Ethical Leadership and Leader Member Exchange (LMX) Theory
Authors: Babič Šejla 
Published: August 2014

The aim of this paper is to evaluate the contribution that developments in the area of ethical leadership and trust have made to our understanding of effective people management within organisations. This paper is based on a case study from Harvard Business Review (2007) called "IBM - Leading the Turnaround". The author will use Leader Member Exchange (LMX) theory by Graen and Uhl-Bien (1995) and integrate the ideas of ethical leadership to critically evaluate the leadership style of the CEO of IBM Louis V. Gerstner that led to the turnaround of IBM. In particular, the author will focus on the following question: What role did trust play in the leadership style of Gerstner in the transformation of IBM?

When Gerstner became the CEO of IBM in 1993, an $8.1 billion loss on the stock market was announced by IBM; this was one of the largest in U.S. history. Gerstner was facing a difficult job as stock market commentators were rapidly writing off IBM as a 'slow elephant' and, as a result, IBM's workforce was not in any state to accept change. Gerstner's first task was to analyse what was going wrong within IBM, despite having dedicated people, high technological infrastructure, and a sound strategy, he found that IBM was suffering from its own success during the many years of operation. Its own success was its downfall, for it had become slow moving and inward looking.

Organisationally, it had become a decentralised 'kingdom' in which none of the business units communicated with each other. Gerstner realised that, if IBM was to be saved, he had to lead this massive organisation through cultural change. He realised that changing the attitude and behaviour of thousands of people was hard to accomplish, but was the main key to success. Management could not change organisational culture through words and policies alone; leaders such as Gerstner had to create the conditions for transformation and invite employees to respond willingly.

IBM had a tradition of appointing executives from within. Indeed, Gerstner was the first CEO to be hired form outside; this in itself was revolutionary and created widespread internal concern. Before Gerstner arrived, it was accepted that the break-up of IBM was inevitable. The question was only what form this would take. Morale was at rock-bottom, and Gerstner's appointment did nothing to raise spirits. It was assumed he had been brought in to 'wield the hatchet'.

Therefore, it was a real surprise when Gerstner made himself open to input from anyone in the company. It was even more surprising when he announced that IBM's strength lay in its integration and that there would be no break-up. Immediately spirits started to soar. Everyone knew there would be a pain, but now it seemed it would be on a much lower level, and employees were prepared to listen for a change. While it took time to build trust, Gerstner's no-nonsense style created confidence that someone was in charge. His actions were not popular, but they were decisive. It was this that steadily led to a sense of trust; he did what he said he would do, and he proved himself trustworthy.

In the next section, the author will provide a background to leader-member exchange (LMX) theory and relate it to ethical leadership so that we can explore the leadership style of Gerstner during the change at IBM.