Tacit Knowledge and Moral Leadership as a Source of Business Value

In Erden and Nonaka’s paper “Quality of Group Tacit Knowledge” they introduce the idea that business value derives from tacit knowledge — that is, the knowledge that can only be gained through experience.  Tacit knowledge cannot be codified, explicated, or completely documented.  It is expensive to create and difficult to share.  Therefore, a firm that has a high quality of shared tacit knowledge will be able to stay ahead of competitors that cannot acquire that knowledge.

Understanding the distinction between tacit and explicit is essential to understanding other distinctions, such as the difference between rules and norms, and how legal differs from ethical, which differs from moral.

Rules vs. Norms

Rules are explicit prohibitions or requirements that prescribe specific consequences resulting from violations.  By contrast, norms are shared expectations of behavior (like manners) that don’t suggest specific consequences.  Norms are tacit social expectations.  The expectations of a norm may sometimes made explicit (e.g., “Don’t cut in line.”), but the consequences are not.  Consequently, norms are enforced through social processes, such as shaming or ridicule, rather than through judicial or bureaucratic processes.

This excerpt from an insightful TED talk by Clay Shirky called “How Cognitive Surplus Will Change The World” illustrates both the difference between a rule and a norm, and what can happen to culture when norms become explicitly stated as rules.

Legal vs. Ethical Vs. Moral

Laws result from legislative processes.  They represent rules laid out by the government and are attached to specific consequences, including maximum or minimum penalties, sentencing guidelines or other disincentives.  On the other hand, ethics do not typically result from legislative action.  They emerge from social processes particular to a group with aligned interests, such as a professional society or a guild.  Ethics are shared expressions of values and may be codified as rules of behavior, but they are typically enforced outside of government — i.e., by the specialty group itself.  Often, the punishment for breaking an ethical expectation is excommunication from the group, such as disbarment (for attorneys) that may result in a loss of livelihood.  In contrast to laws and ethical codes, morals exist at the scale of the individual.  They are not necessarily shared or negotiated among many individuals in a group.

It is possible for behavior to be legal, but unethical or immoral.  Similarly, moral behavior might be unethical or illegal.

Management vs. Leadership

The final important distinction to make is between management (explicit) and leadership (tacit).  In this video, Seth Godin tries to clarify this distinction, although his explanation is still more inspirational than descriptive.

Managers operate within a bureaucratic or administrative structure.  Their authority to influence the behaviors of others reposes on the organizational structure: it’s policies, procedures and allocation of resources.  According to Godin, managers work towards the explicit goal of incremental improvement within an existing paradigm by coercing compliance from subordinates.

By contrast, leaders work outside the bureaucratic structure of performance reviews, merit pay increases, and annual bonuses.  In Godin’s view, leaders empower others to accomplish things previously thought impossible.  Certainly, both managers and leaders influence the behavior of others.  However, moral leadership does not exert this influence for the benefit of the leader (such as a Chief Executive Officer), but rather for the benefit of the follower, or for society.  Thus, real leadership is an act of service.

Godin believes that the industrial paradigm of the modern corporation was short lived and is now essentially over.  What brought it to an end, in his view, is the Information Revolution, which he believes is exemplified by Google.

Godin’s critique is essentially consistent with Erden and Nonaka’s thesis that shared tacit knowledge is now the principal source of value in any firm.  Godin points out that information-communication technology has reduced the marginal cost of explicit information to essentially zero and brought transaction costs to such a low level that anonymous personal assistants can now be hired by the hour over the internet.  This, he says, breaks the industrial age “monopoly” from which profits were once extracted.

When explicit information, such as that which can be downloaded over the internet, is essentially free, then what what will serve as the source of competitive advantage for any firm?  Erden and Nonaka claim the answer is “tacit knowledge”, but they don’t explain from where this tacit knowledge originates.

Connecting Nonaka to Godin, we could hypothesize that the source of high quality group tacit knowledge is moral leadership — thus positioning moral leadership as the principal source of business value in the Information Age.


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