12/23/2010 04:17 pm ET Updated May 25, 2011

Ethical Leadership: An Operating Manual

The demand for ethical leadership is growing, yet the supply remains low, as evidenced by the recent credit crisis that sparked the worst global recession since the 1930s. The rising generation of leaders appears equipped merely to navigate rather than to guide. Navigating describes how we naturally react and adapt to an interconnected world while guiding refers to how we forge a sustainable path and build endeavors of sustainable value in an ethically interdependent world.

Fortunately, prototypes of ethical leaders exist, thanks in part to professor Elie Wiesel, the Nobel Peace Prize winner whose work through the Elie Wiesel Foundation for Humanity has been churning out models of 21st century leadership for more than 20 years. Before I say more about Wiesel's organization, I want to talk about ethical leadership.

In response to the financial crisis, many leaders are rethinking notions about the source of competitive advantage, which increasingly comes from how we behave rather than what we produce. We are rethinking how we lead, by placing less emphasis on carrots and sticks and more on inspiration, and putting humanity at the center of our organizations. These efforts, if they are to succeed, require ethical leadership, which inspires the behaviors in people necessary to create competitive advantage.

Ethical leaders distinguish themselves by doing that which is inconvenient, unpopular, and even temporarily unprofitable in the service of long-term health and value. They view the world as interconnected and develop multidisciplinary solutions to address complex problems that crop up every day. Rather than automatically extending payment terms to a supplier during economic busts, for example, ethical leaders consider the financial stability of the supplier, potential negative impacts to the supplier (as well as to the supplier's employees and its suppliers-and to the company itself) if payment terms are elongated.

Ethical leaders also consider other solutions (e.g., sharing best practices with suppliers) that may require an investment but generate more value over the long term. Ethical leaders extend trust to their workers, creating the conditions necessary to empower employees, suppliers, and even customers to take the risks necessary to create game-changing innovations. The Ritz-Carlton's leadership team allows each employee to spend up to $2,000 to address customer issues at his or her own discretion (an example I will expand upon in my next column). What's more, ethical leadership is a renewable human resource and, for this reason, represents one of the most efficient and practical assets an organization can put to use.

Essay Competition
The hopeful news is that exemplars of ethical leadership exist today. For the past 20 years the Elie Wiesel Foundation has awarded its Prize in Ethics, a competition that rewards college students in the U.S. for viewing human endeavor through an ethical lens. The best of their essays are featured in a new book, "Ethical Compass: Coming of Age in the 21st Century" (Yale University Press).

Wiesel created the contest to connect with people at the most formative time of their lives. My company, LRN, is the foundation's exclusive corporate sponsor of the prize. We joined together because we shared a belief that to solve some of the world's biggest problems, we need to help young people embrace a new perspective for being "other regarding."

The prize is designed to help future leaders develop the skills needed to become great human beings (or guides) and not just "human doings" (or navigators). And the foundation has "quietly operated as an incubator of talent and innovation that would rival Google, Intel and any other Silicon Valley company," New York Times columnist Thomas Friedman notes in the book's foreword. "But unlike the technology icons pumping out next-generation hardware and software, for the past twenty years, Professor Wiesel has been hard at work trying to improve our human operating system by inspiring the next generation of ethical leaders."

Ethical Voices
Here is how the future of ethical leadership looks.

"One should not ask, 'Is this the wrong thing to do?' " writes 1997 Prize in Ethics winner Mark Reed, "but, 'Is it the right thing to do?' " By asking the first question, people immediately turn to policies and rules, and then venture no further. They adhere to the rule, fudge it, or simply ignore it. The second question carries a challenge with the potential to fuel great innovation. If this is not the right thing to do, what other process, product, idea, relationship, or people might we tap to achieve this same objective?

In her effort, 1992 winner Kimlyn Bender examines the metaphorical "masks" we humans use to free ourselves from an innate drive to behave ethically in order to commit immoral acts. "The challenge of ethics today," she writes, "is to focus not on the masks, but on the individuals behind them and to reawaken within the individual a renewed sensitivity to the moral conscience, bringing every area of life and action under its guidance."

Zohar Atkins, who won in 2009, frames our responsibility as global citizens. "We are responsible both for being who we are and becoming who we ought to be," Atkins writes. "Our challenge takes many forms: ... to philosophize, question, and critique, and to act, answer, and take a stand." How do we execute our mission? "The answer is love," Atkins argues. "... for to love is to say: 'I am not the master of the world. I am incomplete, in need of another.' "

We are "in need of another" because our decisions and actions affect so many others in our interconnected world. Hence we need future leaders who are "other regarding," as Wiesel puts it. In his foreword, he asks, "Have we taught [young people] to develop an ethical compass within?"

The 2007 winner, Magogodi Makhene, makes this argument in more compelling terms when she writes, "My humanity is inextricably linked to yours and unless I acknowledge your humanity in defining my own, I will never realize the highest summits of human experience." Makhene was writing about her "tear-gassed childhood" in South Africa during the last throes of apartheid. However, her insights can be applied to the decision-making process nearly every 21st century leader conducts.

No country, company, or individual will scale the summits of human endeavor unless we recognize our inextricable and moral interconnectedness to the rest of humanity and start behaving, and leading, in what Elie Wiesel describes as a "society yearning for guidance and eager to hear ethical voices."

* This story appeared in, and was written for, Bloomberg Businessweek.