Compelling evidence points to a direct link between ethical leadership and higher profits. So states the Center for Ethical Business Cultures (full disclosure: I'm a board member) in its 2001 study, The Ethical Advantage: Why Ethical Leadership Is Good Business. Certainly, ethical leadership offers no protection against a badly flawed corporate strategy. But a fundamentally solid organization stands to gain an ethical advantage by developing three traits.

A Balance of Stakeholder Interests

Enlightened executives recognize that their firm fits into a larger community. Its relationships — with employees, customers, business partners — are intertwined. Doing business in an enlightened social context is both a predictor and a consequence of superior financial performance. A firm generates this virtuous circle when it honors employees, who in turn produce a higher- quality product, which in turn pleases customers so much that they stand on a hilltop to direct others to your door.

Before your executive team votes on a big issue, first mull over its effect on your constituencies. The three-word litmus test — Is it fair? — will expose flawed analysis and produce better decisions.

Leadership Integrity

The tire industry has always been tagged as unprofessional. So when I started Tire Plus Stores (which I sold to Bridgestone/Firestone in 2000), I wanted to set us apart by presenting a cleancut, professional image. Tires Plus Stores were upscale, with cappuccino machines, prints on the walls, TV and movies, toys for kids, and shiny, clean floors for them to play on. Some team members thought we went too far. An internal survey showed that 60 percent of our sales staff hated wearing white shirts and ties. The issue came to a vote at an executive-team meeting. I voted yes. Everyone else voted no. I vetoed the team's decision, one of only a handful of times I overruled everyone.

Enlightened executives must tune out the grumbling. You are a purpose pleaser, not a people pleaser. You need to be less concerned about who is right than what is right. Base your decisions on what's best for all stakeholders. The long-term benefits are worth the price of short-term pain.

A leader's primary role is to ensure that all decisions uphold the company's mission, advance its vision, and express its core values. Set the ethical tone by modeling the West Point cadet prayer:

Make us to choose the harder right
instead of the easier wrong,
and never to be content with a half truth
when the whole can be won.

Process Integrity

Process integrity (or institutional integrity) is a reflection of how deeply a company's ethics are ingrained in its core processes. Every element must be held to the same high standard. And people, as well as processes, must be held accountable for results. In an environment like this, employees feel free, and perhaps obligated, to report individual and organizational breaches of conduct. They follow their scruples, even at the cost of profits.

These principles have guided Reell Precision Manufacturing Corporation, a manufacturer of electromechanical components for more than 30 years. When fears of a recession plunged orders and revenue in 2001, Reell executives asked employees to take a temporary pay cut to avoid layoffs. Workers readily accepted the proposal because the dozen senior execs had already stepped up and slashed 16 percent off their own pay. Reell saved half a million dollars — and dozens of jobs.

That's business as usual for the Vadnais Heights, Minnesota, company, which was awarded the 2002 Minnesota Business Ethics Award. Reell's institutional integrity is strengthened by its teach/equip/trust style of management — as opposed to command/direct/control. The results show up on the assembly line. Workers are typically hired with no particular skills, but they learn every stop on the line, from scheduling and assembly to quality checks and failure analysis. Product is shipped only when the line worker signs off — without inspection other than periodic audits.

The goodwill between Reell's management and labor propels the company's virtuous circle. "Turnover is almost zero," said Reell co-founder Bob Wahlstedt. "The most important reason for enriching the production jobs is to benefit the workers — they're happier and more fulfilled. But from the company's standpoint, encouraging and educating employees to develop mastery in their work, and to take pride in it, makes for a consistently better product." Reell's faith in its people and processes produces stratospheric quality achievements. Of the roughly half a million units Reell shipped annually to Xerox, not one was rejected during a four-year span.

Times of crisis magnify a firm's ethical advantage. When everyone — employees, customers, business partners — categorically trusts a firm, they're more likely to pitch in to help it weather a storm. Six months after Reell's pay cut, the company restored salaries and returned to profitability.