Toward organizational integrity measurement: Developing a theoretical model of organizational integrity

Fuerst, Madeleine J.; Luetge, Christoph; Max, Raphael; Kriebitz, Alexander Article — Published Version Toward organizational integrity measurement: Developing a theoretical model of organizational integrity Business and Society Review Provided in Cooperation with: John Wiley & Sons Suggested Citation: Fuerst, Madeleine J.; Luetge, Christoph; Max, Raphael; Kriebitz, Alexander (2023) : Toward organizational integrity measurement: Developing a theoretical model of organizational integrity, Business and Society Review, ISSN 1467-8594, Wiley, Hoboken, NJ, Vol. 128, Iss. 3, pp. 417-435, https://doi.org/10.1111/basr.12329 This Version is available at: https://hdl.handle.net/10419/288075 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ ORIGINAL ARTICLE Toward organizational integrity measurement: Developing a theoretical model of organizational integrity Madeleine J. Fuerst 1 | Christoph Luetge 2 | Raphael Max 2 | Alexander Kriebitz 2 1 Chair of Business Ethics, TUM School of Management, Technical University of Munich, Munich, Germany 2 Chair of Business Ethics, TUM School of Social Science and Technology, Technical University of Munich, Munich, Germany Correspondence Madeleine J. Fuerst, Chair of Business Ethics, TUM School of Management, Technical University of Munich, Arcisstrasse 21, Munich 80333, Germany. Email: [email protected]e Funding information Volkswagen Aktiengesellschaft Abstract Organizational integrity is a key concept with and through which a company can assume its responsibility for ethical and societal issues. It is a basic premise for sustainable corporate success, as ethical risks ultimately become economic risks for a company. Recent research shows the potential of integrity-based governance models to reduce corporate risks and to improve business performance. However, companies are not yet able to assess nor evaluate their level of organizational integrity in a sound and systematic way. We aim to develop a theoretical model as a basis for the measurement of organizational integrity by conceptualizing the construct and sizing the theoretical model's scope. We suggest that the theoretical model follows a holistic approach and involves three types of dimensions: prerequisite dimensions, independent dimensions, and dependent dimensions. The organizational integrity triad—consisting of active commitments to self-imposed norms and principles, their transparent institutionalization into corporate processes and structures, and their implementation into action—plays a key role in this context. Received: 13 September 2022 Accepted: 13 July 2023 DOI: 10.1111/basr.12329 This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited. © 2023 The Authors. Business and Society Review published by Wiley Periodicals LLC on behalf of Albert P. Viragh Institute for Ethics in Business at Duquesne University. Bus Soc Rev. 2023;128:417–435. wileyonlinelibrary.com/journal/basr 417 KEYWORDS business ethics, measurement, organizational integrity, theoretical model 1|INTRODUCTION The board of management oversight role has advanced in recent decades because companies are becoming more complex; thus, company failures have more extensive impact and consequences on multiple stakeholder groups. Amid the growing power of companies in society, corporate governance has become an object of broad public interest (Paine & Srinivasan, 2019). According to group agent theory (List & Pettit, 2011), a company bears responsibility not only over its members but also beyond. 1 In fact, companies bear responsibility for ethical and societal issues, such as human rights, climate change, and poverty—just to name a few. The organizational integrity construct is a key concept with and through which a company can assume this very responsibility. 2 Moreover, Fuerst and Luetge (2021) argued that organizational integrity is a basic premise for corporate success. Integrity-based actions result (among others) in fundamental trust that is essential for a healthy and sustainably profitable company in the long run. Ethical risks ultimately become economic ones (Fuerst & Luetge, 2021). An obvious question that arises—at least from a board of management perspective in its oversight role—is how organizational integrity can become an integral part of corporate governance. Recent research approaches show the potential of integrity-based governance models to reduce corporate risks and to improve business performance (Arjoon, 2017; Cameron et al., 2004; Fuerst & Luetge, 2021; Hajduk & Schank, 2017; Laufer, 2006; Menzel, 2005). Indeed, developments in practice indicate that integrity-based governance models are becoming a vital part of corporate risk management as related research gains attention (e.g., Arjoon, 2017; Brink, 2017; Calder on et al., 2018). Simultaneously, practice also shows that merely compliance-based governance models are reaching their limits: In 2008, the subprime mortgage crisis, for example, caused Lehman Brothers to apply for insolvency. In 2015, the Diesel emission scandal severely disrupted the entire Volkswagen Group; courts are still handling compensation cases to this day. Many such examples of varying magnitude can be found at the international level. What they have in common is the aftermath: Integrity-based governance models are needed in a more substantiated concreteness than has been to date (e.g., Arjoon, 2017; Brink, 2017). How does a company manage organizational integrity? While integrity-based corporate governance is gaining attention, companies are not yet able to assess nor evaluate their level of organizational integrity in a sound and systematic way as a conceptualization of the construct and a holistic theoretical model are lacking. By calling for a holistic theoretical model, we refer to a holism understanding coined by Smuts (1926). Accordingly, a holistic approach refers to the whole of something or to the overall system rather than just its parts. It is characterized by interconnected parts that can only be explained in relation to the whole. A holistic theoretical model, in fact, could help companies take on responsibility as group agent by serving as a new, complementary approach in corporate governance. In addition, effectiveness assessments of respective activities and benchmarking could become possible in tandem. 418 FUERST ET AL. The aim of this article is to develop a theoretical model as a basis for the measurement of organizational integrity by conceptualizing the ethical construct and sizing the scope of the corresponding theoretical model. The aim of this article is not to develop a readyto-implement measurement approach with scale items. Accordingly, we aim to respond to two guiding questions: First, what would a theoretical model of organizational integrity look like? Second, can organizational integrity be measured (at all)? We start this article with a brief literature review of existing measurement approaches in the organizational context of integrity—from a positive organizational scholarship perspective and virtue ethical perspective. We then lay the theoretical foundation consisting of a construct definition and three theories that build the groundwork for construct conceptualization. Hereafter, we elaborate on our first guiding question of what a theoretical model of organizational integrity can look like. Finally, with regard to our second guiding question and considering the controversial debate on measurement in general, we provide fundamental considerations for when measurement—in general and in specific ethical concepts—might be legitimate. We conclude this article with practical implications and implications for future research. 2|LITERATURE REVIEW Our literature review considers the positive organizational scholarship perspective as well as the virtue ethical perspective as these are the two main research domains that study and examine the organizational integrity construct. Positive organizational scholarship studies the construct with an (mostly) empirical methodology. Virtue ethics examines the construct with a (mostly) conceptual approach and involves the roots and origin of the construct because integrity is a virtue. 3 Both research domains are relevant and necessary when developing a theoretical model as the basis for construct measurement. When it comes to the measurement of integrity in a business context, we see two different levels of analysis: the organizational level and the individual (mainly managerial) level. 4 Although the scope of this article is located at the organizational level, we also give a brief overview of the major measurement scale streams at the individual level because these account for most existing measurement approaches. We also consider measurement scales that aim to measure organizational virtuousness or managerial virtues 5 and that include integrity as one scale item. 2.1 |Organizational level of analysis At an organizational level of analysis, a sound measurement instrument is rare. Kaptein and Avelino (2005) presented the first study regarding organizational integrity in the workplace of the US workforce. The study illustrates how the construct can be measured via a primarily survey-based approach and presents relevant dimensions. Key dimensions for analysis are as follows: (1) the presence of codes (e.g., code of conduct), (2) the presence and quality of compliance programs, (3) the way codes and programs are embedded in and reinforced by corporate culture and structures, (4) the occurrence of unethical conduct, and (5) the impact of unethical conduct on the company itself and its stakeholders (Kaptein & Avelino, 2005). Although this study considers the organizational context like structures, policies, processes, and FUERST ET AL.419 culture, primarily individual behavior within the organization is measured rather than organizational behavior. Yet, the latter is our intention. Besides, various measurement systems concerning positive organizational virtuousness exist where integrity is one dimension or scale item among multiple ones (see, e.g., Bright et al., 2006; Cameron et al., 2004; Chun, 2005). For example, the virtue ethical character scale for organizations by Chun (2005) identified six dimensions of organizational virtues or the organization's character. One of these dimensions is the integrity dimension. It consists of four items that are assessed using a 5-point Likert scale: (1) honest, (2) sincere, (3) socially responsible, and (4) trustworthy. When answering the questionnaire, the respondents were asked to imagine the company as a person with character traits (items). Then, they were asked to rate these items on a 5-point Likert scale from (1) strongly disagree to (5) strongly agree. Cameron et al. (2004) developed a scale to measure organizational virtuousness from a positive psychology perspective. The scale consists of five factors, one of which is the integrity factor and assessed using three associated items. The respondents were members of the company evaluating its characteristics. The three integrity items are as follows: (1) “Honesty and trustworthiness are hallmarks of this organization,”(2) “This organization demonstrates the highest level of integrity,”and (3) “This organization would be described as virtuous and honorable”(Cameron et al., 2004, p. 778). 2.2 |Individual level of analysis At a personal level of analysis, leaders' integrity and leadership integrity are the main subjects of existing literature (see, e.g., Craig & Gustafson, 1998; Davis & Rothstein, 2006; McCann & Holt, 2009,2013; Prottas, 2008; Simons, 2002; Thoms, 2008). Craig and Gustafson (1998) developed and initially validated an instrument for assessing employee perceptions of leaders' integrity—the Perceived Leader Integrity Scale. It consists of 31 items. 6 Respondents were asked to indicate how well each item describes their immediate supervisor on a 4-point scale. Simons (2002, p. 19) developed a conceptual model of behavioral integrity which is “the perceived pattern of alignment between an actor's words and deeds.”Here also, different measurement systems concerning managerial virtues exist where integrity is one scale item among multiple (see, e.g., Riggio et al., 2010; Shanahan & Hyman, 2003; Whetstone, 2003). To summarize, we have identified two major levels of analysis—the individual level and the organizational level. Our work is to be located at the latter, thus attempting to focus on organizational behavior. Here, existing measurement approaches face three main challenges: First, although considering the organizational context like structures, policies, processes, and culture, it is mostly individual behavior within an organization that is measured. Second, underlying theoretical models focus not precisely on the organizational integrity construct but on organizational virtue or managerial virtues (both are broader concepts). Third, when survey methodology is used, it is not assured that the respondents among each other have the same understanding of the construct when answering the questionnaires. 3|THEORETICAL FOUNDATION A premise for developing a theoretical model for organizational integrity as the basis for construct measurement is a profound construct definition. Second, we introduce three 420 FUERST ET AL. theories—theory of incomplete contracts, stakeholder theory, and the pyramid of corporate social responsibility (CSR)—that build the groundwork for construct conceptualization. 3.1 |A definition of organizational integrity The organizational integrity construct comes with a broad range of interpretations in literature and practice. While some interpretations refer to an individual level and, for example, concentrate on the behavior of managers and employees, other interpretations refer to an organizational level and emphasize corporate structures and compliance systems (see, e.g., Becker, 1998; Brown, 2006; Collier, 1995; Maak, 2008; Moore, 2015; Paine, 1994,2014; Palanski et al., 2011; Solomon, 1992a,1992b; Tullberg, 2012). Furthermore, while some references state that organizational integrity manifests itself in organizational behavior, others say that organizational integrity is something that a company possesses (see, e.g., Solomon, 1992a,1992b). Fuerst and Luetge (2021) defined the organizational integrity construct and go beyond the descriptive level. First, they elaborated on the construct's origin, which is found at an individual level, using an Aristotelean approach. Second, they elaborated on the application to the organizational level using agency theory and arguing that companies are moral agents 7 ; thus, the personal integrity construct can be applied at the organizational level as well. This definition provides the basis for our attempt to design the theoretical model. Organizational integrity is the integral ability of a company to practice self-fidelity in the sense that its activities are based upon an internally consistent framework of principles and reflects to which extent self-legislated norms and legal standards in force are implemented into organizational actions. A certain maturity is required regarding the company's infrastructure, its CID [corporate internal decision] structures. Organizational integrity includes the ability to self-evaluate and incorporates awareness of both its own organizational strengths and weaknesses, resulting in the ability to further mature (in the sense of further develop). Finally, organizational integrity is in need of desirable moral principles like legal compliance, honesty, and respect. (Fuerst & Luetge, 2021,p.6) Accordingly, organizational integrity is not so much a corporate character trait but rather manifests in corporate behavior and actions. To simplify and operationalize this definition, Fuerst and Luetge (2021) delineated three (closed) stages, which we call the organizational integrity triad 8 in the following. Figure 1shows the organizational integrity triad consisting of (1) the active commitments to self-imposed norms and principles, (2) the transparent institutionalization of these commitments into corporate internal processes and structures, and (3) the assurance of commitment implementation into actions. The organizational integrity triad assists in a holistic construct definition as the three manifestation degrees of organizational integrity are interrelated, but only as a whole do they constitute organizational integrity. Three questions might arise in the context of the organizational integrity triad: First, when is a commitment a commitment? Second, when is a commitment transparently institutionalized? Third, do all commitments have to be transparently institutionalized? FUERST ET AL.421 Regarding the first question, we argue that a commitment publicly expresses and records a corporate position or self-legislated norm on a certain topic that is in the interest of the company's stakeholders and on which no positioning is obligatory from a legal point of view (e.g., a company in the cosmetics industry expresses its opposition to animal testing and publishes its position on the corporate website). Furthermore, ideally, a commitment is demanding rather than lapidary (McFall, 1987). As for the second question of when a commitment counts as transparently institutionalized, we argue that the institutionalization refers to the implementation of the position or selflegislated norm into corporate internal decision structures (e.g., in the form of policies or guidelines). Furthermore, transparent, in this context, refers to reasonable and requires qualitative or quantitative reporting on the committed conduct. The Global Reporting Initiative (GRI) Standard, 9 for example, provides global best practices for impact reporting on the economy, environment, and people. To the third question, whether all commitments must be transparently institutionalized to be valid, we respond by saying no. Besides the explicit form of organizational integrity, there is an implicit form. As the definition above indicates, there are fundamental moral principles inherent in the organizational integrity construct, without which organizational integrity can hardly unfold. These moral principles include, for example, legal compliance. It does not require active commitment to comply with the law, meaning legal compliance is implicitly inherent in the construct. Merely the explicit form of organizational integrity requires a transparent institutionalization of the commitment. Besides a profound definition, we demand the theoretical model of the organizational integrity construct be based on solid theoretical grounds. In the following, we introduce three theories that, we suggest, build the groundwork for construct conceptualization. FIGURE 1 The organizational integrity triad with its three manifestation degrees. 422 FUERST ET AL. 3.2 |Three theories that build the groundwork for conceptualizing organizational integrity 3.2.1 | Theory of incomplete contracts The theory of incomplete contracts (Grossman & Hart, 1986; Hart, 1995; Hart & Moore, 1990) posits that interactions are not completely determined by rules and contracts (Hart & Holmstrom, 2010). Consequently, a certain level of predictability is required among the actors involved. While institutional arrangements are intended to allocate power among agents, morality reduces the cost of searching, negotiating, and implementing agreements (Hart, 1995). Morality is an important precondition for economic health and growth. In this sense, organizational integrity—particularly the explicit form that comes with commitments and their transparent institutionalization—helps increase the predictability of the involved actors and can compensate for incomplete contracts (Luetge et al., 2016). 3.2.2 | Stakeholder theory The stakeholder theory (Freeman, 1984) suggests that managers have a duty to formulate and implement processes, which align and satisfy all stakeholders' needs and ensure the long-term success of a company. Furthermore, stakeholder theory provides the opportunity to redefine the way of thinking about value creation and trade (Freeman, 2010). “If we can make the twentyfirst century the century of value creation for stakeholders […], then the sheer audacity of our fellow humans will lead to prosperity and freedom for more and more people”(Freeman, 2010, p. 9). Besides, “firms that contract (through their managers) with their stakeholders on the basis of mutual trust and cooperation will have a competitive advantage over firms that do not” (Jones, 1995, p. 422). As organizational integrity functions as a binding element between the company and its stakeholders (and among the stakeholders themselves) and a lack of organizational integrity is likely to have consequences for several stakeholders of a company, we suggest considering a stakeholder approach in terms of scope and structure in the theoretical model of the organizational integrity construct. 3.2.3 | Pyramid of corporate social responsibility (CSR) The pyramid of corporate social responsibility (CSR; Carroll, 1991) suggests that a company must fulfill responsibility at four levels: economic, legal, ethical, and philanthropic. All four levels build on each other. The lowest level, thus the foundation on which everything stands, is economic responsibility. “[B]usiness organizations were created as economic entities designed to provide goods and services to societal members”(Carroll, 1991, p. 40). They may and should make acceptable profit because without a sustainable and profitable business model, all other three responsibilities become impossible to fulfill. The second level is legal responsibility. Within the framework of the social contract between business and society, companies are expected to operate legally. They are expected to comply with laws and regulations enacted by federal, state, and local governments as basic rules for doing business. Although economic and legal responsibilities involve ethical norms about fairness and justice, they cannot codify all activities and actions in law. The third level is FUERST ET AL.423 ethical responsibility, which goes beyond the law and embodies those standards and norms that protect the moral rights of stakeholders. Furthermore, “ethical responsibilities may be seen as embracing newly emerging values and norms society expects business to meet, even though such values and norms may reflect a higher standard of performance than that currently required by law”(Carroll, 1991, p. 41). For the theoretical model of the organizational integrity construct, we propose it to be forward-looking and develop over time. At the top of the CSR pyramid is philanthropic responsibility. This stage is about embracing corporate citizenship and contributing resources to communities, thus improving the quality of life in the community. Considering that corporate social responsibility is only one out of several corporate responsibilities, Maak (2008) argued for a broader and more inclusive notion in place of CSR, namely, that of organizational integrity. In summary, organizational integrity manifests in corporate behavior and actions. These behaviors and actions group into three (closed) stages, the organizational integrity triad. The organizational integrity triad represents a central element in our theoretical model. Additionally, we have introduced three theories from which we derive three implications for the theoretical model's scope and structure. First, the theoretical model ought to help improve the predictability of the actors involved and compensate for incomplete contracts. Consequently, transparency plays a key role. Second, the theoretical model design should consider all stakeholder relationships of the company in a balanced way. Third, the theoretical model ought to take into account all four levels of the corporate social responsibility (CSR) pyramid, but it should also go beyond these. 4|DEVELOPING A THEORETICAL MODEL OF THE ORGANIZATIONAL INTEGRITY CONSTRUCT Based on the theoretical foundation, we answer our first guiding question of what a theoretical model of organizational integrity can look like. We propose a theoretical model of the organizational integrity construct that takes a holistic approach and derive three types of dimensions that form the model's structure: prerequisite, dependent, and independent. Table 1 shows these different types and their associated dimensions. In total, we suggest 16 dimensions for the theoretical model. TABLE 1 Sixteen dimensions of the theoretical model of organizational integrity, categorized into three types of dimensions. Prerequisite dimension Independent dimensions Dependent dimensions 1. Legal compliance 1. Communications 2. Corporate culture and climate 3. Corporate policies 4. Human resources instruments 5. Incentive and reward structures 6. Reporting and decision structures 7. Resources 8. Whistleblower system 1. Competitors 2. Customers and clients 3. Employees 4. Politics 5. Shareholders 6. Society 7. Suppliers and business providers Note: Dimensions are listed alphabetically not by relevance. 424 FUERST ET AL. 6.2 |Implications for future research The proposed theoretical model would benefit from both further theoretical and empirical research. At the theoretical level, the dimensions could be challenged, expanded, and specified. In addition, it could be explored which existing standards (e.g., GRI, United Nations Sustainable Development Goals, Bribery Act, and Ethics & Compliance Initiative or ECI) could be used to operationalize and assess the organizational integrity triad dimensions (dependent dimensions). At the empirical level, future research can substantiate the theoretical model by validating its dimensionality. When it comes to the development of a measurement instrument, determining which method best suits the different types of information and data would be important. Finally, exploring statistical correlations between the dimensions and its topics would be interesting. Actual scale development and, if appropriate, testing for reliability and validity 22 also remain open for future research. ACKNOWLEDGMENTS The authors received project funding from Volkswagen Aktiengesellschaft related to the development of an organizational integrity measurement approach. Open Access funding enabled and organized by Projekt DEAL. CONFLICT OF INTEREST STATEMENT The authors declare that they have no conflict of interest. ORCID Madeleine J. Fuerst https://orcid.org/0000-0002-4942-4790 ENDNOTES 1 Certain groups of individuals can be viewed as single agents. They possess the ability of agency which is generally attributed to physical persons only. For a more detailed elaboration, see List and Pettit (2011). 2 Rossouw (2008) even found (organizational) integrity to be the construct through which business ethics—as one form of applied ethics—can be practiced. 3 Solomon (1992b) even referred to integrity as a supervirtue. 4 Few research projects focus on the team-level unit of analysis, for example, Palanski et al. (2011). However, we do not go into more detail as the literature review is intended to give a general overview. 5 Most studies use virtuousness and virtues interchangeably. For a precise distinction of the two concepts, see Sison and Ferrero (2015). 6 For the 31 items, see Craig and Gustafson (1998, p. 143f ). 7 In a nonmetaphorical manner. In this context, see, for example, French (1998) and List and Pettit (2011). 8 We propose that the integrity triad term is also valid in the context of personal integrity. However, certain factors, such as transparent institutionalization, will manifest themselves differently. 9 https://www.globalreporting.org/ 10 In 2002, the Sarbanes–Oxley Act introduced the concept of whistleblowing for private companies in the United States. The US federal law was a reaction to corporate reporting scandals, such as Enron and WorldCom. Since then, all publicly traded companies (in the United States) have been required to establish a whistleblowing function. In December 2019, a European Commission regulation on the protection of whistleblowers went into effect. 11 https://www.undp.org/content/dam/undp/library/corporate/brochure/SDGs_Booklet_Web_En.pdf FUERST ET AL.431 12 https://www.globalcompact.de/fileadmin/user_upload/Dokumente_PDFs/2021_New_VP_Brochure_ 20211012_FINAL.pdf 13 https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/ 14 https://www.oecd-ilibrary.org/science-and-technology/artificial-intelligence-in-society_eedfee77-en 15 https://www.eismd.eu/ai4people/ 16 https://ai4people.eu/wp-content/pdf/AI4People7AIGlobalFrameworks.pdf 17 In large parts of the literature, only two main ethical theories are referred to deontological ethics and utilitarianism. Adherents of these two theories claim that “their views already incorporate many of the theses allegedly peculiar to virtue ethics”(Crisp, 2005, p. 1043). Yet, virtue ethics has experienced a renaissance in recent decades and is increasingly used as a philosophical foundation for addressing business phenomena (e.g., Koehn, 1995; Moore, 2015; Robson, 2015; Solomon, 1992a). Therefore, we refer to three main theories. 18 For a structured presentation of the three central conceptions of justification of norms under dissent, see Luetge and Uhl (2021, p. 88ff ). 19 Mennicken and Espeland (2019) showed four domains where measurement and quantification scholarship has particularly flourished: administration, democratic rule, economics, and personal life. 20 For a more detailed summary of the two sets of ethical stakes, see Islam (2021). 21 In 2019 and 2021, a pilot measurement instrument based on our proposed theoretical model has been developed and explored in a practical pilot case and recurring assessment at one of the world's largest automotive manufacturers, which also experienced challenging times after the Diesel emission scandal in 2015. 22 We are aware of the controversial debate about validity and reliability in multimethod approaches, especially in qualitative research. For a good summary, see, for example, Golafshani (2003). REFERENCES Arjoon, S. 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