Ethics, innovation and the open enterprise

Recent accounting scandals have highlighted the dangers of allowing dysfunctional knowledge processing in a corporate context. Mark W. McElroy discusses how knowledge management can help generate a greater sense of openness in managerial decision making, in turn reducing the risk of exposing your organisation to unethical or illegal business practice.

By the end of July this year, no less than 15 major companies in the US had been accused of accounting irregularities, if not outright fraud. Two of them, Enron and Worldcom, subsequently went bankrupt. Pension funds sank in value, nest eggs dried up and captains of industry were routinely hauled in for congressional grillings in the bright light of the American press.

As a result, investor confidence plummeted, stock prices fell and many a manager’s head rolled from inside the offending companies. Even President Bush and Vice President Cheney were dragged into the fray, thanks to previous dealings of theirs with former employers, Harken Energy Corporation and Halliburton Company respectively.

Everyone had the same questions. How could so many companies have made so many illicit decisions on such a scale as they did and get away with it for so long? What could they possibly have been thinking? And how could their practices have escaped the safety net of independent accounting and the oversight of their boards for as long as they did?

And, by the way, what does any of this have to do with knowledge management?

A new value proposition for KM

While it’s true that the kinds of problems described above are not often associated with knowledge management, KM is uniquely well equipped to provide a solution. This points to a much overlooked value proposition for KM – enhancing transparency in management – a proposition whose time has clearly come.

Bad practice is nothing more than bad knowledge in use. When we see cases of bad, if not illegal, knowledge being practised by leaders in business, we can fairly ask ourselves how such knowledge managed to get as far as it did and, more generally, what the climate of knowledge processing must be within the offending firms. These are the kinds of questions often asked by practitioners of so-called second-generation knowledge management, since for them the focus of KM practice is always the quality and complexion of knowledge processes – it’s not knowledge management, it’s knowledge process management.

What connects KM to corporate governance and management issues is the extent to which the discipline concerns itself with the processes through which management knowledge (and therefore practice) is produced. While it is not the job of KM to produce business strategy or management policy, its role does include managing the knowledge processing environment within which such knowledge is produced.

Clearly, there was something terribly wrong with knowledge processing in the firms cited above if in any one of them conspicuously unethical and/or illegal behaviour was taking place. Knowledge processing in those firms was profoundly broken, or at least dysfunctional. This is a KM problem, plain and simple.

KM is managing openness

In the vocabulary of conventional management, the important variable of interest here is transparency. But what is transparency and why do we value it? Transparency is openness in the practice of knowledge, as well as in the processes that account for its production, adoption and enforcement. We value openness in knowledge practice because it helps us to understand and evaluate management’s thinking and intent, and we value openness in knowledge processing because it helps us to kill our bad ideas when they occur – before they kill us.

Without openness in knowledge processing, then, it should come as no surprise to anyone that from time to time we find ourselves in precisely the sort of pickle we have before us today. Of course bad ideas will get further along in practice than they should. If there’s no (or low) transparency in the knowledge production system, bad ideas will have a better chance of surviving the journey to becoming practice. Transparency is not just a means of enhancing visibility, it’s a necessary condition for survival in human social systems, allowing us to trap and kill our worst ideas before they escalate into practice. When we suppress transparency, we do so at our own peril.

But alas, conventional knowledge processing in the modern corporation is oligarchical – knowledge is made by the privileged few. Not only is visibility or transparency inside of it low, access to its operations is also restricted. Producing and integrating knowledge is confined to the hands of relatively small bands of powerful people, and if you’re not one of them, you are excluded from the process – even from simply observing it.

So what can KM do about any of this? A great deal, actually. In fact, the only true solution is a KM solution, by definition, because KM is the one management discipline that concerns itself with managing the quality and complexion of knowledge processing. It, and no other body of management practice, deals explicitly with the manner in which organisational knowledge is produced and integrated into practice. The transparency problem in business is fundamentally a knowledge management problem, because bad practice is nothing more than bad knowledge in use, and bad knowledge in use is the product of dysfunctional knowledge processing.

Notwithstanding the clarity of this, there’s a certain irony to the story that is also worth noting. The openness principle in knowledge management, first conceived by members of the Knowledge Management Consortium International (KMCI), was developed as a model for enhancing business innovation. The thinking was, and still is, that management climates marked by openness in knowledge processing (ie, free and open access to debate on important management issues) are key in determining the rate and quality of innovation because, first, they continuously expose current assumptions to constructive criticism and, second, they engage a broader spectrum of stakeholders, instead of only smaller bands of leaders.

The irony is that the same prescription for openness (administered with ‘good’ innovation in mind) turns out to be the antidote for ‘bad’ innovation as well. By embracing a normative form of openness in knowledge processing, we simultaneously manage to kill our bad ideas before they kill us, even as we manage to create our good ideas before our competitors do. This is almost too good to be true. But how do we do it, you ask?

Managing for sustainable innovation

According to the KMCI model for openness in knowledge processing, there are several operating dimensions of a firm that can be seen as levers, the settings for which determine the degree of openness or transparency in a business. Chief among these are the policies and programmes that underlie the behaviours we see in how knowledge is produced and integrated in any organisation. By managing the values of these variables, we can influence, if not control, the degree of ambient openness in organisations.

One approach to managing these levers is the policy synchronisation method. The name stems from the objective of maintaining knowledge processing policies in such a way that they are synchronised with the self-organising tendencies of people to produce and integrate knowledge in their own particular ways. Much of the thinking behind this approach is deeply rooted in complexity theory, according to which knowledge processing is self-organising, and the performance of which is enhanced through synchronised policies or inhibited by conflicting ones. Using the KMCI model for knowledge processing as a guide, the policy synchronisation method makes it possible to make interventions that enhance innovation simply by shaping the relevant organisational conditions in which it naturally occurs.

In addition to my own work in this area, Joseph Firestone, also affiliated with KMCI, has contributed a great deal to the subject. Together, we are co-authoring a book entitled Key Issues in the New Knowledge Management (forthcoming from Butterworth-Heinemann, 2003), in which a chapter on ‘The open enterprise’ will appear. Our contention is that organisational performance can be measured in terms of a firm’s sustainable capacity to adapt, and that this capacity rests heavily on a firm’s ability to innovate. After all, innovation is nothing more than organisational learning and problem solving. But to innovate well, an organisation’s knowledge processing environment must be ‘open’. Here, I use the terms innovation and knowledge processing synonymously, because they are indeed equivalent.

So the logic runs as follows:

Turn up the degree of openness in knowledge processing in a firm, and a larger population of stakeholders will participate in the process;
Larger populations of stakeholders involved in knowledge processing will, in turn, lead to more active innovation and more intensive scrutiny being placed on the study of new ideas – both good ones and bad ones;
More active innovation and scrutiny paid to the development of new ideas will, in turn, lead to higher quality outcomes – more good ideas and fewer bad ones, thanks to the filtering effects of public scrutiny and a greater numbers of participants;
Enhancements in knowledge processing will lead to improvements in the organisational capacity to adapt (ie, innovation outcomes will improve);
Enhancements in adaptivity will lead to improvements in organisational performance (ie, business outcomes will improve).

Some specifics

There are many variables that collectively determine the degree of openness in a firm. Firestone and I, however, believe that two of them in particular play a more important role than any of the others in accounting for outcomes. They are, first, openness in problem detection behaviours, and second, openness in knowledge claim evaluation behaviours.

The importance of the first variable (problem detection behaviours) stems from the view that all innovation is triggered by the detection of problems. Here, we use the term ‘problems’ in the epistemic sense. In other words, a problem in this context is not a business problem; rather it is marked by the absence of knowledge about how to close a current versus goal-state gap in the mind of a worker or group. Such a gap could, in turn, be triggered by the need to process transactions or alternatively could take the form of someone recognising the arrival of an opportunity or an issue. Either way, it is the epistemic gap of not knowing how to act in response to the trigger that precipitates opportunities (or the need) to innovate.

The issue in most firms, then, is the extent to which actors other than managers are encouraged and invited to participate in the problem detection process that precedes all innovation. Organisational cultures that discourage problem detection behaviours on the part of their workers or other stakeholders can be said to be closed. Organisations that encourage and support it can be seen as open.

One way for management to encourage openness and inclusiveness in problem detection is to let go of the monopoly it holds on learning, and expose the organisation to the ideas and insights of all of its workers, regardless of who they are or what their position is in the hierarchy. At 3M Company, for example, many employees there are free to spend up to 15 per cent of their time engaged in self-managed learning. This stands in sharp contrast to the conventional approach to learning employed by most firms, according to which learning occurs as a function of prescribed training.

At 3M, it’s precisely the opposite. Instead of the company driving employee learning agendas, employees drive the company’s agenda. New ideas spring forth from self-inspired learning experienced by individual employees – the company inherits the ideas, develops them, integrates them into practice and performance improves accordingly. The result? Market-leading, sustainable innovation. The innovation management system is synchronised with the tendency of people to produce and integrate knowledge in their own, self-organising ways.

The second variable of enormous importance to openness and innovation is knowledge claim evaluation. A knowledge claim is simply an idea or an assertion of truth. Take Enron, for example. Management there formulated a knowledge claim at some point that suggested that piling up phoney business transactions on an off-balance-sheet (and offshore) basis would be a positive move. The claim was later put into practice, and the rest is history. But what if the claim had been hatched in a climate of openness in which its content could have been scrutinised and debated in the bright light of day? What if Enron’s knowledge claim evaluation behaviours had been more open?

One of my favourite examples of openness in knowledge claim evaluation behaviours can be found at the US Forest Service. Suffice it to say that employees there do not always agree with the political bent or the policies of their leaders. In response, many Forest Service employees banded together years ago and formed the Forest Service Employees for Environmental Ethics (FSEEE). The purpose of the FSEEE, in the terms set out in this article, is to make it possible for employees to openly scrutinise and critique knowledge claims, as held and practiced by their managers. As one Forest Service employee put it, what they have is a kind of “discordant harmony” between workers and managers.

The FSEEE organisation goes so far as to publish a magazine in which its views and opinions on Forest Service policies and management decisions regularly appear. In fact, anyone can subscribe to the publication, especially outside stakeholders such as US citizens, who have vested interests in keeping tabs on how well the government is managing their natural resources. This would be akin to a population of corporate stockholders subscribing to a magazine published by the company’s workers, whose writings and commentaries on management’s policies would be of enormous interest to them. I call this approach to openness in knowledge claim evaluation free employee presses (FEP).

It should be obvious that the effect of an FEP in an organisation is that it materially changes the environment for knowledge claim evaluation, as well as the collective behaviours of stakeholders in the organisation when it comes to the validation of new ideas. The effects? Management tends to be more cautious and perhaps more rigorous in the development of new ideas, as well as in their adoption and enforcement in practice. Employees become more involved, and the overall size of the population engaged in knowledge processing increases. And stockholders, too, become more involved by virtue of their having access to new and authoritative insights from non-management, employee insiders. In these and other ways, an FEP can be a powerful tool for fostering openness in a firm.

Space does not permit further discussion of other variables in the open enterprise. But suffice it to say that a state of relative openness in a firm is marked by the same general social climate of encouragement to participate in the knowledge processing affairs of a firm, on all of the other fronts identified in the KMCI model for knowledge processing. In addition, we see KM functions themselves that have the charter and necessary authority to make interventions aimed at changing the rules for knowledge production and integration, including the required degree of independence from temporal management regimes needed to facilitate, but not hinder, their work.

Indeed, in the open enterprise, the KM function is more likely to report directly to the board than to any arm of conventional management. This is not unlike the manner in which the finance function ultimately reports directly to the board as an extension of the board’s fiduciary responsibility. What we’re talking about here is a similar imperative: the need for independence, integrity and trust in the knowledge processing affairs of a firm, the controlling duty for which should also rest in the hands of directors, and not their potentially conflicted managers.

Conclusions

The crisis of investor confidence seen in the US earlier this year is arguably tied to the manner in which knowledge is produced in relatively closed or hidden ways in modern corporations. From this perspective, bad practice can be seen as nothing more than bad knowledge in use. The question, then, becomes how to change the knowledge production process so that knowledge is produced in climates of relative openness, thereby reducing the likelihood of questionable knowledge being elevated into practice.

Separately, we can see that a move towards more openness or transparency in organisations not only has an impact on illicit behaviours, but also serves to enhance innovation. The precipitating factor in both cases is identical: greater inclusiveness in knowledge processing. By involving higher proportions of stakeholders in knowledge production and integration, organisations can avail themselves of both more quality control over knowledge in use and more stakeholder participation in the process, thereby adding to the depth and breadth of organisational creativity. Openness is, at once, a prescription for enhancing both corporate responsibility and business innovation.

We have also seen that managers and directors can have an impact on shaping the degree of openness in their organisations by crafting policies and programmes that seek to encourage stakeholder involvement in problem detection and knowledge claim evaluation. These aspects of knowledge processing, above all others, have a great deal to do with the overall quality of knowledge processing in a firm, and its general capacity to detect and solve problems and to adapt.

It is also clear that knowledge management is uniquely well equipped to assist organisations in making the transition from relative states of ‘closedness’ to greater openness in knowledge processing, primarily because KM is a management discipline that seeks to enhance knowledge processing. The targets of its interventions are always knowledge processing behaviours, not just their outcomes.

Finally, in a commentary on the wreckage left behind following the collapse of Enron, Worldcom and the rest, Warren Bennis, professor of management at USC, perhaps put things best when he said: “What businesses now need more than ever are managers who know how to create social architectures for openness.” These words amount to a clarion call for action by knowledge managers. Let the record show that we have heard them. The question is, is KM capable of putting its narrow interpretations of what it does aside, in favour of broadening its scope to include not just information management but knowledge process management as well? I certainly hope so.

Mark W. McElroy is president of the Knowledge Management Consortium International (www.kmci.org) and CEO of Macroinnovation Associates, LLC. He is also the author of the forthcoming book, The New Knowledge Management – Complexity, Learning and Sustainable Innovation (Butterworth-Heinemann, October 2002). He can be contacted at: mmcelroy@vermontel.net