The Sharing Economy: The End of the Summer of Love

The Summer of Love – early 1967, to be precise – was a high point in 60s-era ideology, when reality seemed to match the hype. Shortly after, things began to fall apart. 1967 was also the summer of riots in Newark, Detroit and 126 other US cities. Drugs and violence popped up.

By late 1969, the Altamont Festival heralded an end to the 60s; but the seeds were sown well before.

The Sharing Economy Summer of Love

The high priestesses of the sharing economy – Lisa Gansky and Rachel Botsman – were early promoters, long on utopian idealism. They spoke about trust, and about transforming business, consumerism, and the way people related to each other. And there’s still a lot to like about that story.

It’s all based on vastly under-utilized resources. How often do you use your video camera, anyway? Your bicycle? Table saw? Your car? Your apartment? What if there were a way other people could use them, and you could get paid for that use? And, amazingly, there were apps for that.  Lots and lots of apps. And so the “sharing economy” got its name.

With karma and economics moving in parallel, what could possibly go wrong?

Disintermediation by Any Other Name…

The sharing economy was originally rooted in peer to peer sharing. But we temporarily forget there are two kinds of peer-to-peer situations.

In Type A, mi camera es su camera (or gardening tool, or bicycle, etc.), all through the miracle of an app that connects us – peer to peer. Directly. No intermediary, no middleman.  Works great, and we don’t mind paying the app-producer a bit, or even more than a bit, for arranging and facilitating the serendipity.

Of course, there was that pesky issue of trust.  But in fairness, outfits like eBay figured that one out to a great extent – reputation, track records, public shaming. And it works pretty well.

It worked well enough that we could vacation on AirBnB at half the price – partly because the owners didn’t have to deal with irksome regulations and taxes on hotels. Ditto rides on Uber and Lyft – who needs all that regulation, and taxes, and for that matter all those lazy taxi drivers waiting in queues.

But then another Fact of Life showed up. In this day and age of Thomas Picketty’s best-selling book Capital, we have re-learned the word for an important phenomenon: it is, indeed, capital.  When the peer supply of the good in question falls short of the peer demand of the good in question, capital emerges to fill the gap. These are Type B peer situations – where intermediaries, or middleman, have a role to play. In e-babble, it’s called scaling.

Type B works like this. Not everyone has a spare apartment to rent out when they’re on vacation; maybe because they hardly ever go on vacation, or maybe because their condo in central Pennsylvania doesn’t sound all that attractive in February anyway.

Not everyone has a car with a backseat you’d want to ride in, much less the time to drive around waiting for people to call their app.

The solution: The app-makers team up with capital-owners, integrate downstream into buying assets, then hire cheap labor to manage the pool. Buy a bunch of apartments; buy a bunch of cars. Hire freelance maids and drivers.

Suddenly, there are lots of people who own multiple apartments and rent them out as a business. Of course, they’re not in the hotel business, they’ll tell you, hence they shouldn’t be taxed by cities or subjected to safety or labor regulations.

What just happened? Maids just got disintermediated, and returns to capital just went up, while aggregate wages just went down.

If there aren’t already, there very shortly will be people who get the idea of hiring their neighbors to run the family car for hire in their own off hours; and maybe of buying a few more cars, for more neighbors. But don’t call it a taxi service, because those services are regulated and pay taxes.

What just happened? Taxi drivers just got distintermediated, and returns to capital just went up, while aggregate wages just went down.

With Uber sporting an implied $17B valuation, and AirBnB at $10B, don’t forget to ask yourself to whom these returns accrue. The answer is not you and your car, or you and your apartment. It’s capital.

Economic Change is Fast: Economic Justice Takes Longer

To be clear, there’s nothing immoral going on here. Nor is this anything economically unique (though it may be dysfunctional).  The legal and regulatory status of these new capital intensive businesses is under review through the normal legal and regulatory channels, and will proceed quickly; see, for example, the insurance industry is taking aim at Uber and Lyft.

But let’s be clear – this is not the second coming of peace, love and understanding. While there are lots of small-scale apps and programs that link peers directly to peers, the big money, as always, will be found where capital joins labor. Where there’s room to scale, you will find capital. That’s precisely the case in Big Businesses like transportation and lodging.

And while capital owners in big scale businesses are delighted to continue the “little guy against the corporation” myth, in truth it’s nothing more than another round of disintermediation. It’s important to note that while you may save a bit on a vacation room or a trip to the airport, there are also jobs at stake – jobs staffed by real people whose unions and representatives took decades to hammer out economic agreements with employers.

At the risk of grossly over-simplifying Picketty’s core dictum: absent world wars and a booming economy, capital grows faster than wages. This is a prime case in point. What looks like technological progress driving social integration with the lights dimmed down, looks a whole lot more like traditional disintermediation in the harsh light of day.

We do ourselves and society an injustice if we let new economy happy-talk blind us to the social effects of the same-old same-old economic shifts.

A Successful 7th Generation Family Company

This is a guest post from old friend Jim Monk. Jim is a Texan by way of MIT who now grows coffee in Hawaii. H also writes great travelogues. He sent me this, about a tour of the Crane Paper Company. I just had to share it.

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Once in a while you get a chance to see something different.  Yesterday was one of those.  I am on a week long tour of New England – the home of the American Industrial Revolution.

We started out in Lowell, Massachusetts, where the American textile industry took a major leap forward.  There we looked at the canal system that powered up to 175 mills at one time and where employment was up over 80,000 at its peak in the late 1800’s.  From there we have visited an iron works, a shipyard, a museum dedicated to precision machine tools that enabled companies to manufacture products with interchangeable parts and, yesterday afternoon, a special paper company.

You may have used some Crane Paper company products when you have written nice notes to someone – Crane paper has been synonymous with quality and upscale for a long time.  But the reality is you probably use a Crane Paper product every day, without even thinking about it.

Crane Paper

Since 1871, the Crane Paper Company has been the sole supplier of the paper for the US currency.  However, “paper” is not quite correct.  What the company supplies to the government doesn’t contain an ounce of tree in it – it is all cotton and linen, with nowadays a slight admixture of very special fibers made by the government in a special laboratory and handed to Crane to be poured into the batches of material that will be made into greenbacks.

Greenbacks first got their name in the early 1800’s when the federal government finally started producing bills to replace the banknotes then in circulation.  “Banknotes” had been made by individual banks in various cities and states – hence the term banknote.

What we use now are no longer “banknotes”, even though we call them that.  The federal government made its first notes with the backside of them all in green ink – at that time green was difficult to photograph well and was hard to obtain, so the government felt the green would help to keep the bills from being counterfeited.

Today, thanks to North Korea, our bills are a whole lot more sophisticated.  It seems North Korea has been working on producing counterfeit $100 bills for some time to disrupt the American currency situation.  An observant teller at a federal reserve bank noticed one bill that had a different feel than the others – and that was the first time the government knew about the new counterfeit bills.  Eventually they traced them to North Korea, who then seems to have moved operations to Canada, where the percentage of counterfeit bills in circulation is far higher than in the US.

But American bills now have a nanotechnology woven into them as the latest round against counterfeiting – a whole concept that Crane developed.  Our speaker said they have some 40 patents on the technology but they have withheld lots of information on how the technology is used – “tradecraft”  — so no one else has been able to duplicate the new measures yet.

A special tape runs down the bills and has the interesting property that when you tilt the bill back and forth, you will see the image in the tape section move from side to side.  Rotate the bill side to side, and the image will move up and down!  And the image changes from a liberty bell to a “100” if the bill is a hundred dollar bill or the number of any other denomination it might happen to be.  This is done with a whole series of 2 micron wide lenses that are looking at images down below them.  The image you see is formed from hundreds of the lenses collecting bits of the images below them and compositing them towards your eyes.

The Present Mr. Crane

Now all of this was interesting, but for me the most interesting part of the presentation was the presenter, Doug Crane.  He’s in his early 50’s, judging from appearances, has children in high school and college and has already retired.  He came in to talk to us because he, too, went to MIT and just felt like talking to a bunch of MIT folks.

He said he is the seventh generation of his family to be involved (!) with the Crane Paper Company.  It is a privately held company – his family are the sole owners of the only company that has made our currency paper for over 140 years.

Towards the end of his talk his cell phone started ringing where it had been placed next to the computer that was controlling his presentation images.  He looked at it, looked sheepish and said, “Sorry, I have to take this one.”  We heard him arrange that the person would come to the place where we were to pick him up.

When he hung up, he said that was his Dad, who was coming to take him out to dinner because it was his birthday that day.

Now just how many seventh generation, successful company owners do you know?  Especially who seem quite modest, clearly knowledgeable about their business, plainly dressed and being picked up by their father that evening after coming in to give a talk to some strangers on their birthday?

When he left, he slung a back pack over his shoulder on his way out.  If America had more companies run by folks like that, we would be doing very well.

My tour is a success.  I hope your day is as well, Jim.

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It is now, Jim, many thanks.

Grow Trust with Delegation and Boundaries

Taking Care of The Horses

We often think of ‘management’ as black and white. It’s not. I’m delighted to welcome Jurgen Appelo, one of Europe’s finest management writers, to Trust Matters, to finely articulate some shades of gray. Check out Jurgen’s new book, Management 3.0 Workout, as well.”

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I once tried to figure out what the difference is between the words responsible and accountable. I honestly didn’t know. The words are often used interchangeably. And in Dutch, German, Swedish, Finnish, and other European languages, they even translate to the same word! This makes the use of the two words confusing for readers and annoying for translators. The Wikipedia entry on Delegation tries to clarify it like this:

“Delegation (or passing down) is the assignment of authority and responsibility to another person (normally from a manager to a subordinate) to carry out specific activities (…) However the person who delegated the work remains accountable for the outcome of the delegated work.”

Wikipedia, “Delegation”

In my own words:

You are responsible for your own agreement to be held accountable by someone else.

Beware the accountability trap

It is crucial that you understand that this works in both directions. In any value exchange between two people, each is responsible for his own actions, and for agreeing that he can be held accountable by the other. Sadly, this is often misunderstood. In management 1.0 and management 2.0 organizations, “superiors” seek fulfillment of their own goals over the fulfillment of others, and they hold their “subordinates” accountable without acknowledging that they themselves should be held accountable for the well-being of the workers. Some call it the accountability trap. [Mayer, “The Accountability Trap”] This one-sided view of accountability leads down the path to compliance, compulsion, and complicacy and probably some complaints. You can escape this trap by not only ignoring the difference between the words (as we do in some European languages), but also by acknowledging that empowerment is a reflexive relationship between two equal partners.

Defining Boundaries

The word “management” is derived from the Italian word “manneggiare,” which means “taking care of horses.” I often compare teams and organizations—not people!—with horses, and I believe in mutually respectful relationships between horses and their caretakers. The caretaking of horses includes giving direction and setting boundaries. Quite often, when managers delegate work to teams, they don’t give them clear boundaries of authority [Vozza, “How to Set Healthy Boundaries in Your Workplace”]. By trial and error, teams need to find out what they can and cannot do usually incurring some emotional damage along the way. This was described by Donald Reinertsen as the “discovery of invisible electric fences,” [Reinertsen, Managing the Design Factory pag:107]. Repeatedly running into an electric fence is not only a waste of time and resources but it also kills motivation. And it ruins the coat of the horse. With no idea of what the invisible boundaries are around it, the horse will prefer to stand still or kick another in the head.

Reinertsen suggests creating a list of key decision areas to address the problem of not setting boundaries. The list can include things like working hours, key technologies, product design, and team membership. A manager should make it perfectly clear what the team’s authority level is for each key decision area in this list. When the horse can actually see the fence, there will be less fear and pain. And the farther away the fence, the more the horse will enjoy its territory.

It also works the other way around because of the reflexive relationship of responsibility and accountability. A team usually delegates work to management, such as rewards and remuneration, business partnerships, market strategy, and parking space. The horse is not required to simply accept any kind of boundaries, constraints, and abuse. Nature gave the horse strong teeth and hind legs for this very reason.

Balancing Authority

There’s nothing that scares an inexperienced rider more than the loss of control over the horse. Indeed, a well-managed horse will heed the instructions of its rider, while at the same time the rider will understand the needs and desires of the horse. When we consider a manager and a team, is there an equivalent of the bridle and the reins? Delegation is not a binary thing; there are shades of grey between a dictator and an anarchist. Managers can hand over responsibilities to teams in a controlled and gradual way. The art of management is in finding the right balance. You want to delegate as much as possible in order to decrease bureaucracy and increase power. But if you go too far, self-organization might lead to an undesirable and costly outcome, maybe even chaos. How much you can delegate depends on the maturity of the team, the status of its work, and the impact of decisions on the organization.

Delegation is context-dependent and reflexive. Teams are responsible for their agreement to be held accountable by their managers, and vice versa. Trust between the horse and the rider should always work both ways.

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References
Mayer, Tobias. “The Accountability Trap” <http://bit.ly/YLhZsS> Business Craftsmanship, 20 December 2012. Web.
Reinertsen, Donald G. Managing the Design Factory: A Product Developer’s Toolkit. New York: Free Press, 1997. Print.
Vozza, Stephanie. “How to Set Healthy Boundaries in Your Workplace” <http://bit.ly/1l9NgRs> Entrepreneur, 30 December 2013. Web

The Blind Men and the Elephant of Trust

The Elephant of TrustIn my last post I wrote about the silos that exist between and within business and academia when it comes to trust. There are few subjects outside philosophy for which the question of subject matter definition is so important as it is in the case of trust.

Like the tale of the blind men and the elephant, each party sees an important part of the subject of trust – but then is inclined to view the rest of the world in those terms. As the saying goes, if you have a hammer, the world looks like nails.

So this is my attempt to define the differing perspectives on trust, looking across the fields of business and academia. I welcome your additions or comments.

I identify four important views of trust, and I’ll label them by the best-known holders of those viewpoints. They are distinguished mainly by differing focus on the trustor, the trustee, and the resultant trust, as well as by individual, social or institutional trust.

The Psychologists’ View

The psychologist’s view focuses on the perception of an individual person facing the decision to trust. In the words of Mayer, Davis and Schoorman in an oft-cited 1995 article, trust is:

the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party.

This is a model built around an individual trustor, not a trustee, and in particular about the trustor’s assessment of the trustee’s competence, integrity and benevolence. It’s my impression that this model is typically portrayed in a rational, self-good-maximizing context, comfortable to behavioral economists, for example.

If you search Twitter streams – the democratic way of market research – this is also the most common use of the word ‘trust.’ The twittersphere is full of “don’t trust women, they break your heart,” or “when people lie to me I can’t trust them.” (Though note: twitter users are a whole lot more affective or emotional than the usual behavioral model allows for).

An interesting application of this trustor-centric viewpoint beyond the individual to the corporate perspective is Bob Hurley’s The Decision to Trust, where he deals with group decision-making and cultural factors that affect trusting behavior in the company.

The Political Scientists’ View

Political scientists like Uslaner or Fukuyama also focus on the trustor’s viewpoint, but focus on groups of trustors (e.g. nations, or cultures), and on their willingness to trust generally, e.g. their inclination or propensity to trust strangers. It is from this viewpoint that we read about the greater levels of trust in the Scandinavian countries, or the lower levels of trust in southern Italy or in Wall Street trading firms.

Uslaner calls this generalized trust, something measured in the General Social Survey for decades; it changes slowly, unlike trust in specific people or institutions.

The Corporate Virtues and Values View

Where psychologists focus on the trustor’s decision to trust (a verb), business tends to focus on the trustee’s trustworthiness (a noun). At an individual level, that might be called virtues; at a group level, values.

In my own model, co-developed first in The Trusted Advisor, the Trust Equation is the expression of the the individual virtues of trustworthiness – credibility, reliability, intimacy, and other-orientation. At an organizational level, the Trust Principles are the articulation of group values in my own construct.

A recent example of this viewpoint is PwC Chairman Dennis Nally’s article The Trust Agenda. It focuses on creating value through values, and on creating greater trustworthiness from within; and not much at all on the issues of trusting.

The focus on virtues and values is an obvious one for business, which for the most part is more concerned about being trusted than trusting. Of course, being trustworthy alone isn’t sufficient to make trust happen – you need a trustor. Business in general focuses on the trustor role mainly through the eyes of the trustee, just as psychology tends to view the trustee largely through the eyes of the trustor.

Business and academics alike have trouble defining institutional trust; it makes a little bit of sense to say we trust Citibank (or not), but very little sense to say that Citibank trusts us. Both trusting and being trustworthy are largely individual traits.

The business focus on the trustee therefore makes “a trustworthy organization” at least conceivable, whereas the academics’ focus on the trustor makes “a trusting organization” problematic. The answer, I suggest, is to frame trust issues at the organizational level as being about creating trust-enhancing environments – not just about trustworthiness, and certainly not about abstract entities committing human acts of trusting.

There is one important attempt to rigorously identify objective characteristics of trustworthiness at a corporate level; it is the FACTS model of Trust Across America. It is the most data-based proof I know of the corporate-wide profitability of trustworthy behavior.

The State of Trust View

What happens when you measure the result of the interaction between trustor and trustee? You get something like the Edelman Trust Barometer, which is known for drawing conclusions like “trust in banking is down.”

This is a survey approach to trust. It doesn’t try to distinguish lower trustworthiness in bankers from lower propensity to trust by consumers, but instead precisely tracks the net result of that interaction.

Numbers in the State of Trust view are constantly changing (unlike in the political scientists’ view), because the object of trust is very specific (an industry, a government sector), and there is an implied specific action. Asking “do you trust Amazon” presumes a very specific object of that trust – typically to buy books or to guard data. It doesn’t occur to us to trust Amazon with our babysitting.

By contrast, numbers in the political science view change slowly because, as Uslaner puts it, if I punch you in the face, your trust in me may decline, but your trust in the human race is pretty much unaffected.

The Role of Risk

There can be no trust without risk, Ronald Reagan’s “trust but verify” statement notwithstanding. Risk is implicit in the Corporate Virtues and Values view, and explicit in the other three.

In the corporate realm, partly because of the focus on being trusted, companies have confused risk eradication with increasing trust. There is a vicious paradox of trust – the more either party tries to control risk, the less trust results. Companies who think they are increasing trust by risk mitigation and compliance programs are doing just the opposite – they are eroding trust.

The challenge for business –recognize the role of trusting, both within the organization and outside it.

In the academic realm, partly because of the focus on trusting, it’s difficult to account for the boomerang effect of greater trustworthiness that results from being trusted. People have a way of confounding rational-choice models when it comes to trust.

The challenge for academia – recognize the roles of virtues and values in their own terms, not just through the eyes of the risk-taking trustor.

What business can learn from academia: a structured, disciplined approach to studying issues of trust.

What academia can learn from business: a wealth of real-world data to be studied and understood.

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So there you have it – my attempt to describe several of the blind men feeling the elephant of trust.

What’s your take on it?

Michael Lewis, Wall Street, and Trust

Outsourcer?Right after Michael Lewis’s 60-Minutes appearance to promote his new book Flash Boys I wrote a blogpost about it.

The next day I received a phone call from a retail stock broker. His tone was somewhere between kindly uncle and exasperated old-timer, but his message was clear:

“That Lewis guy’s obviously got an axe to grind,” said the caller. “He lost big-time in the market and he’s trying to get even with people. And that Katsuyama guy he writes about, he’s just a spoiled baby, trying to make an even bigger buck than he was lucky to get paid in the first place. The whole thing is just a bunch of hype designed to sell books, and you’re getting suckered into it.”

If you know anything about the book (and if you don’t, here’s a good start), you know that’s a crock. In any case, my caller exhibited three traits:

  1. He’s convinced the world is of the dog-eat-dog variety,
  2. He’s convinced that everyone else believes the same thing,
  3. The default strategy therefore is do unto others before they do unto you.

My caller does not believe in people with different value systems. Let’s call such people “unicorns” Canadians.  (Did I mention Katsuyama is Canadian?)

Now, I suggest the odds of making my caller more trusting and  trustworthy through more regulations are roughly zero. The odds of making him trustworthy  through incentives, can be only slightly better (and I can’t even imagine the incentives).

The only way he’s ever likely to behave in a trusting and trustworthy manner is if he gets beat in a level playing field market by those who are capable of trusting and being trusted.

The Showdown on CNBC

The next day, Lewis and the book’s hero Brad Katsuyama appeared in a very confrontational spot on CNBC  with Bill O’Brien, President of BATS. BATS is an exchange that the book accused of being at the heart of misleading investors and supporting high frequency trading in a legal form of “front-running.”

O’Brien wasted no time throwing the first punch, leading off with:

O’Brien: Shame on you, Michael and Brad, shame on you both for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model. It’s a very, very old tactic to try to build a business on the planks of fear, mistrust and accusation; this is certainly taking that to a new level. It reflects either an unwillingness – a continued lack of understanding about how this market operates or just unwillingness to acknowledge it, because you’re trying to launch a new business and you want to get volume for your platform…

Katsuyama: If you’re going to launch these accusations, let me ask – what market data do you use to price trades?

O’Brien:  We use direct feeds.

Katsuyama: No, you don’t. [You use SIP feeds]

O’Brien: Yes, we do [use direct feeds]

The very next day, the Wall Street Journal reported:

BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work…the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.

This is what is known, in my circles as – technical term – being caught in a flat-out lie.

In any case, Mr. O’Brien exhibited the same three traits as my retail-level caller:

  1. He’s convinced the world is of the dog-eat-dog variety,
  2. He’s convinced that everyone else believes the same thing,
  3. The default strategy therefore is do unto others before they do unto you. Which of course is just what he tried to do.

O’Brien does not believe in people who believe in honesty or fair dealing; in other words, he does not believe in unicorns or Canadians – even when staring one in the face (did I mention that Katsuyama is Canadian?).

The odds of making O’Brien and his ilk more trustworthy through better regulations are roughly zero. The odds of making him trustworthy  through incentives, only slightly better (and I still can’t even imagine the incentives).

The only way he’s likely to behave in a trusting and trustworthy manner is if he gets beat in a level playing field market by those who are capable of trusting and being trusted.

And that is precisely what Brad Katsuyama is setting out to do in the development of a new exchange, IEX. Not a regulatory answer; not a new incentives answer; an answer based on the hope that enough customers in the market will actually choose to do business with an exchange that is unconflicted, that is transparent about its data, that offers only easy-to-understand offers, and that enforces a level playing field.

Will it work?  Stay tuned. There are some interesting positive signs, including even from (hold your breath) Goldman Sachs.

Trust on Wall Street

Having focused solely on trust in business for over 15 years now, several things are apparent to me.

1. The Mother Theresa Paradox is Real. The less trust exists in an industry, the less interested are the industry players in reforming it. It is the already-trust-conscious industries (and companies) who are convinced of trust’s value, and who are interested in improving it. This despite the fact that trust is an overwhelmingly powerful competitive advantage for anyone who can see it. Katsuyama’s new exchange will be a great test of that proposition.

By anybody’s measure (e.g. Edelman’s Trust Barometer), financial services are at the bottom of the trust list. Low hanging fruit, for anyone willing to think their way out of the low-trust box.

2. You Can’t Get Trust with Cheese.  The rats-and-cheese model of behavioral change through incentives doesn’t work with trust, because incentives are personal and trust is relational. Unless you can make incentives team-based and long term, they fail. Even then, they can and will be gamed by very smart rats. See next item.

3. Regulation Is a Vicious Circle. Wall Street pays much more than regulators, and many regulators go to work in the industry they regulate. Regulators have small budgets. But even if that were untrue, you can’t regulate morality. In fact, the more you make “ethics” the target of regulatory efforts, the less it becomes about morality and the more it becomes just compliance.

4. The Needed Values are Clear. They’ve been obvious for some time. They are:

  1. a focus on the client first for the sake of the client
  2. a belief in collaboration
  3. a focus on relationships, not transactions
  4. a default to transparency

These are key to trust. They are clearly in short supply on Wall Street.

So, how to increase ethics on Wall Street? Two answers:

One is, cheer on Brad Katsuyama’s noble capitalist market experiment in honesty, transparency and customer focus.

The other? Instead of Occupy Wall Street, how about – Outsource Wall Street! To Canada!

Within months, I suspect, we’d see lower transaction costs, less risk of flash crashes, higher liquidity, higher legitimate volume, and a reduction in the total size of the industry with no loss of value added.

All it takes is the willingness to operate based on values other than dog-eat-dog.

 

Trust Hero: Brad Katsuyama, on CBS 60 Minutes

Illustration: Truth and LieMichael Lewis’s new book Flash Boys goes on sale at Amazon this morning, March 31. The headline, as he put it in Sunday’s exquisitely timed CBS 60 Minutes – “The stock market is rigged.”  And it’s rigged in favor of high-frequency traders.

Complaints about high frequency trading are not new. What is new, to nearly all of us, is the story of an unlikely trust hero that Lewis profiles, and the amazing response to HFT that he is developing.

Brad Katsuyama, a Canadian employee of Royal Bank of Canada, ran the New York trading desk for RBC. He noticed that the trading action was as if someone was constantly front-running him, causing him higher prices to fill orders, and thus higher costs to his customers. He soon found the problem was endemic in the industry.

He teamed up with an Irish fiber networks expert. The two of them and their team figured out how it all worked. Firms like Spread Networks had figured out how to lay enough fiber cable to allow just milliseconds of advantage – enough to notice an order from someone like RBC, then quickly get in front of that order at other exchanges, and buy-then-sell the same stock before the victim’s trade, running on slower networks, could get filled.

It is, as Lewis says, “legalized front-running.” And it was clearly worth billions.

Trust Motives

Now comes the trust part. Katsuyama and his team figured out how to beat the front-runners by spreading their orders to all arrive at the same time at different exchanges.  But he wasn’t done yet. He wanted to change the rigged market. Why? “Because it just didn’t feel right. Customers of pension funds and retirement funds are getting bait-and-switched every day.”

Katsuyama quit his million-plus job and set out to found a new exchange. What motivated him – the chance to earn multiple millions more, in good capitalist fashion? No. In his words, “It felt like a sense of obligation; we’ve found a problem affecting millions of people, blindly losing money they don’t even know they’re entitled to.”

They founded IEX, a competitive exchange; using 60 kilometers of cable to disadvantage the HFTs, they beat them at their own game. The exchange is off to a good start, though with lots of powerful enemies.

Selling Trust 

Katsuyama himself is a bit giddy. “To think that trust itself is actually a differentiator in a services business – it’s kind of a crazy idea.”

Of course, it is anything but crazy. As Michael Lewis says, “When someone walks in the door who is actually trustworthy, he has enormous power. And this is about trying to restore trust to the financial markets.”

Exactly. As anyone who’s been reading this blog for years knows, trust sells. Trust scales. Trust creates value. Trust is an enormous competitive advantage.

If you can drag untrustworthy practices out into the sunlight, customers overwhelmingly prefer trustworthy practices. Key investors like David Einhorn agree; Einhorn figures IEX is a winner.

More power to Katsuyama and to IEX. It’s good to have someone you can trust on Wall Street. I would not bet against him.

Why Some Men Don’t Trust Women In The Workplace

(And Why Some Women Don’t Trust Men, And How to Break The Vicious Cycle)

Why Some Men Don't Trust Women in the Workplace 23-Feb-2014Nobody, it seems, wants to talk about one of the most important dynamics of the modern workplace: Men quite often don’t trust women, and women with comparable frequency don’t trust men. The breakdown of trust is especially common when the male is a manager and the female is his subordinate. Burdened by stereotypes, myths and other hidden assumptions about female employees, he doesn’t trust her to get the job done. Having repeatedly been marginalized by her male bosses and male co-workers, she adapts in ways that exacerbate the breakdown in trust.

This reciprocal breakdown in trust can torpedo not just one, but two careers. Still, all is not lost. There are ways to sever the dual ring of vicious cycles and reestablish trust between men and women in the workplace.

Cycle 1: Why men don’t trust women

Let’s start with the stereotypes about women as employees. Women always put family and children above their jobs. If there’s a ballet lesson or if school gets out early, the callback to a key client will have to wait until tomorrow. Women always get pregnant and take maternity leave just when a new office is opening. Women take Family Medical Leave to care for an elderly parent with a stroke or a teenage child with mononucleosis just when a new computer operating system is being installed. Women are always on the verge of quitting when child-care responsibilities become overwhelming, and they will no doubt quit right before a crucial deadline.

We move on to another unstated but critical myth. Women are emotional and not analytical. Women will make workplace decisions based on feelings rather than facts. Women worry more about their co-workers’ comfort level than about getting the work done.

Then there’s the hidden assumption that a female employee is not really committed to the business. In the minds of many male managers, this assumption is reinforced every time a woman requests flexible work accommodations. Working from home means less “face time” with her male manager, and when a woman is out of sight, she must not really be working for the company.

Sometimes a male manager assumes that his female subordinate has gotten her job solely because the company had to comply with affirmative action guidelines. He feels that the pressure from higher-ups to diversity the workforce has lowered the quality of new hires. He looks at the top echelons of the company, sees very few female executives, and concludes that investing in a junior woman is a waste of his time. Better to not trust her to do important assignments. Just let her wither on the vine.

Cycle 2: How women reinforce the mistrust

Let’s start with the natural inclination to trust those who are like us. A male manager may perceive that his female subordinate is just different. She has had different experiences. Perhaps she didn’t play on the high school basketball team. Maybe she could care less about the lack of good relievers in the bullpen or the dubious wisdom of a first-round draft pick. Having experienced harassment or bullying in the workplace, a woman may have her guard up. She may be disinclined to engage in backslapping, deprecating humor. When it’s time to remind a co-worker about an upcoming meeting, she may not tell him to “get your butt over here pronto.”

Let’s move on to the false inferences that male managers draw from women’s inferior salaries. Many women find it difficult to demand higher starting salaries and to negotiate raises. As a result, they end up doing the same work as their male peers for less. Managers are privy to salary information. A male manager may interpret a woman’s lower salary not as evidence of inequity, but as a sign of weakness, as an indicator that she does not really have a long-range commitment to the company.

A male manager may find himself excluding his female subordinate from informal get-togethers where co-workers can bond with each other. He may believe that women don’t want to go out for drinks, take advantage of free tickets to the season opener, or attend industry conferences. He may worry that close familiarity will be interpreted as sex discrimination or sexual harassment. When his female subordinate is excluded from these bonding events, he doesn’t get to know her. Feeling excluded, she lacks the motivation to go the extra mile for the company, and the gap in trust just widens.

Finally – and perhaps most important – you cannot trust an employee if you feel her behavior is unpredictable. A male manager may find it difficult to give critical assignments to a female employee because he’s not sure how she will interact with her co-workers or with customers. He’s not sure how she will handle a crisis. He doesn’t feel confident that she will put in the extra hours when the deadline approaches.

This sense of unpredictability is exacerbated by what I’ll call the toggling strategy that many women are forced to adopt. Having received conflicting signals about how to act in the workplace, she toggles back and forth between the traditional male mode – decisive, aggressive, demanding, career-focused – and the more sex-neutral collegial mode – collaborative, inclusive, less dictatorial. This toggling frustrates her manager, who perceives her as alternately antagonistic and ineffective.

Trust has become a key competency

There’s no need to dwell here on the adverse consequences of this lack of trust for the woman’s career. Nor does it require an in-depth analysis to see the enormous waste of talent and corporate resources. The critical point is that trusting co-workers of the opposite sex has become a key competency for assuming a position of leadership. A breakdown in trust can sidetrack a man’s career as well as a woman’s.

The business world has become increasingly diverse and globalized. A male manager who cannot look beyond the stereotypes of his female employees may be similarly unable to develop trusting relationships with peers and clients of different races, ethnic groups, religions and nationalities. The same goes for a female who has developed self-protective behaviors that exacerbate the breach in trust. Failure to trust will translate into failure to advance to the top ranks of the organization.

Breaking the cycles of mistrust

So how can a male manager resist his stereotypes about women in the workplace? And how can a woman steer clear of the safety strategies that exacerbate the mistrust?

First, he needs to accept as fact that women as a group are no less committed to their careers than men. Take it at face value that a woman who gets an education, shows up every day for work, completes her assignments and is receptive to feedback is, in fact, serious about her job. Understand that everyone has some family responsibilities and that a good manager can incorporate absences into his planning, whether they’re due to pregnancy, tennis elbow or a heart attack. If a woman is taking advantage of some form of flexible work arrangement, focus on the work performed, and not on how often you see her face.

He needs to persist in his efforts to include his female subordinates in the entire range of work-related activities. That means water-cooler conversations, after-work drinks, sports events and industry-wide meetings. She needs to break the habit of refusing any such overtures, to entertain the possibility of loyalty and respect for him as a manager. She needs to recognize that through his efforts at inclusiveness, she will get to know about the business. She will get to know him and his peers. She will trust him.

He needs to avoid pat assumptions about how she will react to others, as these assumptions rarely hold up in practice. He needs to make a genuine effort to get to know her, to understand why she acts the way she does, and she needs to allow him to understand her. She needs to send him the message that he can be confident about her reactions to future deadlines, mishaps and crises at work.

She needs to tell him straightaway when an assignment is unclear or when his expectations about her performance are fuzzy. He needs to tell her if she is acting in ways that make him uncomfortable.

He needs to realize that most women suffer from lack of adequate feedback, and not from poor motivation or bad intentions. He needs to tell her when she’s erred, to suggest mentors and coaches, and to model behavior. When there is a problem, he needs to no longer be reluctant to address it. And she needs to accept his advice. Don’t write her off. And welcome him into the bargain.

 

 

 

Building the Trust-based Organization, Part II

The Elephant In The OrganizationIn my last post, Building the Trust-based Organization Part I, I suggested that approaches to trust at the organizational level fell into several categories. Like the parable of the blind men and the elephant, all captured some part of the puzzle, but none grasped the entirety of the issue.  The five categories I listed were:

1. Trust as communication
2. Trust as reputation
3. Trust as recipe
4. Trust as rule-making
5. Trust as shared value.

I suggested a holistic approach would have a Point of View, a Diagnosis, and a Prescription.  Here is my attempt to offer such an approach.

Organizational Trust: A Point of View

Trust relationships are asynchronous – one party, the trustor, is the one who does the trusting, and who takes the risks. The other party, the trustee, is the one whom we speak of as being trustworthy. “Trust” is the result of a successful interaction between these two actors.

Trust is largely an interpersonal phenomenon. Trustworthiness is mostly personal, though we do speak of ‘trustworthy’ companies as having a track record or being reliable. Trusting, however, is a completely human action, not a corporate one.

Risk is necessary to trust: if risk is completely mitigated, we are left only with probability.

It follows that the most powerful meaning of “organizational trust” is not an organization that trusts or is trusted, but an organization that encourages personal trust relationships:

A trust-based organization is an organization which fosters and promotes the establishment of trust-based relationships between various stakeholders – employees, management, shareholders, customers, suppliers, and society.

Organizational Trust: Diagnosis

What is needed to create a trust-based organization? Since ‘trust’ is such a broad concept, it’s clear that themes like communications, regulations, and customer relationships will have a role. But to avoid a mere laundry list, what’s needed is some kind of primus inter pares relationship; or perhaps some necessary vs. sufficient distinctions.

My nomination is simple: an agreed-upon system of Virtues and Values. Virtues are personal, and represent the qualities sought out in employees and managers. Values are organizational, and reflect basic rules of relationship that ought to govern all relationships within the organization.

Some typical trust-based virtues include: candor, transparency, other-orientation, integrity, reliability, emotional intelligence, empathy.

I have suggested elsewhere Four Trust-based Organizational Values. They are expressed below in terms of customer relationships just to be specific, but they apply equally to relationships with suppliers, fellow-employees, and so forth.

  1. Lead with customer focus – for the sake of the customer. Begin interactions with other-focus rather than self-focus.
  2. Collaboration rather than self-orientation. Assume that the customer is a partner, not in opposition to us.  We are all, always, on the same side of the table.
  3. Live in the medium-to-long term, not the short term; interact with customers in relationship, not in transactional mode. Assume that all customers will be customers in perpetuity, with long memories.
  4. Use transparency as the default mode. Unless illegal or hurtful to others, share all information with customers as a general principle.

Advocates for Values.  I am not alone in citing Values as lying at the heart of the matter. McKinsey’s Marvin Bower put values at the center of his view of business, and McKinsey for many years was run from his mold. As Harvard Business School Dean McArthur said of Bower, “What made him a pioneer was that he took basic values into the business world.”

In 1953, Bower said, “…we don’t have rules, we have values…”

In 1974, he wrote, “One of the highest achievements in leadership is the ability to shape values in a way that builds successful institutions. At its most practical level, the benefit of a managed value system is that it guides the actions of all our people at all levels and in every part of our widespread empire.”

Bower’s biographer noted that Bower believed that “while financial considerations cannot be ignored, business goals must not be financial; if they are, the business will fail to serve its customers and ultimately enjoy less profit.”

The alumni of McKinsey – some, anyway – learned well. Harvey Golub said, “[values are] a powerful way to build a business…it worked for McKinsey and it worked for IDS and for American Express.”

IBM’s Lou Gerstner said: ‘“I believe that I learned from [Marvin] the importance of articulating a set of principles that drive people’s behavior and actions.”

[Note: McKinsey itself had some noticeable hiccups post-Bower. In my view, this is not an indictment of values-based management, but a sad example of how it requires constant values-vigilance].

The Case for Values.  The use of values as the basis for management is well-suited to the subject of trust, and this advantage shows up in numerous ways.

  • Values scale, in a way that performance management systems never can do.
  • Values are about relationships, in a way that incentives never can be; this makes them highly suitable to the subject matter of trust.
  • Values are infinitely teachable, in a way that value propositions or communications programs alone cannot aspire to.
  • Values are among the most un-copyable of competitive advantages.

Organizational Trust: Prescription

Managing a values-based organization will center around keeping the values vibrant. This is pointedly not done mainly through compensation and reward systems, corporate communications plans, or reputation management programs. Instead, it is done through the ways in which human beings have always influenced other human beings in relationship.  To name a few:

  1. Leading by example: trustworthy leaders show the way to their followers by their actions, not just their words
  2. Risk-taking: trusting others encourages them to be trustworthy, and, in turn, to themselves trust others
  3. Discussion: principles undiscussed are principles that die on the vine. Discussion, not one-to-many communication, is key to trust
  4. Ubiquitous articulation: trust principles should underpin many corporate decisions and actions; trust-creating leaders seize the opportunity for teaching points in every such case
  5. Recognition: Public praise for values well-lived is intrinsically motivating
  6. Confrontation: Trust-building leaders do not hesitate to overrule business decisions if they violate values, and to do so publicly in ways that teach lessons. Values, not value, are the ultimate arbiter of all actions.

To sum up: it’s a simple concept. Trust in a corporate setting is achieved by building trust-based organizations. Trust-based organizations are built to consciously increase the levels of trusting and of trustworthiness in all organizational relationships. The best approach to creating such an organization is values-based management and leadership. This is different from most approaches to management and leadership in vogue today.

The quotes about Marvin Bower were taken from:
Edersheim, Elizabeth Haas (2007-12-10). McKinsey’s Marvin Bower: Vision, Leadership, and the Creation of Management Consulting. Wiley.

Building the Trust-based Organization

The Elephant of TrustDo your eyes glaze over at that title? Mine do. I always click on such titles, but am usually disappointed when I get what feels like low-content or high fluff-quotient material. So I set out to tighten up the perspective.

Tentative conclusions: sometimes the issue really is vague, fluffy, fog-sculpting content. More often, however, it’s more a situation of the blind men and the elephant: all describe a key component of the answer, but none have a holistic perspective.

The Parts of the Elephant

This is not an exhaustive taxonomy, but a great number of pieces about creating trust in organizations do fall into these categories. Here are the equivalents of the blind men seeking to describe the elephant of trust.

Trust as Communication. “Communications is fundamental to earning trust,” says Jodi MacPherson of Mercer in Ivey Business Journal. “At the heart of building trust is the process of communication.”

This approach gets one thing very right; trust is a relationship, not a static set of virtues or characteristics. Hence the connection between parties is key, and communication is the basic way parties relate to each other.

However, the communication approach begs one huge question – the content begin communicated.

Trust as Reputation. The Edelman PR firm’s annual Trust Barometer has been a major communications success.  A sample statement:

Corporate reputation and trust are a company’s most important assets, and must be handled carefully…Beyond safeguarding a reputation, the 2012 Edelman Trust Barometer findings reveal that businesses acquire a greater license to operate as they expand their mission and create more meaningful relationships…By identifying a company’s assets and weaknesses in the realm of trust, we help corporations uncover, define, exemplify and amplify their authentic identity in ways that resonate with stakeholders and inspire support of their business mission.

This approach has one big risk: by equating trust and reputation, the emphasis naturally falls more on managing the perception of the trustor, and less on managing the trustworthiness of the trustee.  It is also inherently corporate, and therefore impersonal.

Trust as Recipe.  There are probably more approaches that fall into this camp than any other.  It includes lists of (typically 4 – 6) actions, principles, insights, definitions, concepts which, if considered or managed or invented or followed or preached about, result in greater trust in an organization and between that organization and its stakeholders.

A good example is Ken Blanchard Company’s The Critical Link to a High-Involvement, High-Energy Workplace Begins with a Common Language.  They offer  four trust-busters (one of which is lack of communication), five trust-builders, and three rules to building leadership transparency.

Trust as Rules-Making. A Harvard Law blogpost titled Rebuilding Trust: the Corporate Governance Opportunity, Ira Milstein points out the critical roles that can be played by boards and shareholders in increasing trust.

A similar point is made from an Asian perspective, in Corporate Governance: Trust that Lasts, author Leonardo J. Matignas says “Corporate governance is not premised on a lack of trust. It simply ensures that trust is accompanied by practices and principles that will further strengthen it.”

While these views may appear slightly narrow, they’re part of a broader governance category that says corporate trust lies in better rule-making. If the game is out of control, we need to clarify the rules, tweak the goalposts, empower the referees, and not be afraid to make changes to the environment in which business operates legitimately as business.

The strength of this view lies in its linkage of business to society – the implicit statement that there is no Natural Law that says business has any right to stand alone outside a broader social context.

Trust as Shared Value. In Michael Porter and Mark Kramer’s notable 2010 HBR article Creating Shared Value, Porter auto-performs a conceptual sex-change operation on his previous work. The author of Competitive Strategy and the Five Forces affecting competitive success boldly charts out a world in which companies take the lead in formulating multilaterally beneficial, long-term projects for the greater betterment of all stakeholders. The lions and the lambs can get along after all, it seems.

Porter and Kramer deserve mention here because they have pinpointed something few others do – an unflinching claim that economic performance at a macro level is consistent with firms behaving at a micro-level in longer timeframes and in more multi-stakeholder collaborative manners. (Incidentally, this view reclaims Adam Smith from the clutches of the Milton Friedmans and Ayn Rands who suggest competition is purely about survival of the fittest, and restores to him a sense of Smith’s broader views as reflected in his Theory of Moral Sentiments).

They are not entirely alone. The Arthur Paige Society a few years ago published The Dynamics of Public Trust in Business, which similarly stated:

…trust creation is really an exercise in mutual value creation among parties who are unequal with respect to power, resources, and knowledge. We believe that a core condition for building public trust is the creation of approaches that create real value for all interested parties—businesses and public alike.

Of all the views, Trust-as-Shared-Value is the one most breathtaking in scope. The issue facing it is one of execution. There is a bit of a “then a miracle happens” quality, perhaps inevitable given the scope of envisioned change.

Seeing the Elephant Whole

All the five generic approaches above get something important right – but none of them constitute a full answer to “How do we make trust-based companies?”

So what would constitute a good answer?  It must have three parts: a Point of View, a Diagnosis, and a Prescription.

Crudely speaking, in the list above, Porter/Kramer’s Shared Value is a point of view lacking a prescription. Trust as Rule-Making is a diagnosis without prescriptions or a point of view, and Trust as Recipe is pretty much prescriptive in nature.

In Part II of this post, I offer my suggestion for how to best answer the question across all three dimensions.

It Depends on What the Meaning of the Word ‘Responsible’ Is

Photo By: Bob JagendorfIf that title reminds you of a Bill Clintonism, that’s no accident.

New Jersey Governor Chris Christie today joined Mr. Clinton as a recipient of the PTSA (Politicians’ Tortured Syntax Award). But in Christie’s case, we’re not being educated about existential issues – rather, it’s about what we mean when we say we’re responsible.

Christie declared himself “responsible” for some bad things that happened under his watch –  all the while making very clear that he himself never did and never would condone such things, never knew or approved of them, etc.

In fact, he was shocked–shocked! – to find that such things had been going on.

When Christie says “I’m responsible,” he is relying on our being confused about what that  word means (and like all good deceivers, he probably suffers from the same confusion himself).

What he is trying to sound like is more like what we mean by “accountability.”

Meaning: the buck stops here, at the end of the day they all report to me, it happened on my watch.  All these are ways of saying the Guy in Charge must suffer the occasional betrayal from his underlings, but he himself is noble, and grievously wounded by these terrible doings from the disloyal dogs in whom he had misplaced his trust.

Other examples? We heard the same thing from Rupert Murdoch. Ronald Reagan was famed for saying ‘mistakes were made.’ Jamie Dimon recently lamented the London Whale who cost JPMorgan so many billions.  And we’re often suckers for that line, because we confuse the meaning with something else.

The Real Meaning of Responsibility

The other meaning of responsibility is not “accountability,” but direct, causal linkage. For example:

 

Q.  Who was responsible for hiring these lying and conniving aides?
A. Chris Christie

Q. Who was responsible for delegating considerable authority to these lying and conniving aides?
A. Chris Christie

Q. Who was responsible for believing and backing these lying and conniving aides when they were questioned?
A. Chris Christie

Q. Who was responsible for creating a culture which tolerated or encouraged such venal behavior?
A. Chris Christie

This is the meaning of the word “responsibility” that CEOs and politicians need to be held to. Not whether they were personally culpable, but whether they created the reality in which these things happened. Notwithstanding the smoke they want to throw in our eyes about personal guilt.

Peter O’Toole died recently. One of his memorable roles was as Henry II in the film Becket. When held to high standards by the troublesome Archbishop Thomas a Becket, Henry cried out to a group of his knights, “Will no one rid me of this troublesome monk?” The men got the hint. Becket was killed – and Henry had what diplomats delicately refer to as “plausible deniability.”

Christie is trying to claim plausible deniability on the grounds that he didn’t do the deed.  He shouldn’t be allowed to get away with it, anymore than Richard Nixon was.

Nixon famously said,  “I am not a crook.”  That was not the point for Nixon, not the point for Henry, not the point for Murdoch, or Dimon, and not the point for Christie. The point is – who designed the organization in which these things “happened” to happen.

That is “responsibility.” It’s a rare commodity these days.