Six Reasons We Don’t Trust Wall Street

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In 2013, finance is the least trusted industry globally.

It hasn’t always been this way. Within the industry, it’s tempting to think that trust can be regained by reputation management. Reputation is seen largely as a function  of communications or PR departments in 50% of companies in one survey.

But it goes deeper than that – deeper even than enlightened views of reputation management. There are serious structural issues that have driven down trust in the sector, and it’s hard to see how trust can be restored without directly addressing some of them.

But let’s let you be the judge of that. Here are Six Reasons we’ve lost trust in Wall Street.

1. “Wall Street” Ain’t What It Used to Be.  In 1950, a discussion of “Wall Street” unambiguously meant the NYSE, the Big Board, and brokerage firms like E.F. Hutton. Today, Wikipedia says:

The term has become a metonym for the financial markets of the United States as a whole, the American financial sector (even if financial firms are not physically located there), or signifying New York-based financial interests.

That means “Wall Street” came to include commercial banking (think Chase and Bank of America), mutual funds, hedge funds, investment and trading operations like Goldman Sachs, private equity, and insurance companies like AIG.  I think it’s fair to say the “new” financial businesses have had more than their share of the negative press that financial services has gotten over the years.

Many years ago, the president of GM could say – in good conscience – “What’s good for General Motors is good for America.”  Can you picture Lloyd Blankfein saying, “What’s good for Goldman Sachs is good for America” with a straight face?

2. Finance Has Shifted to Zero-sum Uses. In traditional banking, borrowers create increased value with the money they borrow from lenders and put to good economic use. By contrast, in pure trading, no value is created. It is a zero-sum proposition. And the proportion of the financial sector represented by essentially pure trading has increased dramatically.

At the same time, Paul Volcker says the financial services’ share of “value-add “in the US economy grew from 2% to 6.5%.  That’s not “value added” in the economic sense – it’s just an increase in price over cost. And, Volcker added, it was due not to innovation, but to increased compensation. As he famously put it, “The biggest innovation in the industry over the past 20 years was the ATM machine.”

Wall Street has increasingly focused on the “point spread,” not the fundamentals. In the NFL, they don’t let players bet on point spreads. But on Wall Street, that’s the name of the game.

The industry’s counter to such data is that they have increased liquidity, thereby lowering risk and volatility.  Yet volatility in the stock market has steadily increased for decades, while the industry has gotten less efficient. And “black swans” have become part of our lexicon – we have massively underestimated risk.  The value of the added liquidity is far outweighed by the risks it has entailed.

3. Finance Is a Larger Part of the Economy. In 1950, the US financial sector accounted for 2.8% of GDP. By 2011, that number had grown to 8.4%.  In 2011, the financial industry generated 29% of all US profits.  That proportion had never exceeded 20% in all of the 20th Century.  From 1980 to 2010, the profit per employee in the financial sector of the US economy grew by over a thousand percent – far more than all the rest.

And as finance became less efficient, more profitable, and more zero-sum oriented, it also came to dominate business more. In 1937, 1 percent of the graduates of Harvard Business School went into finance. In 2008, that number hit 45%.

4. The Shift to the Short Term. 
As of 2011, 60% of the daily turnover in US stock markets was accounted for by high-frequency trading something that didn’t exist a decade before.  In 1960, the average holding period for stocks on the NYSE was 8 years. By 2010, it was down to 3-4 months.

In 1950, the marginal tax rate was 85%, putting a brake on short-term trading, since capital gains taxation of 25% kicked in only after 6 months.

A short-term mentality has always plagued the US in comparison to Europe and especially Asia. The shorter the timeframe, the more focused we become on transactions, and the less value we place on relationships. And that kills trust.

5. The Transactionalization of Finance.  J.P. Morgan once said, “A man I do not trust could not get money from me on all the bonds in Christendom.”  For several years now, we’ve had the IBGYBG problem on Wall Street: “I’ll be gone, you’ll be gone – do the deal, who cares.”

Can you say “moral hazard?”

In the Christmas movie It’s a Wonderful Life, local employees of a local bank lend mortgage funds to local borrowers, with the bank then holding the mortgage itself. By 2007, the lending was done by non-local employees of non-local mortgage companies who then resold the mortgage to non-local banks, who then securitized and sold to global investors. A relationship business had become thoroughly transactionalized.  This drives down trust.

6. The Attack on Regulation. The LIBOR rate-rigging scandal shocked everyone last year. But rate-rigging turned out to be not a bug, but a feature.  The chairman of the CFTC said LIBOR rates “are basically more akin to fiction than fact.” The truth is more like the Wizard of Oz saying, “Pay no attention to that man behind the curtain.”

It’s a market that turned out to be mythical – can you say “Bernie Madoff?”

The Glass-Steagall Act was repealed in the late 90s, arguably giving free reign to bankers to misbehave. The industry has fought consumer legislation governing things like credit card costs, not to mention the mix of Dodd-Frank rules.

It’s hard to trust an industry which visibly and without much embarrassment argues for more and more, after the rather remarkable feast of the last two decades.

The solutions to trust issues that I hear about most coming from the financial services industry tend to be reputation management and personal trustworthiness. I do believe that both these tools – especially personal trustworthiness – could be applied to great effect in certain financial sectors – notably financial planning, wealth management, traditional investment banking, and commercial lending.

But that’s not where the money is, nor where the biggest problems lie. And it’s going to take a whole lot more than the usual approach to reputation management to deal with them.

Until the sector can address those six areas of structural disconnect, the issues of trustworthiness will continue to dog the industry.

Trust But Verify? Ask Angela Merkel About That

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Trust is a subject full of wise-sounding sayings that often just reflect muddled thinking. “Trust takes time” is one such case. Another is that trust can be destroyed in an instant.

But the all time winner for trust obfuscation has to be Ronald Reagan’s “Trust – but verify.”  A deceptively simple statement (taken from a Russian proverb), Reagan used it to good effect for his own political positioning – and Gorbachev appreciated it as well.

Trust and Verification in Politics– Part 1 

But let’s put Reagan’s statement in context. The most famous utterance of it came in 1987, at the signing of the INF treaty.  Mikhail Gorbachev was present at the signing in the White House’s East Room:

At the signing, Reagan said, “We have listened to the wisdom

of an old Russian maxim, doveryai, no proveryai – trust, but verify.”  “You repeat that at every meeting,” Gorbachev replied.  “I like it,” Reagan said, smiling.

The statement was the acknowledgement that major agreements between major powers are never undertaken lightly. The negotiations leading up to the treaty took years, and were filled with many ministers and bureaucrats addressing many complex issues.

In such an environment, Reagan’s quote was for public consumption. Gorbachev was very much in on the joke, which wryly – and publicly –acknowledged the need for global powers to proceed with enormous caution.

Trust and Verification in Politics– Part 2

Yesterday, German Chancellor Angela Merkel lashed out at the US for revelations that the NSA had tapped her phone. Merkel felt so strongly about the matter that she personally called President Obama.

Calling it a “breach of trust,” Merkel said:

We are allies. But such an alliance can only be built on trust. That’s why I repeat again: spying among friends, that cannot be.

What happened to “trust but verify?” Is Merkel being naive? Does she not get the game of international intrigue? Is she shrewdly playing domestic politics, getting on the popular side of an Ugly American scandal?

I don’t think so. I think she was genuinely outraged – and properly so. 

Trust Means You Forego Verification 

A parent might say to a teenager about curfew, “Sure I trust you – up to a point. But I’m going to check up on you, you can be sure of that.” The teen may be upset, but not legitimately offended.

But if that parent says, “Absolutely I trust you,” and then plants a microphone in the teen’s car without telling him – that is cause for outrage.

“Trust but verify” is an oxymoron. It means there’s no trust. It may be right, necessary and understood that you’ll have verification; but let’s not call it “trust.” Trust is about risk-taking – verification is about risk mitigation.

This is true even at heads of state level. Every nation knows that intelligence gathering is going on all the time. It’s not only tolerated, it’s understood as necessary to prevent incidents based on ignorance.

But not when it’s a baldfaced lie – even if the lie is implicit. I have little doubt that Merkel didn’t believe the US would tap her phone. And the US, I’m sure, did nothing to persuade her otherwise. So when she found out, she was outraged. As any person would be.

Heads of state are, among other things, people. The human proscription against being lied to extends even to them.

Reagan and Gorbachev had a personal relationship, one which was important to them, and to history. Relationships matter. And, as Merkel apparently said to Obama, friends don’t spy on each other and lie about it.

If you’re tempted to trust but verify – make sure the other party understands, wink-wink nod-nod, what you’re doing. If you’re not prepared to tell them you’re verifying, including implicitly denying it – then either don’t do it at all, or just don’t call it trust.

Why Trust In Our Institutions Is So Low

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Heads? Or Tails?The headlines, surveys and news stories are everywhere. Trust is down – in world leaders, in legislatures, in financial institutions, doctors, even religious leaders and educators. It is very, very easy to draw one conclusion from all this – that we have a crisis of trustworthiness.

Not so fast. That is a half-truth.

Trust is a Two-Sided Coin

One of the tragedies of discussions about trust is that the very language we use is flawed. Consider this simple, self-evident truth:

Trust is a non-symmetrical interaction between a trustor and a trustee. One trusts, one is trusted. One does the trusting, the other is the one who is trusted. To trust someone is different from being trusted by someone.

It would seem obvious that if there is a failure in trust, we should look at both sides to determine where the problem lies: is it in paranoid trustors, or in untrustworthy trustees?

And yet – the presumption we all make when reading those news stories is always about the latter – “It’s those lying ___’s, you can’t trust any of them, none of them are trustworthy.”

But what about the other side of the trust relationship?  What’s up with trusting?

The Problem of Low Propensity to Trust

I used to hitch-hike. Who does that anymore? I’m sure the proportion of people who lock their doors habitually has gone up. The proportion of people who buy guns for self-protection has gone up, just as crime has gone down. All these are daily indicators of a decline in propensity to trust.

At a business level, consider the enormous growth in lawyers. Consider the increasing length of contracts, for the most trivial transactions. Consider the ease with which people resort to civil lawsuits. Ask yourself what happened to the handshake deal?

At the national political level, I’m seeing articles about how President Obama might be lying to the world about chemical warfare in Syria. Let’s review the bidding, in reverse chronological order:

  • George W. Bush told us there were weapons of mass destruction in Iraq
  • Bill Clinton said he didn’t have sex with “that woman”
  • George H.W. Bush said, “Read my lips – no new taxes”
  • Ronald Reagan said, “Trees cause more pollution than cars”
  • Jimmy Carter said he had left Georgia with a budget surplus – far from true
  • Gerry Ford lied about discussing East Timor with Suharto; not to mention Nixon’s pardon
  • And Nixon? Well, enough said
  • Turns out even George Washington’s cherry tree “I cannot tell a lie” story is itself apocryphal.

And the press? Well, what about the entire wink-wink/nod-nod approach to Presidential sexual liaisons back in the day of John F. Kennedy? That level of tolerance in the fourth estate is unimaginable today.

My point is not that society has become more trustworthy rather than less – my point is that people have, in many ways, simply become less willing to trust.

Low Trust: A Chicken and Egg Problem

Consider in your own life the truth of this quote: “One of the best ways to make someone trustworthy is to trust them.”  Or, “Whether you think good or ill of someone – you’ll be right.”

The principle of reciprocity underlies a great deal of human relations. We return good for good and evil for evil. The simple nature of etiquette is a way of ensuring that we practice reciprocity in all our daily doings.

So it’s only fair to ask: when there’s a crisis of trust – how much of it is due to lower trustworthiness?  And how much of it is due to our reduced propensity to trust?

You don’t have to be a Pollyanna about trustworthiness to see this. All that’s required is we stop being crybabies repeating endlessly, “Well Johnny did it to me first!”  Get off the paranoid pity pot.

At its extreme, a low propensity to trust descends into paranoia, resentment, low expectations, cynicism, tribal clannish behavior, lower levels of generosity and charity, and a “raise the gates” mentality. It’s not going too far to say that the roots of civic morality lie in the willingness to trust others.

What Can I Do?

Of course we can all do a better job of being more trustworthy. But that’s almost a passive activity, waiting to build up a track record that others can see. Interestingly, it’s a lot easier to practice trusting.  Here are just a few ideas to practice on in your daily life:

  • Smile at someone on the street, and don’t look away immediately
  • Ask someone at the coffee shop to watch your computer while you go to the restroom
  • Think what tool you have that a neighbor might benefit from using, and lend it to them
  • Join some form of the sharing economy
  • Practice not locking your car so often (not everywhere, I know)
  • Ask somebody for advice on something – then immediately take it
  • Ask a stranger to hold your briefcase while you tie your shoes
  • Ask a stranger to take a photo of you and a friend while on a trip

What else? What are some actions you can take to help increase the level of trust in the world? Please add your suggestions to the comments below.

After all, it’s better to light a candle than to curse the darkness.

The Number One Mental Illness in Business

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Watch Your Blind Spot.Sometimes we don’t think right. Often we don’t think right, and we don’t even notice it. (This is well-described in a book called Blind Spot, by Banaji and Greenwald).

People in business have big blind spots, just as we do in other social milieu. Recently I’ve run across two items that, together, highlight one of the biggest blind spots of them all.  I don’t know what to call it, and I’d like your help in deciding that.

The two items popped up in neuroscience, and in business strategy.

Neuroscience

I’ve written before about How Neuroscience Over-reaches in Business. In response to that particular article, reader Naomi Stanford sent me a stunningly good academic critique of the “neuro-leadership” research. Sober, laser-like, and devastating, it lists a number of reasons why the neuro-leadership crowd is up to non-sense.

It’s called Not Quite a Revolution: Scrutinizing Organizational Neuroscience in Leadership Studies, by Dirk Lindebaum and Mike Zundel. It’s tough going unless you love philosophy of science, but worth it if you’re into this issue.

I want to highlight just one of the many points they make, because it jumped out at me so strongly. In their words:

… we argue that a predominant focus upon neuro-science to the study of leadership as an individual difference excludes further important units of analysis…a more appropriate ontological locus of leadership resides in the dyadic relationship between a leader and follower – as opposed to a leader-centric or follower-centric locus…Our appreciation of the dyadic nature of leadership, coupled with the need to be contextually sensitive, is incongruent with the predominant view of organizational neuroscientists who view leadership largely as residing in the leader.

In other words: leadership is a relationship. It’s not [just] a character trait, a skill, or a neuron path residing in an individual, any more than is love, or trust. It’s a 1+1 = 3 situation. You can’t get to the whole by just analyzing the parts.

In leadership, this suggests the key doesn’t lie in examining (or training, or selecting) one party, but in understanding multiple parties in relationship.

What’s the name of this blind spot in neuroscience? The authors suggest it’s reductionism – a desire to break things down to simpler parts.

I think it also smacks of the cult of the individual.

Strategy

Until the 1970s, business strategy was thought of in metaphors of war, and distinguished largely from tactics. But in the late 1960s, Bruce Henderson took a backwater part of strategy – competitive strategy – and turned it into a quantitative, matrix-hugging bounded idea set. Michael Porter put the finishing touches on it in Competitive Strategy in 1979.  The triumph of this view was so complete that the adjective has been redundant ever since. We now think all strategy is competitive strategy.

The essence of BCG and Porter’s worldview eerily presages the neuroscientists decades later. They saw the essence of strategy as lying within the single, solitary organism of the corporation (or the business unit, if you will).

Strategy, by this view, is all about the solitary struggle of each company to gain and sustain competitive advantage over the Hobbesian hordes who would do it in.  Nearly all business strategy today assumes the solitary nature of the business – the corporation is the atomic unit of business.

But strategy makes the same mistake the neuroscientists would make later. We are increasingly seeing that the successful businesses are not those who see themselves as valiantly struggling alone against the odds – they are instead those who collaborate, form trust-based relationships, and basically get along with the rest of business and society – rather than constantly struggling to ‘win’ against everyone else.

Again, 1+1 = 3. Unless you insist on looking only at 1, and then at 1 – in which case you’ll always end up with 2.

Here’s a small example: the Top Ten most trustworthy companies, over a three year period, outperformed the S&P by 24%.

What’s the name of this blind spot? Perhaps it’s reductionism again. Perhaps it’s the delight that economists like Milton Friedman take in pushing abstract models to the hilt. Perhaps it’s the alienated angst of Ayn Rand lovers. Perhaps it’s the thrill of the old Wild West rugged individualism, or maybe it’s just protectionism.

But whatever – I think the blind spot is the same in both cases.  It is a case of looking to individuals, instead of to relationships, for answers to what are most completely seen and understood as relationship problems.

The blind spot we’re stuck in – focusing on individuals, not relationships – carries multiple penalties. We should interview people for how they get along in groups – but instead we scrutinize their individual performances. College admissions look mainly at SAT scores and grades, not at social abilities. And I’m not even going to mention Congress.

In strategy, Michael Porter is an interesting case. A brilliant mind, he knows full well that the imperative of businesses these days is to get along. But in his recent writings, he is struggling to square the circle – to explain why a company must get along with others in order to gain maximum competitive success. The goal is inconsistent with the tactics for getting there. Companies who “do good” in order to “do well” end up doing neither.

We really need to stop seeing things this way in business, as elsewhere. We live in a relationship world. Thinking we are solitary Robinson Crusoes floating around on our solitary islands is sub-optimizing at best, and destructive at worst.

Expense Sheets and Cultures of Trust

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Business travelers know the taxi expense fiddle. You ask the taxi driver for a receipt. He winks at you and gives you a blank form, implying you can fill it in later, and who’s to say how much that ride cost, wink-wink, nudge-nudge.

How honest are you about the number you write down? How honest do you think others are? Do you think it varies by occupation? By income level? By geography? Would a college professor from Ohio State be less, or more, honest than an associate at a New York private equity firm?

Does the typical response look different in Beijing than in New York? What about Paris? Or Buenos Aires?

What are the cultures of trust? And what drives them?

Chinese Receipts and American Rentals

In China, street vendors hawk fake receipts for sale, as if they were DVDs or watches or fast food.   An American instinctively thinks, “How corrupt!” And yes, it is.

The news is also rife with stories of massive graft in Chinese government, with mid-level officials buying Mercedes and expensive wines. We also hear horror stories emanating from China about food safety.

Clearly China has a problem with trust in government and business. We in the West can comfortably turn up our noses and tell ourselves that at least our trust issues are far more evolved.

Or are they? Consider the NY private equity partner and lawyer who engaged a broker to find a scarce rental in the Hamptons.  When the broker found them one, they brazenly approached the owner to cut out the middleman broker.

Consider the Big Company which, when charged with violating their self-advertised objectivity, independence and integrity came up with the novel defense that hey, nobody believes that crap anyway, so don’t hold us to it.

Leaving aside whether those kinds of violations are more “evolved,” they surely are different in kind. What are those differences?  What are the kinds?

Cultures of Trust

We often talk about trust in business as if it were a single, universal trait. It is not. Francis Fukuyama, in his seminal book Trust, wrote well about this. In China, the level of trust is very high within extended family relationships – but quite low outside it. The reasons are linked to China’s historical development.

By contrast, French society has a great deal of confidence in centralized, bureaucratic institutions, e.g. the Ecole Polytechnique, or wine labeling.  Trust in Japan is high within the island-bound nation/culture of Japan itself, but much lower when it comes to gaijin. In southern Italy and Eastern Europe, trust is often more tribal.  And so forth.

What is the culture of trust in the US, particularly in business? Given the nation’s short and melting-pot  based history, it’s not driven by a common culture or religion. Instead, there are two ideologies that play a particular role in determining the nature of trust in the US: freedom and capitalism.

The “brand” of the US has always pitched freedom as front and center, and not just religious freedom. For countless millions, it has meant freedom to make it economically, through the fruits of your own labor, if not for you then for your kids.

Closely linked to that is our view of capitalism. While of course there are nuances, the main view of business throughout our history has been a belief that the pursuit of individual good ends up benefiting society as a whole. Adam Smith’s Invisible Hand has been a welcome metaphor for US business over the years.

There are a whole lot of things to admire about that ideology; the US can point to its own economy as Exhibit A. But it does mean we look at trust in a  slightly different way than do Chinese, or Russians, or Chileans.

In particular, we look at it like rules in a game.

The rules of the game are clear, but they can change. We generally don’t like rules, but admit that some are necessary. We have referees to help interpret and enforce those rules. Occasionally, the refs get over-matched, and social change results (though usually not before some disaster makes it politically unavoidable).

The main rule is, stay within the rules. All else is fair game, until and unless the rules change.

That kind of ideology makes trust a little more conditional in the US than elsewhere. And there is good and bad in that as well. The good part is that Americans can move with the times, adjust, be flexible about issues of trust when the need arises. The rules of trust may change, but the game itself keeps its integrity.

The American trust problem arises, I think, when we stop treating business as a game. And we have. Etiquette is out. Simple agreements are so last-century – now they need hedging with counter-parties. And handshake deals? Last millennium.

The rules become exogenous to the game, seen as a hindrance, and only one rule survives– survival of the fittest. That’s where we’ve gotten to, and the results are ugly. The doctrine of competitive strategy says, at its heart, that relationships are a cruel myth – the only thing that matters is sustainable competitive advantage, over your customers, your employees, and everyone else.

We’ve marinated in that solitary stew long enough. In an increasingly inter-dependent world, the view of every-man-for-himself is a recipe for a circular firing squad.

A New Business Ideology?

Are things changing? Does Capitalism 2.0 require Adam Smith 2.0, or something even more radical? I’ll talk about that in an upcoming post.

Unconscious (Ethical) Incompetence: The Curious Case of SAC Capital Advisors

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Should Have Seen That ComingNoel Burch is credited with formulating the Four Stages of Competence model. It describes the psychological states involved in a progression of competence, as in:

1. Unconscious Incompetence
2. Conscious Incompetence
3. Conscious Competence
4. Unconscious Competence

The model has always struck me as one of those so-obvious ideas (like spreadsheets) that the miracle is no one ever thought of it before. It just makes sense.

It is usually applied to the mastery of skills, expertise, or knowledge. It is equally interesting, however, to apply it to the concept of moral development in people and in organizations. Which brings us to the curious case of SAC Capital Advisors.

SAC Capital: The Contradiction

Last week, SAC Capital Advisors was indicted by a Federal Grand Jury in New York for insider trading. The firm pleaded not guilty, and of course nothing I say here should be construed as an opinion on the merits (and my legal credentials are zip-squat anyway).

In reporting on the story, New York Times financial reporter James B. Stewart highlights an interesting question:

According to SAC Capital Advisors, the wildly successful hedge fund now accused of systematic crime, the firm not only has “a strong culture of compliance” intended to “deter insider trading,” as the firm put it recently, but may also have one of the most rigorous and “cutting edge” hedge fund compliance programs in the country.
The firm said it spends “tens of millions of dollars,” on compliance, “deploys some of the most aggressive communications and trading surveillance in the hedge fund industry,” has hired big-name lawyers like Peter Nussbaum and Steven Kessler to oversee compliance, and has a staff of “no fewer than 38 full-time compliance personnel.
Which sets up the question: What were they doing?

What indeed.

Two Scenarios for Going Bad

Let me suggest a continuum of answers to that question, with the two extremes reflected in the following two purely hypothetical internal conversations at SAC following the indictment:

Version A: “Can you believe our bad luck? Just when everything was going so great, some flunky up and blows the whistle on the greatest inside deal since Teapot Dome. It was perfect! I guess it was too good to be true, something had to go wrong some day and we’d get found out.  Well, let’s fight the hell out of it and see what we can still walk away with.”

 

Version B: “Can you believe our bad luck? We take compliance seriously around here, nobody spends on compliance like we do, we’ve got the best systems in the business, the best programs, the best communications and the best lawyers to make sure we’re squeaky clean, and – a couple of lousy bad apples come in and ruin it. Not only for us, but for our clients as well. If they only knew the opportunities we pass up… For crying out loud, when is enough; blood from a stone. We are over-regulated to a T already, how much more compliant can you get?”

I don’t know about you, but I’d put money on the B end of the continuum. What looks like clear malfeasance from the outside all too often looks like business as nearly usual on the inside, with shrill grenades of  misunderstanding being lobbed in from the outside. Whether it’s SAC, Enron, WorldComm, or the generals in charge of preventing rape in the military, most frogs sitting in the water don’t notice the temperature rising to a boil.

Which raises the ethics conundrum – Scenario B is a form of Unconscious Ethical Incompetence. The doers of badness do not recognize that it is badness they are doing. Indeed, they often see it as goodness.

In the Four Stages model, unconscious incompetence is the first step in the process. That heightens the contradiction, because the evil-doers in such cases think they are actually at the opposite end of the scale – having already internalized the right behaviors so that they are unconsciously competent. Nothing could be more wrongheaded and insulting, they think, than to suggest they are actually at the bottom of the scale!

Hence the reaction – not guilt, or even remorse, but pained indignation. Moi?  Nous?  Surely you jest.

You Can’t Depersonalize Trust and Ethics

Cases of this sort highlight a vicious circle in managing for trust. Violations of trust are met with new processes or procedures for preventing it in future. Since so much of business is about processes and metrics, this is seen as a perfectly normal response.

However, by turning trust and ethical issues into issues of process, they are robbed of their context in a relationship, and therefore stripped of their human quality. The predictable result of this is to lower the internal standards of conscience and social behavior, which then leads to more violations. And on, and on.

This is the substitution of quantitative, transactional, impersonal focus for qualitative, relationship-based, human phenomena. Unless checked, it only gets worse. Financial services is only one of the most obvious industries in which this happens. You can see it in pharma, in many sales organizations, even in academia.

Unfortunately, most outside consultative solutions to institutional trust issues tend to focus primarily on traditional change management factors – incentives, structures, communications (or culture, which I tend to see as the result of all the other things). But those traditional change management factors, which work so well when introducing quality or customer focus initiatives, have limited range when it comes to issues of trust and ethics. In fact – they make it worse, by implicitly suggesting the issues are ones of incentives, structure and communication.

What is sorely needed is something that sounds too old-fashioned – personal role-modeling of character-based behavior by leaders. Personal actions at the most minute level – comments, reactions, shading of language, confidence of decisions, personal displays of integrity in the moment. These are the things that employees notice, absorb, and emulate.

Former SEC Chairman Harvey Pitt had done some consulting for SAC. He told reporter Stewart that he “Came away from his visit to the firm unimpressed. ‘My sense was that it was a check-the-box mentality, not a serious commitment,'” he said.

Whether he was right or wrong about SAC, the distinction is powerful. As Mr. Pitt also said, “When it comes to compliance, you have to live, eat, breathe and drink it. It has to be embedded in a firm’s DNA.”

And the route to the firm’s DNA (metaphorically) goes straight through that of the leaders (literally).

S&P and the New Challenge of Integrity in Business

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We’ve all read tales of corporate wrongdoing – think Bernie Madoff, Enron, LIBOR. In most cases, managers engaged in nefarious behavior, knowing they were doing wrong. There are a few cases where the miscreant could plausibly argue ignorance, or good intentions – Martha Stewart, perhaps.

But a recent courtroom defense by Standard & Poors in response to a Federal charge of fraud, opens up a whole new threat to corporate ethics.

Subordinating Ethics to Legal Arguments

Back in April, S&P responded to a Justice Department’s complaint that S&P’s claims of ratings objectivity, independence and integrity were false, and part of a scheme to defraud investors.

S&P’s creative approach was to argue that such statements were only “puffery,” and that a reasonable investor would not depend on them.

Let’s underscore this. S&P, as a legal strategy, decided to disavow its own declarations of objectivity, independence and integrity, saying in effect, “everyone knows we’re just blowing smoke.”

  • Picture Boeing saying, “About that 787 safety stuff – you didn’t really think we were serious, did you?”
  • Picture Legal SeaFood saying, “Oh, you thought we meant genuine bluefish?  Ha ha, silly you.”
  • You get the picture.

This is not a company trying to avoid being caught. It’s not a case of extenuating circumstances, or offsetting benefits.  It is not even arguing an interpretation of what is wrong.

S&P is arguing – as part of a legal strategy – that “integrity” is just a marketing tool. This subordinates “integrity” to both marketing and legal considerations. It puts it somewhere on a par with market research or creative ad spots.

 The Name of the Problem

It’s not just S&P that is confused – the media is implicated too. In his Bloomberg News story on the issue, Jonathan Weil characterizes the problem this way:

The problem is that sound legal strategies sometimes create public-relations nightmares…Often PR and legal professionals end up pursuing conflicting agendas if they don’t work cooperatively. There’s an old test that everyone in the public eye should use when making important decisions: How would this look if you read about it on the front page of a major newspaper or website?

Where S&P’s lawyers confuse ethics and legal arguments, Weil is reducing ethical issues to ones of reputation and PR.

At least Bernie Madoff had a moral compass. He knew what he was doing was wrong, and tried to hide it. But if “integrity” is a marketing tool, justified by ROI or PR, then we are in uncharted waters.

A Simple Problem

This should not be hard to manage. If someone brings a legal strategy of “integrity as puffery” to the Chief Counsel or CEO, this is what they should say in response:

“Excuse me – you are deeply confused.  This is not a legal or marketing strategy issue. There will be no analyses of riskiness, ROI, or trade-offs with reputation. Integrity is not something we bargain with. It is a core value. That means precisely what it says.

“Throw away immediately any work you were doing in that direction. And I want to know tomorrow at 9AM, in writing, why it was you were even thinking in this misconceived direction. Am I clear?”

Which would you trust?  A company with leadership that answered this way? Or a company that went to court with integrity for sale?

Judge Carter, who heard the case, was clear:

The court cannot find that all of these ‘shalls’ and ‘must nots’ are the mere aspirational musings of a corporation setting out vague goals for its future. Rather, they are specific assertions of current and ongoing policies that stand in stark contrast to the behavior alleged by the government’s complaint.

Exactly.

 

 

 

Why We Don’t Trust Companies Part IV: The Solution

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Solving The PuzzleMy last three posts – here, and here, and here – were about why we don’t trust companies. To review the bidding, I’ve said it’s because:

  • Trust is predominantly personal in nature – a fact most companies don’t recognize
  • Corporate missions, motives and mindsets are all tainted by zero-sum, competitive ideologies
  • Trust requires risk, while companies abhor risk.

Stripped down – companies see trust as impersonal, ideologically suspect, and too risky.

Now, if I am right about that, then we would want to see solutions in the business world that recognize the personal nature of trust, incorporate trust-enhancing ideologies, and embrace risk-taking to enhance trust.

Surprise surprise – that’s not what we see.

The dialogue about corporate trust is consistently mis-framed. It is not companies that trust, or are trusted. It is the people in the companies who trust, or are trusted. The challenge is not to make companies trust or be trustworthy – it is to create corporate environments in which people can trust and be trusted.

In the trust game, the company is an agent, an enabler – not a primary actor.

The Usual Recommendations to Increase Corporate Trust

I spend a lot of time reading reports on how trust in business can be improved. Here are a few examples;

Believe me, there are hundreds more.

These are all reasonably good pieces of work (there are certainly worse). But even from these top-drawer sources, the top-line recommendations are bloodless, abstract, and cold – because they’re focused at the corporate level. (Curiously, the right answers in all four of these cases are in fact contained in the reports – they’re just buried deep.)

Typical topline recommendations look like these (taken from the sources above):

  • Increase adherence to ethical codes and standards
  • Create a set of values that define and clarify what your enterprise and its people are at root, and work to ensure that these values are adhered to consistently across your enterprise.
  • A well-defined, repeatable roadmap for the conversation…more transparency about fees and costs
  • Communicate frequently and honestly on the state of the business.

Again – there’s nothing wrong in these recommendations. But taken alone, they are sleep-inducing; they sound like Charlie Brown’s teacher’s Mwah, Mwah, Mwah.

Where is the personal? The belief system? The risk-taking? Where’s the people?

The Right Answer for Increasing Corporate Trust

Again, not that there’s anything wrong with the suggestions above, but they don’t get to the heart of the matter. Here are some recommendations that do.

1. Trust is personal – so lead by example.

Role model it. Everyone, not just the top leaders.  And to be sure what “it” is, identify hundreds of situations and the appropriate responses for each (not to memorize, but to ensure understanding). Talk about them – endlessly.  Get coaching. Do brainstorming sessions. Talk about what you’re doing with employees, and with customers. Identify key vocabulary terms you’ll use, and use them. Publicly praise and private counsel appropriate personal examples of trust-based interactions.

The way to get a trust-based company is not to fix the company – it’s to fix the people and the environment they live in so that the people can trust and be trusted in all their affairs.

2. Articulate and preach the trust ideology.

Reject zero-sum thinking. Think long-term relationships, not short-term transactions. Make transparency a default state in all conversations (except where illegal or harmful). Emphasize win-win solutions with customers, employees, and other stakeholders. Believe that trust relationships are more profitable over the medium and long-term, that they are complementary not opposed to corporate success.

3. Teach Social Risk-taking

People can’t learn to trust if they have no degrees of freedom to do so. People are more likely to be trustworthy if they are trusted. Human relationships are formed by the constant reciprocal taking of small risks; the result is long term risk mitigation.

There are personal relationship skills that drive trust. They can be taught, and the teaching of them gets to the heart of a trust-enhancing organization.

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The route to a high-trust organization is through its people. That route starts not with corporate policies per se, but with human interactions.

 

 

Why We Don’t Trust Companies, Part III – Risk

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Take the RiskThis is the third in a four-part series about why we don’t trust companies. The final post will offer solutions.

In the first and second posts, I said trust in companies is so low because companies don’t understand the personal nature of trust, and because they hold various beliefs that seem at odds with trust.  Call those drivers “ignorance” and “ideology.”

[Note: ignorance and ideology are not the reasons commonly cited for low corporate trust. The usual suspects include lack of regulation, conflict of interest, perverse incentives, lax enforcement, and greed].

There is one more big issue that affects our distrust of companies – the issue of risk. Risk is fundamental to both corporations and to human trust, but their views on the subject are diametrically opposed.

Trust absolutely requires risk, while corporations abhor it. The conflict between these two views explains quite a bit.

Risk and Trust

There simply is no trust without risk, almost by definition. To trust another is to willfully put oneself in harm’s way. The act of trusting lies somewhere between one extreme of cold calculation of odds, and the other extreme of blind faith.

Contrary to what Ronald Reagan was fond of saying, “trust but verify” is an oxymoron. If you have to verify, it isn’t trust; and the act of verification tends to negate trust.

Risk plays a critical role between the two parties of a trust relationship. The trustor is the one taking the risk, the one who puts himself in harm’s way. The trustee is the one who is granted the power by virtue of the trustor’s risk. How he responds is critical to the establishment of trust.

This dance of risk-taking is the essence of human relationships. I extend my hand, and you either extend yours back to me, or turn on your heel and spurn me. Romantic relationships are established by an elaborate ritual of progressive risk-taking and positive responses. So it is with trust.

Trust is a bilateral, asymmetric relationship – risk is the medium of exchange. A trusting relationship can mitigate larger risks, but it almost always begins with a small risk taken.

Risk and Companies

By contrast, corporations abhor risk. In a zero-sum, Hobbesian, sustainable-competitive-advantage world (see part II of this series), to put oneself in harm’s way of another is simply irrational, if not suicidal.

[Note: I’m not talking here about risk in financial markets – alpha and beta, hedging, risk appetite – those are design features of a product being sold.]

This negative attitude toward risk is pervasive. It’s at the root of business insurance contracts, legal reviews, communications approval processes, and a great many policies and procedures.

I recently heard of someone in the reputation management business who said they’d gotten inquiries from people and from companies alike in times of crisis. But, when they heard that his recommendations included an apology, all the corporate inquiries dropped off. Only individuals were willing to consider reputation repair that included  apologies.

The reason is clear: to apologize looks like an admission of guilt. An admission of guilt opens up a corporation to civil lawsuits. Almost all companies will view such a situation in strictly legal terms, and the “right” answer is the one that limits risks. Ergo, no apology.

This dichotomy makes sense because humans relate to apologies – to apologize is a form of risk-taking that can help restore trust. Corporations, not being human (see Part I), see apologizing in strictly legal, non-human terms. For people, apologies are about character and reputation; for corporations, they’re about threats and survival.

We as humans want truth-telling and accountability in order to trust. But companies tend to resist telling the truth or taking accountability if it puts them legally at risk.

When you have different perspectives on truth and accountability, you have a very wide divide. One more reason we don’t trust companies – they don’t usually behave by the “rules” of trust, which is (see Part I) predominantly human.

==========

The final part in this series will move from the negative to the positive, and offer solutions.

 

 

 

 

 

How Neuroscience Over-reaches in Business

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The Science of BusinessEvery age has its fads and fashions. Some of them hold up over time – competitive strategy, business process re-engineering, quality circles.  Applying neuroscience to business, I suggest, will not be one of them.

In Mark Twain’s classic Huckleberry Finn, there is a passage where Huck tries to explain to Jim that French people speak a different language. Jim would no more be able to understand a Frenchman, says Huck, than he could understand a dog, or a cow, or a cat – because they all speak different languages.

Jim’s retort is that a Frenchman is not a dog, cow or cat, but a man – and that therefore by all rights he should talk like a man, meaning English. As is true in Huckleberry Finn at a meta-level, it’s the truth of the innocents (this time voiced by Jim) that is the deeper truth. The difference between human languages is trivially and categorically distinct from the differences between the species.

Neuroscience in business is something like that. Neuroscientists seem to think that their research is revealing previously hidden secrets of leadership, influence, motivation, and decision-making. But all too often, all they’re doing is translating into French.

Overstating the Case

There are plenty of examples, frequently from highly distinguished, educated, and highly regarded people, of claims for neuroscience in business. For example:

The statements all follow a general pattern. First, a discussion about the structure of the brain, or the neurochemistry of a particular event type. Second, a correlation of those structures or chemistries with some management phenomenon.  And third, a conclusion about what can and should be done in management, based on the preceding two insights.

The Proof is In the Pudding

Here are actual examples from the authors themselves about the power of neuro-thinking to help management.

Here is Daniel Goleman distilling the neuroscience advice on how to help others change bad habits:

  1. Empathize before giving advice
  2. Be a good listener
  3. Offer a caring gesture
  4. Give them your full attention

Here are Crawford’s four lessons from neuroscience on how to improve innovation:

  1. Eat and sleep well, and don’t stress
  2. Expose yourself to new ideas
  3. Make it safe for people to share ideas
  4. Create playful environments.

Here is John Ryan on four neuroscience-derived “tactics to boost our performance and model success for our colleagues.”

  1. Be positive
  2. Give detailed, positive feedback
  3. Stay healthy and in good physical shape
  4. Seek challenge, but not to the point of stress

Here is Pillay on ways that brain science can “enhance understanding within the executive environment”

  1. Re-packaging old ideas in neuroscience terms can make them more acceptable
  2. Using the language of brain science can seem less personally threatening
  3. Brain science uncovers myths (he lists six myths, none of which need brain science to debunk)
  4. Giving further insights and evidence (e.g. “visualizing isn’t just New Agey,” and “the brain can change.”)
  5. Providing a system for targeted interventions
  6. Developing coaching protocols and tools.

Non Sequiturs and Blinding Flashes of the Obvious

I don’t know about you, but I find these conclusions to be either completely unrelated to the neuroscience itself (Pillay’s claim that people like scientific language, therefore the language helps people understand better), or numbingly old hat.

Do we really need the language of neuroscience to be convinced that we should be positive, healthy, empathetic and good listeners? Where are the now-decisively vanquished proponents of negative, unhealthy self-absorbed managers?

The neuro-fans do have one point, however. An MIT study evaluated the effect of logically irrelevant neuro-babble on listeners to a debate. They found:

Subjects in all three groups judged good explanations as more satisfying than bad ones. But subjects in the two nonexpert groups additionally judged that explanations with logically irrelevant neuroscience information were more satisfying than explanations without. The neuroscience information had a particularly striking effect on nonexperts’ judgments of bad explanations, masking otherwise salient problems in these explanations.

In other words – it all just sounds so much prettier when they say it in French.

[Note: I do believe there are valuable applications of neuroscience, particularly in designing targeted medical solutions. I just don’t see them much in evidence in business. And yet, it’s a mainstream fad. Ah, Barnum…]