Integrity pays dividends: the case for minding your own business

Integrity pays dividends: the case for minding your own business Timothy Devinney – Professor of Strategy at University of Technology, Sydney The first decade of the 21st century has...

Integrity pays dividends: the case for minding your own business

Timothy Devinney – Professor of Strategy at University of Technology, Sydney

The first decade of the 21st century has heightened interest in the ethical and social positioning of companies.  However, one of the real dilemmas associated with the movement toward more “corporate social responsibility” (CSR) is the lack of any clear definition of what “social responsibility” means.

Even with the movement towards internationally standardised guidelines for CSR, such as ISO-based CSR standards, the reality is that it will be impossible to come up with readily acceptable global standards that are meaningful in anything other than a bureaucratic and regulatory way.

My viewpoint has always been that such attempts will be doomed to fail because they do not address the basic reality that corporations are not purposeful actors, despite the fact that they do engage in what appears to the naive observer to be purposeful organisational actions.

We read in the press about how corporations make this decision, or that decision.  But corporations do not decide. Individuals — either individually or collectively — decide for the corporation.

In my article, “Is the Socially Responsible Corporation a Myth?”, as well as in my book with Pat Auger and Giana Eckert, The Myth of the Ethical Consumer, I argued that what mattered was not corporate social responsibility but “individual social responsibility” (ISR).

That corporations, as a nexus of contracts between individuals within societies, can be socially responsible only in proportion to which the individuals who are party to the corporation − customers, employees, investors, managers, and so on − were themselves socially responsible.  I will admit that, at that time, I did not really have much of a clue as to how this might fit together into a coherent theory — but the logic was simple.  If individuals had a naturally selfish character, all that a corporation could do was exacerbate, mitigate or modify that tendency through  financial and collective incentives.

If the incentives were toxic − as in the case of Enron − you end up with aggregate bad behaviour.  If the incentives were more collective − as in the case of Ray Anderson’s company, Interface − then you end up with a CSR icon.  However, to argue that one group of individuals was more “ethical” or “socially responsible” than the other was an inappropriate way to understand the differences between these companies.  While convenient to believe that managers and employees at Enron were more “evil”, there is no justification for such a belief.

At this year’s Academy of Management Conference, Michael Jensen of Harvard University presented his theory of “integrity” at the Academy of Management Perspectives Symposium.  In listening to what he argued, I realised that he was potentially providing the missing link between ISR and CSR.  Jensen’s idea is not new, but his formulation is simple and operational and has evolved into a very effective set of rules.  It is also powerful in that it is based on no higher moral standard than individuals acting in their own best interest.

Basically, Jensen’s idea is based on the social contract between individuals when they “give their word”.  In this sense, he links individuals in a nexus of formal and informal social contracts that make up the firm.  If these contracts meet the conditions of his rules, he argues that the individual is a person of integrity.  If the individuals in the organisation agree together to abide by the rules, then the organisation possesses integrity.  In reality, no individual is pure and will fail to always behave with integrity.  Hence, no organisation will ever meet the gold standard of integrity.

However, there is value in trying, because organisations that are made up of individuals possessing integrity are more productive and efficient, and individuals possessing more integrity will be more likely to have economic and social opportunities open up to them.

First: when individuals give their word, they intend to keep it.  In essence, Jensen argues that one should not give one’s word unless they have done an analysis that giving one’s word is in there own best interest.  In this sense, integrity is not about “doing good” in some general ethical sense, but in understanding that when you give your word, it influences other people’s actions and you are responsible for keeping your end of the bargain.  However, in his case, keeping your end of the bargain is, ex ante, the best thing for you to do.  In other words, Jensen argues that you need to do a cost-benefit analysis for yourself before giving your word.

Second: if, for any reason, you cannot keep your word when it comes time to execute what you promised, you will work to minimise any effect on the person to whom you gave your word.  In this sense, Jensen is arguing that you must be prepared to ensure that the individual is, ex post, no worse off because of your failure to keep your word.

Third: you must not ever do a cost-benefit analysis associated with keeping your word.  We have been in these situations.  A boss gives his/her promise to do something in the future, but when the time comes it is not in the boss’s best interest to meet the terms of the verbal agreement.  Normally some excuse follows as to why his/her promise is no longer valid, usually prefaced by “this is one of the hardest decisions I have had to make” and followed by a “but there is really nothing more I can do”.  According to Jensen, all integrity disappears when individuals treat their word as subject to period-by-period optimisation.  Once this is done, it never pays for other individuals to believe that you will hold to your word.

Jensen’s notion of integrity is not a complete theory but something of a work in progress.  However, it highlights an interesting way to link the social responsibility of the individual to that of the corporation.  By beginning with what amounts to a “do no harm” to those to whom I give my word, we can quickly see how this implies that an equivalent statement would ultimately hold true for the corporation in relationship to its external stakeholders.

The key to more social responsibility may not lay in more standards and regulations meant to demarcate “good” from “bad” behaviour, but the ability to get more individuals to behave with integrity. This means that when they give their word in their organisational capacity, the stakeholders can believe that that is a bona fide contract to which all parts of the organisation will work to achieve.  While no easy task, if Jensen is right and organisations that possess more integrity will be more efficient, then integrity may represent a more dynamic market-based solution to both improving corporations social responsibility and improving their competitiveness. Rather than wanting to be more socially responsible to avoid the costs of not being seen as socially responsible, managers would become more socially responsible solely because it is a by-product of being more internally and externally efficient.

Reproduced with permission The Conversation