Capstone: trust, ethics and a leadership diagnosis of Cedarline Outdoor

The final session brings the cohort back to Cedarline Outdoor, the outdoor apparel company they have followed through the Lakeshore School of Business weekend executive MBA in Chicago. In earlier courses they diagnosed Cedarline's financial position, with revenue growing from 312 million to 468 million dollars over five years while inventory more than doubled and cash flow collapsed, and analyzed the launch of the Ridgeline insulated jacket. The board has now asked a different question: does Cedarline have the leadership and organization to carry out the turnaround the finance team has recommended? Dr. Sato asks each study group to prepare a leadership diagnosis using the tools of the course, and to finish with a personal leadership development plan of their own.

Trust: the foundation of influence

Before the diagnosis, Dr. Sato returns to a theme that has run through every session: trust. Roger Mayer, James Davis and David Schoorman's 1995 model, one of the most cited in management research, defines trust as the willingness to be vulnerable to another party based on the expectation that they will perform an action important to you, irrespective of your ability to monitor or control them. Trust depends on three perceived qualities of the person trusted. Ability is the competence to deliver in the relevant domain. Benevolence is the extent to which they are believed to want to do good for the trustor, beyond self-interest. Integrity is adherence to principles the trustor finds acceptable, such as honesty and consistency between words and deeds. A meta-analysis by Jason Colquitt, Brent Scott and Jeffery LePine in 2007 confirmed that all three are related to trust and that trust is related to risk-taking, task performance and citizenship behavior.

Trust is built slowly and lost quickly, partly because negative information about integrity is weighted more heavily than positive information. Repair is possible but depends on the type of violation. Research by Peter Kim and colleagues found that for violations seen as failures of competence, an apology with acceptance of responsibility tends to repair trust more effectively than denial, while for violations seen as failures of integrity, an apology can be taken as an admission of bad character, so actions that demonstrate changed behavior matter more than words. For leaders the practical rules are to make commitments carefully, keep them visibly, explain decisions, admit mistakes of competence quickly and treat any question about integrity as the most serious threat to their influence.

Ethical leadership

Michael Brown, Linda Trevino and David Harrison defined ethical leadership as the demonstration of normatively appropriate conduct through personal actions and relationships, and the promotion of such conduct to followers through two-way communication, reinforcement and decision making. The definition has two parts: being a moral person, honest, fair and caring, and being a moral manager, who talks about ethics, sets standards and holds people accountable. Leaders who are moral persons but silent about ethics are often seen as ethically neutral. Meta-analyses find that ethical leadership is associated with followers' trust, satisfaction, organizational citizenship and lower counterproductive behavior.

Ethical failures in organizations rarely start with a decision to do something wrong. They usually begin with goals and pressures that make small compromises seem reasonable. The cases studied across the course illustrate the pattern. Aggressive sales targets at Wells Fargo, combined with intense pressure from managers, led employees to open millions of accounts without customers' authorization over several years, as documented by regulators and in the bank's own board investigation. Research on goal setting, discussed in the session on motivation, predicted exactly this risk: specific, very difficult goals tied to strong rewards and penalties, with weak monitoring of how they are met, encourage cheating. Ann Tenbrunsel and David Messick have described how people engage in ethical fading, framing a decision as a business decision so that its ethical dimensions recede from view. Leaders counter this by naming the ethical dimension explicitly, asking who could be harmed and how the decision would look if fully reported, and making it safe to raise concerns.

The fraud triangle, a framework from criminology and auditing, holds that fraud usually requires pressure, opportunity and rationalization. Leaders influence all three. They create or relieve pressure through targets and how they respond to missed targets. They limit opportunity through controls and segregation of duties. And they shape rationalization through the culture they build: whether people believe that everyone cuts corners, or that the organization will stand behind someone who refuses.

A leadership diagnosis of Cedarline

The study group led by Grace, Hana and Owen gathers data on Cedarline from interviews, the company's most recent engagement survey and its organization charts. Cedarline has about 1,450 employees in six units. The data reveal problems that the financial diagnosis had hinted at. Inventory grew because merchandising planned for growth while supply chain ordered against optimistic forecasts, and the two units barely spoke; each blamed the other when stock piled up. The chief executive has fourteen direct reports, decisions about assortment depth are reopened at every monthly meeting, and the distribution center, where volume has more than doubled, has lost a third of its supervisors in a year.

The group applies the course's frameworks one at a time. The job demands-resources model explains the distribution center: demands doubled while resources fell, with spans of 22 and supervisors leaving faster than they can be replaced; turnover of 38 percent is the health impairment process in action. Expectancy theory explains merchandising: planners were rewarded for revenue growth, not for inventory turns, so effort went where the rewards were. The research on decisions explains the monthly meetings: nobody holds the decision on assortment depth, so it escalates to the chief executive, who has too many direct reports to decide it well. The research on teams and conflict explains the relationship between merchandising and supply chain: process conflict over forecasting has turned into relationship conflict, along a faultline between two units with different leaders, different metrics and different locations. And Schein's culture model explains why the company's stated value of operating as one team has had no effect: what leaders paid attention to and rewarded for five years was top-line growth.

From diagnosis to priorities

A diagnosis is useful only if it leads to a small number of priorities. The group resists the temptation to propose twenty initiatives and recommends five. First, reduce the chief executive's span from fourteen to about eight by grouping merchandising, planning and supply chain under a single chief operating officer responsible for inventory as well as availability, which aligns structure with the financial recommendation to release working capital. Second, clarify decision rights for assortment depth and buy quantities, with merchandising recommending, supply chain and finance required to agree and the chief operating officer deciding, recorded in a decision log. Third, restore resources in the distribution center by hiring and developing supervisors to bring spans down to about twelve, and giving teams more predictable schedules. Fourth, change the measures: planners and buyers share a balanced goal combining sell-through, inventory turns and availability, with a guard metric to discourage under-buying. Fifth, the executive team models the new priorities in what it pays attention to, opening each monthly meeting with inventory and people data, not only sales.

The group is careful to separate this from what belongs to later courses. The design of reward systems, workforce planning and supervisor development programs will be addressed in Strategic Human Resource Management, and the process of leading Cedarline's employees through the reorganization belongs to Leading Change. What this course contributes is the leadership diagnosis: understanding why capable people in Cedarline are producing poor results, and what leaders must do differently.

Your own leadership development plan

The second half of the capstone is personal. Dr. Sato reminds the cohort that leadership development research suggests that people grow most through challenging experiences, reflection and feedback rather than through courses alone. The popular 70-20-10 rule, that roughly 70 percent of development comes from experience, 20 percent from relationships and 10 percent from formal learning, derives from interviews with executives at the Center for Creative Leadership in the 1980s; it is a useful reminder of the importance of experience but not a precise empirical finding. What the evidence does support is that development plans work best when they are specific, built on feedback, linked to real assignments, supported by a coach or mentor and reviewed regularly.

Each participant writes a plan with three development goals drawn from their 360 results and the course, and for each goal identifies a stretch assignment, a person who will give feedback, a measure of progress and a review date. Leo's plan is typical. His first goal is to delegate decisions on client delivery to his new heads, measured by the share of client decisions that reach him, currently about 60 percent, with a target of under 20 percent in six months. His second is to hold monthly development conversations with each direct report, measured by completion and by a pulse question. His third is to improve how he runs leadership meetings, measured by an end-of-meeting rating from participants.

# Leadership development goal tracker: progress toward targets over time
goals = {  # name: (baseline, target, higher_is_better, monthly readings)
    "Client decisions reaching Leo (%)": (60, 20, False, [55, 48, 41, 35]),
    "Development talks held (% of planned)": (0, 100, True, [50, 67, 83, 83]),
    "Meeting rating (1-5)": (2.9, 4.0, True, [3.0, 3.3, 3.2, 3.6]),
}
months_total = 6
for name, (base, target, up, readings) in goals.items():
    latest = readings[-1]
    progress = (latest - base) / (target - base)
    expected = len(readings) / months_total
    status = "on track" if progress >= expected - 0.1 else "behind"
    trend = "".join("+" if b > a else ("-" if b < a else "=")
                    for a, b in zip(readings, readings[1:]))
    print(f"{name:<40} latest {latest:>5}  progress {progress:>5.0%}  "
          f"expected {expected:>4.0%}  {status:<8} trend {trend}")

Client decisions reaching Leo (%)        latest    35  progress   62%  expected  67%  on track trend ---
Development talks held (% of planned)    latest    83  progress   83%  expected  67%  on track trend ++=
Meeting rating (1-5)                     latest   3.6  progress   64%  expected  67%  on track trend +-+

The tracker converts each goal to the share of the distance from baseline to target that has been covered, so that goals measured in different units can be compared, and compares it with the share of time elapsed. After four of six months, Leo has covered about 62 percent of the distance on delegation and 83 percent on development conversations, both on track, while his meeting rating, also close to schedule at about 64 percent, has an uneven trend that rose, dipped and rose again. The tracker cannot tell him why; the conversation with his feedback partner can. Its value lies in making progress visible and prompting the review.

One final caution concerns the diagnosis itself. Leadership diagnoses are vulnerable to the fundamental attribution error, the tendency to explain others' behavior by their character rather than their situation. It would be easy for the board to conclude that Cedarline's merchandising director is reckless or that the distribution supervisors who left lacked commitment. The course's frameworks repeatedly point the other way: capable people respond predictably to the goals, rewards, structures and demands they face. That is good news for leaders, because situations can be changed more quickly than people.