Werner Erhard

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Putting Integrity Into Finance:
A Purely Positive Approach
,
Published in Capitalism and Society,
Volume 12, Issue 1
,
by Columbia University's
Center On Capitalism and Society

 

 


Putting Integrity Into Finance:
A Purely Positive Approach

NBER Working Paper No. 19986

ECGI Working Paper 417/2014

Harvard Law School

 

 

 
 

A PURELY POSITIVE* THEORY OF INTEGRITY

Werner Erhard, Professor Michael Jensen and Steve Zaffron have developed a new model of integrity that links integrity with corporate and personal performance. They address integrity in a developing academic paper, whose primary purpose is to present a positive model of integrity that provides a powerful access to increased performance for individuals, groups, organizations, and societies. (*'Positive' as used here is as it is used in the sciences - it does not mean something good or desirable, it means the way integrity actually is and operates.)

The creation of this model reveals a causal link between integrity and increased performance. Through the work of clarifying and defining what integrity is and it’s causal link to performance, this model provides access to increased performance for private individuals, executives, economists, philosophers, policy makers, leaders, legal and government authorities.

This new model was initially presented at the Gruter Institute Conference on Values in June 2006. Since then it has been presented at the Center for Public Leadership, John F. Kennedy School of Government, Harvard University, Boston, MA, May 10, 2007, Simon School of Business, U. of Rochester; Fisher College of Business, Ohio State University, Columbus, OH, Sept. 2006, Nottingham College of Business, Nottingham, UK, ESADE Business School, Barcelona, Spain; HEC, Paris, France, Nov. 2006, Yale Symposium on Corporate Governance, Inaugural Lecture, (Yale Law School and Yale School of Organization and Management), New Haven, CT, January 2007, Gruter Institute Squaw Valley Conference: Law, Brain and Behavior, May 2007, Harvard Business School Negotiations Organizations and Markets Seminar, Sept. 2007; Yale School of Management, Sept. 2007: MIT Sloan School of Management Leadership Center, Cambridge, MA, Oct. 2007; Harvard Law School, Law, Economics and Organizations Research Seminar, Cambridge, MA, Oct. 2007; USC Marshall School of Business, Finance and Economics Dept. Distinguished Speaker Series, Nov. 2007; LeBow College Corporate Governance Conference, Lebow College of Business at Drexel University, Philadelphia, PA, April 2008; Special Seminar Series, Business Department, Juan Carlos III University, Madrid, Spain, April, 2008; Herbert Simon Lecture, Rajk Laszlo College, Corvinus University of Budapest, Budapest, Hungary, April 21, 2008; Exeter at Said Business School, Oxford, UK, April 24, 2008; University of Rochester Simon School of Business Alumni Seminar, NYC, May 5, 2008; DePaul U. Kellstadt School of Business, Chicago, IL, May 8, 2008; 1st IESE Conference on Humanizing the Firm and the Management Profession, IESE Business School, Barcelona, Spain, July 2, 2008 Stern Stewart International Finance Summit, Cape Town, South Africa, July 31, 2008; Concordia University John Molson School of Business, Montreal, Quebec, CA Sept. 16, 2008; Institute of Corporate Directors Conference on Governance and Financial Markets in North America, Montreal, Quebec, CA, Sept. 19, 2008; Duisenberg School of Finance, Amsterdam, Netherlands, Oct. 14, 2008; Paduano Faculty Research Symposium in Business Ethics, Stern School of Business, New York, Oct. 23, 2008; Olin School of Business Faculty Forum Sponsored by the Center for Research in Economics and Strategy and the Center for the Study of Ethics and Human Values, Washington University, St. Louis, MO, Nov. 6, 2008; Fisher School of Business, Ohio State U., Columbus, OH, Nov. 7, 2008; United States Air Force Academy, Platinum Series, Colorado Springs, CO, Jan. 21, 2009; Texas A&M Distinguished Lecture Series, College Station, TX, Feb. 10, 2009; Social Innovation Research Seminar Series, INSEAD, Fontainebleau, France, March 16, 2009; University of Texas, McCombs School of Business, Nov. 12, 2009; Dale P. Jones Business Ethics Forum, Hankamer School of Business, Baylor University, Nov. 13, 2009; Washington University Olin School of Business, March 26 2010; Wake Forest University, Schools of Business, January 31, 2011.

 

ACADEMIC PAPERS AND PRESENTATIONS:

"Putting Integrity Into Finance: A Purely Positive Approach" by Werner Erhard and Michael C. Jensen Ph.D. published by Columbia University's Center On Capitalism and Society in their Journal: Capitalism and Society, Volume 12, Issue 1.

ABSTRACT: The seemingly never-ending scandals in the world of finance, accompanied by their damaging effects on value and human welfare, make a strong case for an addition to the current paradigm of financial economics. We summarize here our new theory of integrity that reveals integrity as a purely positive phenomenon with no normative aspects whatsoever. Adding integrity as a positive phenomenon to the paradigm of financial economics provides actionable access (rather than mere explanation with no access) to the source of the behavior that has resulted in those damaging effects on value and human welfare, thereby significantly reducing that behavior. More generally we argue that this addition to the paradigm of financial economics will create significant increases in economic efficiency, productivity, and aggregate human welfare. Because integrity has generally been treated as a virtue (a normative phenomenon) the actual cause of the damaging effects of out-of-integrity behavior are hidden, resulting in assigning false causes to those effects. This keeps the actual source of these damaging effects invisible to us. As a result, in spite of all the attempts to police the false causes of these damaging effects, the out-of integrity actions that are the source of these effects continue to be repeated. This new model of integrity makes the actual source of the damage available for all to see, and therefore to act on. Integrity as we define it (or the lack thereof) on the part of individuals or organizations has enormous economic implications for value, productivity, and quality of life. Indeed, integrity is a factor of production as important as labor, capital, and technology. Without a clear, concise, and most importantly, an actionable definition of integrity, economics, finance and management are far less powerful than they can be.

Working papers available at:

National Bureau of Economic Research (NBER), Also Online Appendix

European Corporate Governance Institute (ECGI)

Harvard Law School Forum on Corporate Governance and Financial Regulation

Harvard Business School Working Knowledge

Working Paper Summary, Harvard Business School Working Knowledge: Behavior that lacks integrity leads to value destruction. This paper analyzes some common beliefs, actions, and activities in finance that are inconsistent with being a person or a firm of integrity. Each of these beliefs leads to a system that lacks integrity, i.e., one that is not whole and complete and therefore creates unworkability and destroys value. Focusing on these phenomena from the integrity viewpoint, the authors argue, makes it possible for managers to focus on the value that can be created by putting the system back in integrity and correcting the non-value maximizing equilibrium that exists in capital markets. Overall, this paper summarizes a purely positive theory of integrity that has no normative elements whatsoever ('positive' as used here does not mean something good or desirable, it means the way something actually is), and demonstrates how it applies to both individuals and organizations. 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. Key concepts include:

  • Integrity matters. Not because it is virtuous, but because it creates workability.

  • Workability increases the opportunity for performance, and maximum workability is necessary for realizing maximum value.

  • Integrity thus becomes a necessary (but not sufficient) condition for value maximization-a proposition that should become an important element in every finance course in every business school .... Read the working paper at SSRN

"Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality" - Abridged

"Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality" - Full Paper

The Online Appendix to “Putting Integrity Into Finance: A Purely Positive Approach” rigorously defines and discusses the meaning of one’s word, whether that word be the word of an individual human being or the word of a human entity such as a partnership, corporation or governmental agency.

Michael C. Jensen delivering the Commencement Address - McDonough School of Business, Georgetown University, on Integrity, Authenticity and Being Committed To Something Bigger than Yourself.

Harvard Announces “Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity” - by Michael C. Jensen and Werner Erhard, February 2010

"Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity" - PDF of Keynote Slides

Michael C. Jensen speaking on "Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity" - Presentation delivered at Wake Forest Universtiy, Jan 31, 2011.

"A New Model of Integrity: The Missing Factor of Production", - presented March 26, 2010 at Washington University Olin School of Business

"Integrity: Without it Nothing Works", an interview of Michael Jensen by Karen Christensen on the topic of integrity as published in the Magazine of the Rotman School of Management, pp. 16-20, Fall 2009

"A New Model of Integrity: An Actionable Pathway to Trust, Productivity and Value" - PDF File of Keynote Slides) November 12, 2009

Michael C. Jensen presenting "Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality" - Kellstadt Graduate School of Business, Depaul University Business Conference, May 8, 2008

"Integrity: Where Leadership Begins - A New Model of Integrity" - Presentation at the Center for Public Leadership, Kennedy School of Government, Harvard University, June 18, 2007

Dialogue with Werner H. Erhard and Michael C. Jensen. "Integrity: Where Leadership Begins" - Center for Public Leadership, Kennedy School of Government, Harvard University, May 2007

"Integridad: Un Modelo Positivo Que Incorpora Fenomenos Normativos de Moral, Etica y Legalidad" - Abreviado

"A New Model of Integrity in Corporate Finance" Harvard Prof. Emeritus Michael C. Jensen

"The Hidden Power of Integrity and Access to Vast Increases in Performance" Harvard Prof. Emeritus Michael C. Jensen's presentation given at Entrepreneurship@UBC, University of British Columbia

A New Model of Integrity in Corporate Finance: Harvard Professor Emeritus Michael C. Jensen's presentation given at Kellogg School of Management

A New View of Integrity: A Life-Changing Model; "There is far too much concern today about the conflicts of interest between people; for example, agency theory (the conflicts of interest between agents and owners) -- a favorite topic of Jensen -- and not enough attention paid to the damage caused by an individual's conflict of interest with himself or herself... We argue here that a large amount of the damage inflicted on people and organizations is caused by actions of individuals that are not in their own self interest. That is, people consistently impose costs on themselves, their loved ones, friends, associates, partners, employers and the public by actions that are not in their own self interest. Werner Erhard and Professor Michael C.Jensen

 

RELATED LINKS:

Michael C. Jensen on Integrity - Concordia University, November 2013

Harvard Business School Working Knowledge - Working Papers, April 27, 2012

“Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality” - Citations

Michael Jensen wins 2009 Morgan Stanley-American Finance Association Award for Excellence

"Beyond Coordination and Control Is... Transformation"- EconomicPrinciples.com

Michael Jensen’s and Werner Erhard’s Talk on Integrity - The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Michael C. Jensen - Publications

Legal Ethics and Professional Responsibility - Legal Profession Blog, A Member of the Law Professor Blogs Network, May 2007

Do Markets Need Integrity?- A Publication of the Yale School of Management

Integrity is a Strange Loop - Legal Profession Blog, A Member of the Law Professor Blogs Network, May 2007

Integrity - A Business Conference- Photo Slide Presentation

MIT Sloan School of Management- Spotlight Archives: Leadership

Michael Jensen on Integrity - HEC Paris

Columbia University - Syllabus for Leadership in International and Public Affairs (pdf)

Michael C. Jensen and Steve Zaffron - Video discussion on Integrity at Duisenberg School of Finance

Handbook of Leadership Theory and Practice, - Nitin Nohria and Rakesh Khurana cite Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality

Integrity Paper - discussion at Compliance and Business Ethics for Private Equity Real Estate

Gruter Institute, 2007: Law, Behavior and the Brain

Michael C. Jensen on Integrity as a Competitive Advantage in Business

Ethics, Rebuilding Trust in Finance & Some Lessons from Islamic Finance: Speech at EFICA 2014, Nasser Saidi, Economist and Governenance Reform Advocate - Keynote address at Ethical Finance Innovation Challenges & Awards (EFICA) 2014, organised by ADIB and Thomson Reuters, held on 29 Oct 2014 in Dubai.

How Integrity Can Save Your Company (and the World) - Wall Street Journal

Without Integrity Nothing Works - A Huffington Post article by Tony Smith

Putting Integrity Into Finance: A Purely Positive Approach, EconPapers - Online Economics working papers and journal articles

Putting Integrity Into Finance: A Purely Positive Approach, Ideas - Bibliographic database dedicated to Economics

A Wolf in Sheep's Clothing: The Use of Ethics-Related Terms in 10-K Reports, Time Loughran, Bill McDonald, Hayong Yun; Journal of Business Ethics, May 2009, Volume 89, Issue 1, pp 39-49 - "We examine the occurance of ethics-related terms in 10-K annual reports over 1994-2006 and offer empirical observations on the conceptual framework of Erhard et.al. (Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality - Harvard Business School, 2007)

CEO Pay and Appointments: Putting Integrity Back into Hiring Decisions, Katja Rost, University of Zurich - Institute for Organization and Administrative Science

Curbing Broker-Dealers' Abusive Sales Practices: Does Professor Jensen's Integrity Framework Offer a Better Approach, Barbara Black, University of Cincinnati - College of Law

 

 

 
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