Evolving Business Ethics: Integrity, Experimental Method and Responsible Innovation in the Digital Age 3476058441, 9783476058447

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W I R T S C H A F T S E T H I K I N D E R G L O B A L I S I E R T E N W E LT

Christoph Lütge / Marianne Thejls Ziegler (Eds.)

Evolving Business Ethics Integrity, Experimental Method and Responsible Innovation in the Digital Age

Wirtschaftsethik in der globalisierten Welt Series Editor Christoph Lütge, Technische Universität München, München, Germany

Die Ordnungsethik analysiert die normativen Grundlagen moderner Gesellschaften einschließlich ihrer ökonomischen Aspekte und macht sie für die praktische Gestaltung zugänglich. Dies umfasst sowohl systematische als auch historische Perspektiven der Wirtschaftsethik sowie verwandter Gebiete der Philosophie, Ökonomik, Geistes- und Sozialwissenschaften. Reihe Herausgegeben von Prof. Dr. Christoph Lütge Technische Universität München Deutschland More information about this series at https://link.springer.com/bookseries/13464

Christoph Lütge · Marianne Thejls Ziegler Editors

Evolving Business Ethics Integrity, Experimental Method and Responsible Innovation in the Digital Age

Editors Christoph Lütge Technische Universität München München, Germany

Marianne Thejls Ziegler Technische Universität München München, Germany

ISSN 2524-3802 ISSN 2524-3810  (electronic) Wirtschaftsethik in der globalisierten Welt ISBN 978-3-476-05844-7 ISBN 978-3-476-05845-4  (eBook) https://doi.org/10.1007/978-3-476-05845-4 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer-Verlag GmbH, DE, part of Springer Nature 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Coverbild: © alexmu / stock.adobe.com Responsible Editor: Frank Schindler This J.B. Metzler imprint is published by the registered company Springer-Verlag GmbH, DE, part of Springer Nature. The registered company address is: Heidelberger Platz 3, 14197 Berlin, Germany

Preface

With this volume, Prof. Christoph Lütge and his team acknowledge their gratitude to Mr. Peter Löscher for the generous private donation that enabled the founding of the Peter Löscher Chair of Business Ethics in 2010. Professor Lütge and his team have enjoyed 11 years of productive cooperation and would also like to thank Mr. Löscher for his continuous interest and participation in the work and the activities of the chair. Mr. Löscher was the first CEO of Siemens to be appointed from outside the company. At his appointment, he was initially faced with the challenge of reestablishing the integrity and the reputation of the legendary corporation, which had been damaged as the corruption scandal erupted in 2006. Thanks to Mr. Löscher’s relentless energy, Siemens’ rise from the ashes has served as inspiration and role model for other corporations in similar situations, and through his professional as well as his private dedication to ethical standards he has made major contributions to business ethics in German corporate culture. The transformation of Siemens to a sustainable organization with solid compliance policies and integrity standards and his personal dedication to research in business ethics has earned Mr. Löscher wide recognition, such as a prominent placement on Ethisphere’s 2010 list of most influential people in business ethics. In line with his commitment, the chair has pursued a number of research topics, ranging from issues of corporate integrity and corporate social responsibility to experimental ethics and responsible innovation. As ethical principles are applied to emerging technologies such as autonomous driving, that is, to new kinds of agency, the limitations of basic ethical principles believed to be universal become apparent. A major challenge for business ethics and for ethics of technology is therefore to anticipate future issues that will arise with emerging technologies. This development includes an evolution also in research methods such as experimental and multi-disciplinary approaches. These tasks and research methods have been and are being pursued at the Peter Löscher Chair of Business Ethics. Ethical codes and guidelines are needed for educators, scientists, industries, law and policy makers, as well as for the general public engaged with emerging technologies not only to ensure a smooth transition into the autonomous and digital age, but also to ensure that in the process, we do not unknowingly disengage from basic human rights, values and responsibilities. v

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Recently, the chair has increased its focus on ethical aspects of future technologies, in particular on challenges posed by artificial intelligence. The chair has pursued the aim of contributing to research as well as to public debates on issues of acute relevance and in particular on issues of future relevance. In this process traditional, time tested and universally accepted principles of business ethics, including principles of integrity, responsibility and sustainability are employed to address the unique issues that emerging technologies as well as societal developments present to humankind. The volume “Evolving Business Ethics: Responsible Innovation in the Digital Age” accordingly brings together contributions in the field of business ethics from a diversity of perspectives and disciplines. The contributions are divided into three thematic categories. The Part I concentrates on traditional business ethical issues of integrity, entrepreneurship and corporate social responsibility. The Part II gathers articles on two topics of particular relevance for the Peter Löscher Chair of Business Ethics: Order Ethics and Experimental Ethics. The Part III takes up the most recent focus of the chair: responsible innovation in the digital age. München, Germany

Christoph Lütge Marianne Thejls Ziegler

Contents

The Peter Löscher Chair of Business Ethics—10 Years After . . . . . . . . . . 1 Christoph Lütge Part I Integrity, Entrepreneurship, and Corporate Social Responsibility Individual and Corporate Integrity. Stretching the Concept. . . . . . . . . . . 9 Marianne Thejls Ziegler Organizational Integrity: Discussion of an Approach to Business Ethics in the Age of Digitization. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Alexander Kriebitz and Raphael Max Risk Taking and the Ethics of Entrepreneurship. . . . . . . . . . . . . . . . . . . . . 37 Christoph Luetge Disentangling Gut Feeling: Assessing the Integrity of Social Entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Ann-Kristin Achleitner, Eva Lutz, Judith Mayer and Wolfgang Spiess-Knafl Part II  Order Ethics and Experimental Business Ethics Chances, Problems and Limits of Experimental Ethics . . . . . . . . . . . . . . . 83 Christoph Luetge Order Ethics: A Contemporary Ethics for the Digital Society. . . . . . . . . . 93 Matthias Uhl Order Ethics: The Turn Towards Polycentric Democracy. . . . . . . . . . . . . 99 Julian F. Müller Part III  Responsible Innovation in the Digital Age Responsible Artificial Intelligence. Challenges in Research, University, and Society. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Klaus Mainzer vii

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The Ethics of Crashing: Defending the Order Ethics Approach. . . . . . . . 129 Julian F. Müller and Jan Gogoll Motivating Employees in a Globalised Economy. The Moral Legitimacy of Applying Gamification in a Corporate Context. . . . . . . . . . 137 Marianne Thejls Ziegler

The Peter Löscher Chair of Business Ethics—10 Years After Christoph Lütge

1 A Brief History of the Chair The Peter Löscher Chair of Business Ethics was founded with a generous and unconditional private donation by Peter Löscher, during his time as CEO of Siemens. The Deutsche Forschungsgemeinschaft (German Research Foundation) granted me a Heisenberg Professorship, and these two contributions allowed the Chair to be established at Technical University Munich (TUM) in 2010. The University, from their side, confirmed the Chair’s continuous establishment right at the start. I studied business informatics and philosophy in Braunschweig, Göttingen, Paris, and Berlin. After having worked as a visiting scholar at the Department of History and Philosophy of Science at the University of Pittsburgh in 1997, and as a research fellow at the University of California, San Diego in 1998, I took my PhD in philosophy at the Technical University of Braunschweig in 1999. I then held a position as assistant professor at the Chair for Philosophy and Economics at the University of Munich (LMU) until 2007 and in this context, I wrote my Habilitation in philosophy. I was also visiting professor at Venice International University (2003) and Acting Professor at Witten/Herdecke University (2007– 2008) and at Technical University of Braunschweig (2008–2010). Since my appointment at TUM, I have held further visiting positions at National Taipei University (2015), Kyoto Pharmaceutical University (2015) and at Harvard University (2019).

C. Lütge (*)  Peter Löscher Chair of Business Ethics, Technical University München, Munich, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer-Verlag GmbH, DE, part of Springer Nature 2022 C. Lütge and M. Thejls Ziegler (eds.), Evolving Business Ethics, Wirtschaftsethik in der globalisierten Welt, https://doi.org/10.1007/978-3-476-05845-4_1

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The Peter Löscher Chair of Business Ethics was initially assigned to the TUM School of Education, which had only been established itself in 2009, as part of a larger program for extending the portfolio of disciplines: The TUM School of Management had been opened in 2002, and the TUM School of Governance followed in 2015. In 2011, I applied for a secondary appointment at the TUM School of Management, which was granted in the same year. Eventually, with the creation of the TUM School of Governance, the Chair was re-assigned to this new school (in effect on 1st January 2017), with ongoing secondary appointments in both the School of Management as well as the School of Education. In 2021, the new TUM School of Social Sciences and Technology was formed from the Schools of Governance and Education, and the Chair was made part of it.

2 Research Areas Under my direction, a team of philosophers and economists have been conducting research on a broad number of topics within business ethics as well as ethics of technology. A consistent central theme of these endeavors has been the perspective of “Order Ethics” (Ordnungsethik), which defines an ethical framework for the Social Market Economy. Some of the key research areas under scrutiny during the years of the Chair are the following:

2.1 Ethics of Digitization The ethical analysis of digitization issues has been a focus area of the Chair’s work for several years. One of the first steps was the Chair’s participation in the establishment of TUM’s transdisciplinary research group “Automation and society: the case of highly automated driving” (ASHAD) in 2012, in the course of the second round of the Excellence Initiative. My appointment as a member of the German Ethics Commission for Automated and Connected Driving in 2016 was a major milestone for the Chair; just one year later, this commission presented the worldwide first ethical guidelines for autonomous driving (Lütge 2017). This led to a series of new, and in many case large-scale projects in the field of ethics of digitization, such as the successful winning of a major grant by Dr. Matthias Uhl: He secured the funding for a junior research group “Ethics of Digitization” at the newly established Center for Digitization Bavaria (ZDB), which has been running since then, until Matthias Uhl took up a new professorship at TH Ingolstadt in 2021. A new dimension was added to this research focus when Prof. Lütge received a large research gift by Facebook Inc. in 2019 for the newly founded TUM Institute for Ethics in Artificial Intelligence. This institute has been set up successfully and currently hosts eight research groups on different topics of the ethics of AI. It is taken as a model for similar institutions which are being set up or planned at key research locations worldwide, for example at the Universities of Oxford and Melbourne. It also managed to gain more major partners like Fujitsu (in 2021) as well as secure EU and other funding.

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2.2 Experimental Ethics In 2012, I founded the “Experimental Ethics Lab” (EEL), one of the first of its kind worldwide (for comparison, the “Behavioral Ethics Lab” of the University of Pennsylvania, which is often cited, was founded only in 2013). The general goal of this type of experimental research is to conduct research on business ethical topics using the method of behavioral or experimental economics. A group of researchers at the Chair, led by Dr. Uhl, had been planning and conducting experimental studies on ethics at the EEL (set up with the School of Management), on topics such as fair behavior in competition, human-machine interaction, autonomous driving and others. Some of the results as well as methodological reflections can be found in Lütge et al. (2014), Jauernig et al. (2017) and Gogoll and Uhl (2018). The research of the EEL is being continued also within the research on ethics of digitization and AI. Further research areas of the Chair have been and continue to be CSR, compliance and diversity (Lütge et al. 2020) and the theoretical order ethics approach of a contractarian business ethics (Lütge and Mukerji 2016). The Chair has cooperated and cooperates with a number of international partners, among them Oxford University (in particular, the Oxford Internet Institute), Tokyo University, Sorbonne University, Johns Hopkins University, BI Norwegian Business School (Oslo), the University of Melbourne, and Ritsumeikan University (Kyoto).

3 Key Publications Among the most important publications of the Chair personnel, the following should be highlighted: • Christoph Lütge/Matthias Uhl: Wirtschaftsethik, München: Vahlen 2018. An updated and reworked English version was published with Oxford University Press in 2021. • Christoph Lütge/Nikil Mukerji (eds.): Order Ethics: An Ethical Framework for the Social Market Economy, Heidelberg: Springer 2016. • Christoph Lütge/Thomas Armbrüster/Julian Müller: Order Ethics: Bridging the Gap between Contractarianism and Business Ethics, Journal of Business Ethics 136 (4), 2016, 687–697. • Christoph Lütge: Order Ethics or Moral Surplus: What Holds a Society Together? Lanham: Lexington 2015. • Christoph Lütge/Hannes Rusch/Matthias Uhl (eds.): Experimental Ethics, Basingstoke: Palgrave Macmillan 2014. • Christoph Lütge: Ethik des Wettbewerbs. München: Beck 2014. The English version was published here: The Ethics of Competition: How a competitive society is good for all, Cheltenham: Elgar 2019. A Japanese version was published with Keio University Press in 2020.

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• Christoph Lütge (ed.): Handbook of the Philosophical Foundations of Business Ethics (3 vols.), Heidelberg: Springer 2013. • Christoph Lütge and Hannes Rusch: The Systematic Place of Morals in Markets: Comment on Armin Falk & Nora Szech “Morals and Markets”, Science 341 (6147), 16th August 2013, p. 714.

4 Teaching In the years since its opening in 2010, the Chair has been offering courses in the TUM School of Governance, the TUM School of Management, the TUM School of Education, the Carl von Linde Academy and the School of Life Sciences (WZW). All these courses have been opened for students of other schools as well. In total, more than 1000 students are enrolled per year in the Chair’s courses, the majority of them from the programs in Management & Technology, Public Policy, Engineering (different programs), and Computer Science. Of particular interest is the lecture course “Introduction to Business Ethics”, which has been a compulsory course for all first-year students of Management & Technology since 2013. This course is being taught using a number of innovative methods, including live experiments in the lecture hall, e-learning recording and guest lecture by practitioners from the fields of business ethics and compliance. Other courses, even if not compulsory for all students, have become standard elements in many programs ranging from the Consumer Science to Sustainable Resource Management. The chair also organizes the annual lecture series „Munich Lecture in Business Ethics“. A particular highlight was the 2016 lecture, given by Vernon Smith, Nobel Laureate in Economics 2002.

5 Conferences and Other Events Organized by the Chair A number of conferences and other events helped to establish the Chair as an important forum for international exchange. The first one was the conference „Business Ethics and Risk Management“, organized at the TUM Institute for Advanced Study in 2011, with Deirdre McCloskey as keynote speaker. The 2014 conference „Der ehrbare Kaufmann zwischen Bescheidenheit und Risiko“ started a regular cooperation with the Akademie für Politische Bildung in Tutzing, with whom the Chair has since then organized a conference every two years. In 2016, the conference “Diversity in Business, Institutions, and Culture” (keynote speaker: Gayatri Spivak), was organized in  cooperation with the Amerikahaus München. In 2017, the “Munich Conference on Ethics in Innovation” was organized jointly with the Max Planck Institute for Innovation and Competition, the World Forum for Ethics and Business and the European and German Patent Offices. Keynote

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speakers were Luciano Floridi (Oxford University, Jaan Tallin (co-founder of Skype)  and Sri Sri Ravi Shankar (Founder of World Forum for Ethics and Business). In 2018, the conference “Business Ethics and Digitization” marked the turn towards digitization and AI, which led into the founding of the TUM Institute for Ethics in AI soon afterwards. The Chair is indebted and grateful to the long support by Peter Löscher, without whom this success story would not have been possible.

References Gogoll, Jan / Matthias Uhl (2018). Rage against the machine: Automation in the moral domain. Journal of Behavioral and Experimental Economics 74, 97–103. Jauernig, Johanna / Matthias Uhl / Christoph Lütge (2017): Voluntary Commitments between Competitors: Trick or Truth? in: Journal of Business Economics 87, Issue 9, 1173–1191. Lütge, Christoph (2017). The German Ethics Code for Automated and Connected Driving. Philosophy & Technology, 30(4), 547–558. Lütge, Christoph / Christiane Lütge / Markus Faltermeier (eds.) (2020): The Praxis of Diversity, Basingstoke: Palgrave Macmillan. Lütge, Christoph / Nikil Mukerji (eds.) (2016): Order Ethics: An Ethical Framework for the Social Market Economy, Heidelberg: Springer. Lütge, Christoph / Hannes Rusch / Matthias Uhl (eds.) (2014): Experimental  Ethics, Basingstoke: Palgrave Macmillan.

Part I

Integrity, Entrepreneurship, and Corporate Social Responsibility

Individual and Corporate Integrity. Stretching the Concept Marianne Thejls Ziegler

1 Introduction Integrity combines a moral and a structural element and different definitions of the concept tend to distinguish themselves by the way they balance these two elements. One understanding of integrity emphasises the aspect of coherence between different values and actions. In this case, professionals or organisations are expected to “walk the talk”, in other words, to act according to the values they propagate. Critics of this definition claim that the exclusive focus on coherence deprives the concept of moral content, in so far as a Nazi might also walk her talk by engaging in unethical conduct. The second aspect of the concept of integrity emphasises the moral content. According to this definition, integrity characterises the persons who consistently do the right things, in other words, a moral person. The position emphasising the moral element would see integrity as coherence between action and the right values, and the position emphasising the structural element would see integrity as coherence between action and any values. This tension becomes apparent when the concept is applied in a professional context. Here, integrity is often coupled with compliance, and seen relative to compliance, which refers to formalised and/or legal regulation, integrity constitutes a moral pole; it emphasises not just coherence, but coherence between moral values and actions. As a consequence, organisational integrity indicates coherence between the values reflected in legislation, the values of the organisation and the values of individual employees. In the wording of J.D, Rendtorff; “individual integrity is the basis for organisational integrity in the sense that the civic responsibility of individuals helps improve corporate citizenship.” (2011) The aim of this

M. Thejls Ziegler (*)  Peter Löscher Chair of Business Ethics, Technical University of Munich, Munich, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer-Verlag GmbH, DE, part of Springer Nature 2022 C. Lütge and M. Thejls Ziegler (eds.), Evolving Business Ethics, Wirtschaftsethik in der globalisierten Welt, https://doi.org/10.1007/978-3-476-05845-4_2

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article is to investigate the extent to which the concept of individual integrity can be transferred to that of organisational integrity; it will question whether the kind of integrity that characterises individuals is also the kind of integrity that would characterise organisations. The article will distinguish between a general, broad definition and a narrow definition. The general definition of integrity covers all possible manifestations of the concept. Because the broad definition covers every possible manifestation, it may lose its informative value and, therefore, come to resemble the very imprecise idea of a decent person. The narrow definition has stricter criteria and therefore more informative power, but it is controversial because it does not cover all possible manifestations. The article argues that a broad definition of integrity applicable to a wide audience is not suitable for describing the moral requirements imbedded in the assertion of corporate integrity. However, integrity in the narrow sense is an unnecessarily strong concept for individual employees, i.e. it requires more of the employee than necessary. If the arguments are valid, then the conclusion would be that individual integrity is not necessarily a basis for corporate organisational integrity.

2 Integrity in Corporations In recent decades, the corporate world has mustered a cornucopia of scandals. As Enron went bankrupt in 2001 and the extent of the fraud became known to the public, it also came out that Kenneth Lay and Jeffery Skilling had encouraged their employees to buy Enron shares for their meagre savings, while selling their own shares behind the scenes. Enron was followed by a string of spectacular bankruptcies and the casino capitalism of the 2000s, culminating in the 2008 financial crisis. Since then, perceived and real social inequality has increased even further, leading to a political polarisation that may one day threaten the very foundation of free enterprise; the licence to participate in a free, competitive market economy. There are three reasons why corporations’ interest in compliance and integrity has increased in recent years. First of all, corporations risk prosecution and heavy fines if caught in bribery, money laundering or other kinds of corruption or fraud. Secondly, as a consequence of the scandals, the density of legal regulation has increased, particularly in Europe. The regulation of the banking sector provides a clear example. A European bank must follow around 40,000 pages of EU regulation; the Basel III accord from 2013, the regulatory framework aiming at making banks more resilient to economic crisis, contains over 4000 different regulations described on 34,019 pages. If the pace of reading is 50 words per minute and if a person reads one hour per working day, it will take a bank employee 23 years to get through the Basel III regulations (Schulte-Mattler 2018). The “risk, governance and compliance costs account for 15–20% of the total “run the bank” cost base of most major banks” (Callahan 2018). These costs are particularly difficult to cover for smaller institutions. Corporations, as well as financial institutions, therefore have an interest in preventing further intensification of regulation. To quote the

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father of stakeholder management, R.E. Freeman: “Think about a business that’s not a good citizen in the community that routinely ignores or violates local custom and law. That doesn’t pay attention to the quality of life in the community, doesn’t pay attention to issues of corporate responsibility of sustainability, of its effects uncivil society; that’s a business that is soon to be regulated into decline”.1 A third reason for the increasing interest in compliance and integrity is the loss of reputation caused by risky, unethical and illegal conduct of business people and bankers. Though the degree of social polarisation differs from country to country, it is generally assumed that the globalised market economy mainly serves the interests of economic elites. This belief contributes to undermining social cohesion. “Over half of the citizens in developed countries distrust their government and a yawning trust gap is emerging between the elite and mass populations. Among the key factors cited by citizens to explain the prevailing distrust are “wrong incentives driving policies” and “corruption/fraud”.” (Alter 2016) This social polarisation threatens to undermine the very foundation of the free market economy, because dissatisfied voters shift the balance in the political landscape towards the extremes of the political spectrum—both of which are hostile to a globalised, liberal market economy. The corporate world is highly aware of this image crisis; they are aware of the potential damage industry-hostile governments could inflict, and they are aware that “the responsibility for preventing the next corporate scandal lies not only with policymakers and regulators; it is to a large extent the duty and in the interest of business itself. Boards and senior managers are also best placed to ensure that the right actions are taken on the ground, using incentives and monitoring to build a culture of doing business with integrity” (OECD 2015). Corporations are therefore motivated to focus on compliance and integrity, in part by the threat of governmental interference in the form of heavy regulation, but also by the potential damage caused by breach of compliance and the decreasing social acceptance of ‘big business.’ One of many symptoms of increasing awareness amongst businesspeople is recurrent references to the concept of integrity (Wieland 2009). The concept is supposed to convey an impression of moral solidity and deeply grounded awareness of corporations’ social responsibility. Accordingly, larger consulting firms offer Compliance and Integrity Advisory (KPMG 2019) assisting corporations in regulatory compliance. Price Waterhouse Coopers have established a special network for women who are responsible for integrity and compliance, and they encourage their own employees to act with integrity. “In order to be successful in both a sustainable as well as valueoriented way, we and our clients are working on anchoring integrity in organisations. The ideas and approaches from our network will be multiplied by the women within their companies” (https://www.pwc.de/en/consulting/women-driving-integrity.html). EY offers their customers forensic and integrity services assisting companies in living integrity (EY 2019).

1 The quotation is from an undated interview with R.E. Freeman available at https://www.stakeholdermap.com/stakeholder-theory-freeman.html.

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Corporate ethics strategies have been divided into compliance-oriented strategies and integrity-oriented strategies (Paine 1997). A compliance-oriented strategy identifies ethical conduct with legal conduct and, accordingly, a corporation acts ethically when staying within the framework of legal regulations. The borderline is blurred between legal and ethical compliance. Compliance management covers both legal regulations, the breach of which could lead to prosecution, and voluntary soft-law principles that the corporation imposes on itself (Wieland 2014). The integrity oriented corporate ethics strategy has more faith in their employees and allows for self-governance according to ethical principles. According to Paine, these are two different strategies; however, due to increasing complexity of legal regulations, corporations need to implement policies at both levels. This explains the frequent reference to both integrity and compliance. Compliance is necessary in so far as breach of compliance rules would increase risk of prosecution and loss of reputation, and the ethical aspect ensures that compliance is rooted in a personal identification of employees and management with corporate governance rules and regulations and codes of conduct. Exemplifying this idea, EY’s 15th Global Fraud Survey uses the motto: “Do the right thing because it’s the right thing to do and not just because the code of conduct says you should” (EY 2018). EY implicitly refers to a principle-based morality that should guide their clients. The motto suggests that the compliance with rules and regulations is not sufficient enough to reduce risks of misconduct, for which reason they should be rooted in personal values. It indicates that the effectiveness of corporate governance systems depends on pre-dispositions of the employed professionals, that is to say, on both compliance and on the moral integrity of professionals. Integrity and compliance management involves clear and transparent communication where relevant information is distributed systematically and where employees further down professional hierarchies confirm having received the relevant information on legal requirements and codes of conduct (Walden et al. 2018). These systems of information distribution serve the purpose of not only informing employed professionals, but also of clarifying questions of liability. In case of breach of compliance, management avoids liability when they are able to prove that an employee participating, for example, in bribery has confirmed with their signature or with mouse clicks, that he or she has been informed of rules and regulations rendering this conduct illegal (Ibid.). These rules and regulations inform employees of legal conduct but they cannot serve as a surveillance system. If criminal energy is already present, i.e. if the employees would be inclined to commit fraud, compliance management systems would prove inefficient. The only way to secure compliance amongst employees with criminal energy would be through surveillance; a solution subjected to both practical and ethical issues capable of undermining employee commitment to the values of the corporation. In order to disentangle the relation between individual and corporate integrity, the article will look at two definitions of integrity upon which it will argue that the choice of definition has consequences for the understanding of integrity amongst professionals as well as for corporate integrity as such. If the concept of integrity

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is applied in a very broad sense, the concept becomes superficial and incapable of assisting consultants and managers in identifying the fundamental issues of the corporations. A narrow concept of integrity captures the requirements for corporations, however, the requirements imbedded in the narrow concept may pose unnecessary requirements to professionals of the organisation. The article, therefore, questions the claim that “individual integrity is the basis for organisational integrity in the sense that the civic responsibility of individuals helps improve corporate citizenship” (Rendtorff 2011). It will argue that even though compliance requires law abidance from its employees, integrity requires more from management and the corporation as such, than it does from its individual employees. The integrity concepts applied to individuals and organisations respectively would therefore have to differ. In the following section, challenges of defining integrity in general will be elaborated. They are rooted in the tension between, on the one hand, a formal definition of integrity as coherence, walking your talk and consistently complying with rules and regulations; and on the other hand, integrity as moral excellence. The definition of integrity as coherence between values is relatively unproblematic, because rules in corporations are easy to identify. Definitions of integrity as moral excellence raise the question of how a person of moral excellence acts in a corporate context. The application of abstract moral concepts and principles in the practical context of, for example, a corporation requires taking a stand around questions of more or less. How far should the employee sacrifice a professional advantage for the sake of corporate integrity? How far should loyalty towards a colleague extend in the case of minor misconduct or mistakes? Unfortunately, philosophical as well as colloquial reflections on moral issues often halter when challenged by questions of more or less in practical implementations; as a consequence, the article will attempt to sharpen the definition of integrity as a first step into the natural world.

3 The Concept of Integrity The definition of integrity as coherence between principles and actions has played a central role in the philosophical debate, because it has both a structural and a normative element. Integrity, in a broader sense, represents wholeness. The integrity of a country’s borders indicates that no foreign power has violated these borders. Data integrity refers to databases; here the data is intact in so far as no part is missing and no irrelevant data has entered the base. The concept therefore describes both a physical or structural feature of wholeness and a moral feature, when used to describe persons. The latter, however, borrows from the former in so far as moral integrity also characterises, not a single act, but the coherence of the person. The tension within the concept of integrity between, on the one hand, a structural element and, on the other hand, a moral component is pivotal for the philosophical debate, because it roughly divides philosophers into those who support

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a definition of integrity as coherence and those who emphasise moral principles. The emphasis on coherence, i.e. that a person of integrity should have strong moral principles and act in accordance with these principles, is challenged by the argument that, according to this definition, even a Nazi or a tyrant could be a person of integrity. If the only criterion for integrity is coherence between actions and principles, then a Nazi could also act with integrity while committing atrocities, as long as the principles that humans of inferior races should be eradicated is grounded in a deep conviction. “Persons of integrity may thus be responsible for acts others would regard as grossly immoral. What is important is that they act with moral purpose and display intellectual integrity in moral deliberation” (Cox et al. 2017). There are two possible answers to this objection. It can be argued that the definition is correct, and that integrity is therefore an empty concept; John Rawls argues in this manner (1988). Alternatively, real integrity would exclude immoral values and actions, because integrity by definition has to be rooted in moral excellence. In the philosophical debate, the exclusive adherence to specific principles would be immoral when the principles are immoral. Therefore, if integrity is not to be a morally empty concept, the principles behind the actions would need a foundation of moral excellence. The challenge for corporations is that employees need to be intrinsically motivated to comply with rules and regulations, because the corporations have employed free agents. If the principles of the employee differ from those of the corporation, the risk of breach of compliance increases. When EY encourages the employees to do what is right, they expect employees to align the moral principles behind their actions with the compliance rules and regulations of the corporation. One could even consider reversing the causality of Rendtorff’s argument that “individual integrity is the basis for organisational integrity in the sense that the civic responsibility of individuals helps improve corporate citizenship.” (2011) Maybe integrity requires that organisational values are the basis of individual values. We will return to this challenge of the relationship between personal and corporate integrity in the conclusion. According to Paine (1994), ethics of an organisation is rooted in the values of the management, and organisational integrity is the transfer of features of individual integrity to the organisation in terms of “honesty, self-governance, fair dealing, responsibility, moral soundness, adherence to principles, consistency and purpose.” (Paine 1994) Here, the organisational, and thus also the corporate, integrity is defined in terms of moral values. Corporate integrity is the wholeness and coherence of the organisation with regard to compliance issues, meaning that the organisation is not polluted by corruption or other forms of misconduct. As indicated above, the corporate world refers also to the moral integrity of managers and employees, because even the most efficient compliance system would not be able to eliminate the risks caused by the presence of criminal energy in the organisation. Integrity has to be reinforced systematically from the top management as well as from employees; systems as well as ethics have to be intact. Thus, Rendtorff describes organisational integrity as “an expression of the ideal moral and political unity of a corporation.

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[…] Integrity is the capacity to integrate the values and the ethical ideals of the organisation in a common framework for individual members and also for the organisation and its stakeholders” (Rendtorff 2011). The understanding of integrity as the unity or the coherence between different parts reappears in this definition of organisational integrity. Rendtorff also believes that “individual integrity is the basis for organisational integrity in the sense that the civic responsibility of individuals helps improve corporate citizenship.” (Ibid.) In order to develop the argument, we will seek inspiration in philosophical interpretations of the concept for the purpose of developing a deeper understanding of how the concept can be used in a professional context for professional integrity of the individual as well as for the integrity of the corporation as such.

4 Successfully Taking Your Life Seriously Cox et al. construct a definition of integrity as a meta-virtue covering all other virtues. They describe different attempts to define the concept and conclude that previous accounts of integrity, such as “self-integration, maintenance of identity, standing for something, living a convincing life, living a life of moral purpose” (Cox et al. 2014), capture a part of the concept of integrity, but they do not cover the whole concept. A definition that captures the whole concept would be a master virtue of all the other virtues mentioned in previous definitions; Cox et al. suggests defining integrity as successfully taking your life seriously. The definition may cover many aspects of integrity, but the expression itself, to take something seriously, is open to interpretation and provides little information about the nature of integrity. It may be so general that it captures all possible aspects of integrity, but only at the cost of its informative value. If the definition successfully taking one’s life seriously is separated from the explanations provided by Cox et al., the expression becomes rather empty, or at least it is in need of a more detailed explanation as to why integrity is the same as taking one’s life seriously. This, in return, makes the definition redundant, in other words, the definition has no informative value beyond its explanation and it is not meaningful without its explanation. For this reason, integrity is better described in terms of all the virtues and aspects that Cox et al. claim their definition would cover (Thejls Ziegler 2020).

5 The Challenge of the First Definition The Cox et al. definition lacks content and connection to real life situations, which reflects a more general challenge of moral concepts. Concepts that make a clear and unambiguous moral verdict, such as good and evil have little or no natural content. The lack of natural content makes the concept flexible in its application. Normally philosophers require “that well-defined moral concepts have consistent meanings, regardless of the contexts or situations in which they appear” (Levine 2009). Ethical concepts or theories with a specific content, however, are vulnerable to criticism

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of dogmatism. In this manner Kant’s Categorical Imperative is more abstract than Aristotle’s virtues. The latter are criticised for being dogmatic, i.e. for only applying to men living in Athens around the time of Aristotle, and not taking into account that other cultures may value other virtues etc. Therefore, the general definition of taking one’s life seriously says very little of what the person of integrity is doing, and one might as well refer to him or her as a good person (Thejls Ziegler 2020). Moral philosophers are usually interested in general and abstract concepts that aim at universal applicability (ibid.). The theory of utilitarianism is often contradicted with reference to situations where one could not want the principle of utility to apply, and the counter example typically refers to the violation of rights of minorities. Moral concepts or theories are seen as valid when a counterexample to the concept, or the theory that undermines its universal applicability, cannot be found. The definition of integrity as coherence between values and actions was criticised in the same manner. The counterexample was the possibility of a Nazi of high integrity acting according to her conviction that humans of allegedly inferior races should be eradicated. The requirement of universality makes concepts unambiguous, in so far as they always have the same moral polarity. In this manner, the sentence “he is a decent man” is always a compliment and the challenge would be to determine the extent to which a man would qualify for this description. Most people would agree that the generosity of person A towards person B in precarious circumstances is morally praiseworthy; however, as soon as the question of the extent of the individual obligation under specific circumstances is raised, the rule becomes more difficult to apply. Which precarious circumstances would trigger A’s obligation? To what extent is A obliged towards B? To what extent would the life circumstances of A affect the obligation towards B? The concept of torture has a higher naturalistic content and in clear cases of torture the verdict is normally that torture is not morally acceptable. However, the concept is also used in contexts where the moral valence is debatable. If person A leaves his or her partner, person B, the latter could claim it was torture though most people would say the risk of being left by a loved one is part of life. Additionally, even the universal immorality of torture is debatable. If a terrorist who knows the code to defusing an atomic bomb threatening to eradicate the city of Paris was caught shortly before the bomb was meant to go off, torture might be morally justified. Whether it would be the right solution is of course a different question. The concept of debt has a high natural content and a certain moral flavour; however, it also enables society to prosper by increasing business opportunities, in other words, moral flavour, or moral valence, often depends on the context (Ibid.). Since general moral rules and principles tend to create new challenges when applied in specific situations, the concepts are mostly transformed into emotivist expressions of preference that refer to the agent’s opinion on a matter, and less to the matter of concern. If A says “B is a good woman” it means that A approves of B. This general challenge of constructing and defining moral concepts, and concepts with moral connotations, without undermining their informative value is

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highly relevant for integrity. Abstract and general concepts are challenged with regard to their applicability to actual situations and thus, the question of whether a person successfully takes his or her life seriously requires agreement with regard to specific criteria for taking one’s life seriously. The criteria would have to be extracted from the context, since different persons might have different ways of taking their life seriously, and the contextuality would undermine the universal applicability that the definition was meant to satisfy in the first place. In order to avoid that a person of integrity becomes identical to a good person or a decent person, we will proceed to two more specific definitions. These two definitions both add a social dimension to the concept of integrity thereby taking into consideration how and when the concept is used.

6 Calhoun’s Integrity as a Social Virtue “Clearly, integrity is a virtue, but a virtue of what?” asks Cheshire Calhoun (1995). She outlines different examples of the coherence and integration view, i.e. the view that integrity is coherence between, for example, volition and desires or the integration of principles and actions, and concludes, that they make integrity a personal virtue or trait. By delimitating integrity to a personal trait, the important social dimension is left out. The question of integrity is always determined in a social context; it is concerned with the question of how the person relates to his or her own values in relation to a social community. A person lacks integrity when she trades her own view for the gain of status or approval, or when she changes her views in order to escape social disapproval. Each person participates in the co-deliberation of society where each member’s opinion on what matters in life is part of this deliberation. The person of integrity has the courage and self-confidence to believe in her own opinions. “To have integrity is to understand that one’s own judgment matters because it is only within individual persons’ deliberative view-points, including one’s own, that what is worth our doing can be decided.” Standing for something in an interpersonal context in a community is central to Calhoun’s conception of integrity. It means taking one’s own contribution seriously and taking what other persons stand for seriously, making integrity a social virtue (Ibid.). Calhoun’s definition has consequences for the concept of integrity, in so far as it raises unintended questions of a more controversial nature. One assumption appears to be, that we all stand for something in a community. This assumption can, however, be questioned. Many people live in a community without playing an active role. Maybe we tend to think that integrity or lack of integrity applies to all of us, which this article will question. Are we obliged to stand for something, and is it not possible to be a good person without standing for something in a social context? If the question can be answered affirmatively, then it is possible that the question of integrity is not relevant for each and every person. However, this does not mean that some people qua position in society are excluded from integrity. It does

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not mean that they thereby have no integrity in the sense of being willing to trade personal views for the gain of status. Integrity is not an all-encompassing concept where everyone has a score on the scale between Bernie Madoff and Mahatma Gandhi. People are not either of high integrity or deprived of integrity, because for most persons (including the writer of this article) the question is not even raised in the first place. A normal person will be able to influence the quality of the lives of family members, friends and closer colleagues. He or she can make a contribution in their professional life and even participate in charity work or as an active part in democratic processes. This normal person can live a praiseworthy life and be a source of happiness for others without ever having the question of her personal integrity being raised (Thejls Ziegler 2020). For those of us with limited scopes of influence, the question of integrity would only become relevant in extreme situations of severe crisis, for example, the arrival of thousands of refugees, sudden threatening changes of political circumstances, acts of blatant racism in a public or professional context, child abuse etc. This claim would take the definition of integrity in a different direction. Instead of distilling an all-encompassing essence; thereby sacrificing the meaningfulness of the concept, integrity would be approached from the question of how the concept is used. Calhoun’s classification of integrity as a social virtue indicates that integrity has to do with the manner in which an agent exercises influence. If the agent is driven by convictions that are only flexible to important changes in the perceived reality and if, in general, the agent is primarily interested in discovering what reality ‘really’ is (Flyvbjerg 1998), then the agent can interact with society and exercise his or her influence with integrity. Influence and power are what makes it possible for a person to stand for something in a social context. Without influence, visibility and voice, standing for something becomes an empty gesture.

7 Conclusion: Transferring the Conceptualisations to the Corporate World Calhoun’s outline of integrity as a social virtue indicates a reason why integrity has become a widespread concept in the corporate world. Corporations’ focus on integrity is imbedded in their public communication, because it signifies that their conduct (their walk) is coherent with what they communicate in public (their talk). For corporations, the relevance of integrity is indisputable, because their collective conduct constitutes public agency. Through their scope of action as employers and agents in a market economy, they become players in the realm of public interaction. Confirming the use of the concept to describe the conduct in a public realm, integrity is described as the “virtue par excellence of the professional politician.” (Cox et al. 2003, 104) However, this connection between politics and integrity works in both directions. Not only is integrity one of the most important virtues of the politician, but our ideal perception of a reliable politician also provides

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an example of integrity per excellence. The questions of integrity may not be an issue for an anonymous person, but it is highly relevant for the politician whom the people have equipped with power to represent their interests in government. The link of relevance between integrity and power has received very limited academic interest, most likely because the connection appears to deprive less powerful persons of moral dignity; a conclusion that only holds for a broad definition of integrity as identical to “being a decent person.” The price of a concept of integrity that is hardly distinguishable from “being a good person” is a concept that has very little informative value. Such a concept would be too weak in the context of organisations and corporations. According to Rendtorff, integrity is “the virtue that contributes to the integration of individual and organisation according to the idea of the good life with and for the other in just institutions” (Rendtorff 2011). In that way “individual integrity is the basis for organisational integrity in the sense that the civic responsibility of individuals helps improve corporate citizenship.” (ibid.) As indicated in the introduction, a compliance system will not be able to prevent fraud in an organisation of criminals. Rendtorff is, therefore, right in claiming that the moral integrity of the organisation has to be rooted in the integrity of the individual, but the concept of personal integrity would, in this context, have more in common with the first definition; the virtue of successfully taking your life seriously (Cox et al.). These outlines and definitions leave enough room for interpretation to make integrity applicable to the individual employee in an organisation. It would, however, also mean that Rendtorff could just as well claim, that decent employees constitute the basis of organisational integrity. The question is, therefore, if we accept a general conception of integrity resembling the suggestion of Cox et al., is this concept of integrity suitable for describing corporate integrity? Corporations carry a public responsibility; they are group agents with sufficient influence to stand for something in society. The role of corporations, therefore, requires a stronger concept of integrity following the line of thought presented in the definition of Calhoun. In the application of a stronger, more delimitating concept of integrity for levelling individual and corporate or organisational integrity the way Rendtorff suggests, the question should be raised whether this concept of individual integrity is larger than necessary. In order to avoid compliance issues, the corporation needs employees who have an intrinsic motivation not to commit criminal acts. Employees need to be lawabiding citizens who can resist temptations to act in a criminal manner, but do corporations need employees of personal integrity? Do they need citizens, who stand up for their principles in society? If being a law-abiding citizen is identical to being a person of high integrity, then a direct line can be made between personal and corporate integrity. The price of this levelling is the sharpness and informative value of the concept. However, the strong concept appears to be too grand for employees of a corporation. According to Ashforth and Anand (2003), corruption in corporations develops within social processes of institutionalisation, rationalisation and socialisation. In

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the process of institutionalisation, management turns the blind eye to breaches of compliance and rewards the employees who can increase turnover. Rationalisation is the process of explaining why legal infringements are morally acceptable for the organisation and socialisation takes place when newcomers learn from more experienced employees that bending the rules is acceptable. These are all interactive processes between management and employees and between employees themselves. The kind of corruption that poses risks for corporations is imbedded in the system of the corporation and not in the individuals. This highlights the importance of corporate integrity. Corporate integrity is more than the law abidance of each individual, it is the ability to create a professional interaction that does not enable corrupt structures to unfold, because these corrupt structures are exactly what can tempt law-abiding citizens to participate in corruption (Bussmann 2016). Corporate integrity challenges management to incorporate law abidance and ethical conduct at all levels of the corporation; in incentive structures, in the balance of tolerance and the encouragement of high performance, and in the willingness to face consequences of mistakes. The integrity of a corporation requires more of persons in leading positions than of persons with less responsibility, not only in terms of courage but also in terms of their ability to understand the social and political mechanisms of the corporation. By levelling the law abidance of employees with the integrity of the corporation, these aspects and challenges of integrity in corporations become hard to grasp. In so far as we accept the view of corporations as powerful agents in society, whose conduct has consequences for all stakeholders, a corporation with strong integrity has deserved this attribute for that very reason. Corporate integrity requires not only the willingness to comply with rules and regulations, but also the insight of management to implement ethical values throughout the organisation. Thus, in the corporate context, the concept of integrity grows; it acquires sharpness and content, and is, therefore, better served with definitions like the one of Calhoun. This concept, in return, requires too much of the individual employee. Just like the normal citizen of a stable and peaceful society is rarely challenged to act with integrity, so is the normal employee required to comply with rules and regulations, but his or her standing up for specific values is not what drives the progress of the corporation. This is, in return, the responsibility of the leaders, who because of their powerful position are given the opportunity to lead with integrity. Whether they can and will take advantage of this opportunity is of course a different question.

References Alter, R. (2016) The Economy if Influence, Integrity for Inclusive Growth, OECD Insights available at http://oecdinsights.org/2016/12/09/the-economy-of-influence-integrity-for-inclusive-growth/ Ashforth. B.E and Anand, V. 2003. The Normalisation of Corruption in Organisations in Kramer R.M. and Staw (edt.) Research in Organisational Behavior. New York: Elsevir Bussmann K D. 2016. Integrität durch nachhaltiges Compliance Management über Risiken, Werte und Unternehmenskultur. Corporate Compliance Zeitschrift 2/2016

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Calhoun, Cheshire. 1995. Standing for Something. The Journal of Philosophy, Vol. 92, No. 5 (May, 1995), pp. 235–260 Callahan, J. Ü·. Know Your Customer (KYC) Will Be A Great Thing When It Works, Forbes Jul 10, 2018 Cox, Damian, La Caze, Marguerite and Levine, Michael. 2017. “Integrity”, The Stanford Encyclopedia of Philosophy (Spring 2017 Edition), Edward N. Zalta (ed.), URL = Cox, Damian,  La Caze, Marguerite  and  Levine, Michael, 2014. Integrity. In  Stan van Hooft, Nafsika Athanassoulis, Jason Kawall, Justin Oakley, Nicole Saunders and Liezl Van Zyl (Ed.), The Handbook of Virtue Ethics (pp. 200–209) Durham, United Kingdom: Acumen Publishing Cox, Damian, La Caze, Marguerite and Levine, Michael. 2003 The Fragility of the Self. Ashgate Publishing Limited EY. 2018. Integrity in the spotlight. The future of compliance 15th Global Fraud Survey available at https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/assurance/assurance-pdfs/ ey-integrity-in-spotlight.pdf EY. 2019. Forensic & Integrity Servide, wir helfen Unternehmen, Integrität zu leben. Available at https://www.ey.com/de_de/forensic-integrity-services Flyvbjerg, Bent. 1998. Rationality and Power, Democracy in Practice. Chicago UniversityPress. KPMG. 2019. Compliance & Integrity Advisory. Mit Compliance und Integrität zum Erfolg – wir zeigen Ihnen wie! Available at: https://home.kpmg/de/de/home/dienstleistungen/audit/forensic/compliance-integrity-advisory.html Levine, Peter. 2009. Reforming Humanities. United States: Palgrave Macmillan OECD. 2015. Corporate Governance and Business Integrity: A Stocktaking of Corporate Practices available at https://www.oecd.org/daf/ca/Corporate-Governance-BusinessIntegrity-2015.pdf Paine, L. S. 1994. Managing for Organisational Integrity. Harvard Business Review, 72(2), 106–117 Paine, L. S. 1997. Cases in Leadership, Ethics and Organisational Integrity. Boston: Irwin McGraw Hill Rawls J. 1988. A Theory of Justice, Oxford University Press Rendtorff, Jacob D. 2011. “Corporate Citizenship and Organisational Integrity.” In Corporate Citizenship and New Governance. The Political Role of Corporations. edited by Ingo Pies and, Peter Koslowski, 59–88. Dordrecht: Springer Schulte-Mattler, H. 2018. Bankenaufsicht, Ein Stimmungsbild. 2018 EUROFORUM Deutschland GmbH Thejls Ziegler, M. (2020 Forthcoming). Moral Integrity: Challenges of Defining a Shapeless Concept. Business and Professional Ethics Journal Walden et al. 2018. ‘Profit and Loss-of-one’, Preventing fraud, enhancing compliance using digital twins. Fraud Magazine January February 2018 Wieland J. 2009. Compliance Management als Corporate Governance – konzeptionelle Grundlagen und Erfolgsfaktoren in Wieland, J, Steinmayer R. Grünninger S. : Handbuch Compliance Management Berlin: Erich Schmidt Verlag Wieland, J. 2014. Integritäts-und Compliance-Management als Corporate Governance – konzeptionelle Grundlagen und Erfolgsfaktoren, in Wieland, J.: Steinmeyer, R. Grüninger, S. (Hrsg.) Handbuch Compliance Management. Konzeptionelle Grundlagen, praktische Erfolgsfaktoren, Globale Herausforderungen. 2. Auflage, Berlin Erich Schmidt Verlag, 2014 15–40

Organizational Integrity: Discussion of an Approach to Business Ethics in the Age of Digitization Alexander Kriebitz and Raphael Max

1 Introduction In the last two decades, business ethicists and moral philosophers have been preoccupied with the assessment of globalization and digitization from an ethical perspective. The focus has been on how to steer the mechanisms of digitization in such a way that it creates a positive ethical outcome, and how to prevent negative externalities created by the increasing division of labor and the rising importance of multinational enterprises. Although business ethicists rightfully look at the economic aspects of globalization and digitization, a large ratio of the literature seem to have ignored the question of how to design and shape ethics in the context of digitization. In the following paper, argue that integrity could serve as a cross-cultural approach to solve dilemmatic situations and to overcome the confrontation of different values of conduct. Cultural conflicts can also be encountered in our everyday life, since moral standards, perceptions and expectations shape the way human beings judge individuals as well as organizations. Under the conditions of digitization, where spatial distances are rendered obsolete, the difference between moral and belief systems becomes even more pronounced. Especially the emergence of new actors, such as multinational corporations, brings along new legal and ethical challenges, since they operate with partners of different cultural and ethical backgrounds. Multinational enterprises are in particular often confronted with the

A. Kriebitz (*) · R. Max  Peter Löscher Chair of Business Ethics, Technical University of Munich, Munich, Germany e-mail: [email protected] R. Max e-mail: [email protected] © The Author(s), under exclusive license to Springer-Verlag GmbH, DE, part of Springer Nature 2022 C. Lütge and M. Thejls Ziegler (eds.), Evolving Business Ethics, Wirtschaftsethik in der globalisierten Welt, https://doi.org/10.1007/978-3-476-05845-4_3

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following questions: What should a company do when it detects child labor in its supply chain? Is it morally right to invest in countries that violate human rights or is it better to stay out of repressive regimes? Finding an answer to these questions does not only require a long process of ethical deliberation, but also depends on the cultural and ethical background of the decision makers, and puts companies into situations where they are faced with different role expectations. National governments expect legal compliance, social organizations expect adherence to human rights standards and shareholders expect increasing revenues. Given the question of how to bridge these different ethical and economic roleexpectations and how to avoid moral imperialism cultures that impose moral standards that do not share these values—(cf. Goodell 1965), we advocate to concentrate on an ethical standard that we call integrity. We do not regard integrity merely as a strategy to solve ethical disputes, but also as a common ethical baseline from where we can start a philosophical discourse on ethical values in general. In our view, integrity fulfills the two main qualities of an ethical foundation for digitization: Global acceptance and compatibility with society in the age of digitization. In the following, we start with describing the ethical paradox of the age of digitization and elaborate on why it is necessary to create an approach that tackles the challenges that digitization poses to our common understanding of ethics. Based on this, we aim to show that integrity is a cross-cultural standard and to derive a definition of integrity that reflects the special conditions of digitization. Finally, we discuss how integrity fits into business ethics and the positive effects it has for society.

2 How Digitization Influences Business Ethics The formulation and realization of normative concepts depend on the physical and mental constraints individuals face and on the relationship between causes and effects. New technologies and social developments therefore have a strong impact on normative concepts since they change the effects of our actions and widen the range of our options. An example of the impact of technologies on normative concepts is democracy. According to Rousseau, Mill and other social philosophers of the eighteenth and nineteenth centuries, direct democracy was unfeasible for larger societies and countries due to the lack of technologies (compare: Rousseau 1772). However, these assumptions have been changed fundamentally by digital technologies that enable e-voting and e-democracy. The same applies to our traditional assumptions about the economy, politics and welfare. The normative concepts of Plato, Aristotle and Confucius are based on the assumption of small city-states and relatively homogeneous societies (compare: Black 2011; Luetge 2015). However, this assumption is not valid anymore, since societies have become more heterogeneous and individualistic (Santos et al. 2017).

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American, Australian or Singaporean culture hardly exist in the sense of traditional cultures such as Korean or even German culture (compare: Black 2011). As Donald Black (2011) observed in Moral Time, our understanding of morality shifted from a right to homogeneity to a right to diversity. The idea of the coexistence of different belief system—in the form of diversity—has even evolved as founding principle and practice of many Western societies. Due to the increased contact between individuals with different beliefs, creating trust among individuals and organizations requires a shared code of conduct when it comes to ethically relevant questions. This constitutes a drastic difference to pre-modern and small societies, where interactions mostly concerned a particular group of people and where mutual interdependence leads to higher self-discipline, since defection can be sanctioned in the subsequent interaction (compare: Luetge 2015). Technological and social changes also shed light on another aspect of the Kantian question, namely the “I” and the question of the moral actor. In the age of digitization, multinational enterprises have gained an increasingly dominant position enabling them to exert an even stronger influence than national governments (Meyer and Stefanova 2001; Koenig-Archibugi 2004; Zerk 2006). Moreover, multinationals today can exert a strong social and cultural influence even without direct investment, since accessing Facebook and Google only requires a stable Wi-Fi connection. As a consequence, the power of multinationals raises several ethical questions ranging from political influence to data security and privacy concerns. The fact that multinationals do not fit into the classic concept of the ethical agent places them in a peculiar situation, where social role expectations might be conflicting. An American company operating in China that is legally bound by Chinese law might provide services to American customers. While the Chinese government emphasizes that the American company falls under Chinese jurisdiction, American society might demand compliance with human rights and other Western standards. Examples such as the Gao Feng case illustrate that the Janusfaced nature of companies can result in severe tensions (Santoro 2009). A further development that is intensified by digitization is the loss of interpretive sovereignty of churches and religious doctrines. Since the era of enlightenment, the supremacy of the church has been gradually replaced by pluralism, the coexistence of different moral systems and normative concepts across and within societies. The result is that individuals are endowed with moral self-determination and are free to choose their ethical compass. Hence, the way to solve ethical questions varies not only by cultural background, which still forms an important part of moral identity (Santos et al. 2017), but also by the self-chosen principles of individuals within specific cultural settings. As seen above, digitization of our economic, social and political systems amplifies several megatrends that challenge our historically inherited normative concepts. Moreover, global society has lost the consensus about right and wrong while traditional moral monopolies are eroding. At the same time, we witness that articulation of normative positions becomes more important in almost every part

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of society (compare: Black 2011). Individuals as well as companies are therefore increasingly being urged to take a position on ethical issues such as climate change, animal testing, discrimination and human rights. Since these tendencies contradict each other, we encounter the following paradox: Although ethics is becoming more and more individualized, ethical expectations from individuals and companies are increasing. Hence, the main challenge for business ethics is to find the right procedure to solve this paradox. In the following step, we describe how the concept of integrity evolved in different cultures and ages and posit that integrity might overcome the stated paradox.

3 Integrity as Multicultural Concept for Business Ethics As a consequence of these challenges, we need to find an ethical baseline that can be accepted from a cross-cultural perspective and that is acceptable from different cultural perspectives. The search for shared global ethical standards seems to be rather discouraging. Over centuries and continents, human civilizations and cultures have generated a plethora of different moral norms and standards. The diversity of moral standards, which was already observed in antiquity by the likes of Herodotus, Strabo and Augustine, forms the background of sayings such as “When you are in Rome, do as the Romans do”, and highlights the prevalence of diverging moral codes. Differences in moral standards and traditional codes of conduct did not only prevail at an informal level, but also entered civic and criminal law. Religious freedom, for example, is treated completely differently across nations. While the performance of Pussy Riot in the Cathedral of Christ the Saviour in Moscow was considered to be an act of blasphemy in Russia (Amos 2012), Western media and politicians regarded it as an act of free speech. Similar patterns can be observed when it comes to nearly all moral and legal standards ranging from same sex marriage to consumption of alcoholic beverages to the death penalty. We find one principle, the one of integrity that appears to be shared by different cultures. The word integrity is derived from the Latin verb “integer”, with the original meaning of “whole”. In this context, integrity is the inner sense of “wholeness”, deriving from qualities such as honesty, sincerity and consistency of character (cf. Cottingham and Hacker 2010). In Nicomachean ethics, Aristotle dealt with honesty in his writings about courage and trustworthiness. Further aspects of our contemporary understanding of the term integrity can also be derived from Cicero and the Roman Stoics, who regarded “integritas” as one of the major characteristics of good politicians (cf. Cicero,1913; 2001; Braund, 2011). In Cicero’s De imperio Gnaei Pompei, Cicero (1966) describes the ideal politician as a person endowed with integrity and judgment: “Etenim talis est vir, ut nulla res tanta sit ac tam difficilis, quam ille non et consilio regere et integritate tueri et virtute conficere possit.” Other parts of Cicero’s understanding of integrity were veritas (honesty) and constantia (consistence). The Roman poet Juvenal

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referred to the concept of the “arbiter idem integer”, to the impartial judge and referee (Kant 1797). Finally, the deontological concept of integrity in Occidental culture was largely coined by the Judeo-Christian tradition. In Judaism and Christianity alike, lying is considered a vice. Lies are explicitly forbidden in the Ten Commandments. Moreover, the term “devil” originally meant slanderer, since he represented the direct opposite to integrity, namely moral corruption. The link between individuality and integrity was the presupposition of the moral philosophy of the nineteenth century when Kant developed the categorical imperative. According to Kant, ethical decisions are based on moral autonomy, which requires the existence of metaphysical freedom to choose between several actions. In addition to that, Kant posited that the main motivation for integrity is not the consequences of an action but the fulfillment of moral duties such as hard work, honesty, and independence. However, it would be wrong to reduce integrity to an exclusively Western concept. In Confucianism, the term integrity evolved from the concept of lian (廉), a character that can be translated with honesty or cleanness and closely resembles the meaning of the Latin word “integer”. Lian is an essential pillar of Confucianism and belongs to the virtues of an ideal gentleman. Confucius (1999) remarked, “Man’s existence lies in his integrity. A man without integrity can exist merely through his luck.” Similar to Western philosophy, Confucianism understands integrity as an intrinsic virtue when fulfilling obligations to family and others in society. In Islam, the concept of integrity also plays an important role and consists of the notions of purity and wholeness. The idea of purity, which is called fitrah in Arabic, means the natural disposition of the human being. In this sense, integrity in Islam refers to the restoration and maintenance of that natural and primal state of purity. Wholeness implies consistency of the individual with his or her innate purpose. In Hinduism, moral integrity is called trikaranasuddhi (Sankar 2012). The word refers to the unity between moral claims and its implementation in concrete actions. Applied to business decisions, the concept means that people should act honestly and confess their targets. “Talk your Thought, Walk your Talk.” The virtue of trikaranasuddhi has also influenced Buddhism, where abstention from false speech and fraud is included in the pañcasīla, the five essential virtues of Buddhism (Keown, 2013). Similar concepts are also found in other cultures such as in the Japanese Bushido (Nitobe, 2006). Comparing the concept of integrity, we find that the core issue of integrity, “which is walking your talk”, is visible in all major civilizations such as Greek philosophy, Christianity, Islam, Hinduism and Buddhism, which represent a sizeable part of the world’s population. Why do all Cultures We Observe Endorse Integrity as a Norm? We explain the prevalence of integrity as a norm with a common sense argument and ask the question what would happen without organizational integrity. Under the assumption of “talk” and “walk” falling apart, communication among individuals would become distorted and coordination of human behavior would be doomed to fail. In Hobbes words:

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Although Hobbes refers to the lack of governance in the Leviathan, his main argument goes that without the state there is not enough trust among the members of society. However, since not every interaction between individuals is directly supervised and controlled by the state, trust needs to be created and sustained between individuals in order to ensure social stability. Since laws and legislation are not able to coordinate or regulate all interactions between human beings, integrity is a major tool to generate trust and to reduce uncertainty. In a certain manner, integrity plays an important role as a gap filler of the law. Kant argued similarly since he posited that moral corruption and lying cannot be the fundament of society, and describes honesty (Wahrhaftigkeit) as the basis of all duties that emerge from a contract. „Truthfulness in statements which cannot be avoided is the formal duty of an individual to everyone, however great may be the disadvantage accruing to himself or to another. If, by telling an untruth, I do not wrong him who unjustly compels me to make a statement, nevertheless by this falsification, which must be called a lie (though not in a legal sense), I commit a wrong against duty generally in a most essential point. That is, so far as in me lies I cause that declarations should in general find no credence, and hence that all rights based on contracts should be void and lose their force, and this is a wrong done to mankind generally.“ (Kant 1797)

For us, these insights entail two conclusions. First, different societies around the world and throughout history share a basic understanding of integrity, at least when it comes to interaction within the same group.1 Secondly, trust ensures the survival of social, economic and political systems, and integrity serves as the basis of trust.

4 Definition of Organizational Integrity and Its Properties As observed before, integrity is a cross-cultural standard throughout cultures, making it an appropriate candidate for a baseline of globally applied business ethics, especially in the age of digitization. As we have seen, the main function of integrity is the establishment and maintenance of trust, which would not

1 The

concept of Taqiyah allows members of Shiite confession to conceal their belief in times of danger. However, this principle does not apply for interaction within the same Shiite group.

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be possible without integrity. Hence we regard trust as the purpose of integrity, since it does not only relate to the ego, but also to communication with the “alter”. Applied to organizations, integrity refers to the trust-building process between an organization and their stakeholders. Integrity can therefore be defined as follows: 1) Integrity describes the situation in which an organization’s actions correspond to its commitment. This definition is largely derived from the traditional understanding of integrity, which defines integrity as “walk your talk”. Although, it might appear like a very low bar of ethics at first sight, “walking the talk” requires complementary standards of behavior. These complimentary standards consist of trustworthiness, honesty, transparency and law abidance, which we derive from the core meaning of the term integrity. Integrity is, however, more than just the consistency of walk and talk. Commitments and actions require three important properties (2a–c): 2a) The commitments and actions of an organization ought to be based on normative concepts. In the previous example, we have already seen that commitments have to be based on normative foundations. We understand commitments therefore as instruments aiming to trust among the organization and its stakeholders. If companies constantly change their principles, they do not generate trust. Moreover, a normative framework consists of general rules, which settle different individual cases. The use of general rules enhances trustworthiness and provides stakeholders with the information of how organizations will act in circumstances that have not occurred previously. 2b) The commitments of an organization can be self-legislated or externally determined. Based on the assumption of moral self-determination, we argue that an organization is free to choose its normative foundation. Norms can be either defined and established by the organization or externally determined for instance by legal authorities and parliaments. Laws as standardized formal institutions have the objective to regulate and to coordinate human behavior and to set the conditions under which human beings interact. Moreover, laws as abstract norms regulate political, economic and social systems. As it will be argued later, the legal framework itself does not depend on the integrity of the individuals, but is constituted by the mutual assurance of all parties to adhere to self-legislated formal principles. Walking the talk in this sense refers to compliance with the standards that have been stated by a declaration of personal will, especially in democracies, where all members of the society are integrated into the decision-making process via elections. On the other hand, companies can define self-legislated norms that are not covered or enforced by the law. 2c) The commitments and actions of an organization require transparent and reliable communication. In order to establish and maintain trust between individuals and organizations, commitment and actions have to be communicated transparently. All stakeholders should be able to foresee the major steps taken by an organization. Transparency is of central importance if the commitments

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are self-legislated and/or alter the common norm significantly. Transparent communication is furthermore of special importance in case of changes and cases of conflicting norms or when “walking the talk” becomes impossible due to uncontrollable variables such as force majeure. In such cases, we have to look at the purpose of integrity, which is establishing and maintaining trust among individuals and organizations. In order to maintain trust, it is hence necessary to act in a transparent way, explaining why the course of action is changing and informing the parties what the causes of the change of action are. If a company finds out that it is not able to deliver the promised product without going bankrupt, it has to inform its customers as soon as possible and find a solution that justifies continued trust in the company. This rationale is based on feasibility considerations, since individuals cannot be expected to harm themselves or to cause damage to others in order to keep their promise, especially if the persons to which the promise was made, such as customers, friends or colleagues, can understand the changes. Forcing an individual to deliver commitments made in the face of intolerable consequences would conflict with the ethical norm of self-preservation. In such cases, integrity means that we need to change the talk and adapt it to the conditions found in reality. If a party is unable to act according to his or her promises, he/she needs to act in a transparent way and needs to explain why it cannot deliver. Hence, transparency forms another major part of integrity.

5 Why is Integrity an Important Ethics Concept The final section will focus on the importance of integrity for business ethics in the age of digitization. Explicitly, we tackle two questions that concern the practicability and desirability of integrity for society. With practicability, we mean that ethical norms such as integrity can be realized by the actors—in our case organizations themselves—or by creating the right incentivizes to steer actors in a way that complies with integrity. With desirability, we mean that integrity serves as a desirable ethical standard that improves the conditions of all parties and stakeholders involved.

5.1 Integrity and Self-Interest A major precondition of realization and implementation of ethical norms is that they do not conflict with long-term self-interests and the principle of self-preservation. Moral norms could otherwise not be or only be enforced with high expenses. Baruch de Spinoza (Gabhard 1999) and Adam Smith (2000) argued that self-preservation itself constitutes a moral norm, since they based their ethical considerations on the individual. In his Ethica, Spinoza argued that “the more everyone seeks his/her own advantage, and tries to stay in existence, the more virtue he/she has, or in other words, the greater is his/her power of acting according to the laws

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of his/her own nature, that is, of living by guidance of reason (Spinoza and Curley 1994).” Hence, the practicability of integrity depends on whether and how integrity can be harmonized with the self-interest of the acting individual. The notion of self-interest is even more important in the context of companies, since they act under the condition of profit-maximization and constant competition. Although many companies have set goals beyond profit-maximization, implementing integrity requires that integrity and profit-maximization can be realized simultaneously. If companies fail to maximize their profits and adapt to competition, they will be crowded out by competitors. We use this approach in order to integrate the concept of organizational integrity even within business ethical approaches arguing that “the social responsibility of business is to increase its profits (cf. Friedman 2007).” If investors or banks cease to provide a company with money or loans, it will inevitably go bankrupt and not be able to survive competition with financially well-equipped companies. The fulfillment of these conditions is crucial in order to meet the requirement of practicality. Realization of integrity requires that it does not structurally contradict the economic interests of the company. Why should integrity be in line with the self-interest of a company? The answer is simple: Trust. If a company cannot be trusted, employees will fear that they will not receive their salaries, customers will fear that the product does not correspond with their expectations and so on and so forth. The role of trust is even enhanced by digitization. Due to broad access to media reports, product ratings and human rights reports, our contemporary society is increasingly aware of corporate moral behavior and reputation is becoming more and more important for stakeholder engagement and purchase decisions. Moreover, customers are able to differentiate companies with regard to ethically relevant categories. The integrity of a company is fundamental in this context, because it reflects the extent to which self-imposed norms and legal standards are implemented in one’s own actions. From a theoretical perspective, business ethicists (cf. Luetge and Uhl 2018) argue that moral behavior can be regarded as a production factor. In case of corporate misconduct, the reputational costs increase, which in turn increases the incentives for a company to act according to integrity. Hence, the stakeholders incentivize ethical behavior by including ethical considerations in their buying and investment decisions as well as their selection of employees and business partners. If a company does not act consistently and does not fulfill the stakeholders’ expectations, the stakeholders lose their faith in the products and services of the company. The creation of trust in turn is the reason why integrity is desirable for societies. This tendency can be confirmed by empirical findings. Saeidi et al. (2015) show that integrity has a positive impact on corporate reputation, which in turn leads to a higher level of customer satisfaction. According to Wang et al. (2015), ethical behavior is also attributed to enhance financial performance. MartinezConesa et al. (2017) find that a positive effect of corporate social responsibility on innovation and company performance and perceived ethics is an important driver for innovation in general. At the same time, integrity is attributed to have a risk-minimizing effect. Scandals ranging from the Ford Pinto Case in the 1970s to the Madoff investment fraud or the emission scandal in the German automotive

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industry can serve as examples of how closely intertwined ethical and economic issues can be. A thoughtful businessperson has to avoid legal infringements since reputation losses often occur even if the conduct of a company operates within the legal framework. As a result, every company has an interest in minimizing ethical risks. Shiu and Yang (2017) for example argue that corporate integrity and CSR produce insurance-like effects on stock and bond prices of companies. Therefore, the concept of integrity serves as a guide for companies that strive to combine commercial success with ethical norms. Lins (2017) suggests that the trust between a firm and both its investors and other stakeholders, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock. Due to the close connection between integrity and economic results, integrity improves the situation of all stakeholders in terms of more transparency, a higher level of consumer satisfaction and sovereignty. In order to maximize the long-term profit of a company, it must make rational decisions capable of improving the situation of all stakeholders; in the end this includes acting according to the principle of integrity. In reality, we often see that corporations are acting irrational and do not fulfill the theoretical assumptions stated here. In such cases, the legal framework has to set incentives to foster integrity in companies, but companies also have to foster integrity in their own structures. If companies do not incentivize integrity, individuals will strive to realize their self-interest in ways that might contradict integrity.

5.2 Integrity and Competition In the following section, we discuss the positive consequences of integrity in a globalized and digitized economy. A major feature of modern economies is that competition is the precondition for an efficient allocation and distribution of resources. The implications of integrity for competition are twofold: First of all, integrity has a positive impact on the socio-economic performance of society, since it enhances trust in public institutions and enterprises. Empirical studies show that a high level of development correlates with social trust in institutions (eg. Hugh-Jones 2015). Trust itself can be generated by formal or informal institutions, which reward actors that are acting in a trustworthy way and which punish others that defect (Ostrom 1990). It is, however, impossible to create contracts that safeguard that all actors are trustworthy, since contracts cannot specify what must be done in every possible contingency. Moreover, the contracting partners need to be flexible enough to react to sudden changes and to adapt their cooperation to external shocks. Another advantage of organizational integrity is the prevention of corruption and fraud, which distorts the efficient allocation of resources and increases transaction costs as well as risks of prosecution. Secondly, organizational integrity improves market solutions by strengthening consumer sovereignty. Consumer sovereignty, which refers to the controlling power of consumers in the market (Hutt 1940), ensures that market transactions are efficient and that consumers can maximize their utility. Corporate misconduct

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such as fraud, on the other hand, harms customers and competitors alike, since it diminishes the level of trust in the market and reduces the overall benefit to customers. A common tool to prevent these forms of corporate misconduct and to improve the comparability of goods are certifications and product rankings. Although both often play a crucial role in providing consumers with undistorted information, we find that many markets lack comparability and a transparent certification system. In such environments, consumer decisions depend mostly on the reputation of the corporation and the product, which incentivizes companies to invest in organizational integrity. The incentives to invest in reputation are rising due to improved technologies and social networks, as discussed in the previous chapter. As the role of ethics and reputation as production factors becomes more evident, integrity plays an increasing role in the creation of more transparency and the fostering of consumer sovereignty. Considering these two advantages, we find that the benefit of integrity lies in the high opportunity costs society would face without trust, since integrity depicts the mode of a society where the “pacta sunt servanda” is not only implemented in written law, but also in everyday practice by the actors constituting society. If organizations such as companies, but also governmental bodies are not designed in a way that incentivizes integrity, transaction costs are high. In this sense, integrity is important as a substitute for formal contract enforcement, but it also ensures that competition benefits the survival of the fittest and not the survival of the villains.

5.3 Integrity and Discourse Integrity not only plays an important role for the social framework, but also for ethical discourse. As stated above, a multicultural discourse about ethical norms becomes even more important in the age of digitization. Discourse also has the function of discussing the way the legal framework is set. Habermas, one of the most prominent theorists of discourse, claimed that an ideal speech situation has to fulfill the following assumptions: Every subject with the competence to speak and act is allowed to take part in discourse (Habermas (1991): • Everyone is allowed to question any assertion whatever. • Everyone is allowed to introduce any assertion whatever into discourse. • Everyone is allowed to express their attitudes, desires and needs without any hesitation. However, even if all of these criteria are fulfilled, we observe discourse failure originating from a lack of organizational integrity. An example for this situation is the Dieselgate scandal. Due to increased regulations for emissions, automotive companies were in fierce competition to dramatically reduce their emissions. However, many companies such as Volkswagen were technologically unable or unwilling to meet the criteria of the environmental institutions and

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began to circumvent regulations by using defeat devices in order to maintain or even increase their market shares. Defeat devices were used to disable emission controls in order to create the impression that the manufactured cars are environmentally friendly. The Dieselgate scandal exemplifies behavior that violates the principle of integrity. This kind of fraud distorts competition since customers are buying products under wrongful assumptions; it conflicts with legal regulations since defeat devices are illegal, and it harms discourse on the proper standards for the automotive industries. If the companies had sent a strong signal that they are unable to deliver the standards set by the legal framework, they could have set a process in motion that enabled an adjustment of legislation to the moral preferences of society. If the public lacks information or is incorrectly informed about societal problems such as child labor or pollution, it is unable to solve those matters. A company that denies the exploitation of children is not only complicit in violating the law, it also impedes discourse of how to improve the legal framework in order to prevent child labor. Integrity can help improving the understanding of social problems and to set a discourse capable of defining conditions under which competition is enforced (Luetge 2016). The question of how to increase integrity in public discourse has been a major question in recent years and is connected to the issue of digitization.

6 Conclusion In this paper, we have assessed the importance of integrity in a digitized and globalized world and found that “walking the talk” is an ethical principle that can be found throughout cultures, since it is the precondition for social interaction and communication. Honesty, reliability and transparency are major components of this concept and reflect the purpose of integrity, which is establishing trust between people. Integrity is not just intrinsic virtue, but rather an instrument that generates trust among the members of society and reduces transaction costs. Economic growth and social cohesion largely depend on the trust between members of society. The fulfillment of promises and informal contracts cannot always be controlled by the legal framework and requires integrity. Integrity, however, is not only beneficial for society, but also for the actors themselves. The importance of corporate reputation is increasing since digitization increases exchange among consumers and increases the likelihood of revealing scandals. Besides the trust building function, integrity serves the function of informing actors about consequences of their economic decisions. If market participants and the greater public are well informed about social problems and dilemmatic situations, the public is able to discuss how to redefine the legal framework and how to design institutions in a way that leads to the greater good. These two functions of integrity justify that integrity should play a greater role in business ethics. Hence, we suggest that business ethics should enhance research on integrity and assess its potential for ethics discourse in general.

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Risk Taking and the Ethics of Entrepreneurship Christoph Luetge

1 Introduction In his famous article from 1905, “the Protestant ethics and the spirit of capitalism”, Max Weber (1905/2005, 29) described the situation of the continental European textile industry until around 1850: “The number of business hours was very moderate, perhaps five to six a day, sometimes considerably less; in the rush season, where there was one, more. Earnings were moderate; enough to lead a respectable life and in good times to put away a little. On the whole, relations among competitors were relatively good, with a large degree of agreement on the fundamentals of business. A long daily visit to the tavern, with often plenty to drink, and a congenial circle of friends, made life comfortable and leisurely.” This was, according to Weber, capitalist economy only according to its form, but not according to its spirit. Its spirit was still that of a traditionalist economy, with its lifestyle, the traditional modest profit that was mutually accepted, and the traditional daily measure of work. However, this comfort zone was suddenly disturbed, when a new entrepreneur appeared who paid much more attention to the customers, and tailored products to their needs and wishes. It was then that the spirit of modern capitalism entered the arena. However, this entrance was not an easy one, as the entrepreneur found himself opposed by a wave of suspicion, even hatred, and moral outrage. Weber believed that only a certain character of entrepreneurs could prevent them from failure in business, a strong character that included clarity of vision, energy and, maybe most important, certain ethical quality. Among them, Weber countered a kind of sober modesty: the new type of entrepreneurial was supposed

C. Luetge (*)  Peter Löscher Chair of Business Ethics, Technical University Munich, Munich, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer-Verlag GmbH, DE, part of Springer Nature 2022 C. Lütge and M. Thejls Ziegler (eds.), Evolving Business Ethics, Wirtschaftsethik in der globalisierten Welt, https://doi.org/10.1007/978-3-476-05845-4_4

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to be averse to unnecessary effort; he could rather be seen as an ascetic, not living in luxury. According to Weber, it was primarily this specific ethos that led to the rise of the Occident, indeed to the rise of the entire capitalist economy. To precapitalist man, this ethos was completely incomprehensible: for him it was totally baffling, even despicable, how anyone could regard it as the only aim of his life to “to sink into the grave weighed down with a great material load of money and goods” (Weber 2005, 33).Pre-capitalists could only explain this as the “product of a perverse instinct, the auri sacra fames” (Weber 2005, 33). So it was Weber’s thesis that a certain ethos was driving capitalism. As historical evidence, however, has shown, this thesis can no longer be maintained (cf. e.g. Luetge 2012a). There are a lot of other situational conditions and constraints to be taken into account, too. A specific ethos, even coupled with a certain (Protestant, Calvinist) religion, cannot any longer be seen as the main factor, for empirical and theoretical reasons. However, it can still be asked how ethics can be connected, in a forward-looking and innovation-promoting way, to entrepreneurship. Usually, ethics is seen as a means of slowing down, of deceleration—to put it bluntly: as a brake. It asks for moderate profits, for satisficing instead of maximising, for avoiding risks altogether, for putting limits and boundaries to the otherwise unleashed economy. Yet, as I will argue, an ethics for dynamic societies should also encourage risk-taking. This ambivalent nature of ethics with regard to entrepreneurship is somehow expressed in the words from Thomas Mann’s “Buddenbrooks”, written in 1901, where the old Lübeck merchant gives as advice to his son and future owner: “My son, enjoy doing business during the day, but only the kind of business that allows us to sleep peacefully at night.” (“Mein Sohn, sey mit Lust bey den Geschäf­ ten am Tage, aber mache nur solche, daß wir bey Nacht ruhig schlafen können.”) This quote is not a simple call for conducting one’s business in a moderate way (sleeping peacefully at night), but also for enjoying doing business at day. This implies taking risks in order to expand one’s company, and not just aiming for moderate profits. It is what the merchants of the Hanseatic League, in Lübeck and elsewhere, had been doing for centuries, but which got lost or at least reduced in some companies, as the story of the “Buddenbrooks” tells. Ethics should promote risk taking and the entrepreneurial spirit, not only in the economy, but in all parts of society. To argue in favour of this, I will proceed as follows: Sect. 2 will give an overview of some definitions of entrepreneurship. Sections 3 and 4 will discuss the link of risk-taking and competition, respectively, to the entrepreneurial spirit. Section 5 relates the ethics of risk-taking to experimental findings, and Sect. 6 draws some consequences of the present deliberations for ethics in general, leading to a short epilogue.

2 Definitions of Entrepreneurship Economists have defined the concept of entrepreneurship in different ways. The concept originated in France, already during the late Middle Ages. In the 18th century, the early Irish economist Richard Cantillon defined it as “self-employment of any sort.

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Entrepreneurs buy at certain prices in the present and sell at uncertain prices in the future. The entrepreneur is a bearer of uncertainty.” (Cantillon 1755/1931, written around 1730).

In 1816, Jean-Baptiste Say called the entrepreneur “the agent who unites all means of production and who finds in the value of the products which result from them, the reestablishment of the entire capital he employs, and the value of the wages, the interest, and rent which he pays, as well as profits belonging to himself.” (Say 1816, p. 28 f.) One of the most famous characterization has been provided by Joseph Schumpeter (2008, 83), who wrote that there is “a process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism…”. The metaphor of creative destruction has since then been used to characterize not only the activities of the entrepreneur themselves, but the entire process of the market economy. Ludwig von Mises (1996, 585), in his treatise first published in German as “Nationalökonomie, Theorie des Handelns und Wirtschaftens” (Genf 1940), places particular emphasis on the difference between entrepreneurs and other people: “What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do; but he judges the future in a different way.”

Mises’ tradition has been continued within the Austrian School of Economics. One of their main contemporary proponents, American economist Israel Kirzner (1997, 72/69) connects entrepreneurship and discovery: “An entrepreneurial attitude is one which is always ready to be surprised, always ready to take the steps needed to profit by such surprises. The notion of discovery, midway between that of the deliberately produced information in standard search theory, and that of sheer windfall gain generated by pure chance, is central to the Austrian approach.” “The entrepreneurial role: In standard neoclassical equilibrium theory there is, by its very character, no role for the entrepreneur. In equilibrium there is no scope for pure profit: there is simply nothing for the entrepreneur to do.”

And in a similar spirit, Jeffry Timmons (1994, 7) linked entrepreneurship to creativity and vision in an even more general sense: “Fundamentally, entrepreneurship is a human creative act. It involves finding personal energy by initiating and building an enterprise or organization, rather than by just watching, analyzing, or describing one. Entrepreneurship usually requires a vision and the passion, commitment, and motivation to transmit this vision to other stakeholders, such as partners, customers, suppliers, employees and financial backers.”

Entrepreneurship is, therefore, not only for a special group or class of people. This is what M. Yunus (2006) is convinced of: “All people are entrepreneurs, but many don’t have the opportunity to find that out.”

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Creativity and discovery, thus, are two main elements of entrepreneurship. However, risk-taking must be added to them. The point that entrepreneurship crucially implies taking risks has been particularly stressed by Frank Knight (1921/1971) and Peter Drucker (1985). It is present in most of the definitions above in that they highlight that creative role of the entrepreneur. In recent years, risk management has become an important task for corporations and entrepreneurs. It is pivotal, first, for the economic aspect: Enterprises should be successful not only in the short, but also in the long run. This idea is highlighted today by the many approaches to sustainability, which encompass nowadays not only the classical issues of sustainability in production, resources or in the supply chain, but also sustainable innovation, sustainability marketing (Belz und Peattie 2012), and others. But risk management is also a key factor for the ethical aspect of the corporation: especially large corporations must reckon with the possibility of ethical risks. Such ethical risks may arise in problems like corruption, discrimination, working conditions or employee management. And sooner or later, such ethical risks can easily become economic ones, mostly via one of the following ways: either certain actions by the corporation cause damages to its reputation, which in turn leads to reduced sales. Prominent examples of this are Arthur Andersen, which had to go out of business after its reputation was severely damaged during the Enron scandal in 2001, or the major reputational losses Toyota and Goldman Sachs suffered in 2010. The second way involves corporations being heavily fined for violating certain laws and standards. In recent years, fines have become significant even for large corporations not only in the US, but in Europe and countries like Germany, too. For example, after its corruption scandal, Siemens had to pay about 1 billion Euros in fines. ThyssenKrupp, in 2007, was obliged to pay a fine of almost half a billion Euros by the European Commission, for illegal price fixing. And even seemingly smaller and more innocent industrial sectors like vitamins have given cause to fines as large as 790 million Euros in 2001, again by the European commission. It thus becomes clear that even for large multinationals, legal fines due to ethically inacceptable behaviour are a serious economic risk.

3 Risk Taking and Entrepreneurial Spirit Ethical risks make risk management necessary. But what is often overlooked, is the fact that not taking risks can be an ethical risk, too. True, in terms of classical risks, most are aware of the thumb rule according to which any action is better than no action. But in the field of ethics, most approaches and thinkers call mainly for reducing risks, limiting them—and not seeking new ones. A rare counter-example is philosopher Christoph Hubig (2007, 102), who pointed to the fact that not taking alternatives into account can be a risk factor, too, and that new chances should always be seen in relation risks. He calls for understanding risk

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management as the flip side, or even as just one aspect of opportunity management. For ethics, this would imply quite a radical turn. However, the idea is not totally new. There is a famous story in the Bible, the parable of the talents (Mt 25, 14–30 and Lk 19, 12–27), which tells the following story (here according to Luke): A master is preparing to leave his house to go on a long journey. He calls his servants and entrusts them each with the same amount of money, telling them to do business with it until he comes back. After his return, the master demands an accounting of his servants. The first of them has managed to generate the tenfold, and he is greatly rewarded by the master. The second servant has generated the fivefold and is also rewarded, in relation to his achievement. The last one however hands the master his money back, telling him that he just hid it because he was afraid of losing it and being punished. Far from being satisfied, the master now is particularly angry. In the version of Matthew, he says: “You wicked and slothful servant. You knew that I reap where I didn’t sow, and gather where I didn’t scatter. You ought therefore to have deposited my money with the bankers, and at my coming I should have received back my own with interest. Take away therefore the talent from him, and give it to him who has the ten talents. For to everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away. Throw out the unprofitable servant into the outer darkness, where there will be weeping and gnashing of teeth.” (Mt 25, 26–30) Many theologians have tried to interpret this parable as something else than a case for entrepreneurial spirit and profit maximisation. It has been said the parable is meant in a metaphoric sense rather than in an economic one, implying that one should not hide one’s talents. Certainly, the story does have this aspect, too. But it can hardly be denied that the parable is against moderation, against being content with moderate success, against merely satisficing rather than maximizing one’s utility. It is a clear call for investing, in entrepreneurial qualities, which we in principle all have, as the parable seems to imply. Moreover, the means for generating this investment are also mentioned, as a competitive process is put to work between the servants. And in the end, some clearly end up with having more than others, an outcome that is regarded as neither unjust nor inevitable, but as the result of entrepreneurial action, as the return on an investment. And those who turn out not to be sufficiently productive, end up with losing all they got. Therefore, the Parable of the Talents can be understood as a call for a controlled risk-taking.

4 Competition and Entrepreneurial Spirit In a famous article, “Competition as a Discovery Procedure”, Friedrich August von Hayek (1978) lists the main advantages of competition. Hayek puts forward not an unconditional, but a functional argument in favour of competition: He insists that competition creates broadly distributed wealth, because

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a) it sets incentives for creativity and fosters innovations by pioneers, b) it disciplines the suppliers and c) it enables the quick spreading of new ideas and problem solutions.1 In this way, competition, however, mainly creates pressure, not freedom. The idea of the market as primarily an expression of freedom (Friedman 1962) is misleading. Another point that has been added mainly by German economists Walter Eucken (1949) and Franz Böhm of the Freiburg School is that competition is an efficient tool for destroying and eroding temporary positions of power. Hayek himself, however, also points to the disadvantages of competition2: The market aims only at efficiency, not at “social justice”. Even if Hayek regards social justice as an empty concept, a mirage, he is still in favour of correcting some results of the market, for example, doing something for the poor, like establishing minimum standards of living. Other disadvantages are the (seemingly wasteful) simultaneous developments of several competitors and the problem of ‘losers’: who are the ‘losers’ of competition, are there short-term as well as long-term ‘losers’ (and how can those be compensated)? Finally, luck plays a significant role in competition, too, not just merit and ‘needs’. If it should be ‘needs’ alone that count (whatever these needs are), then ethics and competition cannot go together. A general solution to the ethical problem of competition could be the classical Smithian idea that morality can be found in the rules of competition: Morality gets implemented on the level of rules, while competition takes place on the level of individual actions. First, we have to distinguish between rules and actions. When all competitors are subject to the same rules, no one can gain an advantage by failing to adhere to standards at all or by sticking to ‘lower’ standards than his competitors. All sorts of examples can be found for this, from tax laws to ecological protection.3 A possible counter argument could ask whether too much competition can be a bad thing too. Certainly, unrestricted competition can negate the advantages—but this is not a simple question of too much or too little competition. Certain parameters of competition must be restricted, like fraud or blackmail; if we allow for these, competition leads to undesired results. However, after these parameters have been set, then competition should be strict and might lead eventually to the ruin of (less productive) competitors. This is the consequence of the market economy as an economic system.

1 This

is Hayek’s well-known argument against the possibility of a central planning authority, which, he argues, could never amass nor manage the amount of information necessary to produce and distribute the goods. 2 In the same vein, Schumpeter’s (1942) use of the (originally Marxist) term “creative destruction” is equally ambivalent. 3 Cf.

the examples given by Pies et al. (2009).

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According to Harvard historian Niall Ferguson (2010), competition is also one of the killer applications that “the West” developed but other cultures (originally) lacked. Globalisation, then, is a process of others appropriating these killer applications gradually. However, from an intercultural perspective, competition has always been present in non-European cultures, albeit in different forms: For example, while ancient China has traditionally been regarded as anti-competitive and stuck in traditions (Jones 1981), some findings contradict this: For example, China was conducting highly competitive exams for civil servants. Starting in the seventh century, these exams required the knowledge of canonical Confucian texts. The candidates had to know central books of Confucianism, like the “Analects”, the books of Mencius and five others like the “Book of Songs”, the “Book of History” and so on. While in the beginning, some elements of these exams still favoured certain groups, especially the aristocracy, these were eventually abolished completely, leaving only a purely knowledgebased exam. This was a highly competitive system, which in Europe at that time can be compared only to (some) religious orders. It was however not a case of classical economic competition on ‘ordinary’ markets. The upshot of this is: Competition is not an exclusively economic concept. Of course, economists define it and try to develop conditions for good and bad competition. But we find forms of competition quite different from the ones usually discussed in economics, forms that might be more acceptable to critics of capitalism: in sports, in chivalry, in auctions, in other cultures like ancient China, and even in ‘socialist competition’: Lenin was not against competition: There is a 1917 speech in which he goes as far as saying that capitalism destroys competition and that socialism is in favour of competition by breaking up monopolies: “(...) capitalism long ago replaced small, independent commodity production, under which competition could develop enterprise, energy and bold initiative to any considerable extent, by large- and very large-scale factory production, joint stock companies, syndicates and other monopolies. (...) competition is replaced by financial fraud, nepotism, servility on the upper rungs of the social ladder.” (Lenin 1917)

Socialism, according to Lenin, does not aim at doing away with competition: “Far from extinguishing competition, socialism, on the contrary, for the first time creates the opportunity for employing it on a really wide and on a really mass scale, for actually drawing the majority of working people into a field of labour in which they can display their abilities, develop the capacities, and reveal those talents, so abundant among the people whom capitalism crushed, suppressed and strangled in thousands and millions.” (Lenin 1917) The task of a socialist government is to organise competition: “Now that a socialist government is in power our task is to organise competition”—and the elimination of monopolies “is the opportunity created for the truly mass display of enterprise, competition and bold initiative” (my italics).

It is true that Lenin wanted competition mainly to take place within the organisation and administration, but he advocates still competition of some sort:

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C. Luetge “(...) we must organise the accounting and control of the amount of work done and of production and distribution by the entire people, by millions and millions of workers and peasants. (...) And in order to organise this accounting and control, which is fully within the ability of every honest, intelligent and efficient worker and peasant, we must rouse their organising talent, the talent that is to be found in their midst; we must rouse among them – and organise on a national scale – competition in the sphere of organisational achievement … Competition must be arranged between practical organisers from among the workers and peasants. Every attempt to establish stereotyped forms and to impose uniformity from above, as intellectuals are so inclined to do, must be combated.”

One of the most important theorists of Marxism is in favour of competition—and this is very much reminiscent of a quote from British Business Secretary Vince Cable in 2010: “Capitalism takes no prisoners and kills competition where it can.” (Cable on 22nd Sept 2010) This is a criticism of capitalism that even an advocate of the market economy could subscribe to: It is immoral for a company to actively fight competition. It is not immoral to fight competitors within the boundaries allowed by the rules of competition, but from the ethical point of view outlined here, turning against the system of competition itself should be seen as unethical. For example, a former monopolist that envisages competition in the future should not actively engage in preventing competition, lobbying against it or taking steps to discourage potential competitors from taking part in it. It would be ethical, however, to prepare one's company for the future market and taking steps to increase the efficiency of production processes and so on.

5 Risk in Experimental Economics: A Cross-Cultural Perspective In recent years, the field of experimental economics has become a very fruitful resource for business ethics. Ethicists should not overlook experimental findings, concerning, e.g., moral attitudes, moral perceptions or conceptions of justice. Certainly, values cannot be derived directly from facts, but this does not mean that facts have no bearing or no implications for values. In particular, there are “bridge principles” between descriptive and normative aspects, like “Ought Implies Can”.4 The facts do not stand for themselves in ethics but are in need of interpretation— yet certainly they gain relevance for normative questions. On the topic of risks, a number of authors in experimental economics and psychology have conducted studies on comparing risk attitudes between different countries, some of which will be listed here: 1. Four studies relied on questionnaires: In 1994, Rohrmann conducted a study using population samples from Australia, Germany and New Zealand. He found that differences for risk ratings are greater between different groups in

4 Cf.

Luetge, Vollmer (2004).

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society than between different nationalities. In 1999, the same author conducted another study comparing student samples in China and Australia. The results showed that Chinese were less prepared to take risks than the Australians. In particular, the risk attitudes differed in ‘morally questionable’ areas like gambling, illegal drugs or unsafe sex. Third, Weber and Hsee (1998) used student samples to compare risk perceptions in financial settings between the US, Germany, Poland and China. The perceptions differed considerably, but in all countries less risky options were generally preferred. Fourth, the study of Kloep et al. (2009) analysed the attitudes of more than 900 people from ages 14 to 20 in Turkey and Wales. While their risk-taking behaviors differed, the motives for risk-taking were very much the same. 2. In a meta-analysis, Boholm (1998) compiled studies from different countries. Her findings showing that US, France, Poland, Hong Kong and Japan do not significantly differ in risk magnitude means. However, Russians were found to have much lower risk magnitude ratings than US citizens. 3. Three other studies relied on survey data (primarily from the GSOEP) for looking at issues of risk-taking among immigrants: Bonin et al. (2006) found that, in Germany, immigrants of the first generation are more risk averse than Germans. However, this difference disappears in the second generation. Constant and Zimmermann (2006) showed that immigrants are more willing to take risks in that they are more likely to be self-employed. In Jaeger et al. (2010)’s study, people with lower risk aversion were found to be more likely to migrate, at least within a country (Germany, in this case). 4. Finally, a study on 35 firms by Griffin et al. (2009), using data from 1997 to 2006, found that cultural variables, in particular, culture-specific avoidances of uncertainty, have both direct and indirect influence on attitudes towards risk on the company level and should not be underestimated. These findings cast substantial light on the issues of risk taking and ethics.

6 Consequences for Ethics The arguments I have brought forward here have consequences for ethics in a number of ways. First, ethics should cooperate more intensely with other disciplines, and not merely regard itself as a theoretical enterprise mainly concerned with language philosophy, linguistics or deontic logic. As K. Appiah (2010) recently stressed, many great philosophers of the past have ventured into the empirical realm as well—without ceasing to be great philosophers. Some paradigms of ethics, especially at least some strands of Analytic Ethics would benefit from an enriched perspective on social and economic phenomena. Second, major ethical categories might be reinterpreted with the perspective in mind that I have been developing here. Duty can be reinterpreted not as being catergorically opposed to self-interest, but as an encouragement for (long-term)

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investments in one’s (long-term) interest. Duties to act in a specific way might be taken as a heuristic tool for long-term commitments to specific practices, standards or values—and these are not meant in a financial sense only. The old philosophical (Aristotelian) concept of phronesis might be interpreted as wise economic and ethical balancing, as economic calculation in a wider, but not necessarily altruistic perspective, as a way of doing well by doing good. More examples could be given.5

7 Epilogue Just as the idea of the honest business man is embodied in the “Buddenbrooks” as mentioned above, the general idea of ethics and economics as partners can be found in Thomas Mann’s writings as well. In the final part of the tetralogy “Joseph and His Brothers”, “Joseph the Provider” (Joseph der Ernährer), the biblical Joseph is presented as the honest economic politician, who administrates Egypt for the Pharaoh in a wise way, “with a system that combined exploitation of the economic situation with benevolence” (in Original: “ein zusammengesetztes System von Ausnutzung der Geschäftslage und Mildtätigkeit”, Mann 1943/2004, 308). He gives seeds to the poor who cannot afford them, but sells seeds to the rich, “stipulating that they bring their irrigation systems up-to-date and refusing to allow them to continue to bungle along in feudal backwardness…” (in Original: “nicht ohne ihnen zur Auflage und Bedingung zu machen, daß sie ihr Bewässerungssystem auf die Höhe der Zeit brächten und es nicht länger in feudaler Rückständigkeit dahinschlampen ließen” (Mann 1943/2004, 310) And Joseph is finally—in a manner almost reminiscent of Adam Smith—called “no divine hero, no messenger of spiritual salvation, but merely a man of business…” (in Original: “kein Gottesheld und kein Bote geistlichen Heils, sondern […] nur ein Volkswirt” (Mann 1943/2004, 410). That would be an ideal to achieve.

References Appiah, K. (2010), Experiments in Ethics, Harvard: Harvard University Press. Belz, F., Peattie, K. (2012), Sustainability Marketing: A Global Perspective, second edition, Hoboken/New Jersey: John Wiley & Sons. Boholm, A. (1998), „Comparative studies of risk perception: a review of twenty years of research“, in: Journal of Risk Research 1(2), London: Routledge, 135–163. Bonin et al. (2006), „Native-Migrant Differences in Risk Attitudes“, DIW Discussion Papers 560. Cantillon, Richard (1755/1931). Essai sur la Nature du Commerce en Général. London, UK: MacMillan, new ed. 1931. Constant, A., Zimmermann, K. F. (2006), „The Making of Entrepreneurs in Germany: Are Native Men and Immigrants Alike?“, Small Business Economics 26, 279–300.

5 Cf.

Luetge (2012b) and (2013) as well as Homann (2002).

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Drucker, P. (1985), Innovation and Entrepreneurship: Practice and Principles, New York: Harper & Row. Eucken, W. (1949), Die Wettbewerbsordnung und ihre Verwirklichung, ORDO 2, 1–99. Ferguson, N (2010), „In China’s Orbit”, Wall Street Journal, Nov. 18, 2010. Friedman, M. (1962), Capitalism and Freedom, Chicago: Chicago University Press. Griffin, D. et al. (2009), „Cultural Values and Corporate Risk-Taking“, SSRN Working Paper. Hayek, F. A. v. (1978), „Competition as a Discovery Procedure”, in: F. A. v. Hayek: New Studies in Philosophy, Politics and Economics, Chicago: University of Chicago Press. Homann, K. (2002), Vorteile und Anreize: Zur Grundlegung einer Ethik der Zukunft, ed. C. Lütge, Tübingen: Mohr Siebeck. Hubig, C. (2007), Die Kunst des Möglichen: Grundlinien einer Philosophie der Technik, Bd. 2: Ethik der Technik als Provisorische Moral, Bielefeld: transcript. Jaeger, D. A. et al. (2010), „Direct Evidence on Risk Attidutes and Migration“, The Review of Economics and Statistics 92(3), Cambridge: MIT Press, 684–689. Kirzner, I. M. (1997), „Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach“, Journal of Economic Literature, Vol. 35 No. 1, 60–85. Kloeb, M. et al. (2009), „Motives for risk-taking in adolescence: A cross-cultural study“, Journal of Adolescence 32, 135–151. Knight, F. (1921/1971), Risk, Uncertainty, and Profit, Chicago: University of Chicago Press. Lenin, V. I. (1917), „How to Organise Competition“, in: Collected Works, Vol. 26 (4th English Edition translated by Yuri Sdobnikov and George Hanna and edited by George Hanna), Moscow: Progress Publishers, 404–415. Luetge, C., Vollmer, G. (ed.) (2004), Fakten statt Normen?, Baden-Baden: Nomos. Luetge, C. (2005), „Economic Ethics, Business Ethics, and the Idea of Mutual Advantages”, Business Ethics: A European Review 14 (2), 108–118. Luetge, C. (2006), „An Economic Rationale for a Work and Savings Ethic? J. Buchanan’s Late Works and Business Ethics”, Journal of Business Ethics 66 (1), 43–51. Luetge, C. (2012a), „Werte stärken das Vertrauen”, in: IHK München (ed.), Den Ehrbaren Kaufmann leben, München: IHK, 6–9. Luetge, C. (2012b), Economic Ethics, in: Encyclopedia of Applied Ethics, 4 Vols., Oxford: Elsevier. Luetge, C. (ed.) (2013): Handbook of the Philosophical Foundations of Business Ethics, 3 Vols., Heidelberg/New York: Springer. Mann, T. (1901/1998), Buddenbrooks, New York: Vintage Classics. Mann, Thomas (1943/2004): Joseph und seine Brüder. Der vierte Roman: Joseph, der Ernährer, Frankfurt: Fischer (in English: Joseph the Provider). Mises, L. v. (1996), Human Action, fourth edition, San Francisco: Fox & Wilkes. Pies, I., Winning, A. v., Sardison, M. and Girlich, K. (2009), „Nachhaltigkeit in der Mineralölindustrie: Theorie und Praxis freiwilliger Selbstverpflichtungen”, WirtschaftsethikStudie Nr. 2009-1 des Lehrstuhls für Wirtschaftsethik an der Martin-Luther-Universität HalleWittenberg, Halle. Rohrmann, B. (1994), „Risk Perception of Different Societal Groups: Australian Findings and Crossnational Comparisons”, Australian Journal of Psychology Vol. 46 No. 3, 150–163. Rohrmann, B., Chen, H. (1999), „Risk perception in China and Australia: an exploratory crosscultural study“, Journal of Risk Research 2 (3), London: Routledge, 219–241. Rohrmann, B. (2006), „Cross-cultural comparison of risk perceptions: Research, results, relevance“, Presented at the ACERA/SRA conference, July 17–19, 2006. Say, J.-B. (1816), Catechism of Political Economy: Familiar Conversations on the Manner in which Wealth Is Produced, Distributed, and Consumed, London: Sherwood. Schumpeter, J. (2008), Capitalism, Socialism and Democracy, third edition, Part II, New York: Harper Perennial. Timmons, J. A. (1994), New Venture Creation: Entrepreneurship for the 21st Century, fourth edition, Burr Ridge/Illinois: Irwin Press.

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Weber, E. U., Hsee, C. (1998), „Cross-cultural Differences in Risk Perception, but Cross-cultural Similarities in Attitudes Towards Perceived Risk“, Management Science Vol. 44 No. 9, 1205–1217. Weber, M. (1905/2005), The Protestant Ethics and the Spirit of Capitalism, translated by T. Parsons with an introduction by A. Giddens, London: Routledge Classics (Original: M. Weber: Die protestantische Ethik und der Geist des Kapitalismus. Archiv für Sozialwissenschaften und Sozialpolitik 20 (1905) 1–54; 21 (1905) 1–110). Yunus, M. (2006), „Q&A Muhammad Yunus”, Time Magazine, Okt. 16, 2006.

Disentangling Gut Feeling: Assessing the Integrity of Social Entrepreneurs Ann-Kristin Achleitner, Eva Lutz, Judith Mayer and Wolfgang Spiess-Knafl

1 Introduction In recent years, a growing number of social entrepreneurs has emerged around the globe (Achleitner et al. 2007; Witkamp et al. 2011). Social entrepreneurs are individuals who try to solve a social problem through an entrepreneurial approach and who pursue a double bottom line consisting of a social as well as a financial goal.

Published online: 16 February 2012 © International Society for Third-Sector Research and The John’s Hopkins University 2012. This article is a reprint of the following publication: AnnKristin Achleitner, Eva Lutz, Judith Mayer, and Wolfgang Spiess-Knafl (2013): Disentangling Gut Feeling: Assessing the Integrity of Social Entrepreneurs. Voluntas 24, 93–124 (2013). https:// doi.org/10.1007/s11266-012-9264-2. At the time of publication all authors were affiliated with the Technical University of Munich, Munich, Germany.

A.-K. Achleitner (*)  Technical University of Munich, Munich, Germany e-mail: [email protected] E. Lutz  Heinrich-Heine-University Düsseldorf, Düsseldorf, Germany e-mail: [email protected] J. Mayer  Neu-Ulm University of Applied Sciences, Neu-Ulm, Germany e-mail: [email protected] W. Spiess-Knafl  European Center for Social Finance, Munich Business School, Munich, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer-Verlag GmbH, DE, part of Springer Nature 2022 C. Lütge and M. Thejls Ziegler (eds.), Evolving Business Ethics, Wirtschaftsethik in der globalisierten Welt, https://doi.org/10.1007/978-3-476-05845-4_5

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A key challenge for social entrepreneurs is to find financial support for their ventures because their access to internal as well as external sources of financing is limited (Heinecke and Mayer 2012; Milligan and Schöning 2011; Social Enterprise UK 2011). Social entrepreneurs often have only limited possibilities to generate income with their organization, as beneficiaries are often not able to pay for the services they receive (Glaeser and Shleifer 2001). In addition, access to government grants and support has become more difficult in recent years (Miller and Wesley 2010) and governments are often not prepared to fulfill the specific funding needs of social entrepreneurs. In a survey conducted in 2011 in Britain by Social Enterprise UK, 73% of social enterprises replied that cuts in public spending have led to the decreasing financial health of their organizations and 44% stated that they were hampered by lack of financial support (Social Enterprise UK 2011).1 Social venture capital funds, also called venture philanthropy funds, provide an alternative source of capital for social entrepreneurs. Their aim is to create social impact by providing financial as well as non-financial support to social entrepreneurs (John 2007; Scarlata and Alemany 2009). Over the last 10 years, the number of social venture capitalists has grown substantially. In Europe, the development of the membership numbers of the European Venture Philanthropy Association (EVPA) in recent years portrays the increasing relevance of this form of financing. The number of members has increased from 36 in 2006 to 136 in 2011, representing an average annual increase of 31% (see Fig. 1). Despite the increasing relevance of social entrepreneurs (Light 2008) as well as social venture capitalists around the globe (Achleitner et al. 2007; John 2006; Kerlin 2006), little research has been undertaken so far toward understanding the relationship between these two parties. In particular, it is not yet well understood how this relationship comes to be. According to Scarlata and Alemany (2009), the most important selection criterion for social venture capitalists is related to the social entrepreneurs themselves, as they are responsible for building a sustainable social enterprise and achieving the long term social mission. Personality traits of the social entrepreneur such as creativity, passion, perseverance, or empathy are linked to the success of the social enterprise (Boschee 2006; Light 2008; Mair and Noboa 2006). Particularly for social venture capitalists as external investors, the integrity of the social entrepreneur is another relevant personality trait (Heister 2010). Integrity is important because the pursuit of a double bottom line can lead to the risk of mission drift on the part of the social entrepreneur. Furthermore, monitoring possibilities for investors are limited due to a lack of performance indicators for social impact, inducing high information asymmetries. It is therefore important that the social entrepreneur is loyal and committed to pursuing his social mission after he has received funding from the social venture capitalist. Integrity is defined as honoring one’s word, acting in accordance with disclosed values even under unfavorable circumstances and on the basis of a morally

1 In

the Social Enterprise Survey 2011, a total number of 865 social enterprises in Britain were questioned. This represented a response rate of 11%.

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Fig. 1  Development of EVPA members (2004–2011). The figure shows the development of the number of registered members in the European Venture Philanthropy Association (EVPA) between 2004 and 2011. The numbers were compiled using annual reports of EVPA

justifiable value system (Erhard et al. 2010; Pollmann 2005; Simons 2002). It may give an indication whether the social entrepreneur is likely to pursue his social mission and the double bottom line in the long term. This notion was confirmed in selected initial interviews we undertook with social venture capitalists who stated that integrity was important and that they used their experience and gut feeling to judge the integrity of social enterprises. Our aim is to tap into this black box and to analyze the mechanisms used by social venture capitalists to assess the integrity of the entrepreneur. In particular, we want to answer the following research questions: What are important aspects that social venture capitalists focus on when judging the integrity of a social entrepreneur? Are internal factors, i.e., characteristics and efforts of the entrepre-neur, or external factors such as judgments of third parties particularly relevant? How does experience influence the assessment of integrity? We undertook an experiment with 40 social venture capitalists where they had to rank constructed profiles of social entrepreneurs according to how they would judge the integrity of the entrepreneur. As attributes of the entrepreneur, we used personal as well as professional backgrounds, voluntary accountability efforts, reputation and awards/fellowships. Furthermore, the experiment was conducted with 40 students with academic knowledge in the area of social entrepreneurship to test whether practical experience had an influence on the assessment of integrity. Our results indicate that social venture capitalists judge the integrity of social entrepreneurs based primarily on two key attributes: voluntary accountability efforts and reputation. If either voluntary accountability efforts or reputation of

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the entrepreneur are high, social venture capitalists evaluate integrity as positive and high enough to consider the social entrepreneur for funding. In contrast, personal experience, professional background or awards/fellowships are less relevant for social venture capitalists. Furthermore, we show that experience influences the evaluation of integrity. By comparing the results of social venture capitalists and students, we find that experience leads to a simpler decision model with an increased focus on the two key elements described above. Our study has important implications for social venture capitalists and social entrepreneurs. For social venture capitalists, we provide the first systematic analysis on how integrity is assessed by professionals in the social venture capital arena. The experts in our sample consistently put great importance on accountability efforts and reputation. Social venture capitalists entering the market may find this insight on the decision-model of their experienced peers helpful. However, we are not able to draw conclusions on the success of this decision-model as we are not able to link our findings on perceived integrity with the actual post-investment behavior of the entrepreneur. Put differently, we are not able to make normative recommendations as to how social venture capitalists should assess integrity. Insights into the decision-making process of social venture capitalists are also relevant for social entrepreneurs because social venture capitalists provide an alternative source of funding for them. Our results highlight the advantages of voluntary accountability efforts for social entrepreneurs through the self-induced improvements in transparency and outside control of the social enterprise. We show that social venture capitalists judge favorably those social entrepreneurs who decide to establish voluntary accountability efforts. So in addition to the positive effect on internal processes and external communications, social entrepreneurs can gain a positive signaling effect through voluntary accountability efforts. The paper proceeds as follows. In the next section, we characterize the social entrepreneur and social venture capitalists. In addition, we lay out our definition of integrity and explain its relevance to the relationship between a social entrepreneur and a social venture capitalist. Subsequently, we explain five attributes which may be relevant for social venture capitalists in assessing the integrity of the social entrepreneur. We then describe our methodology based on the metricized limit conjoint analysis (MLCA), the sample and data collection process. Afterwards, we lay out our results. The paper closes with a discussion and conclusion.

2 Social Entrepreneurs, Social Venture Capitalists, and the Importance of Integrity 2.1 Social Entrepreneurs Hoogendorn et al. (2010) describe different schools of thought in the area of social entrepreneurship. They broadly differentiate between the American and European tradition and explain the distinct roots of these traditions. According to the American tradition, social entrepreneurship refers to market-oriented economic activities with

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a social goal and neither the legal structure nor the sector is considered relevant. In contrast, the European tradition is rooted in the social sector and focuses on social enterprises which create a social impact for the community in fields where public services do not provide an adequate solution (Hoogendorn et al. 2010). Based on these traditions, a number of schools of thought on social entrepreneurship were developed. It is hence not surprising that no common definition of a social entrepreneur exists (Light 2008). However, some character-istics are regularly included in the definition of a social entrepreneur. An essential element in almost any definition is the social value proposition, i.e., the aim of the entrepreneur to solve a social problem (e.g., Alvord 2004; Austin et al. 2006; Hibbert 2002; Robinson 2006). The traditional Harvard definition of an entrepreneur as someone who is relentlessly pursuing his goal regardless of the resources at hand (Stevenson 1999) is often quoted to describe the entrepreneurial aspects of social entrepreneurs (e.g., Bornstein 2007; Dees 1998; Leadbeater 1997; Martin and Osberg 2007). Furthermore, for many scholars an innovative approach is an integral part of the definition of a social entrepreneur (e.g., Dees 1998; Kramer 2005; Prabhu 1999; Zahra et al. 2009). We combine these common characteristics and define social entrepreneurs as individuals who try to solve or alleviate a social problem with an innovative entrepreneurial approach. In addition, we see the pursuit of a double bottom line consisting of a social and a financial goal as another important characteristic of social entrepreneurs (in line with Achleitner et al. 2012). In our context of the relationship between social venture capitalists and social entrepreneurs, it is important to include this additional aspect as social venture capitalists usually make it a prerequisite that the ventures that they fund are striving for financial sustainability. While the social goal is always overriding, financial goals can be own income generation, financial sustainability or the realization of profits. With the pursuit of a double bottom line as an integral element of our definition of social entrepreneurs, we see social ventures as a subtype of the for-benefit organization as described by Sabeti (2009). The primary attributes of for-benefit organizations are the commitment to a social purpose and the deployment of business activities consistent with that social purpose. Thereby, for-benefit organizations are blending attributes from the private, social, and public sector (Leadbeater 1997) and are acting in a fourth sector (Fourth Sector 2011; Sabeti 2009). Currently, with more organizations being active in the fourth sector, traditional sectorial boundaries are blurring and for-benefit organizations are gaining importance. We focus on social ventures as one type of for-benefit organization and show how the distinct characteristic of this organizational form, i.e., the pursuit of a double bottom line, may affect the relationship with social venture capitalists.

2.2 Social Venture Capitalists The increasing importance of social entrepreneurs (Light 2008) has spurred the development of social venture capitalists that provide financial and non-financial support to social entrepreneurs (Achleitner et al. 2007; John 2006; Kerlin 2006).

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Social venture capitalists use similar strategies as for-profit venture capitalists to finance social ventures. They go through an intense selection process prior to their investment, then monitor and support the social entrepreneur on an ongoing basis and in some cases they already have a predefined exit strategy (Achleitner 2007; Grenier 2006; John 2006). Usually, they focus on social enterprises that use an innovative approach to tackle a social problem. While social venture capitalists are all driven by the goal to create a social return, the pursuit of an additional financial return differs depending on the funding model of the social venture capitalist. Some organizations view their investments as a donation without any payback obligation. Others have the goal to at least recuperate their investment or to even gain a financial return (Bridges Ventures and Parthenon Group 2010). Social venture capital funds include funds of private investors, companies or public authorities as well as foundations with a funding approach not solely focused on single projects. Social venture capitalists apply a multi-stage selection process before making their final investment decision to find social entrepreneurs who will use their funds efficiently to pursue a long-term social mission. Initial studies have analyzed this selection process and found that relevant categories scrutinized by the social venture capitalist include, among others, the social entrepreneur, his business concept, the targeted market, the envisioned social impact and financials (Achleitner and Heister 2009). More specifically, Scarlata and Alemany (2009) identified the social entrepreneur and his supporting management team as the most important selection criteria followed by the potential for a significant social impact. They conclude that the entrepreneur has a pivotal role in achieving the envisioned social impact (Scarlata and Alemany 2009). Furthermore, Miller and Wesley (2010) find that social venture capitalists judge social entrepreneurs with a strong dedication to social change favorably, particularly if they have a strong social investment focus. Overall, these studies highlight the importance of the personal traits of the social entrepreneur in the selection process. Based on two in-depth case studies, Heister (2010) proposes that integrity is one critical item in evaluating the social entrepreneur during the selection process.

2.3 Definition and Importance of Integrity The term integrity is commonly used in science. However, it is not clearly defined and understood (Rieke and Guastello 1995). For our study, we use a definition comprised of three elements. First, a person of integrity is honoring his word, meaning that words and deeds are aligned (Erhard et al. 2010; Simons 2002). Second, integrity implies that a person’s behavior is consistent with disclosed values even under unfavorable circumstances (Pollmann 2005). The third element refers to probity, meaning that a person acts in accordance with a morally justifiable value system (Becker 1998).

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Perceived integrity is a prerequisite for trustworthiness (Glaeser et al. 2000; Mayer et al. 1995; Parry and Proctor-Thomson 2002) because “a person who is perceived as not doing what he says might have substantial difficulties in establishing any trust at all” (Simons 2002). Integrity has been identified as a relevant personal trait when selecting individuals. Chrisman et al. (1998) found that integrity was more important than trustworthiness for the selection of successors in family firms. Findings from the field of strategic leadership also underline the relevance of integrity in judging individuals. Perceived integrity of the leader by sub-ordinates was shown to be positively related to the perception of the leader’s effectiveness and organizational effectiveness in terms of the ability to achieve the targeted bottom-line (Parry and Proctor-Thomson 2002). For personnel selection, integrity tests were shown to be useful to predict dishonest behavior (Ones and Viswesvaran 2001). To our knowledge it has not yet been analyzed, how multiple factors jointly influence the assessment of integrity. Our aim is to show how an individual’s integrity, in our case the integrity of a social entrepreneur, is evaluated by social venture capitalists as outsiders before the two parties form a relationship. For social venture capitalists, the integrity of a social entrepreneur is of high relevance. One key challenge is that social entrepreneurs are pursuing a double bottom line consisting of a social and a financial goal (Mair and Marti 2006; Martin and Osberg 2007). There is the risk that social entrepreneurs get too focused on financial goals at the expense of social goals (Spear et al. 2007). The entrepreneur would then drift away from the initial purpose of creating primarily a social return (so called mission drift, Heister 2010). It may even be rational for an individual to portray himself as a social entrepreneur with only a subordinate profit motive to acquire relatively cheap sources of capital from social venture capitalists. The possibility of a mission drift within non-profit structures is shown by Glaeser and Shleifer (2001). The authors explain that profits could be distributed indirectly by improving the own working conditions, e.g., via shorter working hours or more generous benefits (Glaeser and Shleifer 2001). The social impact may also be harmed by unethical behavior of the entrepreneur in the course of company development. Social entrepreneurs may decide for unethical behavior because they assume the end justifies their means (Zahra et al. 2009). Perceived integrity is assumed to signal that the social entrepreneur is committed to his social mission in the long term and follows the double bottom line as portrayed prior to the investment. In addition, integrity is important as social venture capitalists are faced with difficulties in monitoring the success of a social enterprise. It is difficult for social venture capitalists to assess the success of social ventures as universal performance indicators for social impact do not exist (Austin et al. 2006; Barman 2007). Furthermore, it is often not possible to attribute the social impact to a single organization (Dees and Anderson 2002; Van Slyke 2007). Monitoring is hence difficult and high information asymmetries between social venture capitalists and social entrepreneurs can occur. Furthermore, entrepreneurs are not limited by traditional

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market mechanisms which drive inefficient organizations out of the market (Zahra et al. 2009). Customers, e.g., often have no incentive to decline the services of a social enterprise because they are often offered for free or at a reduced rate (Glaeser and Shleifer 2001) or third parties are paying for the services (Hansmann 1996). Integrity is a signal for the future behavior of the entrepreneur and, potentially, his effectiveness. Hence, integrity is likely to be an important personal trait for a social venture capitalist when evaluating a social entrepreneur.

3 Attributes Affecting the Assessment of Integrity Our aim is to show how social venture capitalists judge the integrity of social entrepreneurs. Specifically, we want to analyze how different characteristics of the social entrepreneur affect this judgment. The assessment of integrity is often based on intuition or gut feeling (Jankowicz and Hisrich 1987) which was also confirmed in initial expert interviews with two social venture capitalists. They stressed that integrity of the entrepreneur was an important factor during the selection process and that they mainly used their experience to assess integrity. Our goal is to tap into this black box by finding attributes that jointly contribute to the overall assessment of integrity. Integrity assessment by outside investors has not yet been explored in the literature. Hence, it was not possible to find an appropriate single theoretical frame to analyze this phenomenon. Our study is therefore exploratory in that we develop and describe attributes using different perspectives. In addition, our study is analytical by using a conjoint experiment with 80 participants to understand indicatively the relative importance of these attributes and trade-offs between them. In a first step, we reviewed existing literature and conducted initial expert interviews with two social venture capitalists to identify potentially relevant criteria for integrity assessment. Overall, we obtained 11 criteria. We then interviewed a total of two social venture capitalists, two social entrepreneurs and a lawyer active in the field to further condense the list down to five attributes (see Table 1). We found that two different perspectives may be relevant for the perception of the integrity of a social entrepreneur. First, social venture capitalists may focus on attributes of the social entrepreneur. These attributes include the personal experience of a social entrepreneur, his professional background and his efforts to increase the transparency of his activities. Second, external judgments of the social entrepreneur might influence the evaluation of his integrity. Reputation within the sector and third party certifications granted to the entrepreneur are considered as important sources for external judgments. We analyze how the attributes of the social entrepreneur and external judgments shape the evaluation of integrity by social venture capitalists. After a discussion on the relevance of the five attributes, namely the entrepreneur’s personal experience, professional background, voluntary accountability efforts, reputation and awards/fellowships, we use conjoint analysis to assess the importance of these attributes. Furthermore, we analyze how experience influences the assessment of integrity.

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Table 1  List of attributes for integrity assessment. This table shows how we arrived at the five attributes for integrity assessment by social venture capitalists. We compiled the long list based on interviews with two social venture capitalists. Based on further interviews with five experts (two social venture capitalists, two social entrepreneurs, one lawyer active in the field), we then condensed the list down to five attributes

3.1 Personal Experience of the Social Entrepreneur Personal experience refers to the relationship that a social entrepreneur has to the problem addressed by his social venture and implies that the social entrepreneur or close relatives or friends are or have been affected by the social issue addressed. For a social venture capitalist, the social entrepreneur’s personal experience may be relevant in assessing integrity as it could be a signal for his intrinsic motivation to follow the social mission (Achleitner and Heister 2009). The self-determination theory distinguishes between intrinsic and extrinsic motivation. An intrinsically motivated person performs an activity for its inherent satisfaction rather than for a separable consequence (Ryan and Deci 2000). In contrast, extrinsic motivation is mainly driven by the achievement of external outcomes such as remuneration. As intrinsic motivation is more stable over time than extrinsic motivation, it positively influences the long-term satisfaction of the person performing the task (Fischer and Wiswede 2009). Satisfaction in turn is important for long-term loyalty (Borzaga and Defourny 2001). In line with these arguments, for-profit entrepreneurs are portrayed to be more successful in cases where they are mainly driven by intrinsic motivation (Guzmän and Santos 2001). In the context of social entrepreneurs, intrinsic motivation may be particularly important in keeping the social entrepreneur focused on his social mission in the long term, as pecuniary rewards for the entrepreneur are limited. Intrinsic motivation can be a signal for the perseverance of the entrepreneur and can foster

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organizational development and growth (Baum et al. 2001; Boschee 1998; Martin and Osberg 2007). So even if external circumstances of the social entrepreneur change over time, she may be more likely to honor her original claim to follow her social mission if she is highly intrinsically motivated. Following our definition of integrity, intrinsic motivation may therefore be linked with integrity. For outsiders, it is difficult to judge the intrinsic motivation of a social entrepreneur. His personal experience with the social problem he is trying to solve is an indicator which can easily be observed by social venture capitalists. So even though the personal experience is only one potential source for intrinsic motivation, social venture capitalists may still perceive it to be relevant in their integrity assessment. Initial empirical reference points show that in many cases social entrepreneurs are or were personally affected by the social issues addressed by their enterprises. Based on a survey of Swiss social entrepreneurs, Barendsen and Gardner (2004) found that about 50% of social entrepreneurs experienced traumas or deeply transformative experiences that induced them to become a social entrepreneur (Barendsen and Gardner 2004). In a survey among 238 social entrepreneurs in Germany, 31% indicated that a personal experience motivated them to start a social enterprise that addresses the social issue (Scheuerle and Schmitz 2011). So far, this empirical evidence only indicates that a large share of social entrepreneurs have relevant personal experiences, without directly linking them to any behavioral patterns. Therefore, empirical verification of the importance of the entrepreneur’s personal experience as an indicator for intrinsic motivation and perseverance is still required. In our initial round of interviews to compile attributes for the assessment of integrity, social venture capitalists indicated personal experience to be relevant. In addition, social entrepreneurs confirmed that they were often questioned by social venture capitalists about their personal relation to the social issue. A recent publication by Ashoka Germany on their fellows also indicates the importance of the attribute of personal experience. In 22 out of 39 profiles, the personal experience of the social entrepreneur with the social issue is highlighted (Ashoka 2011). We hypothesize that social venture capitalists perceive personal experience as relevant criteria in judging the integrity of the entrepreneur. Hence, we propose: Hypothesis 1 Social venture capitalists will evaluate the integrity of a social entrepreneur more positively if the social entrepreneur has a personal experience/ relationship with the problem he is trying to solve.

3.2 Professional Background of the Social Entrepreneur The professional background of the social entrepreneur is an important criterion screened by social venture capitalists in the course of the selection process as it

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portrays the prior experience of the entrepreneur as well as his supporting network (Heister 2010). Prior entrepreneurial experience signals knowledge in building new companies whereas management experience indicates the ability to professionalize and scale the venture in the future (Miller and Wesley 2010). Sectorspecific experience can be particularly helpful in developing innovative methods for tackling a social problem (Perrini and Vurro 2006). The previous experience as well as the network of the social entrepreneur are likely to be linked to the future success of the social enterprise (Lee and Tsang 2001). According to the self-selection theory, individuals who are committed to a social cause self-select into the non-profit sector by accepting lower incomes compared to the for-profit sector. As they identify with the goal of the organization, a high level of integrity could be the result and monitoring becomes less important (Callen and Falk 1993). However, as explained above social entrepreneurs are active in the fourth sector. Some of them previously had business experience while others were active in the social sector (Light 2008). So while some social entrepreneurs self-select to the fourth sector from the private sector, other social entrepreneurs already committed themselves to the social sector prior to founding the social venture. For social entrepreneurs, the link between self-selection and integrity is therefore not distinct. On the one hand, business background could be a signal for high social commitment due to high financial opportunity costs. Financial opportunity costs result from low salaries as well as the limited profit opportunities of social enterprises. On the other hand, social entrepreneurs with a business background do not seem to identify themselves with their social purpose as strongly as actors from the social sector (Miller and Wesley 2010). Accordingly, social entrepreneurs with a social background have shown through their prior career choice that they were already committed to creating social value instead of aiming for a high financial income. This could be an indicator for a low risk of mission drift into the financial direction. However, social entrepreneurs with a social background might lack incentives and know-how to professionalize and scale their venture, which in turn might jeopardize the survival of their ventures (Spear et al. 2007) leading to conflicts with their investors. Based on these arguments, we conclude that prior career choices of a social entrepreneur are unlikely to have a distinct link to the integrity of the entrepreneur. However, a social venture capitalist may perceive the integrity of a social entrepreneur to be high, if he represents working morals and ethics that are similar to his own (Miller and Wesley 2010). As the professional background can be seen as an indicator for these values, there could be a similarity-bias in how social venture capitalists evaluate the link between professional background and integrity: Social venture capitalists with a social background tend to value a social background favorably while the ones with a business background prefer social entrepreneurs with business experience. In the context of for-profit venture capitalists, Franke et al. (2006) have tested such a similarity-bias in the selection of investees

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and found that similarity of the venture capitalist and the entrepreneur in professional experience and field of education, both of which are attributes of the professional background, positively influences the evaluation of the entrepreneur. The existence of a similarity-bias was also shown in employee selection (Anderson and Shackleton 1990) or the selection of business associates (Lichtenthal and Tellefsen 2001). Even though a similarity-bias was found in various contexts, the influence of such a bias on the perceived integrity was not yet analyzed. Furthermore, prior studies did not compare the importance of a similarity-bias to other relevant decision drivers. Our method allows us to identify trade-offs between several criteria. We propose: Hypothesis 2 Social venture capitalists will evaluate the integrity of a social entrepreneur more positively if the social entrepreneur has a similar professional background.

3.3 Voluntary Accountability Efforts of the Social Entrepreneur In recent years, prominent cases of fraud were uncovered both in the private as well as the social sector and have received a lot of coverage in the literature (Gibelman and Gelman 2001; Greenlee et al. 2007; Koss 2005; Ostas 2007). Accounting scandals such as the case of Enron in the private sector have led to higher transparency requirements for large corporations (Petrick and Scherer 2003). In the social sector, the misuse of funds in non-profit organizations such as UNICEF Germany was publicly criticized (Frankfurter Allgemeine Sonntagszeitung 2008; Spiegel Online International 2008). As a result, investors and donors nowadays demand increasing accountability to prevent the inefficient use of their funds (Ebrahim 2003; Ostrander 2007). In addition to its high relevance in the for-profit as well as non-profit sector, accountability is likely to also be important for social entrepreneurs, in particular, in their relationship to social venture capitalists. The social venture capitalist cannot foresee the commitment of the social entrepreneur in pursuing the social mission over the long term. Furthermore, as the performance of a social enterprise in terms of social impact generation is hard to measure, it is difficult for the social venture capitalist to monitor the social entrepreneur over time (Austin et al. 2006). Via voluntary accountability efforts, a social entrepreneur signals the social venture capitalist that she is willing to increase the transparency of her organization and/or to be monitored by outsiders. As voluntary accountability efforts make it more difficult for the entrepreneur to deviate from her initial mission, it can be an indication that she has integrity. In the context of social enterprises, voluntary accountability efforts refer to disclosures of reports or the set-up of a corporate governance structure and other mechanisms which facilitate external control (e.g., memberships in umbrella

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associations). Disclosures of reports decrease information asymmetries between investors and social entrepreneurs (Young 2006). Furthermore, disclosures of social impact measurements serve to legitimize the existence of a social enterprise (Nicholls 2005). Other accountability efforts include the setup of an advisory board or the appointment of non-executive members to the board of directors. They control and monitor the activities of the social enterprise and thereby objectify important management decisions. The inclusion of advisory boards or nonexecutive board members reduces possibilities for opportunistic behavior by the social entrepreneur (Fama and Jensen 1983). The setup of advisory boards has decreased fraud in the non-profit sector (Greenlee et al. 2007). Social venture capitalists often require a seat on the advisory board or the formation of an advisory board as a prerequisite for funding a social venture (Martin and John 2006). Memberships in umbrella organizations are another mechanism to reduce information asymmetries by showing the willingness to have external visibility (Gugerty 2009). Overall, voluntary accountability efforts can improve internal processes of the social enterprise and can increase the external control of social entrepreneurs. This helps to reduce information asymmetries between social entrepreneurs and social venture capitalists and thus might help to mitigate the risk of mission drift or unethical behavior. If the social entrepreneur establishes voluntary accountability efforts, it may be a signal for his integrity. Therefore, we posit: Hypothesis 3 Social venture capitalists will evaluate the integrity of a social entrepreneur more positively if the social entrepreneur engages in voluntary accountability efforts.

3.4 External Judgments of the Social Entrepreneur The first three attributes were linked to the social entrepreneur and his efforts to signal transparency. For the assessment of a social entrepreneur’s integrity, it is furthermore important how the social entrepreneur is perceived by others within the sector. Opinions of others are relevant in the social sector because this sector is characterized by a tight network of stakeholders with diverse interests (Anheier 1995). The stakeholders within this network are dependent on each other, e.g., for volunteering or pro bono services (e.g., Jansen et al. 2010). Furthermore, the manifold connections of social entrepreneurs in the society, e.g., to private supporters, government agencies, peers, and clients, play an important role in building sustainable social enterprises (Kreutzer and Jäger 2008) and a large network of outside supporters and collaborators can be essential for the success of social entrepreneurs (Light 2008). Moreover, the reputation of social venture capitalists is also linked to the public perception of the social entrepreneurs they support. Therefore, external judgments of the social entrepreneur are likely to have an influence on the financing decision of a social venture capitalist (Austin et al. 2006;

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Padanyi and Gainer 2003). Overall impressions of peers and outside stakeholders are reflected in the reputation of a social entrepreneur. Furthermore, third party certifications in the form of awards or fellowships portray formalized external judgments of the social entrepreneur.

3.5 Reputation of the Social Entrepreneur Social venture capitalists are faced with high information asymmetries regarding the future commitment of the social entrepreneur to his social mission. In this context, the reputation of the social entrepreneur can provide the social venture capitalist with valuable information on the entrepreneur’s behavioral patterns. Reputation is defined as the perceptual representation of an individual’s or organization’s actions in the past that describe the overall impression of key peers and outside stakeholders (Fombrun 1996). Social venture capitalists assess the reputation of social entrepreneurs by asking peers as well as experts in the sector for their feedback and by screening media coverage to get insights on the general public perception of the social entrepreneur or the social enterprise. Thereby, social venture capitalists build expectations about the future behavior of an entrepreneur (Duffner 2003). In case of unethical or untrustworthy behavior of an entrepreneur, information about such behavior can be spread by affected people thereby harming his reputation. Therefore, a high reputation seems to be a signal for trustworthy behavior in the past (Ensminger 2001). Furthermore, it reduces the incentive of the entrepreneur for untrustworthy behavior in the future as this would destroy the reputation which he has built up (Diamond 1989). Information of third parties should be reliable as they do not have an incentive to provide misleading information which could reduce in turn their own reputation (Handy 1995; Meyerson et al. 1996). The critical role of reputation in gaining access to external resources has been empirically validated for the non-profit as well as the for-profit sector. Padanyi and Gainer (2003) analyze relationships between peer reputation and performance in the non-profit sector. They show a positive link between the reputation among managers of similar organizations and the ability to attract outside resources (Padanyi and Gainer 2003). In the for-profit sector, reputable entrepreneurs were also shown to be more likely to receive funding from venture capitalists as reputation provides information on their ability to use their network and to grow their venture (Shane and Cable 2002). We further extend these empirical findings by analyzing the importance of reputation for the assessment by social venture capitalists of the integrity of social entrepreneurs. As explained above, high reputation can be a signal of integrity for the social venture capitalist because it mirrors the past behavior of the social entrepreneur and deters him from immoral behavior in the future. Therefore, we anticipate: Hypothesis 4 Social venture capitalists will evaluate the integrity of a social entrepreneur more positively if the social entrepreneur has a high reputation.

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3.6 Awards/Fellowships Granted to the Social Entrepreneur In addition to reputation, we focus on third party formalized certifications as another source for external judgments of the social entrepreneur. Certifications refer to awards or fellowship programs from other organizations (e.g., recognition as a Schwab social entrepreneur or ISO 9000). Third party certifications potentially present valuable information for social venture capitalists because they can be a signal for high commitment of the social entrepreneur (Achleitner and Heister 2009). In order to win an award or fellowship, social entrepreneurs have to go through a formalized application process. Usually, a specialized committee is formed which evaluates in detail the potential of the social entrepreneur and his approach based on predefined selection criteria. These intense formal selection processes can help to increase the transparency of social enterprises. As there are no rating agencies for social enterprises, awards/ fellowship can fulfill an important signaling function and can establish a common standard for performance evaluation and measurement (Gugerty 2009). Third party certifications require formalized information about internal processes in the social enterprise thereby reducing information asymmetries for outsiders (Paton and Foot 2000). Award/fellowships granted to a social entrepreneur are a signal that others have perceived the social entrepreneur as promising and trustworthy and thus can increase the legitimacy of the social entrepreneur. This could have a positive impact on the way social venture capitalists perceive the social entrepreneur’s integrity. Furthermore, awarded organizations receive more public attention (Fombrun 1996) and thus are more likely to be under public scrutiny. This public scrutiny reduces the incentive for unethical behavior. In the for-profit sector, government grant programs were shown to fulfill a certification function for venture capitalists. Entrepreneurs who had received an award were more likely to receive funding from venture capitalists (Lerner 1999). However, awards/fellowships are usually a one-off event. They provide information about a social entrepreneur at a particular point in time and the social entrepreneur may change his approach subsequently (Paton and Foot 2000). The selection committee may be guided by prior awards/fellowships of a social entrepreneur as a sufficient signal for his legitimacy and, therefore, circumvent another detailed evaluation which might otherwise introduce less favorable indicators. Lerner (1999) provides an indication for this type of effect by showing that multiple awards for business entrepreneurs do not lead to a higher likelihood of gaining funding from venture capitalists than a single award. Therefore, it remains to be analyzed whether third party certification is potentially only a weak predictor for integrity compared to other attributes of the social entrepreneur. Our analysis allows us to analyze relative importance and to show trade-offs between the different attributes. We propose: Hypothesis 5 Social venture capitalists will evaluate the integrity of a social entrepreneur more positively if the social entrepreneur has received awards or fellowships.

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3.7 Influence of Experience on the Evaluation of Integrity Evaluating the integrity of a social entrepreneur is complex as social entrepreneurs are pursuing a double bottom line approach and are not just fulfilling a single purpose (Achleitner et al. 2011). Thus, their integrity concerning the fulfillment of two often conflicting purposes has to be assessed. The experience of the evaluator is likely to have an influence on the way integrity is judged. Prior studies on the influence of experience have come to contrary conclusions: that experts have a more elaborate decision-making system taking into account more attributes than novices (Shanteau 1992) or that they have simpler decision models than inexperienced decision makers (Lurigio and Carroll 1985) and only focus on a small number of key factors (Shepherd et al. 2003). In order to test the influence of experience on the evaluation of integrity, we analyze differences between experienced social venture capitalists and students with academic knowledge in the area of social entrepre-neurship. We propose that experience has an influence on the evaluation of integrity and, therefore, we posit: Hypothesis 6  Experienced social venture capitalists will evaluate the integrity of a social entrepreneur differently than will students.

4 Method Scholars often investigate decision policies of managers using post hoc methodologies, such as questionnaires or interviews (Shepherd and Zacharakis 1999; MacMillan et al. 1987; Tyebjee and Bruno 1984). While these methods can yield important insights on the decision-making process they also have some disadvantages. The use of post hoc self-reported data, can cause biases such as recall bias and post hoc rationalization bias (Shepherd and Zacharakis 1999). Furthermore, decision makers often lack introspection into their own decision policies or bias the results by intent (Franke et al. 2006). Conjoint analysis allows researchers to collect data as the decision is made and thereby overcomes many of the limitations of post hoc methods. For investigating the evaluation of integrity, real-time methods are better able to portray the gut feeling of the participant in the decision-making process compared to post hoc interviews. In conjoint analysis, participants are evaluating several constructed profiles which consist of combinations of parameter values of several attributes. Decision policies of participants are deduced from their evaluations of these profiles. Conjoint analysis allows us to assess the significance level of the attributes as well as the relative importance of each attribute in the decision-making process (Shepherd and Zacharakis 1999). Furthermore, tradeoffs between different parameter values of the attributes can be quantified. Metricized Limit Conjoint Analysis (MCLA): Methodological Advancement in Entrepreneurship Research There are two measurement methods for obtaining the evaluations of the participants of a conjoint study. First, participants can rate the profiles on a predefined

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Likert scale. The advantage of rating is that it provides metric data. Second, participants can rank the profiles in order of the dependent variable. The main advantage of this measurement method is an increased manageability due to better haptics (Baierl and Grichnik 2010). In addition, the participant evaluates all profiles simultaneously in the ranking process. It is hence less likely that he will change his evaluation pattern in the process of the experiment which can increase reliability (Teichert 2001). However, conjoint studies which use ranking for data collection only obtain ordinal data. So far, utility values of the ranked profiles were mostly calculated with the unrealistic assumption of equal distances between the profiles. The approach used in our study, MLCA developed by Baierl and Grichnik (2010), combines the advantage of increased information content through metric data with the advantages of ranking methods. MLCA is based upon limit conjoint analysis (LCA). In LCA, participants rank the profiles in a first step and are asked in a second step to place a limit card behind the last acceptable profile (Voeth and Hahn 1998). The inclusion of a limit card leads to a separation of acceptable and non-acceptable profiles. In a study using MLCA, participants additionally are able to adjust distances between ranked profiles by placing wildcards. Wildcards are blank cards which can be placed between profiles to portray differences in the distance between profiles. Participants are free to choose if they want to include any wildcards. Via the usage of wildcards, ordinal scaled data is converted into interval scaled data (Baierl and Grichnik 2010). Utility values of the profiles are calculated using the following formula2:

where Uik = utility value of scenario k for participant i, Li = ranking after which the limit card was positioned, JkLi = sum of all wildcards between scenario k and Li, JLik = sum of all wildcards between Li and scenario k, pki = ranking of scenario k by participant i. See Fig. 2 for an example of the ranking process including profiles, wildcards, and the limit card.

4.1 Sample Our sample consists of experts who are actively involved in the selection of social entrepreneurs as well as students in the field of social entrepreneurship. For the expert sample, we focused on investment managers and investment consultants of social venture capital funds. The directory of the European Venture Philanthropy

2 In comparison to Baierl und Grichnik (2010) the limit card is not interpreted as an additional wildcard.

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Fig. 2  Metricized Limit Conjoint Analysis (MLCA). The figure shows the ranking procedure used in our real-time experiment. The procedure was based on the metricized limit conjoint analysis (MCLA) as developed in Baierl and Grichnik (2010)

Association and a list of John (2006) were used to identify potential participants. The participants were located in all major European countries. In total, 50 experts were contacted and 40 agreed to participate in our study. This represents a response rate of 80%. The average experience of the experts with social investments was 5.6 years. 85% have a university degree as highest degree. 50% have a background (education and previous experience) in the social sector, 50% in business. The participants are 68% male and 32% female. Additionally, students with academic knowledge in the area of social entrepreneurship participated in our study. Overall, 47 students were contacted and 40 agreed to participate, leading to a response rate of 85%. The students did not have any practical experience with social investments. They were mainly enrolled in business programs (88%) but all of them had attended at least one course on social entrepreneurship prior to the experiment. Table 2 presents characteristics of our sample.

4.2 Data Collection We either met the participants in person to undertake the experiment or we guided them through a web implementation via phone. Prior to the ranking exercise, we explained our definition of integrity as honoring one’s word, acting in accordance

Table 2  Characteristics of participants (Voluntas (2013) 24:93–124, 111)

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with disclosed values even under unfavorable circumstances, and having the basis of a morally justifiable value system (Erhard et al. 2010; Simons 2002; Pollmann 2005; Becker 1998). Furthermore, we characterized the hypothetical social entrepreneurs which were to be evaluated. Specifically, participants were told to assume that the social entrepreneurs, which they were to evaluate later on, presented a clear social impact, are innovative and that their concepts have already been implemented successfully in pilot projects. Hence, we focus on the second stage of the selection process after the social entrepreneur has already passed an initial screening. The participants then had to rank the profiles according to their perceived integrity from highest to lowest. In a second step, participants were asked to include a limit card behind the last acceptable profile. Thereby, the ranked profiles are divided into non-acceptable profiles and profiles where the perceived integrity is high enough to consider the social entrepreneur for further evaluation. In a third step, participants were able to adjust distances between ranked profiles using wildcards. In order to test participants reliability, they then had to rate two replicated profiles on a scale of −10 to +10. The conjoint task was followed by a post-experiment survey to obtain the participant’s perception of the experiment and his or her introspection. Overall, 66% of the participants found the inclusion of wildcards helpful to portray the values of the profiles more precisely.

4.3 Measures The dependent variable in this study is the evaluator’s perception of the social entrepreneur’s integrity. The profiles of the hypothetical social entrepreneurs in our experiment entail five attributes which represent the independent variables and stem from the theoretical arguments described above. Each attribute was presented at two levels: 1. Personal experience: affected; not affected 2. Professional background: mainly in social sector; mainly in business 3. Voluntary accountability efforts: high; low 4. Reputation: high; not high 5. Awards/fellowships: yes; no Table 3 presents a complete definition of each of the attributes and the parameter values used in the conjoint analysis. As explained above, we tested the attributes and parameter values in discussions with five experts from the sector (two investment managers of social venture capitalists, two social entrepreneurs, and a lawyer active in this field). They confirmed the face validity for attributes and their levels. For five attributes each with two levels, there are 32 (25) possible combinations for the profiles. In order to make the decision-making task more manageable, we used an orthogonal fractional factorial design to reduce the number of parameter

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Table 3  Definition of independent variables

value combinations (Green and Srinivasan 1978). Our fractional factorial design resulted in eight profiles with which all main effects were testable. Additionally, we included two hold-out profiles which were not used to estimate the coefficients of the model but to measure the predictive ability of the model. Additionally, one limit card and 16 wildcards were offered to participants. Only one participant used all 16 wildcards. Therefore, we assume that 16 wildcards were sufficient.

4.4 Analysis In order to calculate the influence of the parameter values on the perception of a social entrepreneur’s integrity, we model the utility values as a continuous function of the five attributes. Each attribute j (j = 1,..., 5) enters the equation with one parameter value xj, the coefficients of the remaining parameter values are implicitly set to zero (dummy variable technique). Furthermore, we employ a variable Sik which has the value of one if the participant i has a business background and the background stated on profile k is social in order to test for the similaritybias concerning professional background.

The study provides eight observations per participant for the calculations of the coefficients. With 40 experts and 40 students, there are a total of 640 observations. Even though this implies a large number of degrees of freedom, there may be autocorrelation because the 640 observations are nested within 80 individuals. Therefore, we used hierarchical linear modeling (HLM) to analyze the data

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because it accounts for individual level variance (Raudenbush and Bryk 2002). The intraclass correlation, a measure of dependence of decisions within participants (Raudenbush and Bryk 2002), is 35.7% for experts and 19.5% for students.

5 Results 5.1 Results of the Experts A majority of the individual models of experts’ decision policies (67.5%) explained a significant proportion of variance (p