Anna Bernasek’s financial journalism has appeared in the Washington Post, New York Times, Time, and other leading publications. She has a new book out titled The Economics of Integrity (HarperStudio, 2010).

I recently chatted with Bernasek about organizational integrity and trustworthiness. I appreciate how she breaks down the “DNA of integrity” into three strands: disclosure, norms, and accountability. Here’s our RiskChat:

Eric Krell: Anna, thanks for taking the time to chat. What first struck me about your book – aside from its title – is that you begin with the milkman. Why did you view the way milk is produced and delivered as an example of the economics of integrity? And, what, if anything, can we who make content, financial services products, widgets, and other products and services learn from the milkman?

Anna Bernasek: The striking thing about our economy is the astonishing degree of trust that is embedded in almost everything we do. I think that milk is a good example of a product that we have a high degree of trust in. We drink it at home, in restaurants, and from convenient packages without a lot of thought about whether what we are drinking really is cow’s milk, whether it has been adulterated in any way, or whether it carries dangerous pathogens that could threaten our health or even kill us. Milk, after all, is an animal secretion that for a long time was not a very safe consumer product. In the 20th century, a systematic effort was expended to make milk safe to drink, and now it’s among our most trusted products. To make the product safe, a lot of people had to work together — farmers, vets, truckers, processors, distributors, and retailers. That’s still true today. The product you pour on your corn flakes, and that you make your kids drink, is handled carefully and with a lot of integrity by a long chain of people you have never met and may not even know exist. If anybody screws up, or even worse if anybody cheats, the whole industry suffers. We saw that recently in China. But we haven’t had a milk scandal in the U.S. for quite a while.

The tremendous amount of integrity and trust in a simple product like milk is a good illustration of the integrity principle. Since milk is trusted, not just consumers but everybody touching the milk industry and its retailers benefits from the investment in integrity made over time. That’s very valuable. Just think how much less milk they could sell if people really had concerns about quality or safety.

The principle holds true for all industries — in fact, for every aspect of our economy. So with financial services, for example, there are a lot of people working very hard and very ethically to provide valuable services and intangible goods. But as we’ve recently seen, a little wrongdoing goes a long way to destroy value in the industry.

Eric Krell: And even more recently, we’re seeing it with Toyota. I’m impressed that you point out in your book that Toyota’s quality problems are not new: In 2005, the company recalled more cars than it sold (a point that has not received as much attention as I think it should in the current media discussion about Toyota’s issues). What do you make of Toyota’s current challenges in terms of their potential impact on the company’s integrity … and what are the key steps that companies take, or should take, to rebuild their integrity after it deteriorates?

Anna Bernasek: First of all, after studying Toyota in connection with my book, I was as surprised as anyone to find that they were getting adverse publicity in connection with the quality of some of their cars. The current situation is a difficult one for Toyota because all the publicity relates to a problem that may or may not be significant. The reports of acceleration problems are a concern, but the complaints are relatively rare when compared to the many Toyota cars out on the road.

There has been some high-profile speculation that Toyota may have a defect in its electronics, but as far as I know there’s no actual evidence of such a defect. We’ll have to wait until all the facts are in to know what really happened. I recall that back in the 1980s, Audi had a rash of complaints about unintended acceleration which after a long investigation were found to be driver mistakes rather than car defects.

But no matter what, Toyota has to take the initiative to rebuild the trust of its customers who are concerned by all the publicity. As I point out in my book, being trustworthy isn’t any good unless other people buy into your trustworthiness. Toyota will have to be open about its investigation of the issue and take steps that engender trust. But if Toyota’s track record in convincing people that they make a good product is any guide, Toyota seems well equipped to do what’s necessary to build trust and protect its business.

Eric Krell: Anna, did you find any common internal qualities (leadership, methodologies, processes) among the companies you studied that demonstrate a resilient form of integrity and trustworthiness? I’m guessing there is no “killer app” or “seven steps to integrity,” but did you encounter any shared characteristics?

Anna Bernasek: There are lots of examples where companies have taken successful steps to build relationships of trust. To some extent, every business has to do this just to remain in existence. But some companies and organizations do stand out for their creativity and their leadership in matters of trust and integrity. Some special companies have not simply created an impressive integrity asset. They’ve taken the next step, working out a systematic approach to building integrity that consistently keeps them ahead of their peers and brings them rewards in the marketplace.

I think of this in terms of what I call the “DNA” of integrity — disclosure, norms, and accountability. To build really strong relationships, there has to be disclosure of relevant information to all parties so that they can see for themselves what is going on in something approaching real time. Nobody likes surprises — and we don’t tend to trust people who keep back information from us.

The second element, norms, is just as important. Whether it’s a money-back guarantee, an on-time delivery or payment commitment, or a defect-free product, establishing clear norms that both the customer and the seller can trust and verify is another huge element of trust.

And the third piece is accountability. When something goes wrong, all parties need to have confidence that no one can pull a fast one and get away with it. The trick is to apply this “DNA” with a lot of intelligence, constantly looking for feedback and making incremental improvements to the system. The best companies are not looking for quarterly or annual results. They are building permanent value and looking at a very long horizon.

Eric Krell: If there’s one thing you want readers to take away from your book, what would that be?

Anna Bernasek: If there’s one thing I’d like readers to get out of my book, it’s that integrity — or trust, if you prefer — is an economic asset.

Once you understand that, you can think about the topic without being limited by the conventional idea that integrity is a personal virtue, and that it’s costly. If one approaches it in the right way, integrity isn’t a cost at all. It’s an investment opportunity, a way to build wealth. Integrity isn’t an on/off switch. Although challenging to measure with precision, integrity has the property of quantity. That’s very exciting because it means there’s no upper limit to how much trust — wealth — we can create.

I think it’s the biggest opportunity we face. And I’ve never been more excited about the future. ###