Linking ethical leadership and employee performance in the Australian banking industry

In 2017, the Australian federal government announced a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Royal Commission revealed that unethical business practices and leadership were rampant in the industry and thought to be `business as usual' for banks. This discovery sent shock waves through the banking, superannuation and financial services industry, and enraged millions of consumers. Throughout the Royal Commission, many members of the community offered evidence that they had been charged for services they never signed on for; unethical leadership practices within the sector were exposed for the first time.<br><br>As these events unfolded, there was increasing interest among human resource management scholars and practitioners in leaders' ethical behaviour within these organisations. Ethical leadership by top management is critical because unethical leadership has been shown to negatively influence employee attitudes, behaviours, and subsequently, in-role performance. Although studies have demonstrated the relationship between ethical leadership and employee in-role performance, there has been scant research examining the processes through which ethical leadership works to improve employee in-role performance. The research presented in this thesis examines how ethical climate, organisational identification, customer orientation and service climate mediates the relationship between ethical leadership and employee in-role performance.<br><br>The study presented in this thesis consists of two data collection methods: (1) a two-wave survey study of 233 employees in an Australian bank, and (2) use of Qualtrics to collect extra data from 187 employees of a different, but similarly sized bank. Collecting data from two different sources allows testing of causal chain mediation relationships between ethical climate, organisational identification, customer orientation and service climate. The theoretical framework underpinning this research is social learning theory. Further, social exchange theory was used to develop five hypotheses: (1) H1 Ethical leadership positively effects employee in-role performance; (2) H2 Organisational identification mediates the relationship between ethical leadership and employee in-role performance; (3) H3 Customer orientation mediates the relationship between ethical leadership and employee in-role performance; (4) H4 Service climate mediates the relationship between ethical leadership and employee in-role performance; and (5) H5 Ethical climate mediates the relationship between ethical leadership and employee in-role performance. These were tested using the data obtained from the two-wave survey study. The findings indicated support for each of the five hypotheses: ethical leadership significantly predicted employee in-role performance (H1); organisational identification mediated the relationship between ethical leadership and employee in-role performance (H2); customer orientation did not mediate the relationship between ethical leadership and employee in-role performance (H3); service climate mediated the relationship between ethical leadership and employee in-role performance (H4); and ethical climate mediated the relationship between ethical leadership and employee in-role performance (H5). The second dataset was used to retest the five initial hypotheses, and test a new, sixth hypothesis: (H6) ethical climate, organisational identification, customer orientation and service climate sequentially mediate the relationship between ethical leadership and employee in-role performance. Findings from this dataset indicated support for the five original hypotheses, and in the causal chain mediation model for Hypothesis 6.<br><br>This research makes a contribution to the ethical leadership literature by addressing three under-researched areas. First, this thesis contributes to the extant research on ethical leadership theory by unpacking the process through which ethical leadership influences employee performance. By unpacking the boundary factors through which ethical leadership influences employee in-role performance, this research contributes to understanding of the ethical leadership-performance chain as a situational process in which ethical climate, organisational identification, customer orientation and service climate play an important role. Second, this study has attempted to unpack the process through which ethical leadership can influence employee in-role performance through service climate and customer orientation. Third, this research examined ethical leadership in banks.<br><br>The findings of this study have implications for leaders and human resources managers in the banking and finance sector. Most importantly, the findings are expected to assist leaders in developing their skills and knowledge regarding ethical leadership behaviour. In light of the damning findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, banks must invest heavily in management development around ethical leadership and the development of ethical conduct of staff. Based on findings of the Royal Commission, banks must develop and nurture customer orientation in their employees. Banks may need to invest in ethical training and customer service for leaders and employees.