Secciones Fijas > Ethics & Sustainability
Ethics & Sustainability
BRYAN W. HUSTED,
Alumni Association Chair of Business Ethics and Corporate Social Responsibility
Honesty
Miguel de Cervantes wrote in Don Quixote: “Honesty is more effective than dishonest scheming”. This saying has evolved into the well-known phrase, “Honesty is the best policy”. Yet, honesty is actually quite difficult to come by in modern life. In one study, De Paulo and colleagues found that members of one U.S. community told at least one lie a day and college students told two(1).
Emplo yees steal more from business than do outsiders. Business loses 6% of its profits to fraud each year, largely due to employees(2). The MIT dean of admissions recently resign - ed for misrepresenting academic degrees in her resume. Together with its closely related neighbour, promise-keeping, truth- telling is one of the most basic challenges in business ethics and even personal ethics. Economists use jargon like moral hazard and adverse selection to describe these kinds of problems – but the essence is the same. Not only do individuals tell lies, but organizations also are quite capable of similar behavior. One only has to recall the myriad instances of the bait-and-switch gambit, where stores advertise one product at bargain prices, but offer customers a more expensive version upon arrival, or cases of false advertising that are subjects of lawsuits in numerous jurisdictions around the world. The now notorious examples of Arthur Anderson and Enron involved these two very prestigious firms in a vast coverup to hide the truth about Enron’s finances from employees and investors. The evidence of systematic lying by organizations is abundant.
Unfortunately, people are not very good at detecting lies(3). In only about 20% of the cases recorded in the study by De Paulo and colleagues was the deception discovered. Our inability to detect deception often can cause markets to fail as Nobel-winning economist George Akerlof demon strated(4). Akerlof studied the used car market and argued that the consumer’s inability to distinguish good, reliable used cars from defective used cars led the buyers to devalue all used cars.
In response, owners of quality used cars began to withdraw their cars from sale, since they were unable to obtain a reasonable price for their cars. As a result, the ave rage quality of the used cars offered for sale declined, creating a “market for lemons”.
Economists have suggested a number of remedies to overcome these problems of truth-telling. One obvious option is to do something yourself if no one can be trusted to tell the truth. Unfortunately, this option is very often not available. Mark Twain suggested another possible solution when he wryly remarked that “honesty is the best policy - when there is money in it”. Twain’s approach is implicit in the discussion of incentive alignment by economists. They sometimes recommend offering a menu of contracts. For example, an illustration of this approach is the common problem faced by private health insurance companies. Very often health insurance tends to attract those persons most likely to have poor health. However, it can be difficult for a private insurance company to distinguish between poor health risks and good health risks.
The typical solution has been to offer contracts with different combi nations of deductibles and insurance premiums. Heal thy people will tend to be attracted to options involving high deductibles and low premiums. Sicker people will be attracted by options involving low deductibles and high premiums. Each person selects that contract which aligns best with his or her interests, whatever they may be. As a result, the health insurance company does not need to know the customer’s true state of health. However, once again, such a menu of contracts may not be feasible.
A final option is to communicate one’s honesty or trustworthiness to the other party. A reputation for honesty in the past is probably the best way to show that one will be honest in the future. Firms that willingly and transparently communicate the truth about untoward events will build such a reputation for honesty.
Interestingly, corporate reputation has become the focus of much study in recent years. The value of a corporate reputation is inestimable. Companies such as Telefónica have invested tremendous financial and human resources in order to measure and manage its reputation more accurately. One study in Mexico found that 22% of a company’s reputation was due to its reputation for honesty.
So we end where we began: honesty is the best policy. However, in a strange way, corporate reputation provides the missing ingredient that Mark Twain humorously added - incentives. Repu ta tion puts the money into honesty (5).
(1) DePaulo, B.M., Kashy, D.A., Kirkendol, S.E., Wyer, M.M. and Epstein, J.A. 1996. Lying in everyday life. Journal of Personality and Social Psychology, 70: 979-995
(2) Westcott, Scott. 2006. Are your staff ers stealing= How to prevent employee theft and protect your bottom line. Inc., 28 (10), 33-35.
(3) Adler, Robert. 2007. Negotiating with liars. MIT Sloan Management Review, 48 (4): 69-74.
(4) Akerlof, George A. 1970 ‘The market for ‘lemons’: Qualitative uncertainty and the market mechanism’. Quarterly Journal of Economics 84: 488-500.
(5) Transparencia Mexicana. 2006. Índice Mexicano de Reputación Empresarial. 2006. México D.F.: Transparencia Mexicana and Consulta Mitofsky.
BRYAN W. HUSTED,
Alumni Association Chair of Business Ethics and Corporate Social Responsibility
Honesty
Miguel de Cervantes wrote in Don Quixote: “Honesty is more effective than dishonest scheming”. This saying has evolved into the well-known phrase, “Honesty is the best policy”. Yet, honesty is actually quite difficult to come by in modern life. In one study, De Paulo and colleagues found that members of one U.S. community told at least one lie a day and college students told two(1).
Emplo yees steal more from business than do outsiders. Business loses 6% of its profits to fraud each year, largely due to employees(2). The MIT dean of admissions recently resign - ed for misrepresenting academic degrees in her resume. Together with its closely related neighbour, promise-keeping, truth- telling is one of the most basic challenges in business ethics and even personal ethics. Economists use jargon like moral hazard and adverse selection to describe these kinds of problems – but the essence is the same. Not only do individuals tell lies, but organizations also are quite capable of similar behavior. One only has to recall the myriad instances of the bait-and-switch gambit, where stores advertise one product at bargain prices, but offer customers a more expensive version upon arrival, or cases of false advertising that are subjects of lawsuits in numerous jurisdictions around the world. The now notorious examples of Arthur Anderson and Enron involved these two very prestigious firms in a vast coverup to hide the truth about Enron’s finances from employees and investors. The evidence of systematic lying by organizations is abundant.
Unfortunately, people are not very good at detecting lies(3). In only about 20% of the cases recorded in the study by De Paulo and colleagues was the deception discovered. Our inability to detect deception often can cause markets to fail as Nobel-winning economist George Akerlof demon strated(4). Akerlof studied the used car market and argued that the consumer’s inability to distinguish good, reliable used cars from defective used cars led the buyers to devalue all used cars.
In response, owners of quality used cars began to withdraw their cars from sale, since they were unable to obtain a reasonable price for their cars. As a result, the ave rage quality of the used cars offered for sale declined, creating a “market for lemons”.
Economists have suggested a number of remedies to overcome these problems of truth-telling. One obvious option is to do something yourself if no one can be trusted to tell the truth. Unfortunately, this option is very often not available. Mark Twain suggested another possible solution when he wryly remarked that “honesty is the best policy - when there is money in it”. Twain’s approach is implicit in the discussion of incentive alignment by economists. They sometimes recommend offering a menu of contracts. For example, an illustration of this approach is the common problem faced by private health insurance companies. Very often health insurance tends to attract those persons most likely to have poor health. However, it can be difficult for a private insurance company to distinguish between poor health risks and good health risks.
The typical solution has been to offer contracts with different combi nations of deductibles and insurance premiums. Heal thy people will tend to be attracted to options involving high deductibles and low premiums. Sicker people will be attracted by options involving low deductibles and high premiums. Each person selects that contract which aligns best with his or her interests, whatever they may be. As a result, the health insurance company does not need to know the customer’s true state of health. However, once again, such a menu of contracts may not be feasible.
A final option is to communicate one’s honesty or trustworthiness to the other party. A reputation for honesty in the past is probably the best way to show that one will be honest in the future. Firms that willingly and transparently communicate the truth about untoward events will build such a reputation for honesty.
Interestingly, corporate reputation has become the focus of much study in recent years. The value of a corporate reputation is inestimable. Companies such as Telefónica have invested tremendous financial and human resources in order to measure and manage its reputation more accurately. One study in Mexico found that 22% of a company’s reputation was due to its reputation for honesty.
So we end where we began: honesty is the best policy. However, in a strange way, corporate reputation provides the missing ingredient that Mark Twain humorously added - incentives. Repu ta tion puts the money into honesty (5).
(1) DePaulo, B.M., Kashy, D.A., Kirkendol, S.E., Wyer, M.M. and Epstein, J.A. 1996. Lying in everyday life. Journal of Personality and Social Psychology, 70: 979-995
(2) Westcott, Scott. 2006. Are your staff ers stealing= How to prevent employee theft and protect your bottom line. Inc., 28 (10), 33-35.
(3) Adler, Robert. 2007. Negotiating with liars. MIT Sloan Management Review, 48 (4): 69-74.
(4) Akerlof, George A. 1970 ‘The market for ‘lemons’: Qualitative uncertainty and the market mechanism’. Quarterly Journal of Economics 84: 488-500.
(5) Transparencia Mexicana. 2006. Índice Mexicano de Reputación Empresarial. 2006. México D.F.: Transparencia Mexicana and Consulta Mitofsky.
