Trust & Investment Banking: Interview with The Epicurean Dealmaker

The Epicurean Dealmaker is the nom de plume of an investment banker who has written a blog by that name since January 2007.

TED (as I’ll refer to him henceforth) recently achieved a measure of fame, or at least notoriety, by being interviewed and quoted in a New Yorker article calmly but deeply critical of the financial industry, titled What Good is Wall Street?

As he puts it:

I facilitate, justify, and advise parties to M&A transactions, when I am not advising against them. I have been doing this for almost two decades, mostly at a couple of big banks everyone has heard of and lately at an independent advisory boutique. I am one of the bad guys, if you like.

Or, as he suggests in a more recent post, referring to the changes in the investment banking business, “I am one of the good guys, if you please.”

The title of his blog refers to the apparent contradiction between the view of the philosopher Epicurus– that an imperturbable emotional calm is the highest good–and the view of his profession, which is about rather the opposite.

It’s not surprising that TED was chosen for that New Yorker interview—as his choice of name suggests, he has a talent for seeing contradictions in the world; or maybe he just likes playing at being schizophrenic. In any case, he has a unique perspective on the financial sector, and it’s a treat to interview him for Trust Quotes.

CHG: First of all, TED thanks very much for speaking with us here today. I have thoroughly enjoyed reading your blog for several years now. In addition to the rare combination of philosophy and Wall Street, I have always found your comments to be grounded in common sense.

Let’s start with some context. When you joined the field of “investment banking” 20 years ago, what did that term mean?

TED: Thanks, Charlie. I have enjoyed reading your informative and insightful blog on trust issues ever since I got involved online, too. And I promise that I will release your dog back to you unharmed as soon as I am convinced you have presented my views in the most favorable light possible.

As far as “investment banking” goes, when I started over two decades ago, the term described those individuals and firms which acted as middlemen in the global financial markets for capital and control. Our job was to bridge the gap between the providers of capital—investors, both individual and institutional—and the users of capital, which consist of for-profit businesses, state, local, and federal governments and other entities. In addition, investment bankers helped corporations buy and sell control of each other and subsidiary businesses, which is known as mergers and acquisitions, or M&A.

CHG: You and I both believe that investment banking in that sense plays some very socially useful roles. Could you elaborate?

TED: Yes. Well, for one thing, global and even domestic capital markets are huge and extremely diversified. Even in the narrowest of segments, like, for example, technology-oriented equity markets, the numbers of potential providers of capital and the potential users of capital are huge and ever changing. It is surprisingly hard for the people who need money to find the people who have money. And, once they have found each other, their interests, prejudices, and perspectives are so different that they have difficulty talking to each other.

This situation is tailor-made for a middleman, who understands the perspectives and needs of each side, to make a connection. A similar process takes place in M&A. An added wrinkle is that raising capital or doing M&A tends to be a very rare occurrence for most people who do it, so they usually need both a guide and an advocate to help them through the process. I believe this serves a useful socioeconomic function.

CHG: We’ll dig more deeply into this later, but what has the term “investment banking” come to mean these days?

TED: Well. Over the last decade or so, large, global, integrated investment banks have really turned into hedge funds in disguise. Either explicitly, in the form of acknowledged proprietary trading or in-house private equity funds, or implicitly, in the form of large security origination, warehousing, and distribution factories, large investment banks have shifted dramatically from a pure middleman or agency model to a proprietary one.

Most of the revenues and profits investment banks earned during the years leading up to the financial crisis came from trading or investing for their own accounts. This is a role and business which is in fundamental conflict with the role of middleman. For one thing, you act as a competitor to many of your usual clients. For another, it is a far riskier business model than traditional intermediary investment banking.

Part of this transformation resulted from the gradual convergence of commercial and retail banking—lending money to corporations and individuals, in its simplest form—and investment banking into what have become known as universal banks. (Universal banking is only a recent development in the United States, having been the norm almost everywhere else, notably Europe, since inception.)

The other part was the tremendous explosion in the amount and velocity (turnover) of funds available for investment around the globe, which led to increased investment and trading, which in turn offered increased opportunities for trading intermediaries like investment banks to take advantage of.

CHG: I have to ask, how was it that you, given your interests and personality, got involved in Wall Street in the first place?

TED: After graduating from college, I did a number of things completely unrelated to finance. It took me a while, but I eventually figured out that what I enjoyed most about all my different jobs was the learning curve. When a job became routine, I had to leave. Essentially, I discovered that I have the attention span of a gnat. This was quite a revelation for me. Eventually, via friends and by just soaking up the atmosphere of New York City in the 1980s, I discovered investment banking, which is never the same job twice. It’s been a marriage made in heaven ever since.

CHG: So let’s raise the big question: what has happened to Wall Street, and IB in particular, in the last two decades?

TED: Well, as I said above, the industry strayed from its historical roots in pursuit of ever-larger profits, and this led it to taking on ever-greater proprietary risks. In retrospect, it now seems my peers did not have a good handle on either 1) the risks embedded in their own institutions’ activities or 2) the risks embedded in the highly integrated global financial network in which investment banks played a pivotal role.

CHG: Jamie Dimon says the problem lies not with size—after all, Europe and Canada have higher concentration than we do–but with unregulated financial flows. Others, like Sy Sternberg, are quite clear that the problems arose from repeal of Glass-Steagall. What’s your view—what went wrong?

TED: At the end of the day, it’s pretty simple: banks just got too big. Too big to manage effectively, too big to understand the complex waterfall of risks embedded in their business activities, and too big and interconnected for governmental authorities to allow to fail when they did in fact blow up.

Look, the challenge is this: traditional investment banks, and traditional proprietary investment firms (like, e.g., hedge funds), are designed to take relatively high risks. That’s how they make money. The problem arises when their failure or potential failure propagates through the global financial system like an out-of-control virus—through interconnection, domino effects, sheer size, or whatever—and threatens catastrophic failure of the entire system.

That is what governmental authorities perceived as a serious possibility when Lehman Brothers blew up, and AIG, Merrill Lynch, and other major financial institutions were teetering on the brink of failure.

Note that the failures I am talking about were failures or potential failures of the wholesale financial system, not the retail system of deposit taking and consumer loans (although, of course, the entire mortgage industry was deeply implicated). Nevertheless, governmental officials in this country were seriously worried that cascading failures could have paralyzed the global financial system to the extent that automated teller machines would not have been able to dispense cash on Monday morning.

I have no reason to believe they were exaggerating.

CHG: Let’s start honing in on trust. The concept of a client, client relationships, client service, is hardly new to Wall Street, whether we’re talking about commercial banks, investment banks, or even traders. But has it changed? Does ‘client relationship’ mean something at McKinsey that it doesn’t mean at Goldman Sachs?

TED: Wall Street really has two different definitions of the word ‘client’. The one that operates in my business of advising on mergers and acquisitions and raising capital means someone to whom I have special obligations of care, duty, and best effort. My job is to help them accomplish something, usually a deal.

Whereas on the sales and trading side of the business, ‘client’ really means counter-party: someone to whom you have no obligation other than to satisfy the terms of a particular trade. The situation gets a little blurry, of course, because there are sales and trading counter-parties for whom investment banks act as true middlemen—known as market making—and these tend to be stable, recurring relationships which do involve trust.

But the more an investment bank acts for its own interests—like a hedge fund—the less it cares about any obligation to its counter-party other than the terms of the trade itself.

CHG: It seems to me, from afar, that major banks have become a mixture of two kinds of very different businesses, and for some reason they have become blurred in the minds of those banks. I see traditional client-centric businesses like what you signed on to do; and I see, for lack of a better term, casino-like businesses. I do not mean that term to be purely judgmental; casinos are legal, they play a social role of sorts, and we have ample examples of how they can be run fairly with solid regulation, e.g. the Nevada Gaming Commission. But they are, clearly, very different businesses.

Are they not so clearly different? Or have the bankers lost their discriminatory ability to discern the differences?

TED: No, we can tell the difference. But you must understand that the casino bosses, as you call them, have taken over Wall Street. They have been in control for many years–because they made tons more money than my colleagues and me in the advisory and underwriting departments. And the Golden Rule on Wall Street is that he who makes the gold, makes the rules.

CHG: Let’s go over full-strength to trust now. First, broadly speaking: what is the role of trust in a financial system?

TED: Well, at base it is absolutely essential. The word “credit” derives from the Latin verb credere, “to believe.” Again, to use a simple but powerful example, think of a savings account at your local bank. If you and everyone else who had savings at that bank tried to withdraw all your funds at the same time, the bank would not be able to disburse them. There simply isn’t enough money in the vault: it has been lent out many times over to businesses and individuals. And yet (normally) no one worries about this, because that is just how banks operate.

The details and relationships of savings to credit and investment in the global financial system are far more complex than your local bank’s accounts, but the idea is the same. Trust is absolutely essential to the proper functioning of any modern financial system.

CHG: Let me guess that, given how much more interdependent the world has become, there must be some areas of the financial sector where trust has actually increased. Is that true?

But I suppose the opposite is even more true, that there are many areas where trust has decreased. What areas stand out?

TED: I’m not sure trust has increased anywhere, to be honest. But then again, I’m not sure trust is actually a measure that makes sense in the financial system on a systemic basis. I am suspicious of global financial measures that cannot be quantified. How can you quantify trust?

In some sense, you could say trust is measured by credit ratings, credit spreads, and even the prices of financial assets like stocks and bonds themselves. But then again, prices are also the outcome of a balance of supply and demand. And there remains an enormous amount of money that needs to be put to work in financial assets.

I think it is safer to simply say that investors have always had to hold their noses when they invest. It’s just a matter of degree. Certainly, there is no doubt that trust of the financial system and its participants has plummeted among governments, regulators, and ordinary citizens.

CHG: What can we not trust now that we used to be able to trust? Is it particular markets? Or techniques? Or institutions? Where do you find trust is in particular short supply?

TED: Again, I’m not sure the basic challenge of trust in investment banking has changed at all. If you interact with an investment bank, your obligation as a potential customer is to understand what role the investment bank intends to play in your interaction. Is it acting as an agent, with all the attendant obligations of duty and trust, or as a principal, whose only obligations are to its own best interest?

Then, if it is the former, you must decide whether you trust the bank as agent, based upon all the criteria that you describe so eloquently in your own writing here. There is nothing particularly special or different about this kind of trust in investment banking. It is as it has always been. Perhaps only the scale has changed.

If it is the latter, then you as a customer are simply buying something from the investment bank, just like any other purchase. You want to make sure that the product is not defective, that it functions as advertised, and that it is not fraudulent in any way. These are measures of quality, or compliance, with norms and regulations, but they do not rise to the level of trust you normally speak of here, which is a deeper and more comprehensive set of criteria.

CHG: How does trust erode—what are the drivers of erosion? And what can we do to reverse the erosion? In particular, what are the proper roles of a few key institutions—regulators, legislators and educational institutions, to pick three.

TED: I will skip over this one, Charlie, if that’s okay. It doesn’t fit well with my primary conception of trust. I think of trust as a personal, one-on-one relationship, rather than a structural or institutional one. As an investment banker, I view it as my job to build trust with my clients, not anyone else’s.

CHG: Interesting. I’m very prone to that view too, that trust is primarily personal at root. But there are plenty out there who focus on ‘institutional trust,’ and will speak about audits, regulation and reliability statistics. Does that stuff leave you cold?

TED: Yes, it really does. For one thing, you can’t legislate morality. For another, the finance industry is so dynamic and volatile by its very nature that I sincerely doubt any externally imposed and monitored measures or regulation will be able to stay on top of the situation. Lastly, the proper role of regulation—which I believe in wholeheartedly, by the way—is not to impose or enforce someone’s ideas of trust or trustworthy behavior, but rather to prevent fraud, crime, and abuse. This is a much lower bar than establishing and maintaining trust.

CHG: Let’s deal with one sideways issue, the question of anonymity. Some commenters on this blog have been critical of anonymous bloggers. I think anonymity can play some interesting roles, and in some ways can be critical. You’re an anonymous blogger; your view on the subject?

TED: Anonymity can indeed foster all sorts of bad, irresponsible behavior, and I am not in favor of it in general. But blogging (or even commenting on another blog) under a pseudonym, as I do, is very different. Anonymity means no identity; pseudonymity means a false or assumed identity.

For one thing, operating under a pseudonym allows one to build up a corpus of opinion that can be judged in toto. Third parties can develop an opinion of your credibility and the value of your opinions for the very reason that you present a consistent identity, that you do in fact have a name. That this name is false, and a mask, is more a matter of convenience and perhaps professional necessity than it is of deception.

If people judge my words and opinions interesting, provocative, and worthy, it does not really matter whether they know me as TED or Joe Smith. One can always worry that a pseudonymous commenter or blogger has an ulterior agenda, but I suspect that is both hard to conceal over a long period of time (I have been blogging for over four years) and, frankly, beside the point. I challenge you to find anyone commenting in public who does not have at least one unstated agenda. And yet we should be able to judge and evaluate each other’s contributions nonetheless.

I claim to be an investment banker with over 20 years experience in the business. I claim many other things besides. Neither you nor anyone else really knows this to be true or not, and yet I hope my words and opinions themselves have earned me a measure of trust in this respect that a resume or a photograph would not add to. Perhaps I am naïve, but I believe that, given enough time, trust can be built upon words alone. My entire career testifies to that belief.

CHG: I think you’re a testament to the truth of that proposition. Thank you very much for spending time with us today!


The Epicurean Dealmaker on Trust and Investment Banking is number 19 in the Trust Quotes: Interviews with Experts in Trust series.

Recent interviews include:

Robert Eccles on Integrated Reporting (Trust Quotes #18)

Jordan and Barbara Kimmel on Trust Across America (Trust Quotes #17)

Sy Sternberg on Trust in the Life Insurance Business (Trust Quotes #16)

Read the complete Trust Quotes series.

Jim Peterson on Trust, Ethics and Regulation (Trust Quotes #11)

Jim Peterson is almost uniquely qualified to offer perspective on a host of trust issues. 

  • An American, he has lived in Europe for many years: 
  • A lawyer by training, he was for 19 years in-house counsel for a Big 4 Accountancy:
  • A practicing lawyer, he is also a writer: he had his own column, “Balance Sheet,” in the International Herald Tribune for many years, and now actively blogs at Re:Balance :
  • He has been actively involved in issues of industry structure and regulation in both accounting and law, in several countries:

These days he does all three, plus teaching, and lives in Paris and Chicago. We caught up with him the other day from Paris:

CHG: Jim, thanks for doing this interview. You’ve got gray hair, multi-cultural experience, and multi-professional experience—plus being a student of people. What is it that professional services people, especially accountants and lawyers, are really good at? And how does that vary between Europe and the US?

JP: Professional advisers are used differently in different countries. In Europe, both accountants and lawyers are more likely to function as close and trusted advisers, to facilitate their clients’ strategies. In America, the lawyers have taken control of commerce – through detailed, bright-line rules so complex as to require their constant interpretation (but which also invite being bent or broken).

Where Europeans will do with a five-page agreement, American lawyers will churn out 100 pages (and charge accordingly).

Unfortunately, recent years show a convergence of global markets (and liability) toward the American model.

CHG: What about the accountants? What should we trust accounting firms to do, and are we reasonable in our expectations of them? Are they agents of trust-certification? Or is that just silly? And—can we trust the accounting firms themselves?

JP: The accountants have shown themselves trust-worthy within their own limits – to provide reasonable assurance, within limits of materiality, most of the time. The trouble is, and it is partly their own responsibility for over-selling, the public has come to expect and demand “zero defects” regarding their clients’ performance – which is beyond the accountants’ capability.

As a result, infrequent but highly consequential cases of sub-standard performance are serious enough to threaten their survival and the existence of their franchise as it has been structured since the 1930’s.  

CHG: Let’s get into the meaty stuff of trust at the business level. Assuming you agree there’s been a decline in trust in business and our institutions—why is that? What’s the root cause?

JP: History includes cycles of boom-and-bust, which I believe are inevitable, in part because incentives and inducements get out of line with responsibility and accountability. The disconnections of the last three years resemble the savings-and-loan debacle of the 1980’s. So for better or worse, we’re coming through one of those cycles. The cleansing process of the bust-and-recovery part of a cycle can include renewed attention to virtuous conduct – unfortunately, that tends to become diluted by less noble motives on the other side of the cycle.

CHG: Well, let’s cycle through some of the possible solutions to that pervasive loss of trust. I’ve suggested that the business schools share some responsibility, and are part of a necessary solution. What concerns do you have about the effectiveness of teaching about trust, ethics and governance in the business schools and universities?

JP: It’s my belief that much of the teaching is at best ineffective and at worst a misleading waste of time – although I am sensitive to the way this is received among my colleagues in academia. Jeff Skilling and Andy Fastow were celebrated as executives to be admired, and either one would have scored an A+ on any university-level course in ethics or governance.

My experience with 35 years of exposure to world-class corporate frauds and irregularities is that the mid-level personnel and the gate-keepers who are caught up in serious wrong-doing almost all got there through a steady and fully-rationalized bending of what were initially a perfectly fine set of ethical values.

The kinds of issues that students and newly-minted employees can comprehend, while real (plagiarism, personal over-reaching, etc.), are over-taken in the work-place by subtle but compelling pressures to perform that leave their school experiences far behind.  

CHG: Let me push back on you a bit on that one. I’ll bet you’re right that Skilling could have passed any b-school ethics test—and you’re right that Skilling was vetted not only by Harvard Business School, but by McKinsey. But Tom Peters, who knew Skilling at McKinsey, states flatly that the “smartest guy in the room” almost certainly knew his shades of gray, and consciously did what he did. That doesn’t square with the idea of a gradual erosion of “perfectly fine ethics.” If he’d encountered courses that dealt directly with ethical issues, might they not have surfaced earlier? More generally: shouldn’t MBA programs shoulder part of the blame?

JP: No academic program will affect a personality type that is bent from an early age, and Skilling and Fastow may be the exceptions that test my proposition. But – agreeing that the schools have a role and a responsibility – the issue I have with courses that “deal directly with ethical issues” is that they are labeled and telegraph their messages so transparently that they are easily gamed by those inclined to felonious intent. I would challenge the schools to do a more sophisticated job of embedding their ethical training into their mainstream curricula, where the learning opportunities are more nuanced and subtle – and thus better matched to the challenges that real life will bring.

CHG: I couldn’t agree more. Real ethics training ought to be part of the strategy classroom, not a separate curriculum down the hall, where it’s inevitably going to be demeaned and diminished. Any other advice?

JP: Having been around a lot of world-class white-collar criminals,many of whom showed signs of bad behavior at early ages, I consistently advise my clients to avoid the risk of dealing with a repeat offender. The rate of recidivism in corporate malfeasance is too high to make it worth the exposure of falling for a pitch of post-offense repentance.

CHG: So much for redemption! What is your view of the causal relationship between corporate governance codes and the demonstration of ethical or trustworthy behavior?

JP: The focus of my experience has been with the kinds of large-scale malefactions that can threaten the existence of a company – Enron or Arthur Andersen or Fannie Mae or Satyam. These are gestated and erupt at a level that transcends the effectiveness of risk management structures and codes of governance and behavior. Rather, they either occur – or do not – because of the underlying issues with and commitment of senior management to create and enforce cultures of success and of good practice.

“Doing well by doing good” is a reality, in other words. But the latter does not drive the former – instead it is an observable consequence, flowing from the same source.

CHG: So, both “good” and “well” are byproducts of a cultural devotion to doing business from a certain set of principles? Care to say something about what those principles look like?

JP: One of the finest defense lawyers I ever knew, the late Peter Fleming, had nothing but scorn for elaborate codes of behavior – governance, accounting principles, whatever. His guidance required one page: “Can you credibly defend this decision in front of a jury?”

CHG: That’s not unlike the “are you OK with it on the front page of the NY Times” rule. A willingness to submit to commonsense and common wisdom, rather than to pin one’s hopes on precisely delineated behavioral codes. Let’s switch to government’s role. What can we reasonably expect from government by way of contribution to good corporate behavior?

JP: I’m a deep skeptic on the ability of regulators to either detect or to deter bad behavior. Not that oversight and enforcement are not necessary. But it seems to me pretty clear that the post-Enron imposition of Sarbanes/Oxley did not lead to an outbreak of virtue.

Look at the many examples over the last three years, including the investor frauds (Madoff, Stanford and many others) and the civil and criminal claims arising out of the credit crisis – many of them still working their way through the courts — including New Century, Lehman Brothers, Goldman Sachs’s Abacus product, the recent Wells notice sent by the SEC to Moody’s, etc.

Law enforcement is by nature always going to be reactive, behind the curve of the inevitable misbehavior of those who would burst the limits. So although I have gotten in trouble for saying so around groups of investors, it is neither cynical nor unduly libertarian to say that investors and others in the public need to take their own responsibility to heart, and calibrate the extent of reliance they can reasonably place on their watchdogs.

It goes back in part to why societies evolve their laws and codes of behavior. People don’t become law-abiding because more laws are passed – indeed, more lawmaking often reflects a social perception that behavioral norms have broken down and require the imposition of sanctions on violators.

Rather, a society decides what limits and conventions it will accept, and its tolerance for the thresholds of deviance from those norms.

Examples: There is nothing either substantive or self-enforcing about an eight-sided red sign, but there is common agreement that it obliges drivers and pedestrians to stop. And there is shared confidence that counter-parties will do so. Other examples of socially evolved norms, as to which formal legal codes are essentially irrelevant, include:

  • The “rules” for under-age drinking on college campuses
  • The neighborhood self-enforcement on dog clean-up
  • And (as I remember in the 1970’s), the de facto legalization by the population of New York City of amateur marijuana use in Central Park. 

All of which goes in part to say that the level of achievable behavioral virtue involves a complex set of factors including trade-offs of costs and benefits and an understanding of the culture’s real system of incentives and deterrents.

CHG: You said a mouthful there. And that’s great, in terms of understanding. Then again, where does that leave us vis a vis action? Where would you suggest an informed manager should focus his or her efforts? A journalist?   A lawyer? An investor? A tax-paying, voting, citizen?

JP: Since you ask:

  • Investors – Do your own due diligence, take responsibility for your decisions, and don’t whine about being a victim;
  • Citizens – Don’t ask government to do too much, because it can’t; but insist that what it does be done very well;
  • Managers – Remember your community is far broader than shareholders alone, or your own annual bonus;
  • Journalists – Well, it’s hard to watch the degradation in quality from deepening partisanship and races for ratings. There is still a market for quality reporting and quality commentary, though, and it is exciting to think how these will be delivered through rapidly evolving channels.   

CHG: Jim, this has been a pleasure. Thanks so much for contributing to the dialogue here on the Trust Quotes series. 


This is number 11 in the Trust Quotes series.

The entire series can be found in our Trust Quotes section on

Recent posts in this series include:

Trust Quotes #10: David Gebler
Trust Quotes #9: Chris Brogan

Trust Quotes #8: LJ Rittenhouse

David Gebler on Ethics in Business (Trust Quotes #10)

David Gebler is a thought leader, speaker and seminar leader on the subject of ethics in business. Trained as a lawyer, David is a Senior Lecturer at Suffolk University where he teaches Business Ethics and sits on the International Advisory Board of the Graduate Program in Ethics and Public Policy; he is also a principal at Skout Group, a firm focused on culture change.

With globally significant public and private sector clients on his resume, David brings a broad perspective to questions of ethics in organizations.

CHG: David, thanks for joining us here. Tell me, why is it so hard for companies to get their heads around thinking about ethics?

DG: While ethics issues are of critical importance to organizations today, “ethics” as a business function is perceived as quite amorphous and hard to define. In many organizations ethics is synonymous with “compliance,” narrowing the focus to ensuring adherence to stated standards of conduct. In other organizations “ethics” is treated as a vague platitude without clarity as to how it drives behavior.

CHG: You told me once there were three approaches to business ethics: behavioral, philosophical, and legal. Can you briefly explain what those categories mean?

DG: Philosophical business ethics focuses heavily on the intention of one’s actions. Aristotle wrestles with character and virtue, while Kant is unequivocal in the need to always do the right thing, regardless of the consequences. A theoretical look at intent is often irrelevant to business which is more focused on employees’ actual behavior.

American businesses often look at ethics through the lens of compliance. “Doing the right thing” only means observing the law and the company’s code of conduct. However, there may be conflicting “right things” about which employees need guidance.

Behavioral ethics draws from social psychology and looks at what motivates behavior and what an organization can do to remove roadblocks to employees being honest.

CHG: You have come to view ethics in business as largely a function of corporate culture; you looked at the top 20% and the bottom 20% of companies in an ethical cultural study—what did you find?

DG: Most employees have a good sense of their moral values and actively seek to live those values at work. Ethics risk emerges most often when employees face pressures and external influences that drive them to do things they regret.

If an organization surveys employees only to find out if they know what they should do (i.e. the top 20% knows there is a code of conduct and a helpline), they may be missing key data on whether employees would even raise an issue if it arose.

I worked with a large global company that asked me to conduct focus groups with divisions in the top 20% and bottom 20% based on results of an ethics survey. In meeting with employees at one of the top 20% divisions, it was true that when I asked if they would report misconduct everyone said yes (i.e. top 20%).

However, my very next question was “If you found out early in the quarter that you were not going to meet your plan, would you report that to your boss?” And no one said yes. Doing such a thing would be a “CLM” (Career Limiting Move). Open communications and a willingness to raise difficult issues are more critical ethics determinants than knowing whether there is a helpline.

CHG: What kinds of culture, then, are associated with high ethical behaviors? And what can a serious manager do about it?

DG: There are several common traits of ethical cultures:

1) Open communication and respect – employees at all levels feel that they are spoken to truthfully and are respected as people.

2) Personal responsibility and a sense of control – employees are held accountable for their actions and their commitments to others and are engaged in tasks that matter.

CHG: I was surprised to hear you cite the Federal Sentencing Guidelines as a key source for investigating ethics in business. Can you say more?

DG: While business ethics and ethical companies have been around for many, many years, the focus in the US began in earnest in the 1990’s. As a result of the defense industry scandals in the 1980’s, the US Sentencing Commission developed guidelines for corporations to avoid criminal liability if they put into place an effective compliance program. These guidelines have become best practices for US companies. In 2004, as a result of the Enron legacy of scandals, the Guidelines were revised to add language focusing on ethics and organizational culture.

CHG: You mentioned that you were struck by the lack of remorse in post-financial melt down financial industry executives. Say more?

DG: The bottom line is that today’s financial market is only a numbers game. Concepts such as the fiduciary responsibility of one party to another have been lost. While leaders talk about the need for trust to grease the wheels of capitalism, there is very little of it in the system today.

CHG: What’s the difference between ethics and morals?

DG:  Social psychologists have long told us that behavior is a function of the person and their environment. Morals address one’s character, the person. Ethics addresses the ethos, the environment in which we make decisions.

CHG: I was shocked when you first told me, “In my 15 years of work, only one client once asked, "How do we define the right thing?"  So business ethics is largely about how do you get people to concur with what the agreed upon guidelines are.”

DG:  Many companies use the “newspaper test” as a decision-making model. How would you feel if your actions were reported on the home page of While we have a societal set of standards, there are often tough issues that pit right vs. right. Superficial guidelines of being honest may not be enough. For example, every company takes certain risks, even with quality and safety. What guidance do leaders have to know what is “reasonably” safe enough to go to market with a product?

CHG: What’s the difference between ethics and compliance? And does anyone care about the former?

DG: Compliance is the adherence to prescribed standards of behavior. Compliance training educates people on what behavior is expected of them.

Ethics is the determination of whether people will engage in the desired behavior and what should be done to encourage people to do things they know they should do, but often don’t.

CHG: Here’s a biggie for mid-level people in a number of my clients; what should an individual mid-level manager do in the face of what they perceive as “tough” behavior by their superiors, i.e. the “career-limiting move” of speaking out about things?

DG: When faced with a tough situation, managers often look at the issue as being black or white: “Do I do what’s expected of me or do I do what’s right?” Effective use of ethics would be to see whether the issue can be reframed so that it’s not so drastic a choice. Managers in tough spots need not be heroes, but they do need to be savvy:

  • Who else can I bring into this situation to guide me?
  • Who else in the organization would support me in doing the right thing?
  • How can I have a conversation with the person who is forcing me into this situation? Perhaps there is a “third-way” I haven’t thought of.

CHG: What seems to be the American take on ethics in business?

DG:  Americans are unique. We combine a rules-based culture (ever seen the NFL Rule Book?) with a cowboy heritage of heroes and independence. Americans are very results-oriented and in general, are less focused on how we got the results than are other more social cultures.

Therefore, I find that American business leaders are more interested in ethics when they can see that being ethical helps the bottom line: less time and money spent on investigations and fines, and more time spent by engaged employees doing productive work.

CHG: Doesn’t that create a tension—justification of ethics by subordinating it to the bottom line? Or are you saying it’s not so much about particular actions as it is about a culture—creating an ethical environment, which in turn tends to be more profitable?

DG: Let me give you an example from today’s headlines. Toyota shouldn’t be forced to make a trade off between safety and profit. Both are necessary because each one supports the other. Toyota’s brand is based on safety. It won’t sustain its profitability if its products aren’t safe. Similarly, safety has to be addressed in the context of products consumers can afford. We are willing to accept some degree of risk.

Ethics comes in to guide how Toyota balances these two objectives. In leading up to the recent scandal key questions must be answered: Who had information but didn’t report it up to senior leadership? Why not? Which stakeholders, internal and external, were not included in the decision-making process?

This is number 10 in the Trust Quotes series.

The entire series can be found at:

Recent posts in this series include:
Trust Quotes #9: Chris Brogan
Trust Quotes #8: LJ Rittenhouse
Trust Quotes #7: David Maister

L.J. Rittenhouse on Trust and Candor (Trust Quotes #8)

I’m pleased to have with us today on the Trust Quotes series L.J. Rittenhouse, founder of Rittenhouse Rankings in New York. The mission  of her company is to identify and encourage plain, direct and candid communications by companies.

To that end, she produces the annual Rittenhouse CandorTM Rankings Survey, correlating measures of CEO candor with stock price performance.  Her proprietary model allows her to sort, evaluate and quantify content as well as measure degrees of candor. The Rankings feel, to me, gut-level right.

L.J. Rittenhouse is a 14-year shareholder of Warren Buffett’s Berkshire Hathaway, and author of Buffett’s Bites published by McGraw-Hill, due in bookstores by the end of April and available online today at, and She not only has Buffett’s ear, but also his trust and confidence.

She has an MBA from Columbia, and was an investment banker at Lehman Brothers until she left to start her own CEO advisory and investor relations firm in the early 1990’s. She consults with blue chip companies such as GE, Procter & Gamble, and Duke Energy as well as small and midcap companies. In 2002, she authored Do Business with People You Can Tru$t: Balancing Profits and Principles


CHG: L.J. thank you so much for doing this interview. In 2002, your book Do Business with People you Can Tru$t was published and released at the Berkshire Hathaway meeting. How did you come to write about trust?

LJR: I learned about the importance of trust when I joined the corporate finance department at Lehman Brothers in 1981. At that time, the entire firm (including the bankers) was devoted to serving our clients and maintaining the company’s reputation for reliable, top-quality work. Long-term relationships between clients and bankers were prized and nurtured. The early years at Lehman were fantastic; I worked with brilliant, ethical people. The culture was a true meritocracy. But by the mid-80’s this culture began to erode, due to the loosening of Glass Steagall regulations and increasing competition from foreign and domestic banks.

I left Lehman in 1991 to start a CEO advisory and investor relations firm where I could work with many of my previous CEO clients. Together, we developed many programs and practices that were revolutionary, but are now the staple of IR programs: investor targeting, perceptual survey, and in-depth, informative, extended investor information sessions. 

Early on, I focused on the importance of creating trusting relationships with investors, and all of the company’s stakeholders. This notion that trust is the basis for success was not new, but was growing less important as investor holding periods shrank. Investors were growing increasingly impatient. They wanted to see steadily rising corporate earnings quarter after quarter. The temptation of companies to “manage” earnings became standard practice as investors rewarded companies who could expertly play this game. 

I worked with clients who chose to resist the pressure to play this short-term game. They instinctively hung on to the truth of an African proverb: If you know the beginning well, the end will not trouble you. I egged them on to begin thinking, writing and speaking with candor. My book, Do Business with People You Can Tru$t, is a guide to help clients, employees and investors to develop and to spot leaders who create candid, trustworthy communications.

CHG: Don’t you actually measure degrees of candor in communications?

LJR: That’s right. I developed a multivariate model that defines the seven key systems in a business and shows how these systems are balanced for sustained success. The center of this financial linguistic model is the system of capital stewardship. The model evolved from reading thousands of shareholder letters. Why shareholder letters? Because these communications are signed by the CEOs. The best letters, like Warren Buffett’s, are personal, engaging and educational. They demonstrate how a leader honors his words and word. 

Increasingly, the valuation of companies has turned on perceptions of the quality of CEO leadership. The CEO is the guardian (or destroyer) of the corporate culture and candor is essential to building effective cultures. A great deal about the integrity of the leadership and the corporate culture can be learned from financial linguistic analysis. 

Clear patterns emerged as I read these letters. Some letter topics were frequently repeated, while other topics were less frequently mentioned. These statements and patterns revealed the values, norms, practices and ultimately the degree of integrity in the corporate culture. I assigned values to each topic to create CEO communication scores. I gave positive points to straightforward information, and deductions to statements that were undeveloped, confusing and riddled with jargon and spin (corporate “FOG”) . It was surprising to find that many CEOs I worked for were most interested in seeing their FOG scores.

CEOs were amazed when I showed them how the communications in their shareholder letters compared to other CEO letters. “I had no idea that anyone was doing this!” they’d exclaim. They began to see themselves as others saw them. This was not always pleasant. Sometimes the differences were stark. 

But gaining self-knowledge is essential to maintaining effective leadership. As Buffett reminds us, the CEO who misleads others in public may eventually mislead himself in private. By observing what topics were left out of their communications or were not fully developed, I helped my CEO clients to stretch their perceptual boundaries so they could more effectively engage in their internal and external environments.

CHG: So what is the link between candor and trust as you see it?

LJR: Actually, I consider the differences between candor, transparency and trust. Think back to 2003 when Sarbanes-Oxley legislation was passed to promote disclosure by imposing financial and criminal penalties for communications that were not transparent. It led to the biggest year-over-year jump in FOG scores since we began our surveys. Why? Instead of promoting transparency and candor, the threat of penalties opened the floodgates for jargon, clichés and all kinds of meaningless platitudes to appear in shareholder letters. This is the inevitable result of trying to replace moral standards with legal standards. 

Now consider the derivation of the word candor which goes back to the French word candere, meaning to shine or illuminate. It’s defined in the dictionary as “the ability to make judgments free from discrimination or dishonesty.” It is “the quality of being honest and straightforward in attitude and speech.” In other words, candor is about personal honesty, authenticity and the effort to shine light in dark places.

Real candor starts when we are honest with ourselves. If we are, we are more likely to be honest with others: that’s a firm basis of trust. Trust and integrity result from walking our talk. If our talk is meaningless and confusing then our walk will be meandering and without purpose.

Buffett knows this. He chooses candor as an operating principle at Berkshire Hathaway. It has served him well as Berkshire has become one of the most trusted and highly-valued enterprises in the world.

CHG: You are a corporate finance expert and know how to analyze financials, but you choose to analyze the words in shareholders letters instead.  Why choose shareholder letters, especially since many investors don’t believe they are even worth their time?

LJR: You might say that The Rittenhouse Rankings CandorTM Survey supports that belief–that reading shareholder letters is a waste of time. Over the years, we have found that about one-third of the letters in our 100-company annual survey are reasonably well written and informative; some are even inspiring. 

Unfortunately, two-thirds of the letters are poorly written. In fact, the letters at the bottom quartile of our survey are dreadful. Many have more negative points (or FOG) than they score positive points. Why should investors care?

Think about it: why would investors, customers and employees trust a CEO and a board of directors that publish letters full of obfuscation, confusion and unclear thinking? Won’t that send a signal to anyone wanting to work for, invest in or buy from a company, that it lacks integrity? It is so obvious, but amazingly, no one takes the time to consider this.

CHG: Is there a correlation between candor and financial performance? If so, how strong is it?

LJR: For the past five years we have correlated the stock prices of the top 25 and bottom 25-ranked companies. We have consistently found – in both bear and bull markets – that on average, the top companies outperform the bottom companies. In bear markets the gap is consistently wider than in bull markets. This is good news: It does pay to tell the truth.  

CHG: You seem to know Warren Buffett like few others do. In your new book, “Buffett’s Bites: The Essential Investor’s Guide to Warren Buffett’s Shareholder Letters” I’m curious about something that seems implicit: What’s Buffett’s view on the role of trust?

LJR: When I first wrote to Buffett in 1997 about my work in analyzing CEO candor, he wrote back noting I was doing “the work of the angels.” He has consistently offered encouragement to continue this work.

The memo that Buffett published for the managers and employees of Berkshire Hathaway after 9/11 is a great summary of his view on the importance of trust. Commenting on the company’s insurance-related losses, it ended with this: 

Avoid business involving moral risk: No matter what the rate, you can’t write good contracts with bad people. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive.

In other words, for Buffett, trust is all about morality; about personal character. And acting morally can lead to dollars and cents business success, it’s not just about doing what is right. It’s expensive when you rely on people who are immoral. Buffett sizes people up quickly. He wants to see if you trustworthy and deserving of his time. If you gain his time and attention, you have passed his trust test.

In Buffett’s Bites, I extract the morals from Buffett’s 2008 shareholder letter and offer commentary so readers can learn how to spot trustworthy CEOs. Here a few of these morality-based principles:

Find CEOs who treasure cash: trust cash always;

Trust CEOs whose rhetoric matches their record;

Rely on CEOs who nurture healthy corporate cultures;

Trust CEOs who count potential losses and gains when analyzing risks; and 

Seek CEOs who aid investor analysis and explain difficult concepts.

CHG: Buffett is almost unique in the devotion of his shareholders. Can other companies replicate that? 

LJR: Name one other company CEO who believes as Buffett does that “while our form is corporate, our attitude is partnership.” Buffett’s communications are noteworthy for their candor because he practices the Golden Rule of investor partnership: communicate with investors the way you would want them to communicate with you – if they were managers. Because of this unique strategy, Buffett has been able to tap dance to work every day – as he likes to say. Why not? Berkshire shareholders are probably the most loyal investors on the planet.

CHG: There is so much about Buffett that is interesting, but let me ask you to comment on two things. What is his view on private equity? What are his confessions?

LJR: In his 2008 letter, Buffett noted that many of today’s private equity firms are really “leveraged buyout firms” who changed their moniker when it became a bad name. He quickly points out that this is a term that turns facts upside down: 

…A purchase of a business by these [private equity] firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private. (Emphasis added.)

As for his confessions, he is the only CEO I know who publicly reveals big bloopers. Not only does he confess and take the blame for what went wrong, he typically reveals how much it cost investors. He reports on his biggest blunder in his 2008 shareholder letter:

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars. (Emphasis added.)

Why is Buffett so candid? First, he enjoys unmatched investor loyalty based on Berkshire’s track record: outperforming the S&P in all but six of the last 45 years and second, because the majority of his net worth is tied to Berkshire stock. He not only feels investor pain, he shares it.

CHG: As someone who works at the highest levels of corporate management, you have the ear of some very prominent CEOs. What do you tell them?

LJR: I tell CEOs what they often don’t want to hear, but need to hear. This is a high stakes strategy, but it can be very successful. Why? Because corporate success depends on tackling, rather than ignoring the elephants in the room. These “elephants” are typically the reasons why companies suffer and cannot achieve greater success. Worse, they will create conditions leading to serious problems.

CEOs who can be open to hearing painful truths are truly great leaders. Typically, they have nurtured cultures, and promoted senior staff, who prize difficult and constructive debate and questioning. 

Generating sustainable, reliable financial results depends on taking actions that expose strategic blindspots. Not only does this lead to more motivated employees, more effective execution, stronger corporate value propositions and better stock price valuations – it mitigates future risks.

I can tell from reading shareholder letters which leaders nurture healthy cultures and which do not. When I work with a CEO, I show them how they score on our candor benchmarks. Regrettably, it has been my experience that companies that could benefit most from confronting their candor deficiencies are those who choose not to listen.

CHG: What do you think is the role of candor and trust in mending our broken world of economics and finance?

LJR: Let me talk about what the media missed in its reporting on the 2009 Berkshire Hathaway shareholder letter. Here is what Buffett wrote:

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

Out of the news stories we tracked right after his letter was released, only six reporters commented on Buffett’s advocacy for imposing personal financial penalties related to reckless, destructive behavior by both boards of directors and CEOs. The other three reporters omitted boards of directors, stating only that CEOs should be personally liable.

Our economic system is broken because boards of directors are not exercising their fiduciary responsibilities to read shareholder letters and insure that the CEOs they oversee are communicating candidly with investors. I have been to many annual meetings over the years and talked with board members. Never once have a met a director who can comment meaningfully about the shareholder letter.

Similarly, boards of directors hire new CEOs. Why not ask all prospective CEO candidates to write a letter to shareholders as if they were now the CEO? These letters could become part a critical part of the selection process. For example, such a letter would reveal a great deal about the candidate – his or her ability to think clearly, and to effectively communicate the breadth and depth of their strategic vision.

These are simple proposals to enact. Investors – the owners – need to demand they be implemented. Our work can show directors how effectively the CEO will fit into the corporate culture and fulfill his or her role as the company’s chief communicator and risk officer.

Last year, I sent my FOG analysis to all the CitiGroup directors. I believed it was important for them to know that Citi had scored at the bottom of my candor survey scoring 666 negative points of FOG compared to 465 points of positive content. Several months later I received a letter from Richard Parsons, the chairman of the board. His reply was succinct: “Thank you for your letter and sharing your views.”

CHG: L.J., thank you so much for sharing your insights with us today. I know I speak for Trust Matters readers in saying it’s been fascinating.

LJR: Thank you, Charles.

This is number 8 in the Trust Quotes series.

The entire series can be found at:

Recent posts in this series include:
Trust Quotes #7: David Maister
Trust Quotes #6: Anna Bernasek
Trust Quotes #5: Neil Rackham

David Maister on Trust and Professional Services (Trust Quotes #7)

David Maister  is well-known to readers of this blog. David was lead author on The Trusted Advisor along with myself and Rob Galford. A former Harvard Business School professor, he originally specialized in logistics and transportation (writing 8 books on those topics.) He became the guru of Professional Services with his 1993 book Managing the Professional Services Firm after which he wrote 6 additional books on professional service firm topics.

CHG: Welcome to the Trust Quotes series, David, I’m glad to get you on the record on the subject of trust some ten years after we co-authored The Trusted Advisor. How has your view of trust changed, if at all, since then?

DM: I’m probably a little more skeptical and less hopeful now than I was ten years ago as to the degree to which earning trust is learnable (or teachable.)

When you and I (and Rob) wrote about trust in 2000, we stressed that earning trust was not just about the knowledge of tactics or the possession of skills, but required some underlying attitudes or character attributes – for example, a real interest in those you were dealing with, and a sincere desire to help (what we called “low self-orientation.”)

As authors, consultants and teachers, we (and others) can help a lot with the knowledge and skill parts of understanding trust, and perhaps even (through role playing and practice) help people improve on the behavioral aspects – getting more skilled in conversations for example.

But what remains as a dilemma is what happens if people are actually not that interested (on a personal level) with those whose trust they are trying to earn, or are not really trying to “focus on helping first, and keep the faith that, by earning the relationship, you’ll get what you want down the road.” 

I am suspicious about whether the underlying attitudes or character traits necessary for trust are as common now as they have been in the past.

This is not a comment on the inherent flaws of individuals. Rather, I think we have seen a generational change (or two) in the institutional context within which people have been raised. Customers and clients, through their increased reliance on purchasing departments, are signaling a lesser interest in buying through relationships. At all levels (so-called “partner” or “non-partner”) professional firms are routinely achieving improved economic results by treating their people as “employees at will” rather than assets or members of an organization which gives and expects loyalty. The data is very clear – in the law for example, the single biggest means by which firms improved their profitability (across the profession) was de-equitizing existing partners and drastically reducing the numbers of people promoted to partner. That’s not just a response to the recession – it’s been going on for decades.

Accordingly, I think we are living in organizations which have low (and declining) trust and individuals are responding in kind. I think our economy and society has been training people to not trust.


CHG: For the record, what do you think is the role that trust plays in professional services–or for that matter in business as a whole?

DM: I remain as convinced as ever that a high-trust method of operation is the best high-profit, high growth strategy. In my 2001 book Practice What You Preach, I studied 139 professional operations and was able to show statistically that the key determinants of financial success were when the people throughout the organization (not just those at the top) agreed with the statements “we always put the interests of clients first,” “we have no room for individualists who put their own interests ahead of the clients or the firm,” and “Our managers are men and women of integrity who always act in accordance with what they preach.”

However, it is sad to report that while these attributes (where they existed) could be shown to produce high profits and high growth, they were not common. Alas, in most businesses, neither the employees nor the clients can trust that managers will act in accordance with the principles they advocate. So, cynicism and self-protection results.

CHG: In your career, David, you consulted to or worked with a panorama of industries—law firms, accounting firms, advertising, actuaries, public relations, architects, consulting firms. What did you find to be the most common trust issue across all of them?

DM: Over the past decade or two, there has been a collapse of the “professional service firm model” as a special form of organization. In the past, what made a professional service firm different from a general corporation was that it was built on some generally agreed (if sometimes implicit) assumptions. Assumptions that you could depend upon and trust that they would be observed.

Under the old model, professional firms offered careers, not just jobs. If you were hired at the entry level, it was “assumed” that, in exchange for your hard work, you would be given an apprenticeship, be well-trained and, if you didn’t make it to the higher levels of the firm, you would be helped to find an alternative career. If you did “make partner” there were assumptions that (even if there was no such thing as life tenure) you were treated (and expected to behave as) a long-term member of a cohesive team, and that the firm would be loyal to you if you were loyal to the firm.

None of these “rules’ or assumptions apply today. No-one today knows what it means to “be a partner.” It’s hard to be trusting or trustworthy (between and among partners) if no-one knows whether or not there are sustained “rules of engagement.” Accordingly, even in some incredibly admirable firms, I hear sentences like “I feel like I’m only one bad year away from being terminated.”

Few entry-level hires (according to the survey data I have seen) expect to be with their firms 5 years hence. They don’t believe that their firm has any form of commitment to them. The recent actions during the 2008-2010 recession, wherein junior and admin staff were the first to be tossed overboard in the (successful) attempt to preserve partner incomes proved to everyone where the true priorities of most organizations lie. Together with the fact that, in many professions, professional firms are increasingly publicly held, professional firms are (in my view) much more short-term focused than a decade or two ago. This breeds distrust inside the organization. No-one knows what rules or organizing principles (if any) can be depended upon.

I’m sorry to sound so cynical, but my experience is that juniors don’t trust partners, partners don’t trust each other (especially if the other partner is in a different office, practice specialty, or industry group), no-one trust that management will do what they say they will, and everyone views clients as people to be feared (or seduced) rather than people to trust. Shining counter-examples do exist (the usual names) but they are not the norm.

Yes, researchers, authors and consultants can prove that these are counterproductive and self-defeating attitudes, but that doesn’t make them any the less prevalent.

CHG: As long as we have that list in mind—is there one industry in particular that you found particularly better at—or more challenged, for that matter—at issues of trust?

DM: In general, I find excellence at trust to exist at an individual level (there are many incredibly admirable practitioners in every profession) a very few firms that have firm-wide reputations for it, and no one profession or industry that has a consistently high reputation for being more trusted than other industries. There’s a reason there are consultant jokes, doctor jokes, lawyer jokes, plumber jokes, dentist jokes, accountant jokes, etc. As generalizations across entire professions, we’re all bad at working well with clients.

One profession – the law – does have a particular challenge with trust inside their own organizations. As I pointed out in a recent article, lawyers are professional skeptics: They are selected, trained, and hired to be pessimistic and to spot flaws. To protect their clients, they place the worst possible construction on the outcome of any idea or proposal, and on the motives, intentions, and likely behaviors of those they are dealing with. As Tony Sacker, my kind and gentle brother-in-law and a solicitor in the United Kingdom, says: “I am paid to have a nasty, suspicious mind.”

Recently, I was advising a firm on its compensation system. They didn’t like my recommendations. Finally, one of the partners said, “David, all your recommendations are based on the assumption that we trust each other and trust our executive or compensation committees. We don’t. Give us a system that doesn’t require us to trust each other!”

Much current practice in firm governance, organization, and (not least) compensation comes from the fact that partners vigorously defend their rights to autonomy and individualism, well beyond what is common in other professions. There is nothing inherently wrong with that. However, as major corporations consolidate their work among a smaller number of firms, domestically and internationally, they expect that firms will serve them with effective cross-office and cross-disciplinary teams. Firms are vigorously responding to this with a stampede of lateral hires, mergers, and acquisitions. Their goal is to create big organizations offering many disciplines, locations, and cultures. The unanswered—actually, barely asked—question is whether these firms can shift from a managerial approach, based on partner autonomy, to new approaches that can create a well-coordinated set of team players.

It is hard to unbundle which is the cause and which is the effect, but the combination of a desire for autonomy and high levels of skepticism make most law firms low-trust environments.

CHG: What’s happening with trust in business these days? Your take on it?

DM: I’m not sure I have the “view from the mountaintop” perspective about business as a whole, so perhaps the best way for me to try and answer is as a consumer. Continuing my less-than-hopeful theme, I have to report that as a recipient I do not experience much change or improvement, at least systematically, from those who try to serve me. I’m not saying that I don’t like my doctor, lawyer, plumber, dentist, broker, (and so on.) It’s just that I do not perceive that they are doing anything new that they did not do ten years ago. (Do your readers?)

Nor do I see many game-changing approaches from new entrants in many professions that systematically increase trust between provider and client. Many professions are moving to fixed-fee pricing in part due to the historical lack of trust in the motives of providers who billed by the hour.

One approach that recently caught my attention was the offering of a premium-fee “concierge” primary care physician services where the doctor limits the number of patients to 400 instead of the normal primary care doctor who has a “list” of 2,500 patients or more. This COULD be a systematic way to increase intimacy and accessibility, but (at least in Massachusetts) it has not taken off in a big way.

CHG: Your old industry of professional services; what did you find to be the most common failing—and did it by any chance have any connection with trust?

DM: Most of the weaknesses or failings of professional firms, in my view, derive from the fact that professionals (and their institutions) are made up of highly intelligent people who value and celebrate that which is rational, logical, analytical and based on high intelligence. After all, it is superiority in those things that are screened for in doing well in college and, especially, in obtaining advanced degrees. However, few of us who went that route (unless we had it from childhood) were ever helped in developing our interactive, emotional people skills.

No one ever got their MBA because of superior empathetic skills. Few people, if any, had a successful law school career because of their predilection for being a team-player rather than focusing on their own accomplishments. No-one teaches you (formally) the abilities of being a good conversationalist – having a fresh point of view, but not trying to thrust it upon everyone else, speaking politely and respectfully; telling good stories to illustrate key points; being good at drawing other people’s views out and drawing them into the conversation; not being afraid to admit areas of ignorance; listening with genuine interest. In our educational system (and in our firms’ training and development approaches) these basic human skills are either absent, or treated as secondary.

It sounds trivial and trite to say “It’s all about learning to deal with people,” but what’s often overlooked is that it’s very HARD to develop such people skills if you don’t start until later in life. People and firms underestimate how much effort and time it takes to develop such skills.

CHG: Tactically speaking you’ve heard me talk about trustworthiness vs. trusting, with the combination adding up to trust. On which side do you think business needs more work?

DM: I think you have made an incredibly important distinction, Charlie, and it’s a major contribution to get people thinking about it. I think you and I have always believed that you can’t be seen as being trustworthy unless you are prepared to trust, and being prepared to trust is an incredible leap of faith for many people. So, that’s the hardest part for many people.

When people ask, “How can I be seen as more trustworthy?” there’s more than a little hint of “Let’s get to the stage where I begin to benefit as quickly as possible.” Asking “How can I learn to trust more those with whom I want to have a relationship?” demands that people really are taking a relationship (rather than transaction) approach. Unfortunately, there are people looking at “trust’ as an approach or tactic to “do the deal more quickly.’ They underestimate the mindset change that’s really required to make it work.

CHG: How do people come to learn about trust? How did you learn about it?

DM: Today, “trust” is a hot topic. As you have pointed out, Charlie, claims to being “your trusted advisor” are everywhere. Everyone wants to train their people to earn clients’ trust in order to lower selling costs and avoid fee pressure. What is often misunderstood is that enhanced trust CAN do these things, but it’s not a gradually rising response curve. A little more trust does not get you a little less fee sensitivity or a little more repeat business.

In my experience, it’s a big “step function” – only when you have clearly put a big difference in trustworthiness (and trusting behavior) between you and others in the market can you then reap the rewards of being truly different. I’m not saying it’s “all or nothing” but it’s close to that. “I trust them a little bit more than others” is not much of a commendation, and is not likely to lead to a big change in buying behavior.

My own introduction to trust was by experiencing it – examples that we included in The Trusted Advisor book, and some that have happened since. Every so often, you come across someone – a dentist, an interior decorator, a financial advisor – who earns all your business and long-term loyalty by putting your interests first. And when it happens, as it happened to me, you become an instant convert.

I truly believe there are no secrets here – it’s just the Golden Rule, “Deal with others as you would wish to be dealt with.” The trouble is, too many of us think that our business is different or that our clients are different. We don’t trust them to reciprocate if we do the right thing, so we drop the golden rule and relapse into transactional behavior.

CHG: You didn’t just write about trust only in The Trusted Advisor; in what ways did trust show up in your other books?

DM: All of the lessons of trust in dealing with clients also apply, virtually un-translated, into building trust inside the organization. I wish I had done what our co-author Rob Galford did and written The Trusted Leader, which was a logical follow-up.

Actually, I did try write about effective management and how trust applies. It’s a constant theme thorough all my books. However, it’s still hard to be completely convincing. It’s very sad, but there’s a school of though out there among many managers that accepts Machiavelli’s line about it being better to be feared than to be admired. In the balance between “pragmatists” and “ideologues/idealists”, I still find more people who are self-described pragmatists, rather than managing their businesses according to strictly-adhered to values, standards and principles.

CHG: Unlike Willie Mays, you retired while still on top. Do you miss it?

DM: So far, not at all. I’m not saying I won’t wake up one day with a passionate desire to write another book, it could happen.

But it feels really great not to get on airplanes, and my wife and I, after treating Boston (our home town) as the place where for 25 years we did our laundry, are finding that (surprise, surprise!) it has many wonderful things to offer that keep us busy and engaged.

CHG: David, it’s been a delight talking with you again, thanks so much for taking the time.

This is number 7 in the Trust Quotes series.

The entire series can be found at:

Recent posts in this series include:
Trust Quotes #6: Anna Bernasek
Trust Quotes #5: Neil Rackham
Trust Quotes #4: Peter Firestein on Trust, Character and Reputation

Neil Rackham on Trust in Professional Selling (Trust Quotes #5)

Neil Rackham is a name many of you will recognize: the Professor of Professional Selling. He didn’t just write the book, he wrote three books that made NYTimes Best Sellers. Most famously the author of SPIN Selling — a book that still ranks at 2800 on Amazon twenty-two years after publication—Neil continues to travel the world and consult with Huthwaite, the organization that has the rights to SPIN Selling.

SPIN was a revolution in the approach to sales, and still rings fresh today. Massively researched, it introduced the key notions of consultative selling, and of inquisitive interactions. He’s McGraw-Hill’s all time biggest business book seller; his material is used in about half the Fortune 500 companies today.

What does Neil have to say about trust, you may ask? Let’s ask him.

CHG: Welcome to the Trust Quotes series, Neil. Let’s start with that question: to paraphrase Tina Turner, when it comes to selling—-what’s trust got to do with it?

NR: Trust has always been central to effective selling but, in recent years, two things have made trust even more important. First, an increasing percentage of routine transactional sales have migrated away from face-to-face selling to cheaper channels like the Internet and telesales. That means the average face-to-face sale today is significantly larger and more complex than it was five years ago. And the bigger and the more complex a decision, the more important trust becomes.

The second factor that makes trust a more important issue today is the increasing tendency to build service, implementation and advisory components into the sale. So instead of just buying a tangible stand-alone product, you are also buying advice and support. If I’m selling you a product you can think that Neil Rackham is sleazy and untrustworthy, but you look at the product and if it does what you need at a good price, you might well buy it.

But once there’s an advisory component to the sale you can no longer separate the product from the person selling it. If you don’t trust me, you don’t trust my advice. So trust in selling is more important than ever before.

CHG: You’re in that rare position of being able to look at your own work from a 30,000-foot stand-alone level. What do you think the world made of SPIN? And do you think the world got it right? What do you think was its biggest impact?

NR: The SPIN research was notable because it was the first time that anyone had tried to scientifically measure selling and buying behavior. It was also by far the largest sales study ever carried out: 35,000 sales calls in 23 countries over 12 years. In today’s dollars that would cost upwards of $30 million. It’s not likely anyone will try to do another study on a similar scale to take the ideas further.

That’s a shame because bringing a rigorous research approach had a huge impact. Over half the Fortune 500, for example, use models in their training derived from that original research. So it’s had an enormous impact. But I feel we only scratched the surface. There’s so much more.

For me, the biggest impact of the SPIN research has been that it created a model for large B2B sales where none existed before. And it showed that selling is much more about understanding and creating customer value than about persuasion and pressure.

CHG: I recently heard a lovely quote from a blogger: Nobody buys a value proposition. True?

NR: Value propositions are incredibly useful in selling but are generally misunderstood. They are not elevator messages that the sales force is supposed to give to customers. In fact, in most circumstances, the customer should never explicitly be told the value proposition. A good value proposition shows you whether your offering will be worthwhile and – as a result – shows you what your chances are of winning the business.

If you’ll allow me a quick swipe at bad marketing departments, too often value propositions are not about value. They are statements that fancifully massage minute competitive differences. As the inventor of value propositions, Michael Lanning, puts it, “You can’t judge value unless you know its price – and that’s too often a missing element.”

CHG: In the field of complex sales, including intangible sales—what do you find is the most pervasive problem, and what do you find is the hardest-to-correct-for problem?

The most pervasive and hardest sales problem? Premature solutions… The mistaken belief that that sooner they can begin solving the problem, the more effective they will be.

NR: Perhaps the most pervasive one is also the hardest to correct. I’d call it “premature solutions”. Most salespeople understand that their role in complex sales is to use products and services to solve customer problems. Many of them mistakenly believe that the sooner they can begin solving the problem, the more effective they will be.

Our earliest research showed that top salespeople didn’t focus on solutions until very late in the sale. Less successful salespeople couldn’t wait to begin showing how their products and services could solve a customer problem.

So most salespeople don’t spend enough time listening and questioning. The moment they think they have the answer, they jump straight to talking about their solution. As a result they don’t do a good enough job of understanding issues from the customer point of view. And if customers don’t feel that they are listened to and understood, there’s an inevitable loss of trust.

CHG: What has been the impact of some of the nominally depersonalizing aspects of sales: blinded online auctions, the professionalization of purchasing agents, increasingly detailed buying process designs?

NR: On the whole, I think the impact of these changes has been very positive. The professionalization of purchasing, in particular, has introduced a new generation of smart and thoughtful customers into the buying process. Salespeople often feel that the new purchasing has made life harder. And so it has – at least for the good-old-boy traditionalists who used the golf course and business lunches as their main sales tools.

But, for salespeople who genuinely create customer value, it’s a good thing to see customers who would rather make better decisions than be bought a better lunch. When I hear salespeople complain about the new buying professionals, I wonder whether they are really complaining that they are being forced to be more professional themselves and that it’s hard work.

But there is a downside to the new purchasing. Buying processes, purchasing segmentation, the internet, reverse auctions and the like have been designed to benefit buyers, not sellers. So they make it harder for salespeople to get away with excessive margins or offerings that do a poor job of meeting needs.

And, in the hands of inept or rigid purchasing agents, the new purchasing can become a rigid and unresponsive liability that isn’t in anyone’s interests. But, on the whole, the quality of selling can only benefit in the long run from the new purchasing.

CHG: Some sales writers—Jeff Thule, Sharon Drew Morgan—are focusing on the need for the sales person to be kind of an OD consultant to the buyers. Your take?

NR: I’ve a lot of sympathy with the various writers who are saying that selling isn’t about pitching products any more. Research is on their side. We did a study of what customers valued in salespeople. Out of 1,100 buyers we talked to, nobody, not even one, said that salespeople created most value by talking about their products. In fact, the majority of buyers rated product pitches as actively negative in terms of value.

So I think everybody now agrees that the sales role is diminishingly about products. It’s less clear what the various new value-added roles will be. Some say OD consultant, some say intellectual challenger, some say industry advisor, some even say political consultant. I think that it’s whatever the salesperson can do that creates value for individual customers.

CHG: You were kind enough to offer a testimonial for the cover of Trust-based Selling, my own book. What did you find attractive enough to lend your name to in that book?

NR: I’ve been following your work ever since you and David Maister and Galford wrote The Trusted Advisor. Trust is what makes business happen and it’s certainly at the root of any professional relationship. However, I did have a criticism of your early work. Too much of it was focused exclusively on the professional/client relationship when there was a vastly wider seller/buyer population that needed your message.

So I was delighted to read the manuscript of Trust-based Selling.

My only complaint is that you waited too long to write it. Beyond that, I like the way you eat your own cooking. There’s none of the self-importance and exaggeration that goes along with most sales books. It’s a book people can trust.

CHG: (blush) Thanks very much for that. What’s the single biggest thing you think a salesperson can do to improve trust in the relationship?

NR: We know quite a lot about what creates mistrust. The biggest single factor is lack of concern for the customer. So if a salesperson is a poor listener, or appears to be more interested in making a sale than in helping the customer, then it sends off alarm bells. Only a third of high-level salespeople are rated adequate or better by their customers in terms of the depth of concern they show for the customer’s issues and needs.

It’s a pervasive problem because however honest you are, however much integrity you have, however deep your expertise, unless you show concern you will not be trusted. The solution is to demonstrate customer concern by patient listening, skilled questioning and a deep desire to understand rather than to persuade.

CHG: Can you kill this issue once and for all: what’s the role of price?

NR: Price is a real and difficult issue in selling. I’ve no patience with the sales gurus who pretend that price doesn’t matter. But it’s easy, particularly in tough economic times, to overestimate the role that price plays in decisions. Let me give you a couple of examples.

We did a study in Xerox where we interviewed 50 customers who had turned Xerox down and put in writing that the reason was price. It turned out that in 32 cases – that’s 64% — price was not the primary factor. Buyers didn’t trust the salesperson, didn’t feel they could handle internal opposition or were afraid of becoming too dependent on a sole supplier. Each of these reasons can be awkward to explain, so they chose the easy and unchallengeable excuse – the Xerox price was too high.

And another indicator that price may not be as important as it seems comes from one of the most spectacularly successful marketing campaigns of all time. In the 1980’s recession, computer makers were having a hard time. Most of them, like DEC and Burroughs — both long dead – decided it was a price issue and cut their prices by 30% or more.

IBM decided it was a risk issue. They actually raised prices for equipment that was generally agreed in the industry to be overpriced and under-featured. They did all possible to make the decision safe. People today still remember their marketing slogan, “Nobody ever got fired for choosing IBM.” They had record profits in those years because they understood that price is rarely the most important decision criterion. But – and here’s where your work comes in – you can’t sell safety unless you can build trust.

CHG: Why is sales so often viewed as unethical? Not just historically, but intrinsically? I think that is not necessary; what’s your view?

NR: Sales has been its own worst enemy. And I would point the finger particularly at sales management. When salespeople are under pressure to produce short-term results and are being told to get the business this month by whatever means necessary, they pressure customers and this creates suspicion and mistrust.

The most successful salespeople are almost always the most ethical. So good selling, I believe, is intrinsically ethical.

And compensation doesn’t help. Customers find it hard to treat salespeople as objective when they know they are being paid to influence the decision. However, I’m comforted by the fact that the most successful salespeople are almost always the most ethical. So good selling, I believe, is intrinsically ethical.

CHG: What’s the role of sales in the broader corporate context? What’s the role of sales in the broader business at large context? What does great selling do for the economy, and for people’s souls, if I may?

NR: Wow! How many days do I have for an answer? First, the role of sales is becoming more important to corporations than ever before. We’re in an era of organic growth, where organizations will not succeed by internal efficiencies or by acquisitions. They will succeed by outselling their competition.

Second, success today comes more from how you sell than from what you sell. For every Apple that succeeds through an innovative product strategy, there are a thousand companies succeeding through effective selling of products that are not much different from their competitors. So good selling is more important now than it has ever been.

Finally — something I find exciting and inspiring – the top end of selling is changing so much that I’m not sure whether the word “selling” even applies. The new top-level sale is about redesigning the boundary between the buying and the selling company so that new value is created that neither company could have achieved alone. I don’t know about how others feel, but seeing this new and challenging high level selling, seeing how much selling has grown in stature, is certainly good for my soul.

CHG: Neil, it has been a real pleasure to engage with you in this conversation; thank you for your time and insights.

NR: A pleasure.

This is number 5 in the Trust Quotes series.

The entire series can be found at:

Recent posts in this series include:
Trust Quotes #4: Peter Firestein on Trust, Character and Reputation

Trust Quotes #3: Dr. Eric Uslaner on the Nature of Trust
Trust Quotes #2: Robert Porter Lynch on Trust, Innovation and Performance