(29) Truth Has an Operating Cost

The dashboard can be accurate and still be false

In April 2017, Wells Fargo's independent directors published an investigation into the bank's sales-practices scandal. The report described a company committed to cross-selling, a decentralised structure that gave the community bank wide latitude, and senior leaders who were slow to challenge reassuring explanations. Sales volumes were real. Customer and employee survey results existed. Yet those signals sat inside an operating system that imposed aggressive goals, undercounted complaints, fragmented control information and punished resistance. The numbers supported a story because the system producing the numbers had already been shaped by it.

The eventual correction was expensive. The Consumer Financial Protection Bureau imposed a then-record $100 million penalty in 2016. The Federal Reserve restricted the bank's growth in 2018 until governance and controls improved. In 2020, Wells Fargo agreed to pay $3 billion to resolve criminal and civil investigations concerning millions of accounts opened without customer authorisation.

This is an extreme case, but the mechanism is ordinary. Corporate life runs on narratives: growth is on plan, the integration is working, customers want the new proposition, the programme is green, the culture is healthy. Some narratives are accurate. Others are incomplete models that become harder to question as careers, budgets and public commitments accumulate around them.

The thesis is testable. Where rewards depend heavily on target attainment, dissent carries personal cost and assurance lacks independence, adverse information should move slowly and correction should arrive late. Where forecast error is tracked, contrary evidence has a protected route and control functions can force reconsideration, management narratives should change earlier. Truth in a company is therefore an operating capability, and the company must pay to maintain it.

Narratives are coordination infrastructure

An organisation cannot operate from raw facts alone. Facts need selection, interpretation and sequence before hundreds or thousands of people can act together. Karl Weick, Kathleen Sutcliffe and David Obstfeld described sensemaking as turning circumstances into words that support action. Caroline Bartel and Raghu Garud showed how innovation narratives carry ideas across specialist boundaries and connect present work with institutional memory. Dennis Gioia and Kumar Chittipeddi called the managerial effort to shape others' interpretation “sensegiving.”

That work is economically useful. A coherent account lets a board allocate capital, gives employees priorities and allows suppliers or investors to anticipate decisions. A strategy without a narrative is a spreadsheet with no shared meaning. As I argued in Strategy Fails When the Operating System Contradicts It, execution depends on repeated choices matching the stated direction. Narrative helps make that consistency possible.

The problem begins when plausibility becomes the test of accuracy. A persuasive account compresses ambiguity. It explains away exceptions and assigns causality. The same compression that enables action can remove the cues that ought to trigger revision. Research on sensemaking treats updating as active work: teams must notice an anomaly, interrupt the current task, test an alternative explanation and change course. In Marlys Christianson's study of 19 emergency-department teams facing the same broken equipment in simulation, better teams monitored and confirmed cues, investigated them and tested explanations sooner. The initial story was provisional because the operating routine allowed it to lose.

Truth is costly before it is valuable

Corporate truth has no single owner. It is distributed among people with partial information and unequal authority. A salesperson sees deteriorating demand before finance does. Operations sees defects before the executive committee sees warranty costs. A junior analyst may understand why a forecast is implausible while lacking the status to challenge its sponsor. Converting these fragments into decision-grade information consumes time, attention and political capital.

Amy Edmondson's research linked psychological safety with learning behaviour in 51 work teams. Subsequent reviews and a meta-analysis spanning more than 22,000 people found consistent associations with voice, learning and performance, while also showing that much of the evidence is observational and context-dependent. Safety raises the probability that information will surface; it does not establish that the information is correct.

Dissent adds another cost. In experiments on hidden-profile decisions, teams exposed to disagreement considered more unshared information and reached better solutions more often. Charlan Nemeth's work found that genuine dissent can provoke more independent thinking than an assigned devil's advocate. Yet Ethan Burris found that managers often rated employees who offered challenging voice less favourably than employees whose suggestions supported the current direction. The organisation may benefit from correction while the person delivering it pays the price.

This creates a predictable underinvestment. The cost of truth appears now as slower meetings, duplicated analysis, independent staff and uncomfortable escalation. The benefit appears later as a loss avoided, a forecast revised or a project stopped. It is also hard to attribute. No one can point to the fraud that a hotline prevented or the impairment avoided by an early challenge. Budgets therefore favour narrative production over narrative testing. The investor presentation has an owner and a deadline; the capacity to disprove it often has neither.

Targets manufacture the evidence they reward

Incentives turn this underinvestment into distortion. Steven Kerr's classic essay described organisations that reward one behaviour while hoping for another. Bengt Holmstrom and Paul Milgrom formalised the problem for multitask jobs: strong incentives on measurable work can divert effort from valuable work that is harder to observe. Michael Jensen applied the same logic to corporate budgeting, arguing that pay tied to hitting a negotiated target encourages people to submit and defend numbers that serve compensation rather than coordination.

The effect reaches beyond accounting presentation. John Graham, Campbell Harvey and Shiva Rajgopal surveyed 401 financial executives and interviewed another 20. Seventy-eight per cent said they would sacrifice economic value to produce smoother earnings, and 55 per cent said they would avoid starting a very positive net-present-value project if it caused the current quarter's consensus estimate to be missed. These were stated preferences rather than observed transactions, but they expose the strength of the incentive: the narrative of predictable performance can outrank performance itself.

Once a target becomes part of the corporate story, evidence production adapts. Sales are pulled forward. Costs move between periods. Definitions change. A forecast receives a narrow confidence range because a wide one looks weak. Bad cases are labelled exceptional while favourable cases become proof of the model. Each local choice may remain within policy, yet the aggregate picture becomes biased.

This is why capital allocation cannot be separated from information design. The Governance Cost of Diversification rises when businesses can use different metrics and timelines to defend their claims on capital. A board comparing polished narratives is not allocating between opportunities on a common basis. It is allocating between competing systems of measurement.

Distortion moves from meetings to cash flows

A distorted narrative becomes financially material through delayed action. Management keeps capacity that demand no longer supports, funds an acquisition integration that is missing its milestones, postpones a control repair or prices risk from an outdated loss view. The first loss is rarely the final write-down. It is the sequence of decisions made while the story remains protected.

The financial-reporting literature offers a narrower but measurable version of this mechanism. S.P. Kothari, Susan Shu and Peter Wysocki found evidence consistent with managers delaying bad-news disclosure. Li Jin and Stewart Myers developed a model in which opacity allows managers to absorb limited bad news until accumulated information emerges at once. Amy Hutton, Alan Marcus and Hassan Tehranian later associated an accrual-based opacity measure with stock-price crash risk. These studies use contested proxies and observational designs. Sudip Datta and co-authors found that the earlier relationship between opacity and firm-specific return variation did not survive alternative methods, so the literature does not justify claiming that every opaque firm is destined for a crash.

The more defensible conclusion is directional. Delayed bad news can concentrate adjustment. Better disclosure and controls can reduce information risk, though the effect depends on the setting. Christian Leuz and Catherine Schrand found that firms increased disclosure after the Enron shock and that the response was associated with a lower cost of capital. Hollis Ashbaugh-Skaife and colleagues found that changes in internal-control effectiveness were followed by changes in firms' cost of equity. The estimates do not convert “culture” into a universal valuation multiple. They show that the credibility of corporate information can enter financing costs.

Boards often devote more time to strategic narrative than to the evidence that could invalidate it. Why Boards Overweight Strategy and Underweight Execution Risk described the asymmetry: strategy arrives as a coherent event, while execution risk accumulates across small operating decisions. Narrative distortion widens that gap by making weak signals look like isolated noise until the financial consequence is too large to classify away.

More transparency is not the answer

Maximal disclosure would impose its own distortion. Producing, checking and interpreting information takes money. Some information reveals competitive positions, creates legal exposure or overwhelms decision-makers with low-value detail. The OECD's corporate-governance principles explicitly recognise unreasonable cost and competitive harm as limits on disclosure requirements. The US Government Accountability Office found that Sarbanes-Oxley compliance costs weigh proportionally more heavily on smaller companies, even where the control improvements have benefits.

Disclosure can also redirect behaviour. Alex Edmans, Mirko Heinle and Chong Huang modelled a setting in which greater disclosure of hard information encourages managers to improve visible measures at the expense of valuable soft information, including investment. Their result is theoretical rather than an estimate of the average public company, but it identifies the strongest objection to a generic transparency agenda. Measurement can crowd out judgment, and scrutiny can shorten time horizons.

The design question is proportionality. Public disclosure, internal reporting and confidential challenge serve different audiences. A company need not publish every uncertainty to investors or invite every employee into every decision. It does need a route by which material contrary evidence reaches someone with authority to act. The relevant standard is paid-for falsifiability: each consequential narrative should have evidence, an independent challenge process and pre-agreed conditions under which it will be revised.

Build a system that can defeat the story

Paid-for falsifiability starts with forecasts that can fail visibly. Major investments should carry ranges, base rates and named assumptions rather than a single approved number. Management should preserve the original forecast, record subsequent changes and compare both with outcomes. HM Treasury's Green Book applies this logic through explicit optimism-bias adjustments grounded in historical forecast error. A forecast archive turns memory from a political contest into a dataset.

The next requirement is protected contradiction. Employees need confidential escalation, protection from retaliation and evidence that useful challenges affect decisions. Leaders can ask for disagreement, but their treatment of the first inconvenient messenger sets the practical rule. An assigned skeptic can test a proposal; independent assurance is stronger when the issue concerns the sponsor's pay, status or prior judgment.

Control architecture supplies that independence. COSO separates the control environment, risk assessment, control activities, information and communication, and monitoring. The Institute of Internal Auditors' Three Lines Model distinguishes management from risk and compliance oversight and from independent internal audit. The UK Corporate Governance Code 2024 goes further for companies applying the Code: for financial years beginning on or after 1 January 2026, boards must make a declaration about the effectiveness of material internal controls based on monitoring and evidence. None of these frameworks guarantees truth. They assign the work, authority and evidence needed to challenge management's account.

Decision rules should also make revision less costly. A board can agree in advance which customer-loss rate, integration delay, control failure or forecast miss triggers a new capital decision. Prospective-hindsight research suggests that imagining a future failure can help groups identify reasons they might otherwise miss. Probabilistic forecasting research shows that frequent updating, open-mindedness and structured team discussion can improve accuracy. The common feature is permission to change the story before change looks like defeat.

The non-obvious implication is that narrative quality depends less on eloquence than on the cost of correction. A confident story is dangerous when revising it threatens compensation, identity and authority. A tentative story can still guide decisive action when the company has specified what evidence would overturn it. The strongest narrative earns its authority by surviving challenge.

At the next board cycle, select one major investment and attach a falsification schedule to it: preserve the original assumptions, nominate an independent challenger, define the evidence thresholds for review and set the date when forecast error will be examined. If the narrative survives, it earns credibility. If it fails, capital can move before customers, regulators or markets impose the correction themselves.

Sources

Narratives, sensemaking and organisational learning

1. Karl E. Weick, Kathleen M. Sutcliffe and David Obstfeld, "Organizing and the Process of Sensemaking" https://doi.org/10.1287/orsc.1050.0133

2. Sally Maitlis and Marlys Christianson, "Sensemaking in Organizations: Taking Stock and Moving Forward" https://doi.org/10.5465/19416520.2014.873177

3. Dennis A. Gioia and Kumar Chittipeddi, "Sensemaking and Sensegiving in Strategic Change Initiation" https://doi.org/10.1002/smj.4250120604

4. Caroline A. Bartel and Raghu Garud, "The Role of Narratives in Sustaining Organizational Innovation" https://doi.org/10.1287/orsc.1080.0372

5. Christopher Fenton and Ann Langley, "Strategy as Practice and the Narrative Turn" https://doi.org/10.1177/0170840611410838

6. James G. March, "Exploration and Exploitation in Organizational Learning" https://doi.org/10.1287/orsc.2.1.71

7. Marlys K. Christianson, "More and Less Effective Updating: The Role of Trajectory Management in Making Sense Again" https://doi.org/10.1177/0001839217750856

8. Henri Schildt, Saku Mantere and Joep Cornelissen, "Power in Sensemaking Processes" https://doi.org/10.1177/0170840619847718

Voice, silence and dissent

9. Elizabeth Wolfe Morrison and Frances J. Milliken, "Organizational Silence: A Barrier to Change and Development in a Pluralistic World" https://doi.org/10.5465/amr.2000.3707697

10. Frances J. Milliken, Elizabeth Wolfe Morrison and Patricia Faison Hewlin, "An Exploratory Study of Employee Silence: Issues that Employees Don't Communicate Upward and Why" https://doi.org/10.1111/1467-6486.00387

11. James R. Detert and Ethan R. Burris, "Leadership Behavior and Employee Voice: Is the Door Really Open?" https://doi.org/10.5465/amj.2007.26279183

12. James R. Detert and Amy C. Edmondson, "Implicit Voice Theories: Taken-for-Granted Rules of Self-Censorship at Work" https://doi.org/10.5465/amj.2011.61967925

13. Ethan R. Burris, "The Risks and Rewards of Speaking Up: Managerial Responses to Employee Voice" https://doi.org/10.5465/amj.2010.0562

14. Elizabeth Wolfe Morrison, "Employee Voice Behavior: Integration and Directions for Future Research" https://doi.org/10.1080/19416520.2011.574506

15. Elizabeth Wolfe Morrison, "Employee Voice and Silence: Taking Stock a Decade Later" https://doi.org/10.1146/annurev-orgpsych-120920-054654

16. Amy C. Edmondson, "Psychological Safety and Learning Behavior in Work Teams" https://dash.harvard.edu/entities/publication/13a7b031-0fdd-45ec-a7e0-2b80e2bc679f

17. M. Lance Frazier, Stav Fainshmidt, Ryan L. Klinger, Amir Pezeshkan and Veselina Vracheva, "Psychological Safety: A Meta-Analytic Review and Extension" https://doi.org/10.1111/peps.12183

18. Ingrid M. Nembhard and Amy C. Edmondson, "Making It Safe: The Effects of Leader Inclusiveness and Professional Status on Psychological Safety and Improvement Efforts in Health Care Teams" https://doi.org/10.1002/job.413

19. Stefan Schulz-Hardt, Felix C. Brodbeck, Andreas Mojzisch, Rudolf Kerschreiter and Dieter Frey, "Group Decision Making in Hidden Profile Situations: Dissent as a Facilitator for Decision Quality" https://doi.org/10.1037/0022-3514.91.6.1080

20. Charlan Jeanne Nemeth, Keith Brown and John Rogers, "Devil's Advocate versus Authentic Dissent: Stimulating Quantity and Quality" https://doi.org/10.1002/ejsp.58

Incentives, reporting and financial consequences

21. Steven Kerr, "On the Folly of Rewarding A, While Hoping for B" https://doi.org/10.5465/255378

22. Michael C. Jensen, "Paying People to Lie: The Truth about the Budgeting Process" https://doi.org/10.1111/1468-036X.00226

23. Bengt Holmstrom and Paul Milgrom, "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design" https://doi.org/10.1093/jleo/7.special_issue.24

24. John R. Graham, Campbell R. Harvey and Shiva Rajgopal, "The Economic Implications of Corporate Financial Reporting" https://www.nber.org/papers/w10550

25. Bent Flyvbjerg, Mette K. Skamris Holm and Søren L. Buhl, "Underestimating Costs in Public Works Projects: Error or Lie?" https://doi.org/10.1080/01944360208976273

26. Deborah J. Mitchell, J. Edward Russo and Nancy Pennington, "Back to the Future: Temporal Perspective in the Explanation of Events" https://doi.org/10.1002/bdm.3960020103

27. Barbara Mellers and others, "The Psychology of Intelligence Analysis: Drivers of Prediction Accuracy in World Politics" https://doi.org/10.1037/xap0000040

28. Paul M. Healy and Krishna G. Palepu, "Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature" https://doi.org/10.1016/S0165-4101(01)00018-0

29. S.P. Kothari, Susan Shu and Peter D. Wysocki, "Do Managers Withhold Bad News?" https://doi.org/10.1111/j.1475-679X.2008.00318.x

30. Li Jin and Stewart C. Myers, "R-Squared around the World: New Theory and New Tests" https://www.nber.org/papers/w10453

31. Amy P. Hutton, Alan J. Marcus and Hassan Tehranian, "Opaque Financial Reports, R2, and Crash Risk" https://doi.org/10.1016/j.jfineco.2008.10.003

32. Sudip Datta, Mai Iskandar-Datta and Vivek Singh, "Opaque Financial Reports and R2: Revisited" https://doi.org/10.1016/j.rfe.2013.08.001

33. Christian Leuz and Catherine Schrand, "Disclosure and the Cost of Capital: Evidence from Firms' Responses to the Enron Shock" https://www.nber.org/papers/w14897

34. Karthik Balakrishnan, Mary Brooke Billings, Bryan Kelly and Alexander Ljungqvist, "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure" https://doi.org/10.1111/jofi.12180

35. Hollis Ashbaugh-Skaife, Daniel W. Collins, William R. Kinney Jr and Ryan LaFond, "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity" https://doi.org/10.1111/j.1475-679X.2008.00315.x

36. Alex Edmans, Mirko Heinle and Chong Huang, "The Real Costs of Disclosure" https://www.nber.org/papers/w19420

Governance, controls and the Wells Fargo case

37. OECD, "G20/OECD Principles of Corporate Governance 2023" https://www.oecd.org/en/publications/g20-oecd-principles-of-corporate-governance-2023_ed750b30-en/full-report/component-7.html

38. Financial Reporting Council, "UK Corporate Governance Code 2024" https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/uk-corporate-governance-code/

39. Financial Reporting Council, "Corporate Governance Code Guidance" https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/corporate-governance-code-guidance/

40. Committee of Sponsoring Organizations of the Treadway Commission, "Internal Control—Integrated Framework: Executive Summary" https://www.coso.org/_files/ugd/3059fc_ada7bcee03a2437c9bf7f46948da818d.pdf

41. Institute of Internal Auditors, "The IIA's Three Lines Model" https://www.theiia.org/globalassets/site/about-us/advocacy/three-lines-model-updated.pdf

42. HM Treasury, "The Green Book 2026" https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-government/the-green-book-2026

43. HM Treasury, "Green Book Supplementary Guidance: Optimism Bias" https://www.gov.uk/government/publications/green-book-supplementary-guidance-optimism-bias

44. US Securities and Exchange Commission, "Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports" https://www.sec.gov/files/rules/final/33-8238.htm

45. US Government Accountability Office, "Sarbanes-Oxley Act: Compliance Costs Are Higher for Larger Companies but More Burdensome for Smaller Ones" https://files.gao.gov/reports/GAO-25-107500/index.html

46. Independent Directors of the Board of Wells Fargo & Company, "Sales Practices Investigation Report" https://www.sec.gov/Archives/edgar/data/72971/000119312517118654/d375947ddefa14a.htm

47. US Department of Justice, "Wells Fargo Agrees to Pay $3 Billion to Resolve Criminal and Civil Investigations into Sales Practices Involving the Opening of Millions of Accounts without Customer Authorization" https://www.justice.gov/archives/opa/pr/wells-fargo-agrees-pay-3-billion-resolve-criminal-and-civil-investigations-sales-practices

48. Board of Governors of the Federal Reserve System, "Responding to Widespread Consumer Abuses and Compliance Breakdowns by Wells Fargo, Federal Reserve Restricts Wells' Growth until Firm Improves Governance and Controls" https://www.federalreserve.gov/newsevents/pressreleases/enforcement20180202a.htm

49. US Securities and Exchange Commission, "In the Matter of Wells Fargo & Company, Administrative Proceeding File No. 3-19704" https://www.sec.gov/enforcement-litigation/distributions-harmed-investors/matter-wells-fargo-company-admin-proc-file-no-3-19704

50. Consumer Financial Protection Bureau, "Hundreds of Thousands of Accounts Secretly Created by Wells Fargo Bank Employees Leads to Historic $100 Million Fine from the CFPB" https://www.consumerfinance.gov/archive/blog/hundreds-thousands-accounts-secretly-created-wells-fargo-bank-employees-leads-historic-100-million-fine-cfpb/