Knowledge

Moral maturity

There is a moral crisis in the United States (Bazerman & Tenbrunsel, Reference Bazerman and Tenbrunsel2011; Carter, Reference Carter2005), a crisis particularly evident in business environments and morally disengaged business leadership (Detert, Treviño, & Sweitzer, Reference Detert, Treviño and Sweitzer2008; Giacalone & Jurkiewicz, Reference Giacalone and Jurkiewicz2003; Lennick & Kiel, Reference Lennick and Kiel2005). As the world has witnessed regularly in recent years, executive shortsightedness and intentional misdeeds have frequently resulted in devastating long-term effects on hoards of stakeholders at such firms as Adelphia, Enron, HealthSouth, Parmalat, Peanut Corporation of America, Rite-Aid, Skandia, Royal Dutch Shell PLC, Tyco, WorldCom, and, more recently, Barclays, GlaxoSmithKline, HSBC, Lehman Brothers, and Olympus Corporation, among many others. The prevalence of what may be described as a ‘cheating culture’ (e.g., Callahan, Reference Callahan2004) in for-profit organizational environments particularly has led to sea-changing legislation (e.g., Sarbanes–Oxley Act of 2002) designed largely to constrain unethical activity and punish wrong-doers. According to Lennick & Kiel, (Reference Lennick and Kiel2005, p. 21), humans ‘are all ‘hard-wired’ to be moral’ but also require programming – or ‘moral software’ Lennick & Kiel, (Reference Lennick and Kiel2005, p. 22) – in order to develop our moral competence and be guided by a ‘moral compass’ that reflects universal principles. Sadly, driven by self-serving or materialistic motives (Callahan, Reference Callahan2006; Kasser, Reference Kasser2002) and burdened by financial pressures, too many top managers have software that either never developed or whose ethics have been compromised by ‘motivated blindness’ (Bazerman & Tenbrunsel, Reference Bazerman and Tenbrunsel2011).

In order to make wise judgments that result in long-term effectiveness, it is essential that top managers understand the moral implications of the choices they make, and how such choices affect the entire organizational system and the ‘common good’ (Lennick & Kiel, Reference Lennick and Kiel2005; Sternberg, Reference Sternberg1998). Certainly, careful consideration of both deontological decision processes and teleological impacts would have helped reduce some of the recent corporate misdeeds. Morality refers to ‘the standards of behavior by which people are judged in their relationships with others’ (Hosmer, Reference Hosmer2008, p. 99), and behavior of a moral nature is commonly judged with terms such as right versus wrong, good versus evil, or just versus unjust (Hosmer, Reference Hosmer2008). Viewed as having a high level of moral development, moral maturity refers to ‘the ability to stand outside the situation and justify one's actions in terms of universal moral principles’ (Dreyfus, Reference Dreyfus1990). Universal moral principles, such as integrity, compassion, responsibility, forgiveness (Lennick & Kiel, Reference Lennick and Kiel2005), honesty, justice, and trust are the unchanging, proven, ‘natural laws and governing social values that have gradually come through every great society, every responsible civilization, over the centuries’ (Covey, Reference Covey1990, p. 69). From an organizational leadership perspective, Bennis (Reference Bennis1999) has called for executives to embrace such humane (and morality-related) values as humility, openness, magnanimity, and integrity; all of which fit well within a moral maturity framework.

Developing one's moral maturity, which also can be viewed as progressing further along Kohlberg's (Reference Kohlberg1969, Reference Kohlberg1983) stages of moral development and manifested through one's decisions and actions, is foundationally vital to possessing executive wisdom. From an executive decision-making perspective, moral maturity helps to frame knowledge use and constrain decision-making to ethical judgments that reflect sensitivity to salient stakeholders and a long-term effectiveness bias. Those with high moral maturity do not push aside self-interest; rather, self-interests are pursued only with keen sensitivity to minimizing adverse impact on others (e.g., Forsyth, Reference Forsyth1992; Hosmer, Reference Hosmer2008; Sternberg, Reference Sternberg1998). Thus, executive wisdom requires transitioning from, using Kohlberg's (Reference Kohlberg1969) terminology, the conventional level to the post-conventional level. The conventional level is characterized by seeking the approval of others (Stage 3) and by conformity to the law and obligations of duty (Stage 4). At the post-conventional level, an individual becomes a ‘truly autonomous moral entity’ (Thompson, Reference Thompson2000, p. 121; found in Senske, Reference Senske2004, p. 46) who takes a genuine interest in the welfare of others, and believes that all individuals should be afforded basic rights and have democratic processes available to them. According to Mathieson and Miree (Reference Mathieson and Miree2003, p. 464), ‘post-conventional reasoning is a sign of moral maturity’.

Moral maturity is developed over time and typically requires some combination of discipline, a desire to leave a positive legacy, learning from role models and, often, spiritual readings, and reflective learning from prior ethical situations experienced by oneself and vicarious learning from others’ experiences (Bierly & Kolodinsky, Reference Bierly and Kolodinsky2007). Discipline helps individuals ‘make and keep promises and … honor commitments’ (Covey, Reference Covey1990, p. 73). Disciplined executives stay focused (and thus limit distractions) on the most relevant issues. Given the fishbowl that executive management tends to be, it seems wise for executives to be disciplined enough to ‘willingly constrain [their] judgments to only those that fit within a framework of moral acceptability’ (Bierly & Kolodinsky, Reference Bierly and Kolodinsky2007, p. 71). Along with learning from others and experiences, morally mature people commonly have a strong desire to leave the world a better place – what Erikson (Reference Erikson1950) called ‘generativity’ in his model of psychosocial development. Covey (Reference Covey2004) went so far as to call ‘leaving a legacy’ one of the four basic needs of people.

Based on the foregoing, we suggest that moral maturity requires reaching the post-conventional level of moral development, embodying interactionally humane values, modeling universal principles, and possessing a strong desire for generativity. Only when executives move beyond self-interest maximization and a myopic focus on meeting short-term financial targets can they begin to manifest true wisdom and make effective and sensitive moral judgments. However, making decisions that reflect moral maturity and that apply knowledge effectively is not enough for executives to be considered wise. Executive wisdom also requires skill at applying reflective strategic decision-making processes.

Reflective strategic decision-making

Making complex, strategic decisions is a primary function of executives. The decision-making of wise executives is reflective in the sense that there is: (a) Thoughtful consideration of one's own and others’ experiences, (b) an understanding of the issues from multiple perspectives, and (c) a deep understanding of complex issues. Many researchers have identified that reflection on past decisions and experiences is a major component of wisdom (Ardelt, Reference Ardelt2003; Staudinger, Reference Staudinger2001; Staudinger and Glück, Reference Staudinger and Glück2011; Webster, Reference Webster2007). The reflection process involves identifying past relevant experiences, critically evaluating the experiences, and understanding how they are related to current situations (Webster, Reference Webster2007). This type of insight can be gained from both past successes and failures and has great salience for executives with extensive experience with making difficult strategic decisions in complex situations. Reflection on past experiences may occur as part of formal, rational decision-making processes or as ‘non-rational’ processes by the use of an executive's intuition (Simon, Reference Simon1987). Intuition can be an especially powerful tool to supplement rational decision-making when decisions need to be made very rapidly without time to gather more data (Bierly & Gallagher, Reference Bierly and Gallagher2007).

In addition to reflecting on past experiences, it is important for executives to look at issues from multiple perspectives before making a decision (Ardelt, Reference Ardelt2003; Csikszentmihalyi & Nakamura, Reference Csikszentmihalyi and Nakamura2005; Glück & Buck, Reference Glück and Buck2007; Green & Brown, 2009). This process first requires self-transcendence, the ability to dissolve the boundaries between self and others (Staudinger and Glück, Reference Staudinger and Glück2011). Wise executives are able to evaluate arguments by others from a distance such that their own worldview, emotions, values, and goals do not unduly bias their decision-making processes. Additionally, wise executives are able to understand that different perspectives of an issue may all have value and that integrating knowledge from these different sources will more likely result in wise decisions. In organizational settings, this translates to executives managing different stakeholders’ needs, balancing the need to accomplish both short and long-term goals, and balancing the need to be profitable and also provide societal value that benefits the common good (e.g., Freeman et al., Reference Freeman, Dunham and McVea2007; Sternberg, Reference Sternberg2000).

Furthermore, reflective strategic decision-making requires a deeper understanding of very complex issues (Ardelt, Reference Ardelt2003; Baltes & Staudinger, Reference Baltes and Staudinger2000; Glück & Buck, Reference Glück and Buck2007). A logical approach to decision-making is certainly required, but a ‘universal truth’ often cannot be determined (Staudinger and Glück, Reference Staudinger and Glück2011). Many complex issues in business have multiple truths, contradictions and high levels of uncertainty. Thus, making wise judgments takes more than possessing relevant knowledge, moral maturity, and skill in applying reflective strategic decision-making processes – it also requires the ability to manage uncertainty effectively.

Ability to manage uncertainty

Many researchers have articulately explained why managing uncertainty is a critical component of wisdom (e.g., Ardelt, Reference Ardelt2003; Baltes & Staudinger, Reference Baltes and Staudinger2000; Brugman, Reference Brugman2006; Meacham, Reference Meacham1983; Meeks & Jeste, Reference Meeks and Jeste2009; Rooney & McKenna, Reference Rooney and McKenna2007; Weick, Reference Weick1998). Managing uncertainty is particularly salient for business executives, where almost every decision they make involves uncertainty about either the internal or external environment. Many problems involve multiple truths, incompatible goals and ambiguous information. Often, events that determine the success or failure of their firms are out of their control and unpredictable. To manage this uncertainty, executives must first acknowledge and understand the uncertainty they face about current and future situations. Brugman (Reference Brugman2006, p. 454) goes so far as to claim that ‘the core of wisdom is acknowledging uncertainty, which fosters a more flexible attitude toward information’. Hence, wise executives acknowledge the limitations of human endeavors and an awareness, for instance, that they do not know how certain technologies may evolve or the true capabilities of their competitors and even one's own employees. As suggested by Freeman et al. (Reference Freeman, Dunham and McVea2007, p. 162) in the context of stakeholder theory, wise strategy making ‘embraces the indeterminacy and changeability of the kinds of problems facing strategy makers and operates within the context of uncertainty and ambiguity’.

After acknowledging uncertainty, executives must develop ways to manage it, which may include the following techniques. First is the use of heuristics, which are general rules used to simplify complex situations (Kahneman & Tversky, Reference Kahneman and Tversky2000). Heuristics are usually effective in simplifying a complex situation with much uncertainty, but sometimes they do lead to inappropriate and irrational solutions (Gilovich, Griffin, & Kahneman, Reference Gilovich, Griffin and Kahneman2002; Karelitz, et al., Reference Karelitz, Jarvin and Sternberg2010). Having more experience in uncertain situations and previous use of heuristics in these types of situations increases one's ability to apply heuristics. Second, the development of flexible solutions can be a successful strategy to deal with uncertainty (Staudinger & Glück, Reference Staudinger and Glück2011). Third, the use of scenarios analysis is another strategy to proceed with unknown information. This provides a systematic way of thinking about how the future may unfold and allows executives to change directions as they learn more about a specific situation. Fourth, relying on trusted employees, strategic partners, suppliers or other stakeholders can be efficacious when needing to make strategic decisions quickly and with incomplete information. Additionally, DiFonzo and Bordia (Reference DiFonzo and Bordia1998) explain the importance of effective communications during times of uncertainty to reduce the anxiety associated with uncertainty and maintain trust throughout the organization.

Two ‘Big Five’ personality traits (Barrick & Mount, Reference Barrick and Mount1991; Digman, Reference Digman1990) have been identified as antecedents to the successful management of uncertainty: Emotional stability and openness to new experiences (Brugman, Reference Brugman2006; Kunzmann & Baltes, Reference Kunzmann and Baltes2003; Staudinger et al., Reference Staudinger, Maciel, Smith and Baltes1998). During periods of uncertainty, some people cling to old ideas because of fear of the unknown and because the uncertainty may imply the impossibility to predict outcomes and, thus, the loss of control (Brugman, Reference Brugman2006). When executives are resigned to the understanding that there is unpredictability and they have lost some control, they must maintain emotional stability to effectively mange the organization (Brugman, Reference Brugman2006; Staudinger et al., Reference Staudinger, Maciel, Smith and Baltes1998). Being intellectually curious, being open to new ways of looking at problems and solutions, and avoiding emotional panic can mean the difference between success and failure of a project – indeed, organizational survival.

Several authors have stressed the importance of both knowing what you know and knowing what you do not know (Birren & Fisher, Reference Birren and Fisher1990; Meacham, Reference Meacham1983, Reference Meacham1990; Weick, Reference Weick1998). Weick (Reference Weick1998) explains this issue with particular insight. He describes wisdom as an attitude toward one's beliefs, values, information and knowledge that balances overconfident knowing and overly cautious doubt (Meacham, Reference Meacham1990; Weick, Reference Weick1998). Even though much of the business world is unknowable and unpredictable, strategic decisions must still be made and action taken based on incomplete information. Weick argues that a key element of wisdom is the awareness of constraints and contingencies about a given situation such that one takes action understanding that such knowing is fallible. In other words, an important attribute of wisdom is the knowledge that one does not know it all. Indeed, for Socrates, the affirmation of his own ignorance helped form the foundation of his philosophy.

Weick (Reference Weick1998) further argues that an absence of wisdom occurs when there is a lack of balance between overconfident knowing and doubt. Wisdom falters when the overconfident executive believes that what he doesn't know is unimportant. Executives may become too attached to ‘organizational isomorphism’ (e.g., Rooney & McKenna, Reference Rooney and McKenna2007) by sticking with old, comfortable ideas and modifying the interpretation of new inputs to fit such ideas. All too often ‘know it all’ executives make poor strategic decisions by only relying on limited or familiar sources of data, failing to understand situational complexities yet acting with conviction and self-assuredness. When strategic decisions are very visible with wide-ranging impact, top managers often feel added pressure to justify them. Weick claims that this type of justification and commitment to a specific course of action is the enemy of wisdom because it minimizes doubt. Wisdom involves questioning the validity of knowledge and decreasing attachment and bias toward any specific option. Of course, wisdom also is not attainable if one lacks knowledge and is excessively cautious. Not knowing enough about a situation or not gathering enough pertinent data can create too much doubt and a lack of confidence to act. Continual inaction exacerbates the problem, as learning is thwarted and opportunities are missed, resulting in a failure to enhance one's ability to better understand how much one does not know (Weick, Reference Weick1998).

Whereas wise executives proactively seek to be knowledgeable about all pertinent issues to help them make informed strategic decisions, they understand – given the various complexities of organizational environments, such as constant change, dynamic resources, time pressures, competitive threats, and internal uncertainties – that they cannot make decisions with full certainty. Rather, executive wisdom is evident when one is comfortable with weighing all accessible knowledge with the understanding that much cannot be known; this provides for a healthy ‘informed doubt’ that helps optimize strategic judgments. Armed with relevant knowledge, moral maturity, reflective strategic decision-making, and ability to manage uncertainty, the wise executive is well positioned to make enlightened strategic judgments and, subject to one's leadership skills, implement such judgments as principled actions which result in sustainable organizational effectiveness outcomes.

Enlightened strategic judgments

Executives with all of the foundational characteristics discussed above are able to make enlightened strategic judgments; missing any of the foundational characteristics inhibits one's ability to make such judgments. By enlightened strategic judgments, we mean that the multi-faceted consequences of one's decisions and actions are thoughtfully considered prior to implementation; in particular, how each judgment will likely affect self, others, the organization, and society at large (Bierly & Kolodinsky, Reference Bierly and Kolodinsky2007). Given the likelihood that wise executives seek to minimize adverse long-term consequences, enlightened judgments reflect executive integrity, courage, ethics, and careful concern for the ‘common good’ (Jordan & Sternberg, Reference Jordan and Sternberg2007; Sternberg, Reference Sternberg2000). Such judgments therefore transcend an executive's self-interests and center more on the sensitive consideration of impacts on others.

Furthermore, enlightened judgments must be forward-looking and made with careful consideration of impacts on both financial and social performance over time. Therefore, they must be ‘strategic’ in nature. Freeman et al. (Reference Freeman, Dunham and McVea2007, p. 162) assert that managing strategically requires an ethical dimension and ‘enables our sense of the good to emerge from the concrete particulars of our lives’. Moreover, they suggest that wise strategy making ‘imposes no particular ‘formula’ for balancing, weighting, offsetting, or dividing stakeholder interests or rewards but allows the most appropriate approach to emerge from [each] particular situation’. Hence, wise executives seek to make judgments that are both strategic and enlightened. While the ability to make enlightened strategic judgments is certainly a hallmark characteristic of wise executives, to be truly effective they must also implement such judgments into action that helps one's organization.

Principled actions

In order for positive outcomes to be achieved, enlightened strategic judgments must be transformed into principled actions. The executive alone often cannot perform such actions; others usually must be mobilized. Workers who embrace the executive's vision, values, and leadership style are likely to be willing to carry out such judgments, thus helping to ensure that desired outcomes are achieved. One powerful way for organizational executives to inspire workers is to model universal values and principles, such as those noted by Hosmer (Reference Hosmer2008): Personal virtues (e.g., honesty, integrity, trustworthiness, openness), religious injunctions (e.g., compassion, kindness, care for one's community), utilitarian benefits (e.g., decisions and actions that lead to the greatest good for the greatest number), universal duties (e.g., treating others with dignity and respect;), distributive justice (equitable fairness), and contributive liberty (e.g., freedom).

Actions that reflect such universal principles are likely to lead to greater trust, loyalty, and commitment from a variety of stakeholders (Freeman et al., Reference Freeman, Dunham and McVea2007; Hosmer, Reference Hosmer2008). Decisions and actions that fail to reflect such values and principles – egocentricity and extreme selfishness (Bazerman & Tenbrunsel, Reference Bazerman and Tenbrunsel2011), dishonesty, a lack of integrity, openness, and fairness, for example – are more likely to be met with scorn, distrust, and a lack of commitment, loyalty, and effort (Hosmer, Reference Hosmer2008).

Implementation of enlightened strategic judgments into principled actions is contingent upon, among various moderators, the executive's ability to mobilize others to act on one's judgments. This requires leadership skills, the subject of the next section.

Leadership skills: A key moderator

Whereas a variety of factors can impact whether enlightened strategic judgments are effectively implemented into principled actions – for instance, the degree to which workers support management, the degree of slack resources needed for implementation, and the norms and strength of the informal organizational culture (Bazerman & Tenbrunsel, Reference Bazerman and Tenbrunsel2011) – one particular factor seems most important in helping to facilitate the implementation of enlightened strategic judgments. That key factor is leadership skills.

It should be noted that we are not suggesting that leadership skills be part of the executive wisdom construct, but rather part of a toolkit that enables executives to implement their judgments. Many highly skilled organizational leaders – with outstanding leadership skills – have failed miserably in achieving the kind of sustainable effectiveness detailed here. But with such skills, workers are more likely to be inspired – by, for example, the compelling vision set by the executive – to do their part in helping implement principled actions. More formally, the relationship between enlightened strategic judgments and principled actions is moderated by leadership skills, such that the relationship will be stronger with a higher level of leadership skills (see Figure 1).

The leadership literature is voluminous, multi-faceted, and fragmented. However, we view a few key leadership skills as particularly helpful in facilitating such implementation. For example, some of the literature has described effective leaders as possessing strong social effectiveness skills (e.g., Ferris, Perrewé, & Douglas, Reference Ferris, Perrewé and Douglas2002), including emotional intelligence (e.g., Goleman, Reference Goleman1995), the capacity to persuade (e.g., Cialdini, Reference Cialdini2001), and political skill (e.g., Ferris, Davidson, & Perrewé, Reference Ferris, Davidson and Perrewé2005). From our vantage, executives who possess and exhibit qualities consistent with several characteristics espoused in theories related to ethical leadership (e.g., Treviño et al., Reference Treviño, Hartman and Brown2000), transformational leadership (e.g., Bass, Reference Bass1990), and strategic leadership (e.g., Boal & Hooijberg, Reference Boal and Hooijberg2001; Cannella & Monroe, Reference Cannella and Monroe1997) are more likely to meet with success in mobilizing workers to implement their judgments.

Ethical leaders are able to craft perceptions of themselves as moral persons and as moral managers (Treviño et al., Reference Treviño, Hartman and Brown2000). They are viewed as honest, trustworthy, and fair, and model behaviors that show stakeholders a resolute conviction for integrity – that is, they ‘walk the talk’ (Treviño et al., Reference Treviño, Hartman and Brown2000) and regularly voice their ethical values (Gentile, Reference Gentile2010). Moreover, wise executives exhibit behaviors consistent with tenets of transformational leadership (e.g., Bass, Reference Bass1990). Transformational leaders (e.g., Avolio & Bass, Reference Avolio and Bass1995; Bass, Reference Bass1990;) are people capable of influencing others to motivate themselves to accomplish tasks consistent with the leader's vision. Transformational leadership theory posits that such leaders effectively influence others in idealized ways, provide ‘individualized consideration’ to key stakeholders (e.g., employees), have a compelling vision that is inspiring to others, and are intellectually stimulating. A recent addition to transformational leadership theory and relevant to wise executives’ moral maturity is ‘authentic transformational leadership’ (e.g., Bass & Steidlmeier, Reference Bass and Steidlmeier1999; Price, Reference Price2003), which focuses on behavioral motives and differentiates between ethical and unethical transformational leaders. Authentic transformational leaders possess ‘a moral foundation of legitimate values’ (Bass & Steidlmeier, Reference Bass and Steidlmeier1999, p. 184) and emphasize espoused values (both personal and professional), virtues, character, judgments and behavioral processes that are altruistic, congruent, and ‘true to self and others’ (Bass & Steidlmeier, Reference Bass and Steidlmeier1999, p. 191).

In addition to possessing characteristics of ethical leaders and authentic transformational leaders, effective leaders are also strategic leaders. Proponents of strategic leadership theory (e.g., Boal & Hooijberg, Reference Boal and Hooijberg2001; Cannella & Monroe, Reference Cannella and Monroe1997) argue that today's organizational leaders typically face increasingly hyper-turbulent organizational environments and, to be effective, they must possess various capacities that enable them to act wisely, such as absorptive capacity (e.g., the ability and willingness to continually learn relevant knowledge), adaptive capacity (e.g., the ability and willingness to be flexible and change), managerial wisdom (which includes discernment and Kairos time – ‘the capacity to take the right action at a critical moment’), and vision (both industry-specific and market-specific capacity to predict changes in one's organizational environment). Moreover, they must stay continually tuned in to all salient stakeholders and manage the creation of meaning and purpose in (and for) their organizations (Boal & Hooijberg, Reference Boal and Hooijberg2001).

Without such leadership skills, wise executives can still implement their judgments into principled actions, but the path to implementation is more difficult. Next, we look at common outcomes of executive wisdom.

Balanced impact on the common good

In his paper on organizational greatness, Khandwalla (Reference Khandwalla1998) suggests, perhaps pejoratively, that the dominant paradigm of corporate performance excellence is ‘to win’ in the competitive domain. Unfortunately, those who strive solely to win, without regard to impact on stakeholders, too often find themselves degenerating ‘into winning at all costs – costs to others as well as organizational stakeholders’ (Khandwalla, Reference Khandwalla1998, p. 168). Indeed, as argued by Greider (Reference Greider2003), purely capitalistic and self-serving pursuits often result in heavy costs to innocent stakeholders:

Of course, there are notable exceptions to Grieder's (2003, p. 48) dark capitalistic picture, and he offers ‘conviction that American capitalism can be made to conform … faithfully to society's broad values’. Certainly, some executives have learned that winning at any cost is not winning at all. They believe that sustainable competitive advantage comes from actions that reflect a sensitive and balanced impact on both direct and indirect stakeholders. In doing so, these wise executives help their firms approach organizational greatness (Khandwalla, Reference Khandwalla1998).

In strategy making, wise executives delicately balance the needs and interests of a wide variety of stakeholders in order to achieve long-term sustained competitive advantage (Bierly & Kolodinsky, Reference Bierly and Kolodinsky2007). Certainly, the marked increase in corporate social responsibility (CSR) practices and the lasting popularity of stakeholder-related theories (e.g., Freeman, Harrison, Wicks, Parmar, & de Colle, Reference Freeman, Harrison, Wicks, Parmar and de Colle2010; Jensen, Reference Jensen2002) provides some measure of validation of these concerns. In addition, Sternberg's (1998, 2000, 2003) balance theory of wisdom is helpful in this context. The balance theory of wisdom suggests that wise organizational leaders ‘ … skillfully balance interests of various kinds, including their own, those of their followers, and those of the organization for which they are responsible’ (Sternberg, Reference Sternberg2003, p. 395). The balance theory of wisdom ‘specifies the processes (balancing of interests and of responses to environmental contexts) in relation to the goal of wisdom (achievement of a common good)’ (Sternberg, Reference Sternberg2000, p. 638; parentheses in original). More than just expert knowledge and know how, wisdom is ‘relevant to the attainment of particular goals people value, not just any goals, but rather, a balance of responses to the environment – adapting, shaping, and selecting – so as to achieve a common good for all relevant stakeholders’ (Sternberg, Reference Sternberg2000, p. 638).

Whereas profit-maximization and shareholder value are important concerns, organizations that also focus on the ‘common good’ – in their product or service offerings, in their treatment of workers, in socially responsive actions, and in the manner in which the community benefits from the organization – create goodwill and positive synergies that often help them outperform, in the long-term, firms focused mainly on financial ends (e.g., Becker & Huselid, Reference Becker and Huselid1998; Collins & Porras, Reference Collins and Porras1994; Eclles, Ioannou, & Serafeim, Reference Eclles, Ioannou and Serafeim2012; Pfeffer, Reference Pfeffer2003). Hence, it appears to be unwise to focus organizational strategies solely on profit-maximization or shareholder value – ultimately, most stakeholders want to feel connected to an organization in ways other than simply financial performance (Freeman et al., Reference Freeman, Harrison, Wicks, Parmar and de Colle2010; Pfeffer, Reference Pfeffer2003).

To the degree that leadership is focused on such issues as profits over relationships, financial performance over people and society, extrinsic over intrinsic values and motivations, money more than principles, short-term performance more than long-term effectiveness, and what is best for self versus what is best for the common good, then leadership will fail to make wise decisions and judgments. Moreover, such materially focused executives will behave in ways that reflect their short-term, selfish desires (Callahan, Reference Callahan2006), and will fail to act as principled role models that help workers develop in ways that serve their needs (Covey, Reference Covey1990). Profit-focused executives unwittingly send the message to stakeholders that money is more important than people. Alternatively, wise executives send the message that a people-oriented focus rather than money is the best strategy for long-term sustained competitive advantage (Pfeffer, Reference Pfeffer2003).

Stakeholder trust and loyalty

Wise executives are trustworthy and inspire a feeling of trust in stakeholders, and stakeholders respond to such executives with greater loyalty (e.g., McKee, Reference McKee2003). Since ‘trust is the foundation for building and maintaining human relationships’ (Elm, Reference Elm2003, p. 281), and since businesses thrive or die based on their relationships with various stakeholders, one might think that doing everything possible to develop and keep trust would be paramount for top managers. Sadly, this is often not the case. For a variety of reasons, from business scandals to egregious CEO pay to insensitive layoff processes, trust in individuals and institutions – particularly business institutions and the executives who run them – appears to be on the decline (e.g., Fukuyama, Reference Fukuyama1995; McKee, Reference McKee2003). Putnam (Reference Putnam2000) found that just 40% of Americans born in the 1970s believe that most people are honest. Perhaps even more striking is the recent finding that Americans have ‘complete confidence’ in the moral decision-making of just 3% of business executives (Barna Research Online, 2002; found in Maxwell, Reference Maxwell2003). This is substantially lower than previous generations and indicative of the degeneration of trust in the US (McKee, Reference McKee2003).

Executives today have an opportunity to stand out from their counterparts by being trustworthy, honest, and integrated – attributes strongly related to the development of trust. As argued by Elm (Reference Elm2003), it is difficult to separate trust from honesty and integrity. Certainly, it is difficult if not impossible to trust someone who is dishonest, who fails to fulfill a promise, and who betrays. Alternatively, it is easier to trust someone who consistently tells the truth and whose actions follow their words and values, particularly when such actions show moral sensitivity to others. As stated by Fukuyama (Reference Fukuyama1995), ‘trust arises when a community shares a set of moral values in such a way as to create expectations of regular and honest behavior’.

It is up to today's business executives to create the kind of business environment that fosters trust. This starts with being trustworthy and honest in all interactions. Further, fostering a work climate characterized by honesty, openness, and caring all contribute to trust. As executives model such attributes, workers, customers, and other stakeholders respond in kind (e.g., McKee, Reference McKee2003). Such ‘trust reciprocity’ creates a holistic spiraling effect that makes it much easier and faster (Covey, Reference Covey2004) for all to transact, with less need for ‘detailed contract development, policing of contract implementation, and dispute resolution’ (McKee, Reference McKee2003, p. 71). Thus, executives’ enlightened judgments and consistently principled actions create a holistic trust that is enduring and positively impactful.

As wise executives build trust and make strategic judgments that exhibit sensitivity to stakeholder needs, stakeholders respond with greater loyalty. As noted above, internal stakeholders such as employees are more likely to respond to wise and principled behavior with higher trust, commitment, and effort (Hosmer, Reference Hosmer2008). External stakeholders, such as customers, for example, are proud to use products from a principled company – witness the growth of firms with a principled, shared value approach such as Whole Foods, New Belgium Brewing, and Nestlé (e.g., Porter & Kramer, Reference Porter and Kramer2011). One way that customer loyalty is developed is by having loyal, long-term committed employees (e.g., Pfeffer, Reference Pfeffer2003). Firms with stable, loyal workforces tend to foster more loyal customers, which have been found related to superior financial performance (e.g., Reichheld, Reference Reichheld1996). To develop loyal workforces and thus reap the related benefit of more loyal customers, top managers must show that they care. As suggested by McKee (Reference McKee2003, p. 67), ‘An organization's caring for its employees is the foundation for employee caring for customers. Employees treat customers in the way that they feel management is treating them’.

Another direct path to stakeholder loyalty is through worker trustworthiness, honesty, and integrity, attributes that help reduce the costs of exchange in business relationships (McKee, Reference McKee2003). Lennick and Kiel (Reference Lennick and Kiel2005) offer numerous examples of executives whose honesty and integrity resulted in greater stakeholder loyalty and, as a result, increased long-term effectiveness. In one prominent case, a large advertising and marketing firm, Young & Rubicam (Y & R), was asked to bid on the marketing of a proposed new line of products for a large diversified global company, Warner Lambert. Applying their knowledge, experience, and moral maturity, the Y & R team decided after much deliberation that the new product line was in fact a bad idea for Warner Lambert to consider. They gave Warner Lambert their reasoning, and in essence turned down the opportunity to win a new client. Or so they thought. Just a few weeks later, Warner Lambert called to tell the Y & R team that they agreed with its analysis, stating, ‘No other agency was smart enough or honest enough to tell us, but you did. We have decided not to launch the line. Because of your honesty, though, we are going to give you some other business with us, and you won't have to compete for it’ (Lennick & Kiel, Reference Lennick and Kiel2005, p. xxxv).

Worker maximization

When enlightened judgments and principled actions by top managers become the norm in an organization, workers respond with increased trust, motivation, commitment, effort, loyalty, and productivity as they come to recognize that management decision-making takes into account their needs and values (Hosmer, Reference Hosmer2008). When this occurs, staffing issues are less cumbersome, as fewer workers tend to leave an organization that clearly cares for them, and outside candidates clamor to join such a unique firm. Such desirable outcomes can be attributed in part to top management's attention to the needs of workers that come about naturally through the executive's moral maturity and reciprocally through worker recognition of top management's commitment to them (Pfeffer, Reference Pfeffer2003).

To the degree that organizational leaders are attending to (and meeting) workers’ needs, they have the opportunity to build a workplace that demonstrates to workers that the whole person matters – not just work tasks. Such people-centered caring promotes ‘fit’ and trust, freeing workers to maximize their value at work, and hence their performance (e.g., Hosmer, Reference Hosmer2008; Pfeffer, Reference Pfeffer2003). Moreover, attending to worker needs helps organizational leaders foster a culture that enables workers to develop a sense of purpose at work and an underlying feeling of unity (Hosmer, Reference Hosmer2008; Khandwalla, Reference Khandwalla1998), all of which aids productivity.

Reputational capital

Wise executives (and the organizations they run) enjoy strong reputational benefits that endure even in hard times. Reputation can be viewed as ‘a perceptual identity reflective of the complex combination of salient … characteristics and accomplishments, demonstrated behavior, and intended images presented over some period of time as observed directly and/or as reported from secondary sources’ (Ferris, Blass, Douglas, Kolodinsky, & Treadway, Reference Ferris, Blass, Douglas, Kolodinsky and Treadway2003, p. 215). Further, reputation is commonly seen as affecting customer decision-making under conditions of incomplete information (e.g., Kreps & Wilson, Reference Kreps and Wilson1982) and as being ‘collective judgments of … overall character’ (Hannon & Milkovich, Reference Hannon and Milkovich1996, p. 408) with the potential to be a valuable, inimitable, and intangible resource that can affect sustained competitive advantage (e.g., Barney, Reference Barney1991; Dollinger, Golden, & Saxton, Reference Dollinger, Golden and Saxton1997; Ferris et al., Reference Ferris, Blass, Douglas, Kolodinsky and Treadway2003). Indeed, reputation is commonly mentioned as an influential factor in prominent theories relevant to organizations, including game-theory (e.g., Ching, Holsapple, & Whinston, Reference Ching, Holsapple and Whinston1992), agency theory (e.g., Wernerfelt, Reference Wernerfelt1984), and the resource-based view of the firm (e.g., Barney, Reference Barney1991; Fombrun & Shanley, Reference Fombrun and Shanley1990). In the current context, we suggest that when top managers make enlightened judgments that reflect knowledge, experience, and moral maturity, positive reputational capital builds.

Reputational capital can be viewed as a valuable and intangible asset that accrues to those (individuals or organizations) that have stockpiled ‘idiosyncrasy credits’ (Hollander, Reference Hollander1958) that encourage salient others to give the ‘benefit of doubt’ (Greenberg, Reference Greenberg1990) to holders of such capital. Wise executives are aware that reputation has ‘informational, predictive, and trust-enhancing value’ (Ferris et al., Reference Ferris, Blass, Douglas, Kolodinsky and Treadway2003, p. 220) and seek to actively manage it – indeed, influence it – through signaling activities (Fombrun, Reference Fombrun1996; Fombrun & Shanley, Reference Fombrun and Shanley1990). As suggested by Fombrun (Reference Fombrun1996), ‘reputation management is so critical to organizational success that it must be coordinated and integrated with traditional corporate functions such as human relations, finance, and operations’ (found in Ferris et al., Reference Ferris, Blass, Douglas, Kolodinsky and Treadway2003, p. 221). Similarly, Alsop (Reference Alsop2004) asserts that reputation can be a corporation's most valuable asset, and Petrick, Scherer, Brodzinski, Quinn, and Ainina (Reference Petrick, Scherer, Brodzinski, Quinn and Ainina1999, p. 60) suggest that continuous leadership attention should be given to organizational reputation ‘in order to maximize their [firms’] socioeconomic and moral status’.

An excellent example of principled actions by executives leading to reputational capital is the way Randall L. Tobias and Sidney Taurel of Eli Lilly developed fair practices and guidelines for dealing with strategic partners over the last 20 years. They continually stressed the importance of integrity and instituted alliance management training in communications and conflict resolution (Gomes-Casseres, Reference Gomes-Casseres2005). Lilly developed an excellent reputation for dealing fairly with their partners, especially small biotechnology companies, and became the ‘partner of choice’ for many of the most promising small research firms. Lilly's reputational capital led to the development of new drugs with partners that chose Lilly over the other large pharmaceutical firms that also coveted them.

Long-term financial success

Wise executives are different from profit-driven executives in part because they seek to maximize both organizational effectiveness and a positive impact on society. Profit-driven executives are primarily focused on satisfying the demands of the shareholders, who often demand short-term profitability. Drastic actions to maximize short-term profits cut too much ‘organizational muscle’ and cause ‘corporate anorexia’, which is damaging to long-term profits (Hamel & Prahalad, Reference Hamel and Prahalad1994). For example, reductions in R&D spending initially can boost short-term profits, but could be devastating to the long-term strategic position of a firm. A related shortcoming of profit-driven executives is that the needs of people in the organization are subservient to profitability metrics. People in such organizations are not treated as the most important resources (even though they are frequently told they are), and too often are targeted as an expense that can be further trimmed to nudge up short-term profits.

Executive wisdom guides top managers to not only focus on financial reward, strategic impacts (e.g., Bierly & Kolodinsky, Reference Bierly and Kolodinsky2007), and organizational success, but also on true caring for workers and all stakeholders and improvement of society. The results of this approach include that employees respond with increased commitment, loyalty, and motivation, all leading to greater productivity and reduced organizational withdrawal (Hosmer, Reference Hosmer2008). Potential job candidates will find such an organization attractive and an energizing place to work, allowing the organization to hire superior employees. Customers will have a stronger attachment and loyalty to an organization that is trustworthy and that attempts to positively impact society.

The long-term sustained health of the organization is better ensured by a wisdom-based approach as both internal and external stakeholders, including suppliers and alliance partners, value the relationship-building model fostered by this approach. We suggest that reputational advantages will also accrue, based in part on a proactive desire to be involved in one's community, and to be ethically sound and socially responsible. We further suggest that each of these positive outcomes of executive wisdom is sustainable over a long time period and is difficult for others to imitate. Thus, we believe that the outcomes of executive wisdom will lead to sustainable competitive advantages and long-term financial success.