Integrity is more than a virtue

May 10, 2012

The May edition of HBS Working Knowledge features an ambitious research paper by Werner Erhard and Michael C. Jensen entitled Putting Integrity into Finance: A Purely Positive Approach.”  The authors strive at length to define “a purely positive theory of integrity that has no normative elements whatsoever” and to demonstrate how it applies to both individuals and organizations. They draw from behavioral economics and behavioral finance to argue that organizations operate counter to their long-term self interest by systematically engaging in “out-of-integrity” behavior, due in part to the way integrity has been historically (mis)framed.

If integrity is viewed as merely a virtue, the temptation to sacrifice it for short-term gain can be great:

For many people, virtue is valued only to the degree that it engenders the admiration of others, and as such it is easily sacrificed especially when it would not be noticed or can be rationalized. Sacrificing integrity as a virtue seems no different than sacrificing courteousness, or new sinks in the men’s room.

Properly understood, integrity is more than a virtue.  It’s a necessary (though not sufficient – companies also need competitive, organizational, technological and human strategies) condition for value maximization:

In effect, integrity is a factor of production just like knowledge, technology, labor and capital, but it is undistinguished – and its affect (by its presence or absence) is huge. Integrity matters. Not because it is virtuous, but because it creates workability.  And workability increases the opportunity for performance, and maximum workability is necessary for realizing maximum value.

Erhard and Jensen build their case and explain their terms:  personal integrity is (broadly speaking) “honoring one’s word,” while an entity or system has integrity when it is “whole, complete and stable.”  (I.e., its design is capable of producing the intended result, its implementation is faithful to the design, and its use is consistent with the design’s purpose.)  To illustrate what they mean by workability – “the bridge connecting integrity to value creation” – they describe a wheel with missing spokes: “It is not whole, complete and stable. It will become out-of-round, work less well and eventually stop working entirely.”

All this applies to an organization as well as human beings. An organization or system is in integrity when it is whole and complete. This means it honors its word, both to its employees and to its customers, suppliers and other stakeholders. This means nothing is hidden, no deception, no untruths, no violation of contracts or property rights, etc. And if the organization refuses to play by any of the rules of the game it is in, integrity requires it to make this clear to all others and to willingly bear the costs of not playing by one or more of the rules of the game.

This line of thinking resonates with something we argued two years ago in When Business Promotes Honesty.  Quoting sometime guest blogger Will Harrell (founding partner of Capco Asset Management in Tampa), we wrote:

The upside from being perceived as a reliable, consistent, trustworthy, &etc. vendor of certain kinds of goods and services is simply huge. Costco’s CEO has a line I love: “No easy hits on the customer.” Honesty is just a sub-category of this thesis, which in many cases has more to do with product quality or user experience than honesty per se: McDonald’s consistency, the taste of a Hershey bar, etc. It’s also not limited to customers – similar considerations apply to suppliers, capital sources, and employees.

The paper is thought-provoking, as one would expect from these authors.  Our own less scholarly endorsement of the business case for honesty (the moral case is another discussion) rests on the near-universal desire for repeat business.  While a short-term advantage in a single transaction might be gained by jettisoning the “virtue” of integrity, honesty and consistency are critical to success over the long term.  We also put a premium on transparency, as it’s easier to remember the importance of being honest when everyone involved in a business relationship can observe how decisions are being made.

We’ll close with one final thought, one which we made in that same piece two years ago:  there’s a good argument to be made that businessmen are more honest (or less dishonest) in their dealings than preachers, politicians, and professors.  Dwight R. Lee makes the case over at The Independent Review:

Businessmen interested in long-run survival are more honest in their professional dealings than are many other groups in society—not because they are more virtuous, but because they face more effective constraints. Their customers can usually detect and avoid deception more easily than can a politician’s constituents, a professor’s students, and a preacher’s congregants. …It turns out that, because most businesses are profitable only by earning the patronage of returning customers, they have stronger incentives to be truthful than do preachers (“no one can ‘test drive’ a preacher’s most important promise,” Lee observes), politicians (for whom elections are sporadic and often predetermined by gerrymandering and other devices), or professors (whose customers, the students, “often do not care much about the honesty of the professors’ claims”).

 

 

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