Can Trust Replace Contracts?
Too often trust is thought of as a nice-to-have but vaguely soft, squishy, liberal sort of relationship thingy. Not often enough do we realize it also holds the key to reducing costs and time, and to fostering innovation and new value creation. It also mitigates risk.
It’s true: trust is highly profitable. Consider how Warren Buffett acquired McLean Distribution from Walmart. By deciding to trust the management team at Walmart, Buffett reached an agreement in a matter of days and at minimal cost, saving months and many millions in cost.
You may be saying, ‘Fine—but who’s going to double-cross Warren Buffett? It’s different for him.”
I don’t think so. Let me add my own small lesson.
To Sign a Contract? Or to Trust?
In addition to speaking and writing, I run a seminar business. I’ve spent this week training a half dozen worldwide potential trainers, sharing with them all the training manuals, approaches, ideas and concepts that I have developed over the years.
Normal procedure would be for me to have them all sign a non-disclosure agreement to protect my intellectual property, which is, after all, the source of my livelihood. Such agreements can be more or less complex. If violated, they give me the legal right to pursue redress in courts in various countries should one of my licensees/coaches/contractors abscond with my materials or be found to be using them for their own purposes without properly getting my approval or compensating me appropriately.
I could have done that.
Instead, I explained to them that I would prefer to trust them to do the right thing. We went through a 60-second ceremony. All of us raised our hands and, looking at each other, pledged two things: to respect my intellectual property in the commonsense way they felt was right; and if there was any question about what that meant, to talk to me and the rest of our team about it.
No papers. No contracts. Nothing written. Not enforceable in any court of law.
Where’s the Enforceability in Trust?
I feel more protected by this oath than I do by any legal agreement I might have signed. Why? Certainly not because it’s enforceable in a court of law.
Rather, because it’s enforceable in a higher court; the one of their conscience. Conscience is triggered by conscious, collaborative relationships between human beings.
I have no doubt that this group of people, with whom I have worked closely over several days and for months preceding this gathering, will honor the pledge. I trust them. This is partly because of who I know them to be, and also partly because I trust them.
Trust is not something you work on directly; trust is a result. It is the result of two parties interacting: one who trusts, and the other who is trusted. You can practice both trusting and being trustworthy. Probably the fastest way to make people more trustworthy is to trust them first.
Is it risky? Of course. But I think it is less risky than relying on the rather impersonal and tenuous threads of trademark law. My recourse to legal violations is courts, which are costly, time-consuming, and generally manufacture ill-will in the pursuit of their justice.
By contrast, trusting my business relationships itself increases their trustworthiness, which also lowers my risk–and at near-zero cost. My means of enforcement is pre-installed within them in the form of their consciences.
It’s a win-win. Except maybe for the lawyers.
And frankly I think there’s room for lawyers to gain from this too. But that’s another blog.
Charlie –
Being a lawyer by training, I have some bias.
I think you are comparing two different approaches. The first is creating the trust and avoiding the breach of the trust. The second is what happens in the event of a breach of trust.
A contract does not prevent a party from breaching trust or taking an action in violation of the contract. It just provides for the consequences of failure.
You approach is to avoid even getting to that point. I would argue that your 60-second ceremony is a better education for the participants on what they should (and should not) do than their quick read and signature on a non-disclosure contract. Your ceremony goes further in creating trust and avoiding the breach of trust than the contract. As you point out, it has less power once the breach occurs.
I think you have said before that if you want to create trust, you have to be clear about your expectations.
Too often contracts are poorly written in telling the parties what is expected of them. Legalese just hides the obligations and is often ignored by the parties until a breach. But that is another blog.
Charles – a great post – and I am probably another good example of "Trust NOT Contracts" school of business. I have run my consulting and training business for 16 years with no contracts. I also own an advertising firm and have no contracts there. A few clients have asked for one – and I let them write it. Some of my engagements are upwards of $300,000 == all on a handshake and trust, and I have never had any problems – none. The ONLY issues I have ever encountered is when I have hired vendors to work for me and they have required that I sign some long and convoluted contract for their services, which usually indicates we will end up in court some day because they try to depend on the contract to enforce payment… regardless of the quality of the work!!! Now when a vendor hands me a five page contract – I look for someone else to do the work. From my own personal experience, if you are really good at what you do and have very high integrity – contracts are not needed.
Charlie,
Well, as one of those in the room raising my hand, I must say…it worked. As one of the potential Trusted Advisor trainers, I remember feeling both surprised and refreshed to skip the customary signing of legal documents. Your trust in us compelled me to want to give that trust back.
Having worked in the corporate world for over 25 years, our mindset was "sign, then trust." I’m not saying there isn’t a place for agreements. But, it’s easy to believe that every good business relationship has at it’s foundation an iron-clad contract.
The truth is that my sense of loyalty to you and Trust Advisor Associates would not be as strong if you had us ink the obligatory non-disclosures.
You taught me a lesson about the importance of giving trust to get trust.
Very interesting post. I tweeted it and then started thinking further.
Like anything it depends.
For "small things". In this case you are not selling something where a life depends on people doing something right or not. I don’t mean that your life’s work is "small", not by any means. What I’m trying to get at is the impact to society if the contract is not completed as expected.
What if a builder / contractor building a bridge decided not to sign a contract but just asked the contracting authority to ‘trust him" that the bridge would be done on budget and with quality?
What if the contractor decided to cut some corners and not build the bridge as expected.
The bridge could collapse, and people die.
So, it depends. As always!
Thanks for making us think.
Shaun,
If it makes us all think, that itself is a very good thing; thanks to all for doing so.
Doug, as you suggest, there is a whole ‘nother blog (or two or three or four) about the role of ceremonies like this as opposed to contracts, and it’s all pretty interesting stuff.
If I can paraphrase one of your points, you suggest the ‘trust oath’ approach in my case is probably a more effective risk mitigator than a contract, but that a contract is more effective in pursuing redress in the event of a breach. I’m not sure I’d cede the second point.
The violation of a trust oath, if publicized, can have serious social leverage. For example, Tiger Woods didn’t violate a legal contract, but he sure violated a presumption of trust in marriage. And he’s getting burned pretty badly, including financially, for having done so. The threat of publicity over having violated someone’s trust is a powerful sanction. So I’m not yet convinced contracts have a slam dunk advantage at seeking redress.
Shaun, I agree with you that like anything, it depends. On what it depends is the question. And I’m not sure "small" is the key variable. Remember, Warren Buffet put a $20 billion dollar purchase on the line. That’s not small. Though I agree with you that a bridge, badly constructed, is "bigger" yet.
Although: I would note that the presence of contracts has not prevented many an urban contractor from cutting corners on bridges, parking garages, etc. It also depends on whether said contractor is trustworthy: an issue not necessarily advanced by the presence of a contract.
Mark’s comment strikes me as expressing a very deep truth: those who trust another gain a greater degree of trustworthiness in return. Those do who not trust others often find their expectations fulfilled.
It is all worthy of more thought. Thanks all for weighing in.
Shaun,
If it makes us all think, that itself is a very good thing; thanks to all for doing so.
Doug, as you suggest, there is a whole ‘nother blog (or two or three or four) about the role of ceremonies like this as opposed to contracts, and it’s all pretty interesting stuff.
If I can paraphrase one of your points, you suggest the ‘trust oath’ approach in my case is probably a more effective risk mitigator than a contract, but that a contract is more effective in pursuing redress in the event of a breach. I’m not sure I’d cede the second point.
The violation of a trust oath, if publicized, can have serious social leverage. For example, Tiger Woods didn’t violate a legal contract, but he sure violated a presumption of trust in marriage. And he’s getting burned pretty badly, including financially, for having done so. The threat of publicity over having violated someone’s trust is a powerful sanction. So I’m not yet convinced contracts have a slam dunk advantage at seeking redress.
Shaun, I agree with you that like anything, it depends. On what it depends is the question. And I’m not sure "small" is the key variable. Remember, Warren Buffet put a $20 billion dollar purchase on the line. That’s not small. Though I agree with you that a bridge, badly constructed, is "bigger" yet.
Although: I would note that the presence of contracts has not prevented many an urban contractor from cutting corners on bridges, parking garages, etc. It also depends on whether said contractor is trustworthy: an issue not necessarily advanced by the presence of a contract.
Mark’s comment strikes me as expressing a very deep truth: those who trust another gain a greater degree of trustworthiness in return. Those do who not trust others often find their expectations fulfilled.
It is all worthy of more thought. Thanks all for weighing in.
Charlie, first and most importantly, congratulations on expanding your staff! That’s wonderful and exciting news.
As far as contracts go, I’m sure you’re aware that the US is on a fairly extreme end of a continuum on how to handle business agreements, and at the other end, there are a number of cultures and countries that don’t really use contracts at all.
For example, I rarely saw contracts in Japan. When I was there, almost everything was a handshake deal. (I don’t know if that has changed.)
Congratulations again on the business expansion and best wishes to all of you!
Shaula
Charlie, while reading I was thinking back to when business services engagements were arranged on the back of a napkin w/ a handshake. Those engagements were the culmination of a relationship (literally, mano y mano), where both sides developed a level of trust for, and with, each other. A person’s handshake was their bond. If one didn’t hold up their end of the bargain, it was a personal & public embarrassment because they were accountable. It was a time when we didn’t imply in a contract, "we expect you to screw us". People in business bought from other people in business…it was personal. Of course, that relationship took a lot longer than the 15 min one gets in front of a Walmart "buyer" today and/or reading the 25 page sales agreement. I’m speaking more of the private VS public sector, long before huge mega IT projects were commonplace, and definitely long before every company had to have a gaggle of lawyers on staff writing contracts in their procurement offices.
Supposedly we’re more sophisticated and better off today than yesteryear. Lets see, today we have entities (procurements offices/call centers/service centers), not individuals that are responsible – no one person is held responsible & accountable (evidently, it must be more cost ffective to sue an entity than to call an individual); we now have more lawyers on a payroll than middle managers (at least it keeps the legal industy rolling in dough); we keep people out of the process as much as possible to save time & minimize errors (we like having boilerplate speak to boilerplate, after all, we all know computers don’t screw up); we’ve escalated the malpractice insurance rates through the hemisphere; we’ve entombed the catch phrase, "its not personal – its business" so deeply into the MBA curricula, it should be embossed on the diplomas; the courts are so overwhelmed that "bargaining" is the norm regardless of principle; payoffs are still the norm especially in many countries, states and public contracts (lest we not forget NY & NJ), and skimming still occurs even though there are thousand of pages of contracts (HELLO, the Boston Big Dig), etc.
OK, I don’t get the improvement but hey, that’s me!!!
Wow, what a great post and series of thought-provoking comments. Shaun, you raise some great points. Being radical here, let’s imagine that businesspeople — including bridge-building contractors — take a "we will all do the right thing" approach, so no legal docs required. Then something tragic happens as a result of the contractors’ negligence. What would happen? They’d do the right thing: they’d ante up the appropriate amount of accountability, compassion, and $$$ … without a law suit. Again, radical. And also the kind of business world I would like to be a part of.
It’s about risk mitigation. Or perceived risk mitigation. Trust may save money, but if you do a handshake deal and it goes south, well, you’re fired. In general people do what is customary in their society. If they do, and it doesn’t work out, they figure they can’t be blamed. This is true in contracts, in hiring and so on. (For example, evidence is that MBAs are worse employees than non-MBAs, but no one ever got fired for hiring someone with an MBA who turned out to be a dud.)
Ian, thanks for chiming in, I always enjoy your comments
It’s the cold, hard reality of business life today…no one wants "their fingerprints on the smoking gun". What a schizophrenic mentality & culture…we say to EEs, " take a chance, innovate, create & try something new" but then, "screw up and you’re toast". And yet businesses continue to ask, "how do we engage EEs???" We’ve created a culture of lemmings. I’m not advocating keeping duds on the rolls (W reinforced that point) but if we are so-o risk adverse…where does that leave imagination, creativity & possibilities within the business arena? What would have happened if Thomas Edison, Albert Einstein and Alexander G. Bell had been working today??? I’m afraid they’d be collecting unemployment w/the millions of others.
I think we are a long ways from replacing contracts with trust. However, Charlie makes an excellent point, which is that trust is more important than a contract. A contract is the "nuclear option." It is costly and timely to enforce, with questionable benefits in the end. Establish trust before you enter into a contract!
One of the posts talks about the detrimental impact breaking one’s word could have on their reputation. This is absolutely true; however, it does not directly benefit the person who lost out due to the moral failure. If one is willing to accept that they have no recourse to be individually compensated for said loss, then society’s rebuke of a breach of trust may provide the necessary result without the use of a contract.