The Art of Lying: Can It Be a Good Thing? Fibs, white lies, whatever: Entrepreneurs tell them often--in negotiating, to get their companies off the ground, and at other times. Is lying ethical? Nope, but it clearly has a hallowed role in business.
By Jerry Useem

(FORTUNE Magazine) – Had Kathy Taggares told the truth, the whole truth, and nothing but the truth, she probably wouldn't have a $32 million business today. Twelve years ago Taggares was itching to ditch her employer, frozen-food maker Chef Ready Foods, to start her own business. So she covertly approached Marriott International about buying one of its salad dressing factories. To her utter surprise, her overtures got a warm reception. "As a young single woman, I'd had so many doors slammed in my face," she remembers, "and here's Marriott, and they're taking me seriously." Marriott was even offering to help her finance the $5 million purchase over several years. It seemed almost too good to be true. And wouldn't you know it, it was. The Marriott people, it slowly dawned on Taggares, erroneously believed she was representing her employer, Chef Ready--not herself as a solo entrepreneur. That's why they were taking her seriously.

To own up to the truth would almost certainly have meant another door slammed in her face. So what did Taggares do? "They never directly asked me," she says, so "I let them believe what they wanted to believe." Namely, that she was negotiating on behalf of Chef Ready. "They finally found out," she recounts, "and they were quite angry at the very end." But by then the deal had all but gone through. Another acquisition followed. Taggares' company, K.T.'s Kitchens in Carson, Calif., now employs 350 people.

So is Taggares a great bootstrapper? Or is she a liar?

Call them terminological inexactitudes (as Winston Churchill impishly put it), strategic misrepresentations, or just white lies; entrepreneurs tell lots of them to get their companies off the ground. And truth be told, we often accept--even enjoy--these small deceptions as clever gamesmanship, especially in the sentimental view of hindsight. The whole notion of entrepreneurship, after all, connotes playing outside the rules, and we're inclined to celebrate the moxie and brio of those underdogs who push things the furthest. "It's great folklore," Taggares says.

But let's be honest here. Taggares lied. Perhaps not in a strict legalistic sense. She never lied in so many words. She just left some blanks empty, as she puts it. Yet held up against Robert Louis Stevenson's definition of honesty ("not just to state the true facts but to convey a true impression"), her conduct looks downright Clintonian.

Is it ever legitimate to lie in business? Omitting cases of outright fraud where the law clearly says it's not, Fortune put that question to dozens of entrepreneurs and ethicists. While the answers that came back are neither black nor white, one thing is clear: Those who say that lying has no place in business aren't telling the truth.

But first off, why lie? Amar Bhide, visiting professor at the University of Chicago's graduate school of business, says company founders often do it because they find themselves in an "expectations trap": No one will do business with them until they appear successful, yet they can't be successful until people do business with them. "Startups," he says, "can fail just because others expect them to fail."

One way to escape that conundrum--to coax that early customer, supplier, or investor into taking a flier--is simply to create the impression that you're bigger and more established than you are. This might involve playing office background noise in your home office when someone calls or adding "Suite 3B" to your address at Mailboxes Etc.--tricks that don't really rise to the level of outright mendacity. They're a bit like "framing" in baseball, whereby the catcher subtly pulls the ball into the strike zone with his mitt; not cheating, just exploiting the umpire's visual biases. Or perhaps they're a matter of taking to heart Samuel Butler's dictum: "The best liar is he who makes the smallest amount of lying go the longest way."

Entrepreneurs have also been known to soft-pedal risks, puff up capabilities ("Sure, we've built an aircraft hangar before"), and in the case of one four-person Internet startup, affect different voices over the phone to sound more numerous. One entrepreneur told Bhide that he "described the future of the company as if it were the present."

Then you have your classic starter lie: using the first-person plural when referring to a one-person business. "I did say 'we,'" admits Jeremy Barbera, "but my dog was there." Barbera and canine partner Luka started direct-marketing company Metro Services Group (now publicly traded as MSGI) in a small apartment on 84th Street in New York City--though Barbera did his best to disguise his location by receiving mail at a Madison Avenue business incubator. Often he doubled as his own courier. Problem was, when he showed up at a client's office one day in full CEO dress, the security guard recognized him from an earlier visit and called upstairs to say that Metro's courier had arrived. What did Barbera do then? "I told them the courier was my kid brother," he says.

Fred Gratzon, founder of long-distance reseller Telegroup in Fairfield, Iowa, also readily admits to being economical with the truth. The company's first direct mailing was cunningly designed to "look like an official notice from the telephone people." It was a computer printout with no company logo that blandly stated: "NOTICE OF TELEPHONE RATE REDUCTION AVAILABILITY. Due to recent changes in tariffs of the Federal Communications Commission, your company is entitled to reduced rates on long-distance service." Never mind that those "recent" changes referred to the Communications Act of 1934. "The response to this was enormous," says Gratzon. "That was the white lie that launched Telegroup."

That, and the time Gratzon couldn't get friends to sign up for his service fast enough, and went ahead and forged their signatures "willy-nilly." And the time he decided he couldn't afford the expensive registration process in each state and decided to operate illegally. "We trod a very gray line," says Gratzon. "I was desperate, I had no money, I had a 1-year-old son, I was worried about how to feed my family. I didn't have money to buy zucchini. We barely had money to pay our own phone bill." Gratzon might not tell this story, except that his Telegroup grew to a $337 million company (though earlier this year it was sold after seeking bankruptcy protection). "Once you've made it," says Kathy Taggares, "people look back at those stories and say, 'Wasn't she cute? Isn't she entrepreneurial?' If I had failed, it would be, 'She misled us, she lied to us ... [she's] sleazy.' " Success, she emphasizes, means she has never left anyone in a financial lurch.

Indeed, without a little prevarication, some of today's corporate titans--providers of jobs, contributors to the common wealth--might not be around. To get a discounted rate on his first advertisement in Byte magazine, Borland International founder Philippe Khan staged an elaborate deception that involved hiring "extras" to tromp around the office and make the place look busy. And when Hallmark founder Joyce Hall started selling picture postcards at age 18, his invoices listed three branch offices--Kansas City, Mo.; Norfolk, Va.; and a Broadway address in New York City. What the invoices should have said was that Hall's entire inventory consisted of a shoebox under his bed in a 12- by 12-foot room at the Kansas City ymca. (The Broadway address belonged to the brother of the woman who printed the invoices.)

Should we admire these entrepreneurs' bravado and derring-do? Or should we censure them as liars? Which is more important, truth or consequence?

Quinn McKay is not a liar. I know this for a fact because I'm using Truth.Quest, a $79 gadget from the Sharper Image that putatively measures what it calls "involuntary stress on the vocal cords...triggered by a lack of truthfulness." (Even better, it's disguised to look like a "high-tech sculpture" on your desk--a keen little deception in its own right.) Thoughtful and avuncular, McKay talks about lying with an emotional directness that can at times make the listener uncomfortable. "Honesty is a delicate, fragile thing," he says, "and can be destroyed with a pause and an inflection in the voice." That statement sets off the green lights on Truth.Quest, meaning it's true.

McKay is an adjunct professor of business ethics at the University of Utah, a consultant, and author of the book Is Lying Sometimes the Right Thing for an Honest Person to Do? He begins answering that self-posed question by inveighing against the bland pieties found in company ethics statements. "People don't talk about the subject of lying meaningfully," McKay complains. "We engage in preachy, prissy platitudes." The truth of the matter, he says, is that we all carry around two standards of ethics. The first McKay labels personal ethics, which he characterizes as follows: "To deliberately mislead someone would be wrong. To deliberately scout out a person's weakness and take advantage of it would be wrong. To deliberately steal would be wrong." Fair enough.

But there are situations, he notes, where it's okay to do all those things. "In fact," he says, "it's not only appropriate, but we honor those people who do it best." And what would those situations be? Well, a good poker player is a master dissembler. A good tennis player is expected to drill the ball to an opponent's weak backhand. A competitive basketball player tries to hold his opponent's jersey and conceal it from the ref. Which is to say that games have special ethics of their own--call them gaming ethics.

This observation is not a particularly provocative or interesting one until it is coupled with the following question: Are there any other areas of life that resemble a game? Consider the legal arena. The solemn duty of defense lawyers is not to reveal the truth (as personal ethics would dictate) but to get their client off, and they can employ a wide range of dissimulation and bluffing without their moral probity being called into question. Both war and statecraft have clear gaming elements. ("In wartime," Churchill said, "truth is so precious that she should always be attended by a bodyguard of lies.") When Francis Gary Powers' U-2 spy plane crashed on Soviet soil in 1960, President Eisenhower--who, it might be noted, also misrepresented his age by one year to gain admittance to West Point--clung to the canard that it had been a NASA weather plane. And economic statecraft carries its own set of lies: Because a "no comment" is often more eloquent than a confession, governments routinely fib about their plans to devalue a currency in order to curb speculators.

So what about business? Should it be treated as a competitive game or as an extension of our personal lives?

Professor McKay doesn't shrink from the question. "I think the evidence is very clear," he says slowly. "Most executives preach personal ethics but practice gaming ethics." He goes further: "If you're going to compete and win, I think you have to practice gaming ethics." In drawing that conclusion, McKay is in good company. In a 1968 Harvard Business Review article titled "Is Business Bluffing Ethical?" Albert Z. Carr famously argued that "the ethics of business are game ethics, different from the ethics of religion." He wrote: "I think it is fair to say that if the individual executive refuses to bluff from time to time--if he feels obligated to tell the truth, the whole truth, and nothing but the truth--he is ignoring opportunities permitted under the rules and is at a heavy disadvantage in his business dealings." The late management thinker Benjamin Selekman wrote that to expect executives to live the Judeo-Christian ethic in any literal sense would be to put them "into a situation of perpetual sinfulness." (Asked what executives should do about it, Selekman is said to have offered this riposte: "Sin bravely.")

Clearly, there are aspects of business in which the business-as-game analogy doesn't hold. Few people would argue, for instance, that lying on a resume is ethically permissible. (Though Barry Nadell of InfoLink Screening Services in Encino, Calif., estimates that 30% to 35% of the resumes he vets for employers contain untruths.)

But what about, say, the process of paying creditors--or, more precisely, not paying them? Ed Laflamme, founder of a landscaping business in New Haven, has been on the receiving end of plenty of lies in that regard. "First they say they lost the invoice," he says, recounting a typical experience. "Then it's going to be reviewed by someone. Then it hasn't been coded yet. Then it's going through the billing process. Then it's on somebody's desk. Then it's to be paid. Then it's been paid, the check is cut, but the check is not signed." The reality, of course, is that the company is intentionally delaying payment to Laflamme for as long as possible--"playing the float," a technique that some consider a shrewd and laudable form of cash-flow management. (Some retail companies even have "don't pay" departments.) They consider themselves, in short, game players.

What about the realm of negotiations? Deborah Kolb, a professor of negotiation at Simmons College's graduate school of management in Boston, teaches students that "negotiation is in many ways an information game, using tactics to shape a person's understanding of what's possible." Though she's an advocate of honest dealings, she says she also warns students that "it's often part of our culture to bluff and even to lie." She's right. Eyal Balle, founder of Rebels footwear in Gardena, Calif., is unapologetic about the time he bought a Ford Maverick for $500, told an associate that he'd bought it for $1,000, then sold it to him for $750. "That's called profit," he says. One academic study found that 55% of participants in a staged negotiation knowingly misrepresented themselves.

"What is a lie under circumstances in which no one expects the truth to be told?" asks Joseph Badaracco, professor of ethics at Harvard Business School. For his colleagues over in the business school's negotiations department, that has been a touchy question ever since 1979, when the Wall Street Journal ran an article headlined TO SOME AT HARVARD, TELLING LIES BECOMES A MATTER OF COURSE; UNTRUTHS CAN IMPROVE GRADE IN BUSINESS SCHOOL CLASS. Among other things, the article described a student bursting into tears upon learning that her negotiating partner--who had repeatedly assured her that he was being truthful in an in-class exercise--had actually lied brazenly. Since then, says professor Michael Wheeler, the department has opted not to make the outcome of such exercises part of students' grades.

Of course, some entrepreneurs dismiss the business-as-game metaphor as a lot of hooey. "If you've built your company on falsity," says Intuit founder Scott Cook, "your own people won't tell you the truth. You've sown the seeds of huge problems later on." Doug Levin, founder of juice company Fresh Samantha, says he has self-consciously tried to "temper" his salesmanlike personality and instead build a culture of "excruciating honesty, absurd honesty." Example: When Fresh Samantha staffers considered slightly altering an employee mishap to be recounted on juice-bottle labels (they thought it would make more sense if Dee Dee McGuire had gotten too cold while locked inside the delivery truck, not too hot), Levin insisted on the real-life version. "The little stuff can kill you," he reasons.

But even Levin concedes that it's easier to be honest when there's plenty of money in the bank. "The biggest lies I see," confirms Ward Wieman, a small-business consultant in Santa Monica, Calif., "are when a company is in trouble." That's because when failure looms, acknowledging it as a possibility can all but ensure it will happen. It is the expectations trap thrown into high gear: Expecting layoffs, employees preemptively jump ship. Expecting defaults, banks call loans. Expecting shipment delays, customers cancel orders. "Once that process starts, it's very difficult to stop it," says Boston serial entrepreneur Marshall Smith, whose successes (Learningsmith, Videosmith) have been tempered by a couple of failures (Paperback Booksmith and, last spring, Cybersmith). "So I did not say specifically, 'We're in deep trouble,' when we were." On the other hand, Smith says in wrapping up the telephone interview, "I know personally that I never lied."

A few minutes later the telephone rings again. It's Smith. He has a confession to make. "You know, I was thinking," he says. "In the last days of Booksmith, there was something I should have told the bank that I didn't. And it has bothered me for 20 years. It's funny that it's still on my conscience."

Thank goodness for the conscience, because "there is no compelling economic reason to tell the truth or keep one's word--punishment for the treacherous in the real world is neither swift nor sure." So concluded Bhide and Howard Stevenson in another Harvard Business Review article, "Why Be Honest if Honesty Doesn't Pay?" Theirs is a contrarian viewpoint; most business owners argue that dishonesty catches up with you over the long run. Some say the information economy is making falsehoods easier to detect and harder to maintain (the snake-oil salesmen of old, after all, depended on the poor flow of information between towns), an argument that might have some merit. Brett Cosor, founder of Video Networks in Gaithersburg, Md., recently nixed a merger deal after he read Securities and Exchange Commission filings online and found that someone professing to be chief operating officer of a $100 million company was in fact a vice president of a $24 million company.

Still, Kathy Taggares insists, "as long as you really believe in it and feel you have a shot at making it work, it's not really misleading." And therein lies the problem with entrepreneurial optimism: It muddies the line between the possible and the actual. When entrepreneurs describe the future of the company as if it were the present, they often don't feel as though they're departing from reality. Their vision of the future is so palpably close that it already seems real. It just hasn't yet gone through the formality of taking place. (Maybe that's what Nietzsche was getting at when he observed, "The visionary lies to himself, the liar only to others.") Which, in one sense, is a demonstration of the power of positive thinking. "In the case of entrepreneurs, if they looked realistically at what they're trying to do, they'd give up," notes Harvard's Badaracco. "They may need to have some degree of healthy self-deception."

The question that people like Kathy Taggares never seem to ask, though, is whether it's fair to make others buy into that self-deception. By telling employees that layoffs aren't imminent when they are, by telling clients that capabilities exist when they don't--in other words, by getting others to bear some risks of the venture without offering them a true accounting of those risks--company owners do just that.

Yet before we go issuing a clarion call for perfect honesty in business, it might be worth asking, Is perfect honesty really what we want? In studies that ask people to rate their own abilities and prospects in life, it turns out that slightly depressed people give more accurate answers than nondepressed people, who tend to evince exaggerated optimism. It suggests that most of us, to some extent, float on a cushion of "healthy" self-deception. While depression might spur honesty, it seldom spurs much else--certainly not new jobs or new ways of getting things done. Seen in that light, the little lies that "visionary" entrepreneurs tell themselves and others may look less like egregious sins and more like the small toll we pay for their beguiling visions.

A little lying might, indeed, go a long way.

PLUS: ASPS GROWING LIKE WEEDS|A LITTLE GUY TAKES ON WAL-MART|ZAGAT ON THE WEB