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Institutional integrity

Institutional integrity

The difference between a loose aggregation of people and a purposeful division of labour is, self-evidently, created by organisation. Some systems self-organise and self-police, whilst others stand outside of the activities of the participants whilst governing their behaviour. It is usual to call the self-assembling, socially-transmitted forms of organisation "tacit" institutions. The importance of these in the management of societies is only now being recognised.

Economic and social development seems to be crucially dependent on institutional strength at all stages in the development process. However, institutions can, of course, be strong or weak; but they can also be seen to be advantageous and just, or oppressive and unjust. Ethnic prejudice is, for example, an example of a strong but oppressive tacit institution that harms the prospects of many people who are affected by it. State institutions which maintain elite privilege at the expense of the prospects of the majority are regarded as unjust. By contrast, it is structures which are strong, which are enabling structures and which enjoy general esteem that seem to be crucial to the growth and cohesion of societies. People need to feel comfortable with the workings of their society, their firm and their immediate interpersonal relations. The image that they have of how things are supposed to work needs to match the way that they actually do work in reality. A predictable life allows plans to be made, savings to be accumulated, investments to be made. A strong set of institutions manage this predictability, policing defection and crime.

Elsewhere, we have discussed the impact of weak institutions on the economic development of the poor nations. Poor institutions and corruption lead to alienation and fragmentation, to inadequate tax collection and inappropriate resource allocation, to economic instability and generally poor governance. Public debate is stifled, and vast areas of policy become not open to discussion. People feel strangers in their own country, and the authorities are seen as little more than bandits. The best talent is diverted from private entrepreneurship to gaining a place in the bureaucracy.

The institutions of the industrial world have to deal with relatively massive forces and hugely complex relationships. Nations do not become industrialised until they have learned how to solve these issues, and both probity and abstract even-handedness are the hallmarks of this having been achieved. Where there is weakness, therefore, it comes from a mixture of primitive structures which has somehow survived into the modern world (where Fascism was an obvious retrogressive example) or - as is far more usual - where muddle and unresolved differences in priority have not been resolved. Essentially, the right people have not got together in order to hammer out their differences, and suppressed conflict over priorities (or a lack of clarity about priorities) is managed pragmatically, case by case. Such was, perhaps, the British disease in the 1960-1980 period.

The approaches which seem to avoid this kind of muddle are reviewed elsewhere. A large paper on the likely shape of knowledge-deploying formal public institutions can be found here.

Trust

Trust is generated by a number of explicit tools, which are are addressed in a moment. It makes its presence felt through the reduction in otherwise unavoidable friction and costs. Where trust is lacking, the scale of these costs can be very large. Major financial trading houses may spend fully a third of their costs on compliance and monitoring. Around 3.1-5.8% of GDP is spent on policing in high-trust states, and up to 10% is spent on topping up on private security in low trust nations. The overheads associated with the current 'terror of terror' is nudging this sort of spend - for example, in Britain, Eurotunnel is said to have spent an extra-budgetary GBP120 mln, BAA around GBP320 mln, BA an undisclosed but proportionately equivalent sum in the last year. So lack of trust is plainly expensive.

What is trust? The preparedness to take collectively useful risks, based on the expectation that other players will not unexpectedly exploit this. So one can save time by not locking one's house; or save money by not monitoring one's employees.

Effective rules are tacit: that is, everyone knows what they are, but they are not written down because they are interpreted contextually and not legalistically. We feel comfortable when people around us play to these rules, just as we are happy in an environment where shopping either always does or always does not involve bargaining. When we have to stop and re-assess the rules, we stumble; and we cannot rely on others understanding the prevalent equilibrium. We fear the muffled titters as we leave the shop: "They paid the list price! Idiots!" This fear - that we do not understand - slows us up and makes all of the parties suspicious: the easy transaction become hard and armoured, and we end up needing formal agreements. People who have worked in the Arab world will know how desperate locals are to keep agreements informal and to avoid the eternal, inextricable lock-in of a fatwah. Tacit agreements cut costs. Trust is good for your bottom line.

Let us turn to the tools that generate trust. Experimental economics shows us that trust - as above, the capacity to take risks that make friendly assumptions about other players - is ultimately predicated on information about these players. If we have a reputation that will follow us, then we tend not to default. If we can act covertly, and if the consequences of our actions never touch us, then we free-ride and actively default. Such transparency need not be perfect: a ten percent chance of exposure will keep most low-sum games honest.

There are, however, other factors in play in a "game" - transaction involving reciprocity - where trust was an issue. Five other factors to be in place.

The working of these five factors depends on the issue of overarching issue of transparency, which is explored in much more detail in the section which follows. You can, however, sue the Doctor, or get her struck off. You know that they know this, so you can afford to trust them. In an anonymous situation, with low transparency, you cannot be sure of this, and you also know that they know this.

False trust can be created by professions, companies and dictators when they have both a monopoly of information and the ability to define the social relationship. Dreadful things happen under such cover - around 180 million people died violently in the last century under regimes which operated false trust relationships.

So what does a "trusting" HR system look like? Plainly, it fulfils the six conditions above, and it ensures that these conditions match the real world in which the organisation is trying to function. The result is reciprocal -leading to low friction and focused performance - but it is not necessarily "ethical", in the traditional senses of the word. It is hard to be an ethical terrorist but, as any number of organisations have shown us, it is extremely possible to have a potent system of internal trust in such an organisation.

Trust works within functional boundaries, whereas conventional ethics are supposed to be universal. Internal systems of trust and a sound external public affairs position are, therefore, aiming for two different things. It is really splendid - desirable, fine, moral - if the two can be induced to overlap, but it is often the case that they will not or cannot. This is the vast fallacy of what one interviewee in this project called "the Fluffy Bunny school of corporate ethics": for what works is not always nice, and what is nice often does not work. The senior management have to find, communicate, manage for a compromise between these positions.

Tacit institutions.

Tacit institutions are all around us, but we seldom take much note of their crucial role in giving order to our societies. They are, however, bearing the brunt of fast social change, and their fragmentation leaves a void which we find it hard to acknowledge, let alone to fill.

Such governing structures are 'tacit' precisely because they are unacknowledged: we do not know when we acquire them, and we do not notice when they guide our conduct or, indeed, when they punish or reward us. Their role seems to be the natural order of things, the innate way that people interact. Nevertheless, there are real differences in the tacit struictures that do in fact emerge in the country and in cities, amongst the wealthy and the poor, across ethnic divides and belief structures. As we shall see, it seems likely that we are predisposed by our evolutionary history to learn from the group, and to punish those who contravene group norms. Indeed, this is a trait that is by no means confined to humans.

Rare wild animals are sometimes bred in captivity and then released to the wild. Conservationists have found, however, that few of these survive, particularly amongst the highly social species. It transpires that such animals learn a wide range of survival and group skills from their peers. Animals have institutions which are transmitted through learning, not in their genes. Much of what we call 'instinct' varies amongst packs of wild dogs, for example, and that the proper way to defer to the strong, or stalk prey, is particular to the group.

Much the same is true, of course, in human societies. We learn whether to haggle in a shop, or whether to pay the marked price. We learn how a man is to respond to aggression from people of varying relative social status, and how a woman of a given age should behave in the same situation. These regularities become automatic, and greatly ease potential overheads in our lives. We only note their role when we encounter a new situation - as with an American encountering an Asian who wants to bargain about prices, for example - and we feel acutely uncomfortable that our assumptions have been undermined.

Recent research has shown how important such institutions are to us, and how engrained is our tendency to reinforce them. The Nobel prize winner and subject of the film, "A Beautiful Mind" gave his name to the Nash equilibrium. This refers to the stable behaviour that is likely to arise when people have to decide how much to trust others in order to achieve a mutually-useful goal. Most have heard of the "prisoners' dilemma", in which two prisoners are given the choice of betraying each other (and so facing a minor personal penalty) or of staying silent, and so going free if their colleague also remains silent. The down side of staying silent is, of course, that if the other betrays them, then they suffer a major penalty.

The key issue is, of course, that of access to information. If one prisoner knows what the other is doing, then both will always stay silent. Trust ceases to be an issue. Where information is partial, however, then we are forced to trust others, and we work from what we have learned about them. Reputation is, therefore, a major asset insofar as it predisposes people to go further with us than they will with those who lack such reputation.

Experimental 'games', which use real assets such as cash, show how significant reputation can be. Consider a game in which all players pool a sum, which is then doubled and returned to the players in an even manner. If ten people chip in ten dollars each, then each get twenty dollars back from the pool, a profit of ten dollars. Where there is perfect information, all will contribute as much as they can. Where there is no information, however, it is in the interest of each to contribute nothing. If the ten players have one defector, then the pool will be ninety dollars and the payout eighteen dollars each, or eight dollars profit. The defector will, however, make an eighteen dollar profit as he or she contributed nothing. Real games see contributions fall to zero in a few rounds. Similar Nash equilibria see forests over-exploited and the seas fished out because each player cannot trust the others not to over-exploit, so each grabs what they can whilst the supply lasts.

Adding information has a striking effect. If random rounds of the game, or alternate rounds, declare the size of individual contributions, then the grounds for trust are established and contributions remain high. If the scale of past deals are declared in advance during two-person games, those with strong track records for collaboration are treated well, and those with bad reputations are 'punished'. Brand and professional reputation have very real value, therefore. What is very striking, however, is that if players are allowed access to individual contribution to the game, and are allowed to punish defectors by fining them, then they will do this even when the cash cost to themselves is very high.

Similar results are obtained from animal experiments and ethnological observations. We will risk a great deal, and we will damage our immediate personal interests, in order to defend community norms and tacit institutions. Recent research shows that we will even punish those who are extraordinarily successful within the group, essentially taxing them and redistributing their spoils, and that we will do this even at great personal cost. Deep and complex emotional hard wiring seems to lie under the complex concepts of 'fairness', 'justice', 'reputation' and the like. It appears that millions of years of tribal life may have predisposed us - genetically or no - to defend the collective at the expense of the personal.

Tacit institutions are slow to arise, difficult to transmit and very hard to change in a purposeful manner. However, the demands on us and the formal ways in which our societies are becoming organised are often subversive to existing tacit structures. Reputation is important in village life, where everyone knows everyone else, or in city life where commerce and social connections are organised by class, by guild, by ethnic groups and the like. The modern melting pot has no such constraints, however, and reputation is something that can be re-invented to order. Friction must increase, and trust must be lessened by this. We have, however, learned to live as disconnected atoms in the giant city but at considerable cost, as measured in expenditure on policing and audit, and probably at the cost of lost opportunities, at the cost of ease with our neighbours and safety on our streets.

It may well be, however, that the new institutions that manage knowledge and participation will begin to make a stand against this homogenisation. Our financial reputation, at least, now follows us, and we leave an audit trail in almost every transaction which we make. Professionals act for the best, because one slip can cost them their career. Concern with terror and crime has made street surveillance commonplace. The vast expenditure now going into the management of these issues, into credit checking and the detection of criminal patterns of behaviour will, perhaps, begin to enforce professional standards of self-policing on the rest of society.

Liberty comes from balance. The complete absence of rules, or the complete failure to police those rules, does not generate liberty. Societies need their regularities: as we have already noted, friction is lowest when people feel comfort with and confidence in the workings of their world. Prescriptive environments - which certainly deliver regularity - do not afford liberty. The modern synthesis seems to be encountered when individual agents - firms, public organisations, individuals - adapt themselves to a functioning backdrop which is predictable, functional and sensible. There are no rules telling them which option they must pick, but there are clear structures which ensure that such options are stable and accessible. The backdrop itself changes to meet new demands and new capabilities, and the entire structure evolves and adapts in the manner of an ecology. In common with an ecology, such structures are vulnerable to external shocks, to predatory invasion and parasitism, but unlike and ecology, there are governing intelligences which can detect or anticipate these problems and take measures against them.

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