Fertile ground for integrity opportunities may surprise

There are loads of integrity opportunities at any company. That’s not because companies have little integrity—in order to sell anything you need some integrity—but because there’s no limit to integrity. One clue to sizeable integrity opportunities is whether a firm has a bit of market power. Firms with market power tend not to work on relationships of trust perhaps because they feel it’s unnecessary to their survival. The trouble is market power can change over time and it may be too late to build vital trust.

Think of a company like Verizon Wireless for a moment. Verizon has invested a great deal in its network but not in its relationship with customers. (The same could be said for Microsoft. Both companies have put a lot into their product but not much into relationships with customers.) What happens is that a company can sense its vulnerability (little customer loyalty to the company. It’s all about the product) but instead of doing positive things to build greater trust they end up making it worse by doing things to trap customers. Think of what’s involved when you sign up with Verizon. (I’m with Verizon and I was lucky that my husband took on the frustrating work of signing up)The different plans are difficult to understand (even the people working in the store admit they don’t understand them!) It takes time and energy to work through and sign up. The rebates they offer require lots of paper work (and hope on the part of Verizon that you can’t be bothered and they won’t have to pay out the money). The rebate is sent in the form of debit cards that are clumsy to use and time consuming if you keep track of your balance. On top of all of that, the monthly statements are difficult to understand and the format keeps changing. All in all, it’s a dreadful customer experience! Why would Verizon customers have any loyalty to the company if someone else came out with a better product?

Yet it doesn’t have to be that way. Verizon has a good product and should be building trust with its customers not only about the product but about the service it delivers and the way it values the entire customer experience. If Verizon started trusting its customers and did valuable things to exhibit that trust, it would be a far stronger business than it is today. Other industries are in similar situations. Think of financial services firms or credit cards. There’s a huge opportunity for companies with market power to build stronger relationships of trust with customers. And there’s nothing to lose except fear. If you have a great product, then trusting customers is only a win/win for everyone.

A barometer of prosperity

The latest survey by Transparency International shows an increase in perceived corruption around the world. Most notably, the survey found that 67 per cent of people surveyed in North America and almost three quarters of Europeans think corruption has increased in the past three years. What’s critical here is the perception of greater corruption. That's because it's probably the most devastating on the economy. Here's what happens when corruption occurs:
1. Economic outcomes are distorted.
2. As corruption is perceived, it changes behavior and creates a self reinforcing cycle of greater corruption. If everyone else is corrupt why should I do the right thing?
3. Finally, valuable bonds of trust that help create efficiency in the economy are broken. If you no longer trust your credit card company, you will spend more time checking through your monthly statements, looking for alternatives, or forgo credit altogether.
It’s no coincidence that a perception of greater corruption goes hand in hand with a decline in prosperity. Long term wealth and widely shared prosperity are created by building relationships of integrity and trust not destroying them.

The Politics of Integrity continued

When I speak to audiences about the economics of integrity, I often get asked about how integrity relates to politics. While I’m not an expert on the political world I do think there are some similarities (and differences) with the way integrity works in the economy. The biggest difference is that in politics there isn’t a direct financial payoff from acting with integrity as there is in the economy. But I do think there is a payoff nonetheless.

If some smart person were able to measure outcomes, I bet they would find integrity in politics builds trust and that leads to greater political power. Of course, other factors can also give individuals enormous power in politics and clearly that’s where it can get tricky. But in a macro sense, I think there is a direct relationship between integrity in politics and good policies that create a well functioning social and economic system.

If politicians tell lies, mislead the public, and further their interest ahead of the people they were elected to represent, then we’ll get a mismatch of policies that are pretty ineffective and perhaps even harmful. But if our political leaders act with integrity, that is, tell the truth, keep their word, and act in the best interests of the public they are serving, we should get policies that are beneficial to the nation.

A casual observer would probably find little reason to distinguish between Republicans and Democrats on integrity. Wouldn’t it be a striking way for either party to differentiate itself by becoming the party of integrity? Acting with integrity builds trust among the public. The more trust political leaders have, the greater their mandate. It seems to me integrity would be a powerful way forward for any political party to take.

The Politics of Integrity

Recently I have caught myself thinking a lot about George Orwell’s satire Animal Farm and his masterpiece Nineteen Eighty-Four. That seems to be especially true in relation to the current debate on Bush’s tax cuts. What I am wondering is why we are debating the tax cuts at all? The cuts were bad when Bush introduced them and they’re bad now. Why can’t we let them expire and introduce a new tax policy that makes sense? Change doesn’t mean keeping the same economic policy of the previous administration. Nor does it mean keeping the same economic stewards (Bernanke and Geithner), or fighting in the same wars, or keeping the same head of defense. And change doesn’t mean replacing our troops with private soldiers in Iraq and calling it a withdrawal. Orwell used terms like ‘newspeak’, ‘oldspeak’ and ‘doublethink’ to describe the craziness he saw in governments in his day. Others called it ‘doublespeak’. We used to call it lies. Now we don’t call it anything.

Safe food has a financial payoff for all.

It’s no coincidence that we’ve been seeing the growth of both the ‘eat locally’ and organic food movements at the same time as shocking lapses in food safety. Who wanted to eat mass produced eggs last summer or feed them to their kids after the horrifying scenes from the henhouses in Iowa? In recent years, Americans have been losing trust in the nation’s food supply and that’s a huge problem. Not just for a population that faces significant health care costs and job insecurity but for the food production industry as well. You’d think that instead of opposing plans to improve food safety, the industry would get on board and find good solutions for all involved. Apparently that hasn’t been the case as Michael Pollan and Eric Shlosser point out in an op-ed in today’s NYT. It reminds me of the way the financial industry opposed financial regulation after the crisis of 2008. When will big business learn that integrity isn’t a cost but an investment?

Fallout from the exploding Rolls Royce engine

Qantas announced yesterday it had checked 16 engines of its A380 fleet and was satisfied the planes were safe to fly. It would begin to bring back the aircraft into service this weekend after having grounded its flagship fleet for 19 days following the Singapore flight safety incident. Pretty quickly into the investigation, the companies involved announced that leaking oil was probably the cause of the engine exploding. So is that it? Crisis over and everyone back to business as usual?
Not so fast. The incident is revealing about the state of the companies involved. Qantas seems to have emerged from the crisis well. CEO Alan Joyce has been adamant about safety first at the expense of losing money and his approach has helped build trust with the public. Rolls Royce is another matter though. Tight lipped and not very communicative to the public, its announcements have served merely to allow doubt to linger about what’s actually going on at the company, especially in light of other high profile engine mishaps. It may be worth watching what happens next at Rolls Royce. My bet is there could be further bumps ahead.

The power behind rules that enable activity

Try this thought experiment. Have you ever tried to stop doing some activity, say cutting down on eating junk or watching television? What happens when you make a rule that you won’t do something? It’s a safe bet that after a while you’re not all that successful and you end up breaking your own rule. That’s the problem with a lot of the rules we have in our social and economic system; even in our own households! We tend to set up systems where the rules tell us what not to do instead of what to do. Admittedly, it’s not always easy to create rules enabling activity when there are certain things that we want to make sure never happen—say murder for instance. Yet in many cases it can be done and simply requires a different way of thinking about the problem. For instance, if I want to cut down on junk food I might make a rule that I eat fruit for every snack or with every meal. Or that I’ll only eat nutritious or organic food. If I’m trying to cut down on television then maybe I’ll make a rule that I read a book a week. Next time you find yourself struggling not to do something, make a rule for doing something positive instead. It really can work to change behavior.

How to make rules that work

Rules are a bit like exercise or a healthy diet. Most of us would prefer to live without yet we know that in the long run we really can’t. Part of what is undermining our confidence in our economic system is that we’re seeing one high profile case after another of rules that have been flaunted or broken. Think of the banks’ failure to follow the rules on foreclosures for instance. One way to restore confidence is to understand what makes rules work and incorporate those insights into the design of our new economic rules.

In that spirit, here are some ideas for what makes a good rule:

1. Must be based on sound principles
2. Should be clear, simple and consistent
3. Works best if it is intuitive
4. Should be designed to be self reinforcing
5. Ideally is enabling of activity not restrictive

Taking Trust to the Next Level

There’s a typical pattern companies tend to fall into when it comes to thinking about trust. A common question asked might be something like this: how do I get customer x to trust me enough to sign the contract?

But that’s where any thought on the matter usually ends. An extremely valuable follow up question should be: how can I get customer x to trust me more?

When a business starts to think about how to build more trust with its customers, it helps make transactions automatic, more frequent and more valuable. Try it!

A final thought on integrity crises:

You’re not done until you’re done! A company in the middle of an integrity crisis must keep going until it makes changes on four fronts:
1. What it does
2. What it says
3. The outcome for those who have been hurt
4. What the public thinks

Another integrity crisis blows up!

It’s hard to imagine a worse integrity problem for an engine maker than having its engine blow up mid air on a passenger aircraft. Yet that’s exactly the situation Rolls Royce is now in after its engine on a Qantas Airbus blew up out of Singapore last week. Of course, it’s not just the engine maker’s problem now but the airline and manufacturer as well.
So what should they do?

There are three key steps the trio should make together:
1. Identify the problem as quickly as possible
2. Release those findings publicly and in real time
3. Ensure the solution is public, understandable to all, and credible beyond any doubt.

So far, Qantas has been handling the crisis well. Its engineers are working closely with Rolls Royce and Airbus to identify the problem. Meanwhile, the CEO of Qantas has grounded its A380 fleet until it is sure there is no safety issue. One analyst estimated that the cost of that decision could amount to $15 million to $20 million in lost revenue a week. Yet Qantas knows its business depends on its safety record. Flying long distances across the Pacific to and from Australia without even one plane crash is not a trivial accomplishment. It has been the result of many people working diligently over decades to achieve such a stellar safety record. It’s another reminder; integrity really is a company’s most valuable asset and worth protecting even if it costs in the short term.

A quick checklist for an integrity crisis

Here’s a ten point checklist to keep in your bottom drawer in case of a crisis. It incorporates the DNA of integrity and helps build trust with stakeholders.

1. Be honest and open
2. Determine the truth
3. Prevent death or illness regardless of the cost
4. Go see for yourself
5. Reach outside the company for help—ask the leading experts in the field to help find solutions to the problem.
6. Report developments in real time
7. Be generous to those who have been affected. This is not a time to pinch pennies
8. Don’t rest until the problem is fixed
9. Execute organizational changes
10. If someone is at fault, hold them accountable.

Replicating the DNA of integrity to come out ahead of a crisis

The media focus and coverage resulting from an integrity crisis is a harsh and unforgiving trial. But the really exciting news is that with the right approach it’s possible not just to regain one’s reputation but even to enhance it. When everybody is looking, it’s a great time to impress them.

To do that, you need to appreciate the process that creates trust. Knowledge of the “DNA” of integrity—Disclosure, Norms and Accountability—is the key. Honoring those three concepts allows a company to make smart investments in its relationships with customers and stakeholders.

Start with the single most important one: disclosure. When a crisis hits the last thing anyone feels like doing is admit a problem or mistake and deal with it publicly. Hunkering down, being cautious about what is said to the media or even to staff and following the advice of lawyers is all too common a response. Building trust is not about playing a defensive game. It’s about taking risks and reaching out to people. In times of crisis it’s worth remembering there’s no problem that can’t be fixed so long as there’s not an attempt to hide it. That doesn’t mean disclosure is easy. Facts, details and explanations can be difficult to marshal in the midst of a fast moving crisis. For the manager there’s no better approach than to go and see for yourself. And as you communicate in real time, updates can correct mistakes or erroneous data in an honest and open way.

Next address norms. Crucially, you need to make things right with people who have been hurt. Secondarily, you need to change your product, or process, or staffing in a way that credibly removes the public’s concern. The change should be clear, capable of simple explanation and effectively communicated.

Finally demonstrate accountability. If nobody is at fault, say so. But if there was a lapse, hold him or her accountable. And what if it’s your own lapse? Good luck trying to hide it. A far better approach is to address things in an honest and forthright way.

Is 2010 the year of the corporate integrity crisis?

Remember Toyota, Goldman Sachs, BP, Apple, Hewlett Packard and J&J? Just to name a few of the big name corporate crises we’ve seen this year. Instead of learning from the mistakes of others, companies seem to react in the same way each time a crisis breaks: by being defensive and denying any fault. In the midst of a corporate integrity crisis, companies tend to limp from one mistake to another. Bruised by an ‘unfair’ media, misunderstood by the public and unappreciated by the market, corporate leaders tend to hold their breath until the crisis is over and hope that the damage isn’t too great.

But it doesn’t have to be like that. Recognizing that integrity is an investment with a financial payoff can be empowering. Smart companies can learn how to build enormous integrity during a crisis and actually come out ahead. And they can do it without calling in the emergency troops, legions of PR and consulting experts waiting to make money from corporate missteps.

So here’s the single most important point for any manager to remember when a crisis hits: you are no longer in the [fill in the blank] business. You are in the trust business. And your job description is now all about building trust.

While there are plenty of examples of how not to handle an integrity crisis there are only a handful of positive role models. And here’s the reason why: how many managers consciously think about how to build trust and really know how to do it systematically?

Podcast for HR execs

Here's a podcast I did for anyone interested in Human Resources.

Three ideas for good HR

Integrity has huge applications throughout a firm but it is particularly critical for anyone working in the field of human resources. After all, the whole essence of managing human resources boils down to relationships between people. If those relationships are strong and trusting you create a very valuable asset. Here are three simple ideas based on the DNA of integrity—disclosure, norms and accountability—to help HR execs create value in their organization.
1. Absolute honesty
There’s no such thing as secrets within an organization anymore. If you try and keep secrets you’ll look untrustworthy. It’s a tough message for managers to hear but it’s essential to take on board.
2. Simplify norms
Companies do pretty well on norms. In fact, maybe a little too well! Most companies have plenty of established rules and procedures that are integrated throughout the organization. But to build relationships of trust you need people to internalize simple rules that make sense.
3. Hold everyone accountable to the same standards
The recent case at HP where the board dismissed the CEO for bad behavior is a great point in case. But this is by far the exception rather than the rule. It’s not uncommon to give senior management far more leeway with the rules than everyone else. Yet that doesn’t inspire trust in the organization.

Watch Out for Sticky Relationships

Some of the largest companies around today actively build sticky relationships with their customers. That means companies try to ‘lock in’ customers in relationships for certain periods and penalize them if they try to ‘get out’. Cell phones and banking come to mind here. It’s a particular type of mentality that wants to lock in short term business but isn’t thinking about building long term value. Quite often, companies ask customers to make a significant investment in the business relationship but do they care whether the customer is having a good experience or not? For any business it comes down to this: are you treating your relationship with customers as an asset that you are actively trying to increase? Or are you feeding off your customer base and essentially dissipating your asset? A kind of churn and burn strategy where you focus on numbers not relationships. If customers have a good experience with your business, why would you need to lock them in? They will keep coming back, again and again and again!

Bush’s Dishonest Tax Policies Come Back to Haunt Us

The front page of yesterday’s NYT ran a story about an ‘epic battle’ brewing over Bush’s temporary tax cuts. If you recall, the substantial tax cuts on income, dividends and capital gains that Bush introduced in 2001 and 2003 are due to expire by the end of this year.

It wasn’t too hard to see this fight coming. I for one was worried about Bush’s tax gimmickry from the beginning and questioned how easy it would be to allow these tax cuts to lapse. (see one of my past NYT column's for more) Now Bush’s temporary tax cuts are expected to take center stage in the political debate in the fall at a time when we can’t afford to be distracted by hoary old chestnuts like supply side economics and ‘the evils of big government.’ Instead, we need to focus on what matters most to our weak economy: allowing the government to spend on productive investments that will pay off for years.

What's the Biggest Problem Facing our Economy?

Here's a HuffPo piece I wrote today.

What do Toyota, Goldman Sachs and BP have in common?

Since The Economics of Integrity came out at the end of February, three huge corporate stories have unfolded, illustrating the phenomenal importance of integrity to a company’s bottom line. Toyota, Goldman Sachs and BP are great examples of what happens when a company’s integrity is called into question. For public companies the market reaction to an integrity breach is swift and the stock is punished. Longer term, though, the costs will also pile up. Think of what faces BP in the future: a bill for damages, the likelihood of more restrictive regulations around the world, less trust from business partners and so on. But it doesn’t have to be like that. If corporations understand the importance of integrity to their bottom line they can learn to protect and promote their most valuable asset. Here are five critical steps to investing in corporate integrity:

1. Keep your promise. Start with your brand since this is your promise to customers. If you promise quality as part of your brand, then make sure you do everything you can to deliver quality. If it’s safety, deliver safety.

2. Make it a win/win for everyone. Make sure what you do benefits everyone involved: shareholders, customers, employees, suppliers and society. If you’re doing anything destructive, stop immediately.

3. Reliability. Go the extra mile to be reliable. Do not cut corners however tempting it may be.

4. Continuous improvement. Focus on how to make the experience and product better for everyone.

5. Feedback. Seek out constant feedback from your employees, customers, suppliers and so on. It’s valuable information to help improve and address problems as they arise.

The Woman behind Integrity in the Workplace

While doing research I came across the biography of Alice Hamilton. It made me realize that I knew so little about the people behind some of our most important advances in integrity. Hamilton was born in 1869 into a highly educated family. She received her medical degree from the University of Michigan and took a teaching position in Chicago at Northwestern University. It was in Chicago while living at Hull House with Jane Addams that she started her work which transformed the American workplace.

Hamilton began to wonder why so many workers had curious illnesses and often sickened and died. She began to read research on workplace illness which was being done in Europe but at the time not in the United States. She decided to travel the nation, visiting mines and factories to report on the state of health and workplace practices. Her research was considered so remarkable because it was meticulous, impartial and eye opening. She became the pioneer of occupational health and our laws promoting workplace safety today are the direct result of her work. Incidentally, Hamilton was recognized as a trailblazer and hired in 1918 by Harvard Medical School. She was Harvard’s first female faculty member. In 1935 she retired from Harvard and served as a consultant to the US division of labor standards. She died in 1970.

Hamilton is an important reminder that integrity doesn’t just happen by itself. It takes the effort of individuals and governments over many years. The best part though is that the payoff can last for generations.

Does small business sacrifice integrity more than big business?

At a talk I gave recently, a member of the audience commented that in his experience, a big business was more likely to protect its integrity asset than a small business. As a lawyer for subprime lenders, he found that small lenders were willing to cut corners and operate in grey zones to win business but big lenders simply couldn’t afford to take those same risks. His argument was that a big business understood it had more to lose by exploiting integrity than a small business. It was a provocative idea and quite frankly a distinction that I had never made.

My initial reaction was that size shouldn’t matter. But the more I thought about it the more I determined there was something to it. For one, it’s hard to get big without integrity. So big businesses tend to have a lot of built up integrity. Plus big business can afford to have a long run perspective while small businesses, fighting for daily survival may not.

On the other hand, small business has something that big business doesn’t. Small businesses tend to be run by owners and they have a huge stake in the future of the firm. Big business, on the other hand, is often run by professional managers who don’t have as much invested in the firm’s long run performance.

The temptation to exploit integrity seems to arise when a company is under pressure. If a business can’t figure out how to make money or can’t make enough money to satisfy expectations, there will be enormous pressure to sacrifice integrity for short term money making opportunities, regardless of the future. That could mean that small business often faces greater temptations to cut corners or skirt the law than big business. But the key is whether they cave in to that pressure or not. If anyone knows of studies on this topic I’d love to hear about it. Or just chime in with observations!

How to capture integrity opportunities

Here's an interview Dan Schwabel did with me on his personal branding blog.

What does good financial reform look like? And where is it today?

My vote for the best financial reform ever goes to the system of mandated disclosure introduced in 1934 as the centerpiece of the SEC. In response to the worst stock market crash in the nation’s history, lawmakers made a bold and inspiring decision to require full disclosure from publicly listed companies. It was a stroke of genius. Instead of burdening companies with endless rules about how they should or shouldn’t operate, the law required firms to tell the public what they were doing. That way, investors could decide for themselves whether to invest or not. It was a powerful way to rebuild trust in the stock market at a time when it had been broken and it has underpinned trust in the market for decades.

The principle of full disclosure is something that we can all understand. Over time though, that simple and powerful principle has been distorted. The agency itself has gummed up the system of disclosure by introducing rule upon rule of how companies should disclose things and what they need to include and so on. I understand the impulse to clarify but this approach has actually been counterproductive. By introducing endless details in the rules, companies have sought out the help of technicians to make sure they’re in compliance. That can result in situations like AIG where the insurer seems to have complied with GAAP and everything else but it did not disclose the one thing that would have made a huge difference to investors and the market—the fact that it had created an incredibly risky structure that could come tumbling down at any point.

Unfortunately, I believe we’re going to see more cases like AIG if the current financial reform package is any guide. Instead of simple and powerful principles everyone can understand we’re getting lots of technical rules that can be run around. Encouraging good behavior isn’t easy but it starts with the introduction of simple, clear rules that make sense. Once you do that you can hold people accountable to those principles. Anything else just seems to make matters worse.

Interview on promoting integrity and trust

Here's an interview Barbara Kimmel did with me on her blog Trust Across America

Where’s the Integrity in Financial Reform?

It’s hard to believe in the integrity of the financial reform package now almost certain to pass into law. That’s not to say there aren’t some positives in the legislation. But without an honest, straightforward approach the reform isn’t likely to do much good. Here are five gaping holes which spell trouble for the future:

1. The root cause of the financial crisis hasn’t been addressed.
In fact, it hasn’t even been acknowledged! While there were plenty of contributing factors to the financial crisis, the central cause of all the panic was the incredible risk financial players were taking with other people’s money. Reasonable limits on risk remain an absolute necessity. Until we take this on, the financial system will remain vulnerable.

2. Solutions are put off until later.
The main effect of the financial reform bill is to give unspecified powers to untested regulators who may—or may not—create effective rules. Rather than taking on and debating the rules, congress has kicked the can down the road to a new group of Washington mandarins. It may all turn out well but we won’t know for some time. In the meantime, the approach isn’t exactly a profile in courage.

3. The temptation to further complexity appears irresistible.
Finance is already an overly complex area of the economy. The proposed legislation does nothing to cut through the fog and clarify the workings of the system. In fact, it seems designed to create an even more complicated matrix of products and rules. That’s not what we need. We lacked clear information about the outrageous risk taking that led up to the financial crisis. Instead we were bombarded with gobbledygook dreamed up by risk takers and echoed by their regulators. If the past is any guide, the industry should be pretty sanguine about continuing to enjoy lax regulation, and more confident than ever that the taxpayer will pay if things go wrong.

4. Politicians are obfuscating the issue.
Congress and the Obama administration are in universal agreement that financial reform is vital to our economy. But they haven’t exactly tripped over themselves rushing to put reform in place. The time to negotiate reform with the entrenched interests of the financial community was when banks and markets were in desperate need of help from the public. That time is long past, and with its passing the opportunity for strong and effective financial reforms has all but disappeared. So when politicians crow about how great this legislation is, or will be when its effects are ultimately able to be seen, keep in mind that the package appears to be designed to have minimal effects.

5. Financial leaders are morally bankrupt.
After so few take so much from so many, mightn’t it be time for a little humility? The enormous risk in the system was no accident. It was knowingly and intentionally created for the short term gain of a relatively small group of financial leaders. But instead of acknowledging the absurdity of continuing these practices, bankers have been spending their time and energy blocking reform.

Is it really too much to ask for all involved—bankers, politicians and the public—to work together for real reform with the main purpose in mind of making the financial system better for everyone?

A Big Thank You to Readers of the Economics of Integrity!

On Sunday, The Economics of Integrity hit the best seller list in Singapore at number 7! It’s very exciting seeing the book resonate with people around the world. What’s more it’s great to hear from readers about the interesting and important work they’re doing in relation to integrity and trust. I just wanted to mention a few from various exotic corners of the world:

John who is an American, working in China, is developing business initiatives to enhance integrity in commercial dealings between US and Chinese firms.

David Rea, a social scientist in New Zealand, has been working on policy ideas for the New Zealand government to foster greater integrity.

Johanna in Amsterdam has her own business consulting firm and is working on issues like integrity and trust to help her clients prosper.

Carlos who is Spanish and living in Bucharest has been working on taxation policy and is interested in incorporating greater integrity into the tax system.

Thanks to everyone who has gotten in touch with me so far. I really enjoy hearing what you’re working on and sharing ideas!

The Sweet Spot of our Market Economy

Here are two statements:

Following your own self interest benefits everyone. (Adam Smith)

Acting with integrity benefits everyone. (Conventional morality)

The conventional view is that these two statements are mutually exclusive.
The truth is there is a place where those statements intersect. That place is the economics of integrity and it’s the sweet spot of our economy.

When acting with integrity is in our self interest we get a double payoff: economic growth and societal benefits. This opportunity often exists in the short run but it’s always there in the long run. The only way to create lasting wealth is to act with integrity.

Will Health Care Reform create more integrity?

Recently I found myself trying to escape from reality by watching a marathon session of Grey’s Anatomy reruns. One episode was so shocking in it’s depiction of our health care system it’s worth mentioning.

A seemingly prosperous man in his late 50s or early 60s is raced to the emergency room after being in a car crash. Unbeknownst to his wife, he lost his job some months back and their health insurance is due to expire at midnight that very day. It turns out the man needs very expensive surgery to save his life. A resident uncovers the health insurance issue and pleads with the chief of surgeons to undertake this mans surgery before the stroke of midnight otherwise the costs could bankrupt the couple. After refusing to put the man ahead of her other patients who were more in need of help, the chief of surgeons turns to operate on him at a few minutes past midnight. But before she starts she asks the resident, who will record the time of operation for official records, to change the clock in the operating room to one minute before midnight.

The audience has a feel good moment and is relived that the Chief of Surgeons turns out to be on the side of the public against health insurers. While I also found myself being sympathetic I wondered what my reaction would be if I worked for a health insurance firm. How would I feel to see doctors cheating health insurers and that practice being legitimized on mainstream TV? What does it tell us when our health care system is portrayed, in a matter of fact way, as so broken that the only humane response is to cheat?

It made me wonder whether health reform enacted by the Obama Administration will do anything to change that. I’m skeptical. But then with so much of the reform set to be decided in the future, the only fair answer to that question is that no one really knows yet.
Up next: a few things we do know about Obama’s health care reform.

Creating a Culture of Integrity in the Corporate World

Only a few of us will ever lead a big company or wield considerable influence over corporate decision making. But we don’t have to wait for others to promote a culture of integrity, we can do it ourselves, now!
Here are five ideas:

1. Do the right thing in a situation where there’s a temptation not to.
My husband told me a story from his law firm days. Working with a team of lawyers to close a deal, he was in a conference room as they phoned around to all the parties involved. When the call had ended with the opposing counsel it became obvious that the other side hadn’t hung up and my husband’s team could hear their private discussion. The senior partner in the room moved swiftly to hang up the line saying “They’re not aware we can hear them. We shouldn’t be listening.”
Nothing speaks louder than being a model of personal integrity and people remember you for it.

2. Show people you trust them
Give people extra responsibilities or information they might not have as a way to build a relationship of trust. Remember the words of Henry Stimson, the American secretary of war during WWII, “The only way to make a man trustworthy is to trust him.”

3. Tackle problems as soon as they arise.
Remember the old adage “There’s never been a problem that can’t be fixed; unless it remains hidden.” If you can’t fix the problem yourself get help from others.

4. Admit mistakes
No one likes to admit mistakes but grimly hanging on and denying the mistake is not a good look either. Neither is finding clever ways to weasel out of it. Face up to what you did wrong and work swiftly to correct it.

5. Point out what’s working well
Make sure you look for what others in the firm are doing well. Discuss it, learn from it and replicate it.

Tapping into the Power of Social Contagion

Friends from Australia who recently moved to New York City were horrified when their name appeared on a list of donors to the private school their son attended. While it can be daunting to those unaccustomed to the practice, the main purpose of publicly acknowledging donors is to encourage others to give. Charities have found that if they publish the identity of donors, it encourages others to donate, either to be associated with those already on the list or as a way to fit in.

There are times though when we see other people breaking the rules and it makes it a lot easier for us to do the same. Think of driving. When everyone else on the freeway is travelling above the speed limit, chances are we will too. Why? No one really believes in the speed limit. That is, we don’t really accept the speed limit as the law. Plus we don’t often get caught and when we do it’s not that big of a deal.

So how do we encourage the contagion of good behavior?
These three ideas, used together, are a good place to start:
1. Allow behavior to be open and visible
2. Establish well understood norms
3. Insist on accountability

Coming up next:
You really can create a culture of integrity in your own corner of the corporate world. Here’s how.

Integrity is Contagious

Here’s an interesting experiment. David Rea, a social scientist in Wellington, New Zealand recently conducted a test on his students. He presented 28 university students with five ethical dilemmas. The students were split into two groups, given a questionnaire about the dilemmas and asked how they would respond in each case. The questionnaires were identical except that each group received different information about how others had responded to the same dilemma. For example one dilemma about paying taxes was presented to the first group Rea called the ‘ethical group environment’ as:

A very small number of tertiary students use accounting firms to file their tax returns. They do this to access a soon to be closed legal loophole that gives them a refund of $1000 on their student fees. Would you pay $40 to an accounting firm to access this refund?

While the ‘unethical group environment’ was presented with the following:

Almost all tertiary students use accounting firms to file their tax returns. They do this to access a soon to be closed legal loophole that gives them a refund of $1000 on their student fees. Would you pay $40 to an accounting firm to access this refund?

The results were significant. Individuals in the ‘ethical group environment’ acted ethically on average 58 per cent of the time while those in the ‘unethical group environment’ acted ethically only 38 per cent of the time.

Rea’s experiment is important because it provides valuable insight into our own behavior. Human beings have a deep need to fit in. When we see others doing the right thing we tend to follow. But the reverse is also true. If we see others cheating, it tends to encourage us to do the same. Rea’s work also builds on experiments by other social scientists. In one previous experiment, social scientists found that people were less likely to litter if they saw other people throwing garbage in the trash can.

Can you think of an instance when seeing other people’s behavior has affected your own? I’ve noticed it when I leave the grocery store, usually with a cart full of groceries, my children on the verge of a tantrum, and in the middle of a sudden downpour. After I load up the car, I look around and notice where other carts have been left. If I see carts strewn around in parking spaces, higgledy piggeldy, I find it much harder to force myself to trudge over to where you’re supposed to return your cart. But if I see carts neatly stacked at the entrance to the grocery store, I make the effort.

Knowing that people’s actions can be influenced by other people’s behavior is an empowering realization. Importantly, it means that we can create corporate and economic cultures where integrity is internalized and becomes the norm. (Yes even in finance!) Not by adopting onerous and restrictive rules though, but by taping into human nature and fostering self reinforcing integrity systems. It’s an exciting possibility at our fingertips! Stay tuned to find out more.

Does Goldman Sachs offer its customers a satisfaction guarantee?

Think about that for a moment. When a business offers a satisfaction guarantee it communicates trust and a bond of trust with customers is extremely valuable. Not only does a guarantee show a business trusts its own products and services but it also trusts customers to treat its products and services fairly. It’s a critical question every business needs to ask. “Can I offer a satisfaction guarantee?” If not, a firm needs to think long and hard about why it’s ok for customers not to be satisfied with what they’re getting. Whatever the costs of a satisfaction guarantee, the benefits are large. For one thing, it’s an incredibly useful way for companies to get feedback from customers about how products and services can be improved. In the investment business, guarantees are certainly not the norm. But moving toward some form of satisfaction guarantee could be a big step banks take in rebuilding trust.

Is Goldman Sachs the next Toyota?

The lawsuit filed by the SEC against Goldman is in the same category as Toyota’s unintended acceleration problem. Both are about tainted products and whether the firms dealt honestly with their customers. And it could be just as devastating to Goldman’s business as it was to Toyota’s. At stake is the bank’s most valuable economic asset—its integrity.

Conventionally, we think of integrity as an ‘eat your spinach’ topic: a personal issue, entirely up to individuals. But integrity is widely misunderstood. Integrity isn’t personal, it’s collective. It’s the underpinnings for all our commercial transactions. Integrity is a shared asset that brings financial and economic rewards. To understand why, you need to see integrity as a relationship of trust. To actually practice integrity there has to be someone on the other side of the transaction. On one side of the transaction is the firm operating with integrity (or trustworthiness) on the other side is a customer who buys into that integrity (who trusts). Once you have a relationship of integrity and trust you have an asset that produces economic value. Integrity isn’t something nice to have it’s something a firm has to have in order to sell its product and create wealth.

Goldman has built up enormous integrity over decades. It’s the gold standard for the financial industry. Whether or not the firm broke the law though, the lawsuit raises doubts about whether the bank deals honestly with its clients and whether clients should continue to trust Goldman. It also raises big issues about how it operates with trading and investment banking under one roof. It’s critical how Goldman handles this integrity crisis. First, Goldman has to move quickly to explain the extent of the problem in a convincing way. Second, it has to provide a solution that builds trust with its customers. So far, Goldman has told its customers they should have known better. That is, Goldman has effectively blamed its own customers. If Goldman is as smart as everyone says, they will learn from Toyota’s initial mistakes and turn this lawsuit into an opportunity to build greater integrity that may underpin its prosperity for years to come.

The Biggest Blunder on Financial Reform

Thank heavens President Obama is taking on financial regulation as his next priority. It’s our biggest economic policy issue by a long shot. The trouble is the pitch is all wrong and that’s why it’s shaping up to be a tougher fight than it should have been.

The White House wants to make sure that we “never again” have to bail out our big banks. But arguments in favor of safety work best during times of fear. More than a year has passed since the worst of the crisis, and during that time the fear has abated, at least on Wall Street.

For many ordinary people, financial reform still seems like a no brainer but not to bankers. To understand why you have to enter the mind of a Wall Street banker. Here’s what he’s thinking: “I (or my company) took a lot of risks. We effectively went bust. But the government got so scared that it bailed me out and all but a tiny minority of my colleagues. Most of us got to keep our money and our jobs too. And then the government showered us with limitless free money that we are using to make money hand over fist. Why, exactly, should I worry about another crisis? Things look ok to me. In fact, I strongly prefer keeping things just the way they are!”

There was a time not so long ago when bankers were scared themselves. Terrified in fact. The story goes that Hank Paulson (formerly Goldman’s chief) actually got down on his knees—his knees!—to beg Nancy Pelosi to pass the TARP bill. If some of our officials, like Geithner, Summers, Bernanke or President Obama had taken that opportunity to make the bailout conditional on smart reforms, there would have been nary a whimper. But alas the chance was missed, and with the passage of each day the strength and resistance of the bankers increases.

So what should the pitch be? Instead of appeals based on altruism or increased “safety” the focus should be on self interest. Putting people in jail or outlawing practices that are easily evaded won’t accomplish much. We have a unique opportunity to build a better, more valuable financial system. If the US seizes the opportunity and offers real leadership to improve the global system, Wall Street will benefit by continuing to be the global center of capitalism for years to come. That’s what a financial system less prone to cheating can do. It’s a message we can all get behind: politicians, the public and Wall Street. And it means bankers themselves can use their creative brain trust to help make the financial system better and stronger without waiting for Washington. (see Top 5 Ways for Wall Street to regain Trust)

There may not be a second chance.

The Shoe is on the other Foot

After 20 years as a journalist I’m getting a taste of what it’s like to be on the other side of the media. Two days after my book “The Economics of Integrity” was published the Wall Street Journal mentioned it in its “Heard on the Street” column. Which is fine with me, except that the reporter involved admitted to me he didn’t actually read it before he set out to make a jibe at it. The Journal wouldn’t agree to a retraction, but they did print my letter. I’m not all that upset about the incident. On the whole I probably shouldn’t complain too much about people discussing my book, even in ways I don’t approve. But it will give me a little perspective as I write, not always flatteringly, about the people, firms and institutions affecting our economy.

Digging into another myth about health care

Trying to distract myself during a medical appointment this morning, I asked my doctor what she thought of the health care reform proposals before the House and Senate. In a resigned tone, she flatly stated that the proposals did little for doctors or patients and mostly benefited insurance companies. I agreed with her and we commiserated together that little would probably end up being done to fundamentally reform health care. Then I asked what she thought about a government funded health care system. She was favorable to it and had familiarity with the British system but wondered how such an overhaul could be carried out in the United States. I was encouraged that she didn’t run a mile from the suggestion. So often we are told that our doctors would stop being doctors under a government funded national health care plan. In fact, my doctor seemed to indicate just the opposite. She told me stories of her doctor friends who are struggling just to stay in business under the current system. When I got home I checked the number of doctors per patients in major industrialized countries to see if there was any truth to this argument. According to the OECD, Australia, France, Germany, and the UK, all nations with so called ‘socialized medicine’ have more doctors per patients than the US. Only Canada and New Zealand have fewer doctors per person than the US. The claim that there would be a doctor shortage under “socialized medicine” turns out to be just another myth.

Practicing physicians, Density per 1 000 population (head counts)
(Source: OECD 2006 data)
Australia 2.81 Canada 2.15 France 3.37 Germany 3.5 Netherlands 3.82 NZ 2.28 UK 2.44 US 2.42

A Darker Side to Claim's of Women's Earnings Progress

This morning I listened to NPR and was interested in the latest findings about the economics of marriage. New research by the Pew Research Center has found more men are marrying women with higher incomes than anytime in the past. Both the radio and newspapers portrayed this in a positive way for women—that women are becoming more educated than men and in fact are making gains in the workforce. I wish that were the entire story. Unfortunately there is a disturbing and darker side to this. Is it really women making gains in wages or could it also be that high paying jobs, traditionally held by men, are disappearing? Haven’t we all heard that during this recession most jobs being lost are by men? According to the US department of labor, women’s median wages were still 79.9% of men’s in 2008. While women’s wages have been increasing as a percent of men’s over the past few decades those gains are masked by what is happening to average male earnings. They have been stagnating at best. According to the National Association of Colleges and Employers, real starting pay for men with bachelor’s degrees fell 3.2 percent between 2000 to 2007 and 1.7 percent among women during that time. This isn’t only about gender it’s about what’s happening to the middle class. And it’s not a pretty picture.

Who Benefits from Complexity?

This week Jonathan Gruber, an MIT health economist who provided the key analysis which supported the Obama Administration’s health care reform plans, was being criticized for not disclosing a lucrative government contract. What’s fascinating about this incident is what it reveals about public policy. (See my HuffPo post for more) There’s only one expert in the entire nation who has the know how to quickly estimate the effect of health care reform in various scenarios. And none of us have a clue so we have to take his word for it. Isn’t that a little crazy? What’s the value of having such complicated legislation so that only one person in the entire nation actually takes the time to dig through it?

Why we shouldn't give up on the public option

At first when I thought about health care reform I thought of universal health care as a moral issue. But when I took the time to look behind the rhetoric and dig into the numbers I discovered that universal health care, or more explicitly government funded universal health care, is really an economic obligation. When you compare the US to other industrialized nations on the basis of costs, health outcomes, quality and satisfaction there’s only one conclusion you can reach—it’s foolish and wasteful not to move to a government funded health care system. I just wrote a Huff Po post looking at one of the more startling facts about cost. There are lots of angles to look at, and they all seem to point in the same direction. If the current health care legislation does pass, it absolutely can’t be the last word. Without a common sense system similar to other developed countries, the US will be competing with a serious economic handicap.