What’s at the root of our country’s economic woes? A lack of integrity, says Michael C. Jensen, emeritus professor of business administration at Harvard University. Jensen recently presented his theories about integrity and finance to an audience of faculty and staff at Mays Business School at Texas A&M University.

Noted scholar Michael C. Jensen recently spoke to Mays faculty and staff about the relationship between integrity and finance.
Noted scholar Michael C. Jensen recently spoke to Mays faculty and staff about the relationship between integrity and finance.

Jensen’s definition of integrity is divorced from concepts of morality and ethics. Instead, Jensen says we should think about integrity more like the law of gravity; gravity is neither good nor bad, and if you attempt to violate that law, you will experience negative consequences.

“Something is in integrity if it is whole, complete and sound,” says Jensen in a summary of his presentation, “Putting Integrity into Finance: A Positive Approach.”

According to Jensen, “Integrity is closely related to workability because an entity or system that is out of integrity will not be whole, complete and sound. Workability is the bridge to value. The farther out of integrity, the less well any given entity will work.”

Jensen asked the audience to think about a wheel with broken spokes: the integrity of the wheel would be compromised, and therefore the wheel would not work. “Without integrity, nothing works,” he said.

Jensen says he sees a lack of integrity within the capital markets, where managers and CEOs are expected to manipulate financial reports. Jensen questioned how a system could function where such basic information cannot be trusted. In his theory, as integrity declines, workability declines; as workability declines, value declines as well.

“Integrity matters, not because it’s virtuous but because it creates workability,” he said. “Workability increases the opportunity for maximum performance, which is necessary for maximum value.” As an example of a lack of integrity, Jensen cited a study of employment contracts for major corporations’ CEOs; in 96 percent of these firms, Jensen says that if a CEO is fired for breach of fiduciary duty to the organization, the CEO must still be paid the full amount of his contract. “This is a system that is out of integrity,” he said, and the effects to the global marketplace are obvious.

“Without integrity, nothing works,” Jensen told the audience.

Mays Professor of Finance Don Fraser said he appreciated Jensen’s presentation. “It was an insightful way to relate his in-and-out of integrity concepts to the existing academic literature in finance. As such, it provided a new perspective on that literature,” he said.

A scholar of renown, Jensen has done pioneering work in his core field of finance, founding and serving as the first editor of the Journal of Financial Economics, one of the field’s leading journals. In his article about the performance of mutual funds in the Journal of Finance, he developed a new risk-adjusted measure of stock mutual fund performance now widely known as “Jensen’s Alpha,” a measure used throughout the financial world.

Jensen is also well known for his work on agency costs, exploring how corporate managers frequently act in their own best interests rather than in their proper role as agents of the shareholders. This opportunistic behavior can have dire implications for the marketplace.

Jensen’s scholarship has appeared in numerous publications such as American Economic Review, Journal of Law and Economics, Journal of Financial Economics, and Harvard Business Review. He has also testified widely before Congress and a number of state legislatures on proposed shareholder rights legislation, and has served on various corporate and non-profit boards of directors.

Jensen is the founder of the Social Science Research Network (SSRN), and continues to serve as chair of its parent organization. SSRN has played a major role in electronically disseminating social science research.