Decisions: The Race Between Integrity and Time

Managers are increasingly caught between conflicting demands: a welter of rules, regulations and laws mandate ethical behavior - and the economic benefits of doing so are becoming more evident as globally scaled institutions seek to minimize the impact of suppliers' mistakes from staining their reputations or affecting their results.

Examples like the collapsing  garment factories in Bangladesh or the Tier Two automotive finisher in China at whose plant an explosion killed over 125 workers.

The problem, as the following article explains, is that the benefits of ethical behavior tend to accrue over the long term whereas the current financial system, driven my algorithmic high speed trading and a focus on exit strategies over growth objectives, rewards short term performance.

While no one set up integrity and time as opposing goals, that is the practical effect of short termism. One can always argue that the moral high ground is best suited for creating value,  The question is how organizations and those who staff them choose to find their way. Investing in a host of other intangibles like being a desirable place to work, having an admired executive team and a reputation for excellence is tough to justify when your shareholders are bots and the decision to buy or sell is statistically driven, but if everything is ultimately reduced to fungible assets, those with the most valuable assets will always command the highest price. JL

Roger Trapp reports in Forbes:

Those who genuinely believe in integrity and associated principles can reap the rewards – eventually. But they cannot expect to see them quickly or at all if they also seek to produce short-term profits.
Anybody who feels that far too many company reports and websites boast of a commitment to innovation will not be surprised to learn that this is the most cited value  in a survey of how Standard and Poor’s 500 companies present their corporate culture. Innovation – mentioned by fully 80% of companies – was followed by those other staples, integrity, respect and teamwork.
In what might be a disappointing finding for many – especially those advocates of strong corporate culture – the researchers could find no correlation between the advertised values and the profitability of the organizations concerned. However, the team – Luigi Zingales, a finance professor at the University of Chicago Booth School of Business; Luigi Guiso of the Einaudi Institute for Economics and Finance, a new research body funded by the Bank of Italy; and Paola Sapienza, professor of finance at Northwestern University’s Kellogg School of Management – did find that a real culture of integrity does add value to the company. In a forthcoming article in the Journal of Financial Economics, they point out that where employees believe that top management keeps its word, integrity becomes validated as a cultural norm, so – they believe – facilitating social enforcement of integrity among employees. Also, according to a review of the research in the Chicago Booth School of Business’s magazine Capital Ideas, knowing that a breach of trust will lead to a collapse of the corporate culture of integrity makes senior executives reluctant to behave badly.
All this sounds a rather complicated way of saying that managers need to “walk the talk”. But the research also indicates the need to take a long-term view. As the Capital Ideas article stresses, even if a culture of integrity adds value it may also incur short-term costs. In other words, there is a trade-off between short-term profits and long-term value.
This would not be too bad, provided managers always took the long-term view. Instead, as we know, they often focus on short-term stock prices (generally because they can affect their pay) at the expense of the long-term value that will flow from doing the right thing consistently.
But the researchers do not lay the blame for this solely at the managers’ door. Investors, too, can be slow to appreciate the value of developing a culture of integrity. From this it is not too much of a jump to the idea that executives that want to maximise the stock prices of their companies will under-invest in integrity. Since the market values profits over corporate culture, companies will tend to focus on maximizing short-term profits rather than keeping their word.
One conclusion – arrived at by the researchers – is that integrity is highest in privately-held companies (where there is not the distraction of market sentiment). Another is that companies need to stay away from schemes like the Great Place To Work initiative unless they are really committed to the principles behind them. These days, employees and customers are far too savvy to take corporate pronouncements of this sort at face value. Those who genuinely believe in integrity and associated principles can reap the rewards – eventually. But they cannot expect to see them quickly or at all if they also seek to produce short-term profits.