned under ethics training and ethical cli-mate are specific elements of these variables which will be included in the analysis. These elements are explained in more detail in the literature study as included in section 3. of this thesis.

Ethics Training:

- Existence of ethics code - Existence of ethics training program

- Number of hours of ethics training followed

Ethical climate:

- Caring - Law & Code - Rules - Instrumental - Independence Leadership style: - Transformational Leadership - Transactional Leadership - Passive Leadership - Ethical Leadership Regulatory pressure Moderator Moderator

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Master Thesis D. Kramer 9 2.5 Set-up of thesis

In this introduction, the scope of the research as well as the sector in which the research has been conducted was described. The research question was formulated and the research model dis-played. It goes without saying that the research has been based on extensive theoretical research into all variables which have bene included in the research model. In the next section, this literature review is included. Subsequently, in section 4, data and methodology are elaborated upon. The results of the research will be discussed in detail in section 5, after which section 6 shall contain a discussion regarding the results. Section 7 will be the conclusion of the research.

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Master Thesis D. Kramer 10 3. Literature review

3.1 General

In this section an analysis will be provided of literature related to the research question as formulated and described in section 2.4. Each specific variable of the research model shall be fo-cused on separately. First, in section 3.2, literature related to the dependent variable, i.e. ethical climate, shall be discussed. Subsequently, section 3.3 will contain a literature analysis in respect of the independent variable, ethics training. Section 3.4 will ty the two together and translate the the-ory to concrete hypotheses. Section 3.5 will then discuss literature related to the moderators, i.e. each of the leadership styles transformational leadership, transactional leadership, passive leader-ship and ethical leaderleader-ship, as well as very briefly (as this is a very new concept for which hardly any literature exists) the separate moderator regulatory pressure. For each of the variables, hypoth-eses shall be defined.

3.2 The dependent variable: ethical climate

As mentioned in the introduction, ethical climate in organizations is receiving increasing attention. But what exactly is ethical climate, how is it defined? And what makes it important? This section provides a brief overview of the concept of ethical climate and some of its definitions. To be able to do that, we first need to analyse the broader concept of organizational climate.

The concept of organizational climate has been researched extensively during the second half of the 20th_{century and beyond. Schneider (1975) has found that organizational climate may be a} significant factor in shaping the behaviour of employees. Various studies (e.g. Fleishman, 1953; White and Lippitt, 1968) have shown the relationship between climate and behaviour.

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Victor and Cullen (1987) have found proof for the existence of an ethical climate in organi-zations. They define this ethical climate as “the shared perception of what is ethically correct and how ethical issues should be handled” (Victor and Cullen, 1987, pp. 51-52).

Wimbush and Shepard (1994, p. 645) found that “evidence currently suggests that, among other variables, employees' ethical behavior is influenced greatly by their perceptions of organiza-tional policies and practices, which constitute ethical climate.” Deshpande (1996) found that a ma-jority of the respondents perceived successful managers as ethical, although this study was con-ducted in a non-profit organization, which may cause different result compared to profit organiza-tions, due to the type of staff attracted to and selected by the non-profit type. Martin and Cullen (2006) noted that ethical climate is conceptually a type of organizational work climate.

In their meta-analysis on ethical climate theory, Martin and Cullen (2006, p. 14) note: “the effects obtained for the relationships between the instrumental, caring, independence, law and code, and rules climates and the organizational outcomes imply that these climates have important con-sequences for how people respond to their perceived ethical environments in terms of organiza-tional commitment, job satisfaction, psychological well-being, and dysfuncorganiza-tional behavior.”

The five elements referred to by Martin and Cullen (2006) are derived from the study exe-cuted by Victor and Cullen (1988) which led to the so-called Ethical Climate Questionnaire, a survey which has also been used in the context of this thesis as the basis for research into ethical climate (see section 4.5). Victor and Cullen (1988) used a two-dimensional typology of ethical climate whereby they included the ethical criteria used for organizational decision making as the first dimension and the locus of analysis used as a referent in ethical decisions as the second di-mension. This led to the matrix as depicted in Figure 2. These nine items were reduced to five using factor analysis, more specifically the ones mentioned before by Martin and Cullen (2006), i.e. car-ing, law and code, rules, instrumental and independence, as depicted in Figure 3.

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Figure 2. Ethical Climate Matrix by Victor & Cullen (1988)

Figure 3. Ethical Climate Matrix by Martin & Cullen (2006)

Before being able to understand these five elements better, it is important to also understand the sub-scales of the ethical theory, i.e. egoism, benevolence and principle for the ethical criterion element and individual, local and cosmopolitan for the locus of analysis element.

As the term may imply, egoism applies to behavior which has self-interest at its core, which is generally regarded as a “negative” ethical climate element. Benevolence and principle (the latter in other studies referred to as deontology) are concerned with the well-being of others; the former based on the principle that decisions and actions should have the best outcome for largest number of people, the latter by introducing rules and procedures which aim for the greater good.

As for the horizontal scale, the locus of analysis, this determines whether ethical considera-tion takes place on an individual level, within the organizaconsidera-tion (local) and external, in the context of the organization (cosmopolitan).

Having explained the various elements of the horizontal and vertical axis, it is now possible to briefly describe the five ethical climate elements as described:

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• Caring. A benevolent climate with individual and local locus, a caring climate means that decisions are made with the well-being of others in mind. Various studies (e.g. Cullen et al., 2003) have shown this to be the ethical climate type most preferred by employees.

• Law & Code. Found at the intersection of principle and cosmopolitan, a law & code climate strongly depends on an external code, such as a professional (i.e. external) code of conduct. • Rules. Containing the elements principle and local, the rules climate depends on strict internal

rules and procedures and can be seen as the organizational counterpart of the contextual ele-ment law & code.

• Instrumental. An egotistical climate with individual and local locus which can be seen as the opposite of the caring climate. In an instrumental ethical climate, the egoistic perspective is core when it comes to ethical decision making. Self-interest guides behavior above all else. Given this description, it may not be a surprise that instrumental ethical climates have gen-erally been shown to be the least preferred (e.g. Cullen et al., 2003) and is therefore regarded as a negative ethical climate element.

• Independence. Found at the intersection of principle and individual, in an independent ethical climate, ethical decisions are being made on the basis of employees’ own moral convictions, with minimal regard for external forces and outside influence on ethical quandaries, thereby conflicting with especially the element law & code, but also with the element rules.

In conclusion, in line with the theory as presented, ethical climate, defined as “the shared perception of what is ethically correct and how ethical issues should be handled” (Victor and Cul-len, 1987, pp. 51-52), has been split into five separate elements, four of which can be considered positive and one negative, which in the context of this thesis shall be studied as a dependent variable whereby each of the above-mentioned five elements shall qualify as a specific dependent (sub)var-iable.

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Master Thesis D. Kramer 14 3.3 The independent variable: ethics training

Training programs focusing on ethics have been around for quite some time, and considera-ble research has been done into its effectiveness in general, with varying results. Levin (1989) concluded in respect of ethics training in business schools that they are “useless”, while Delaney and Sockell (1992) found in their study into potential effectiveness of firms' ethics training pro-grams results which suggested that training has a positive effect. More recently, Weber (2015) found some effective aspects of ethics training, but also a number of issues, i.e. “[1] the need for expanding ethics training up, down, and outside of the organization; [2] the current reliance on short, infrequent, or at orientation training sessions are likely ineffective; [3] the emergence of online or technology-enhanced training and the use of the lecture method without other, education-ally proven techniques are suspect; [4] the minimal assessment of the ethics training using weak tools or metrics, if assessment is conducted at all, renders the training questionable; and [5] a new employee demographic that will further challenge the impact of ethics training as an effective means in promoting ethical behavior or deterring unethical behaviour” Weber (2015, p. 39).

More generally speaking, Arthur and Bennett (2003, p. 234) found in their meta-study into effectiveness of training in organizations that “the training method used, the skill or task charac-teristic trained, and the choice of training evaluation criteria are related to the observed effective-ness of training programs”. Treviño et al. (1999) note that the extent of success of ethics training largely depends on who gives the training, whereby training by leaders is deemed most effective if they in fact believe in the training themselves. Training by external consultants, however, is deemed less effective.

Valentine and Fleishman (2004) did a more specific study related to the impact of the exist-ence of internal ethics codes as well as ethics training on organizational climate. The authors note

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that ethical culture provides a mere roadmap for individual conduct at work. This normative guid-ance must be implemented using programs and policies. Often, this is done by implementation of an ethics code and by providing ethics training. It is explicitly noted, though, that having an ethics code and providing ethics training by itself is insufficient, they must be supported by other measures. In that respect, Valentine and Barnett (2002) hypothesized and found that ethics code and training improve employee conduct by improving the company’s ethical climate.

In the aforementioned research, Valentine and Fleishman (2004) found that “the results of the analysis provide significant statistical support for the notion that businesspersons employed in organizations that have formalized ethics training programs have more positive perceptions of their companies' ethical context than do individuals employed in organizations that do not” Valentine and Fleishman (2004, p.381).

Valentine (2009) studied the relationship between ethics training and employee satisfaction as mediated by ethical context. The latter concept is “the cultural environment existing within an organization that establishes a strong position on various ethical issues and problems” Valentine (2009, p. 227). The author notes that ethics training can be used to increase the perception of em-ployees of ethical context through effective socialization, increased understanding of ethical issues as well as consensus on how to deal with ethical problems. The aforementioned hypothesized me-diating relationship was indeed found, the results showed that hours of ethics training indeed asso-ciated with increased perceptions among sales and marketing professionals that a company was ethical. The author noted that “organizational leaders sales and marketing professions should con-sider using ethics training to institutionalize an ethical environment in organizations, as well as involving sales managers and other professionals in this” Valentine (2009, p. 227).

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Master Thesis D. Kramer 16 3.4 Hypotheses direct relationships

In sections 3.2 and 3.3 theory has been described explaining the concept of ethical climate as developed primarily by Victor and Cullen (1988) and Martin and Cullen (2006). Current re-search had found relationships between ethical training and organizational or ethical climate (Valentine and Fleishman, 2004, Valentine and Barnett, 2002, Valentine, 2009), albeit not explic-itly in relation to the ethical climate construct as developed by Victor and Cullen (1988) and Mar-tin and Cullen (2006). However, these findings merit the hypothesis that ethics training, and more particularly (i) the existence of a formalized ethics training program (Valentine and Fleishman, 2004), (ii) the existence of a formalized ethics code and (iii) the number of hours of training fol-lowed (Valentine, 2009), is likely to have an effect on the organization in general and the ethical climate in particular. Furthermore, it is important to understand this effect as having a good ethi-cal climate is important for organizations.

Finally, as the ethical climate theory of Victor and Cullen (1988) and Martin and Cullen (2006) is being used as dependent variable, the elements of ethics training as mentioned above shall be measured per element of ethical climate, i.e. caring, law & code, rules, instrumental and inde-pendence. This analysis shall be based on the assumption that companies will want to educate their staff in the positive elements of ethical climate, improving the positive elements and reducing the negative ones.

Taking this into account, for the generally regarded positive elements of ethical climate which are based on benevolence and principle/deontology, i.e. caring, law & code, rules and inde-pendence, it can be hypothesized that increased training effort will also increase the level of these elements. For the negatively regarded element instrumental, the existence of a training program, ethics code and more hours of training would be expected to decrease the level of ethical climate / instrumental. This leads to the first three hypotheses:

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Master Thesis D. Kramer 17 H1. The existence of a formalized ethics code is:

a. positively related to the level of the caring element of the ethical climate in com-panies;

b. positively related to the level of the law & code element of the ethical climate in companies;

c. positively related to the level of the rules element of the ethical climate in com-panies;

d. negatively related to the level of the instrumental element of the ethical climate in companies;

e. positively related to the level of the independence element of the ethical climate in companies.

H2. The existence of a formalized ethics training program is:

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Master Thesis D. Kramer 18 H3. The number of hours of ethics training followed is:

3.5 Moderators

After having formed the hypotheses regarding the direct relationships, the moderation effects can be studied more closely. The research model and question as included in section 2.4 contains two moderators, i.e. leadership style and perceived regulatory pressure, which shall be further an-alysed in this section.

3.5.1 Leadership style

First and foremost, the question can be raised: what is leadership? Many pages have been written attempting to answer this question and the ramifications of the answers to the question. Jago (1982, p. 315) described leadership as follows: “Leadership is both a process and a property. The process of leadership is the use of noncoercive influence to direct and coordinate the activities

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if the members of an organized group toward the accomplishment of group objectives. As a prop-erty, leadership is the set of qualities or characteristics attributed to those who are perceived to successfully employ such influence.”

Looking more directly to the link between leadership style and ethical climate, several re-searchers have concluded that the way leaders behave is related to the ethical climate in the organ-ization (e.g. Brown and Treviño, 2006, Dickson et al., 2001 and more recently Demirtas and Ak-dogan, 2015). In addition, James (2000) noted that leadership in a company shows the leaders’ commitment to ethical principles through their influence on the corporate culture in that company. Furthermore, influence of leaders on training has also been identified, for instance by Treviño et al. (1999) who noted that the extent of success of ethics training largely depends on who gives the training, whereby training by leaders is deemed most effective if they in fact believe in the training themselves. This makes clear that the effectiveness of training depends on external factors, and more in particular raised the question whether or not the relationship between the two elements is influenced by leadership style. This is the main reason for introduction of this variable as a mod-erator in this research.

In the research conducted in the context of this thesis it has been investigated whether lead-ership style moderates the relationship between ethics training and perceived ethical climate, fo-cusing on four very distinct leadership styles, i.e. transformational, transactional, passive and eth-ical leadership. The first three of these leadership styles jointly constitute the so-called full range model of leader behaviour as developed by Bass and his colleagues (e.g. Bass, 1998, Avolio et al., 1999, Bass & Riggio, 2006), although the term used for passive leadership in that case is laissez-faire leadership. The model was operationalized by the authors through the Multifactor Leadership Questionnaire which measures the three aforementioned leadership styles.

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The fact that these three leadership styles are part of the same construct (although the com-pleteness of the construct is challenged by some authors, e.g. Yukl, 1999) made it logical to test all three elements as moderators. In addition, the first two mentioned leadership styles, i.e. transfor-mational and transactional leadership, are two of the main leadership styles researched and are very distinct, in fact were at some time regarded as existing on opposite ends of the spectrum. Using these two very different and extensively research styles is interesting to see what the difference in leadership style does for any moderation effect found.

Within the theory, passive leadership is regarded as contrasting to transformational and actional leadership (e.g. Bogler, 2013). While different from each other, transformational and trans-actional leadership styles require active leadership. It also seemed interesting to see what the effect of an inactive leader would be in contrast with these more active leadership styles.

Finally, ethical leadership could not be disregarded in a study where both the dependent and the independent variable contain ethical elements. If moderation by leadership style makes the positive relationship between ethics training and ethical climate stronger, would ethical leadership not be the most likely leadership style to accomplish this?

In the next sections, these specific leadership styles shall be briefly analysed, containing a summary of theory, and indicating why a moderation effect is hypothesized.

3.5.1.1 Transformational leadership

Transformational leadership as a concept was initially developed by Downton (1968), re-ferring to the concept as “transforming leadership” and was subsequently developed by Burns (1978). However, Bass (1985) was arguably the main person to further develop the concept of transformational leadership and in fact was the one who replaced the term “transforming” by “transformational” (Bass, 1985). He furthermore developed the fundamental mechanisms which

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form transformational leadership (primarily: Bass, 1985) which has since then been developed into what is generally considered to bethe four dimensions of transformational leadership, i.e. idealized influence, inspirational motivation, individualized consideration and intellectual stimulation. Bass also opposed Burns’ aforementioned theory that transformational and transactional leadership are situated at opposite ends of one single continuum and argued that the two leadership styles are in fact separate concepts. Building on this, Judge and Piccolo (2004) noted that the best leaders com-bine both transformational and transactional elements in their style of leadership.

The four dimensions of transformational leadership can be summarized as follows:

• Idealized influence: Charismatic leaders provide vision and a sense of mission, instils pride, gain respect and trust, and increase optimism (Bass, 1985). Judge and Piccolo (2004, p. 755) describe idealized influence as “the degree to which the leader behaves in admirable ways that cause followers to identify with the leader, and note that charismatic leaders display conviction, take stands, and appeal to followers on an emotional level. In summary, the leader is considered a visionary role model, followers feel proud to be associated with them.”

• Inspirational Motivation: According to Den Hartog and Koopman (2001), inspirational motivation describes leaders’ capacity to act as a role model for subordinates, the com-munication of a vision and the use of symbols to focus efforts. Judge and Piccolo (2004, p. 755) describe inspirational motivation as “the degree to which the leader articulates a vision that is appealing and inspiring to followers.” They note that leaders with high levels of inspirational motivation “challenge followers with high standards, communi-cate optimism about future goal attainment, and provide meaning for the task at hand.” Judge and Piccolo (2004, p. 755)

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In summary, the leader is an inspirational leader with a clear vision. Idealized influence and inspirational motivation are often grouped together as charisma (Bass and Riggio, 2006).

• Individualized consideration: This element can be summarized as mentoring and coach-ing. Individualized consideration means giving continuous feedback linking the needs of individuals to the organization’s mission (Bass, 1985). Individualized consideration is also regarded as “the degree to which the leader attends to each follower’s needs, acts as a mentor or coach to the follower, and listens to the follower’s concerns and needs. In summary, the leader tries to develop followers as a mentor or coach and takes their opin-ions and needs seriously” (Judge and Piccolo, 2004, p. 755).

• Intellectual stimulation: a leader who is intellectually stimulating provides subordinates with challenging new ideas to stimulate rethinking of existing ways (Bass, 1985; Bass and Avolio, 1990). The concept is described by Judge and Piccolo (2004) as the degree to which the leader challenges assumptions, takes risks, and solicits followers’ ideas. The leader challenges existing patterns, stimulates creativity and ensures that followers are actively involved.

Transformational leadership has been found to be a moderator in many cases (e.g. Shin and Zhou, 2007; Green et al., 2013; Janssen et al., 2008), but no research has been found where the moderating role of transformational leadership on ethical climate was explicitly researched. Sagnac (2010) did research on the direct relationship between transformational leadership and ethical cli-mate and found several significant effects, which gives rise to the belief that transformational lead-ership can indeed influence ethical climate in certain situations.

Generally speaking, it is easy to imagine that a transformational leader who is very supportive of the training effort of an employee and of ethics in general shall likely stimulate that employee

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to put the training in practice, thereby improving the ethical climate in the organization. A trans-formational leader would, in line with the inspirational motivation element of transtrans-formational leadership, be expected to be a good role model for adherence to ethics codes and participation in ethics training and would also be expected to coach and mentor employees in terms of application of the training and interpretation of ethics code based on the individualized consideration element of transformational leadership.

All in all, a positively moderating influence can be assumed of a transformational leader on training followed and adherence to ethics codes, i.e. for all three independent variables. This posi-tive moderaposi-tive effect works in such a way that for high levels of transformational leadership, the positive relationships between each of the independent variables and the (positively regarded) eth-ical climate elements caring, law & code, rules and independence, would become stronger. The negative relationship between each of the independent variables and the instrumental element of ethical climate would also become stronger, essentially meaning that this negative element would be reduced. This leads to the following three hypotheses:

H4. The relationship between the existence of a formalized ethics code and ethical climate is moderated by transformational leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics code and the caring element of ethical climate will be stronger at high levels of transformational leadership;

b. the positive relationship between the existence of a formalized ethics code and the law & code element of ethical climate will be stronger at high levels of transfor-mational leadership;

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Master Thesis D. Kramer 24 c. the positive relationship between the existence of a formalized ethics code and the rules element of ethical climate will be stronger at high levels of transformational leadership;

d. the negative relationship between the existence of a formalized ethics code and the instrumental element of ethical climate will be stronger at high levels of transfor-mational leadership;

e. the positive relationship between the existence of a formalized ethics code and the independence element of ethical climate will be stronger at high levels of transfor-mational leadership.

H5. The relationship between the existence of a formalized ethics training program and eth-ical climate is moderated by transformational leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics training pro-gram and the caring element of ethical climate will be stronger at high levels of transformational leadership;

b. the positive relationship between the existence of a formalized ethics training pro-gram and the law & code element of ethical climate will be stronger at high levels of transformational leadership;

c. the positive relationship between the existence of a formalized ethics training pro-gram and the rules element of ethical climate will be stronger at high levels of transformational leadership;

d. the negative relationship between the existence of a formalized ethics training pro-gram and the instrumental element of ethical climate will be stronger at high lev-els of transformational leadership;

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Master Thesis D. Kramer 25 e. the positive relationship between the existence of a formalized ethics training

pro-gram and the independence element of ethical climate will be stronger at high levels of transformational leadership.

H6. The relationship between the number of hours of ethics training followed and ethical climate is moderated by transformational leadership in such a way that:

a. the positive relationship between the number of hours of ethics training followed and the caring element of ethical climate will be stronger at high levels of trans-formational leadership;

b. the positive relationship between the number of hours of ethics training followed and the law & code element of ethical climate will be stronger at high levels of transformational leadership;

c. the positive relationship between the number of hours of ethics training followed and the rules element of ethical climate will be stronger at high levels of transfor-mational leadership;

d. the negative relationship between the number of hours of ethics training followed and the instrumental element of ethical climate will be stronger at high levels of transformational leadership;

e. the positive relationship between the number of hours of ethics training followed and the independence element of ethical climate will be stronger at high levels of transformational leadership.

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Master Thesis D. Kramer 26 3.5.1.2 Transactional leadership

Similar to transformational leadership, Bernard Bass was a key author for transactional lead-ership. He notes that this leadership style focuses on the exchanges that occur between leaders and followers (Bass, 1985). In a way, this is a more economical way of looking at the relationship between leaders and their followers, leaders accomplish their goals through the work done by the followers, who in turn are enabled to fulfil their own self-interest. Kuhnert and Lewis (1987) stated this in very simple terms: the transactional leader gives followers something they want in exchange for something the leader wants.

Judge and Piccolo (2004) note three different dimensions of transactional leadership, i.e. contingent reward (the degree to which the leader sets up constructive transactions or exchanges with followers), management by exception-active dimension and management by exception-pas-sive dimension (management by exception in general being the degree to which the leader takes corrective action on the basis of results of leader-follower transactions, whereby “active” leaders take action before problems arise and “passive” leaders take action after the problem has already arisen.

As mentioned in respect of transformational leadership, in the past transformational and transactional leadership styles were regarded as two ends of the same continuum. Nowadays, the two leadership styles are more regarded as existing next to each other. In fact, some authors note that the best leaders both have both transformational and transactional elements in their style of leadership (e.g. Judge and Piccolo, 2004).

Transactional leadership is not very popular as a moderator, however, in this case it is hy-pothesized to have a moderating effect. It can be considered that a transactional leader who engages in an exchange with an employee with the aim to increase the effect of ethics training on the ethical

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climate in companies, for instance by rewarding training put in practice which increases the ethical climate in a company, can positively influence the relationship between ethics training and ethical climate so that it becomes stronger. The same applies to adherence to an ethics code, employees scoring high on ethics code adherence can be rewarded accordingly. Therefore, a positive, rein-forcing influence can be assumed of a transactional leader on training followed and adherence to ethics codes, i.e. for all three independent variables. This positive influence means that for high levels of transactional leadership, the positive relationships between each of the independent vari-ables and the (positively regarded) ethical climate elements caring, law & code, rules and inde-pendence, would become stronger. The negative relationship between each of the independent var-iables and the instrumental element of ethical climate would also become stronger, essentially meaning that this negative element would be reduced. This leads to the following three hypotheses:

H7. The relationship between the existence of a formalized ethics code and ethical climate is moderated by transactional leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics code and the caring element of ethical climate will be stronger at high levels of transactional leadership;

b. the positive relationship between the existence of a formalized ethics code and the law & code element of ethical climate will be stronger at high levels of transac-tional leadership;

c. the positive relationship between the existence of a formalized ethics code and the rules element of ethical climate will be stronger at high levels of transactional leadership;

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Master Thesis D. Kramer 28 d. the negative relationship between the existence of a formalized ethics code and the instrumental element of ethical climate will be stronger at high levels of transac-tional leadership;

e. the positive relationship between the existence of a formalized ethics code and the independence element of ethical climate will be stronger at high levels of transac-tional leadership.

H8. The relationship between the existence of a formalized ethics training program and eth-ical climate is moderated by transactional leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics training pro-gram and the caring element of ethical climate will be stronger at high levels of transactional leadership;

b. the positive relationship between the existence of a formalized ethics training pro-gram and the law & code element of ethical climate will be stronger at high levels of transactional leadership;

c. the positive relationship between the existence of a formalized ethics training pro-gram and the rules element of ethical climate will be stronger at high levels of transactional leadership;

d. the negative relationship between the existence of a formalized ethics training pro-gram and the instrumental element of ethical climate will be stronger at high lev-els of transactional leadership;

e. the positive relationship between the existence of a formalized ethics training pro-gram and the independence element of ethical climate will be stronger at high levels of transactional leadership.

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Master Thesis D. Kramer 29 H9. The relationship between the number of hours of ethics training followed and ethical

climate is moderated by transactional leadership in such a way that:

a. the positive relationship between the number of hours of ethics training followed and the caring element of ethical climate will be stronger at high levels of trans-actional leadership;

b. the positive relationship between the number of hours of ethics training followed and the law & code element of ethical climate will be stronger at high levels of transactional leadership;

c. the positive relationship between the number of hours of ethics training followed and the rules element of ethical climate will be stronger at high levels of transac-tional leadership;

d. the negative relationship between the number of hours of ethics training followed and the instrumental element of ethical climate will be stronger at high levels of transactional leadership;

e. the positive relationship between the number of hours of ethics training followed and the independence element of ethical climate will be stronger at high levels of transactional leadership.

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Master Thesis D. Kramer 30 3.5.1.3 Passive leadership

Passive leadership is described by Bass (1998) as a leadership style that is marked by a gen-eral failure to take responsibility for managing. DeRue et al. (2011) note that passive leadership involves inaction and the absence of leadership behaviour. Yukl (2010) referred to passive leader-ship as “the absence of effective leaderleader-ship’ (Yukl, 2010, p. 279). Based on these statements, the conclusion can be reached that passive leaders do not really lead or motivate followers.

Applying this to the core relationship in the research model, i.e. the relationship between ethics training and the ethical climate in the organization, it is to be expected that a leader can influence the effectiveness of training, by being very supportive, following the training himself, and speaking positively about the training. A passive leader will do none of these things, which may give the employee who is following the training the idea that it is not really important or merely a corporate obligation. This is expected to decrease the enthusiasm of said employee for the training, thereby reducing its effectiveness. In fact, such an employee may feel he has wasted his time following the training.

Passive leadership (or laissez-faire leadership as it is also referred to) has deserved the least attention of the three leadership styles of the full-range leadership theory and is not very popular as a moderator. In this research it is used as such, as contrast against the other leadership styles and based on the idea that a passive leader can negatively influence the relationship between ethics training and ethical climate so that it becomes weaker. The same applies to adherence to an ethics code, passive leaders will not be actively promoting the ethics code. Therefore, a negative influence can be assumed of a passive leader on training followed and adherence to ethics codes, i.e. for all three independent variables.

This negative influence means that for high levels of passive leadership, the positive rela-tionships between each of the independent variables and the positively regarded ethical climate

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elements caring, law & code, rules and independence, would become weaker and may even turn into a negative relationship. The negative relationship between each of the independent variables and the instrumental element of ethical climate would also become weaker or even turn positive, essentially meaning that this negative element would be increased. This leads to the following three hypotheses:

H10. The relationship between the existence of a formalized ethics code and ethical climate is moderated by passive leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics code and the caring element of ethical climate will be weaker or even turn negative at high lev-els of passive leadership;

b. the positive relationship between the existence of a formalized ethics code and the law & code element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

c. the positive relationship between the existence of a formalized ethics code and the rules element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

d. the negative relationship between the existence of a formalized ethics code and the instrumental element of ethical climate will be weaker or even turn positive at high levels of passive leadership;

e. the positive relationship between the existence of a formalized ethics code and the independence element of ethical climate will be weaker or even turn negative at high levels of passive leadership.

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Master Thesis D. Kramer 32 H11. The relationship between the existence of a formalized ethics training program and

eth-ical climate is moderated by passive leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics training pro-gram and the caring element of ethical climate will be weaker or even turn nega-tive at high levels of passive leadership;

b. the positive relationship between the existence of a formalized ethics training pro-gram and the law & code element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

c. the positive relationship between the existence of a formalized ethics training pro-gram and the rules element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

d. the negative relationship between the existence of a formalized ethics training pro-gram and the instrumental element of ethical climate will be weaker or even turn positive at high levels of passive leadership;

e. the positive relationship between the existence of a formalized ethics training pro-gram and the independence element of ethical climate will be weaker or even turn negative at high levels of passive leadership.

H12. The relationship between the number of hours of ethics training followed and ethical

climate is moderated by passive leadership in such a way that:

a. the positive relationship between the number of hours of ethics training followed and the caring element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

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Master Thesis D. Kramer 33 b. the positive relationship between the number of hours of ethics training followed and the law & code element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

c. the positive relationship between the number of hours of ethics training followed and the rules element of ethical climate will be weaker or even turn negative at high levels of passive leadership;

d. the negative relationship between the number of hours of ethics training followed and the instrumental element of ethical climate will be weaker or even turn posi-tive at high levels of passive leadership;

e. the positive relationship between the number of hours of ethics training followed and the independence element of ethical climate will be weaker or even turn neg-ative at high levels of passive leadership.

3.5.1.4 Ethical leadership

Treviño, et al. (2000) note that the two main pillars of ethical leadership are being a moral manager and being a moral person, the former meaning that a manager must be a role model through visible actions, make use of rewards and discipline and communicate in respect of ethics and values, and the latter referring to traits (i.e. personal characteristics), behavior and the decision making process. Ethical leaders are regarded as “fair, principled and balanced decision makers who care about other people and they are also believed to behave ethically both privately and at work” (Brown and Treviño, 2006, p. 597).

Brown et al. (2005, p. 120) define ethical leadership as “the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two-way communication, reinforcement, and decision-making.”

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De Hoogh and Den Hartog (2008, p. 297) note that “ethical leadership is thought to be uniquely important because of the impact leaders may have on the conduct of (others in) the organization and ultimately on organizational performance”.

In line with social learning theory as described by Bandura (1986), ethical leaders contribute to an ethical work environment by modeling and encouraging ethical behavior among their follow-ers. Furthermore, in a study conducted by Philipp and Lopez (2003), ethical leadership was hy-pothesized to be a moderator on the relationship between psychological contracts and certain or-ganizational outcomes. A moderating effect was indeed found.

The above considerations merit the introduction of ethical leadership in the model as a mod-erator of the relationship between ethics training and ethical climate. A leader who is very support-ive of the training effort of an employee and ethics in general and acts ethically himself shall likely stimulate that employee to put the training in practice.

All in all, a positive, reinforcing influence can be assumed of an ethical leader on training followed and adherence to ethics codes, i.e. for all three independent variables. This positive influ-ence means that for high levels of ethical leadership, the positive relationships between each of the independent variables and the positively regarded ethical climate elements caring, law & code, rules and independence, would become stronger. The negative relationship between each of the independent variables and the instrumental element of ethical climate would also become stronger, essentially meaning that this negative element would be reduced. This leads to the following three hypotheses:

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Master Thesis D. Kramer 35 H13. The relationship between the existence of a formalized ethics code and ethical climate

is moderated by ethical leadership in such a way that:

a. the positive relationship between the existence of a formalized ethics code and the caring element of ethical climate will be stronger at high levels of ethical leader-ship;

b. the positive relationship between the existence of a formalized ethics code and the law & code element of ethical climate will be stronger at high levels of ethical leadership;

c. the positive relationship between the existence of a formalized ethics code and the rules element of ethical climate will be stronger at high levels of ethical leadership; d. the negative relationship between the existence of a formalized ethics code and the instrumental element of ethical climate will be stronger at high levels of ethical leadership;

e. the positive relationship between the existence of a formalized ethics code and the independence element of ethical climate will be stronger at high levels of ethical leadership.

climate is moderated by ethical leadership in such a way that:

a. the positive relationship between the number of hours of ethics training followed and the caring element of ethical climate will be stronger at high levels of ethical leadership;

b. the positive relationship between the number of hours of ethics training followed and the law & code element of ethical climate will be stronger at high levels of ethical leadership;

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Master Thesis D. Kramer 36 c. the positive relationship between the number of hours of ethics training followed and the rules element of ethical climate will be stronger at high levels of ethical leadership;

d. the negative relationship between the number of hours of ethics training followed and the instrumental element of ethical climate will be stronger at high levels of ethical leadership;

e. the positive relationship between the number of hours of ethics training followed and the independence element of ethical climate will be stronger at high levels of ethical leadership.