Working Paper | HBS Working Paper Series | 2010

Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity (PDF file of Keynote Slides)

by Michael C. Jensen and Werner Erhard

Abstract

There is far too much concern today about the conflicts of interest between people; for example, conflicts of interest between agents and owners—historically 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 their loved ones, friends, associates, partners, employers and the public by actions that are not in their own self interest.

In this talk we focus on the integrity issues that cause huge problems in the lives of most individuals and to every one we come in contact with. These slides draw on the work on a new model of integrity that we have co-authored with Steve Zaffron and is available at:

http://ssrn.com/abstract=920625
http://ssrn.com/abstract=1542759
http://ssrn.com/abstract=1511274

We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, quality of life, and value-creation for all entities, and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology, yet its major role in productivity and performance has been largely hidden or unnoticed, or even ignored by economists and others.

In summary, we show that defining integrity as honoring one's word (as we have defined honoring one's word): 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at both the individual and organizational level, and 2) empowers the three virtue phenomena of morality, ethics and legality.

Keywords: Moral Sensibility; Lawfulness; Production; Organizations; Performance Improvement; Agency Theory; Conflict of Interests; Trust; Competitive Advantage; Value Creation;

Citation:

Jensen, Michael C., and Werner Erhard. "Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity (PDF file of Keynote Slides)." Harvard Business School Working Paper, No. 10-068, February 2010.