Trust Inc.: Strategies for Building the Trust Asset – Chapter 1

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Trust Inc coverThis is an abridged version of the opening chapter – “The Business Case for Trust” – of the just-published  Trust, Inc.: Strategies for Building Your Company’s Most Value Asset. 

The book is a collection of 30-plus articles by diverse authors on trust in business. Edited by Barbara Kimmel of Trust Across America, the book covers issues ranging from measuring trust, diagnosing its presence or absence, managing trust and increasing trustworthiness, to improving people, companies, industries and societies.

Barbara and I co-authored the opening chapter. Other authors in the book include names like Steven M.R. Covey Jr., Ken Blanchard, James Kouzes and Barry Posner, Peter Firestein (investor relations), Laura Rittenhouse (financial candor), Jim Gregory (branding), and Linda Locke (reputation). And more.

Have a taste of the book, below. And click through here to see a complete table of contents and authors list. Whatever your interest in business in trust, you’ll find something here the addresses it.

The Business Case for Trust

by Barbara Brooks Kimmel and Charles H. Green: from Chapter 1 of Trust, Inc.,publisher Next Decade, November 2013.

Trustworthiness — once exemplified by a simple firm handshake — is a business value that has suffered erosion. We see this in how the public has grown increasingly cynical about corporate behavior—with good reason.

The PR firm Edelman found in a recent “Trust Barometer” survey that trust, transparency, and honest business practices influence corporate reputation more than the quality of products and services or financial performance. And yet, scandals and bad behavior continue to pile up.

Our view is that a company seriously interested in its reputation must increasingly focus not just on “business performance” as it is traditionally understood, but on being seen as trustworthy too.

We believe there is an important, material business case for trust. This doesn’t mean that trust isn’t or shouldn’t be justified on moral or societal grounds. Of course it should. But trust makes for good business as well. This essay will put forth the business case for trust by exploring the gap between low- and high-trust organizations’ performance. We will also offer a framework for assessing corporate trustworthiness, and point the way toward strategies for creating a trust-enhancing business model.

First, let’s look at the costs of low trust.

How low trust affects stakeholder outcomes

Low Trust in Society

Business operates in a social context; because of that, low trust in society-at-large costs business. Indirect examples include the TSA airport security program ($5.3 billion, not to mention the impact on tens of millions of business travelers), and the criminal justice system ($167 billion in 2004). Both of these examples are funded by taxes on individuals and business.

Businesses also shoulder direct tangible losses from crime ($105 billion), where they are often the victims.

A more obvious social cost for business is the cost of regulation. Economist Clyde Wayne Crews releases an annual report entitled “The Ten Thousand Commandments” that tallies federal regulations and their costs. In 2010, the federal government spent $55.4 billion dollars funding federal agencies and enforcing existing regulation. In 2013, The Washington Post reported that “the federal government imposed an estimated $216 billion in regulatory costs on the economy (in 2012), nearly double its previous record.”

Doing business in a low-trust environment is costly. Whether or not you believe that companies can, or should directly impact social conditions, one thing is clear. In aggregate, business bears a lot of weight for the cost of low-trust in our society.

Low Trust in Business Practices

Social costs on business, however, are just the tip of the iceberg. Far bigger costs are exacted by simple business practices. Consider the
need for detailed financial audits. The Big 4 accounting firms’ aggregate global revenue is $110 billion5, of which about one quarter is made up of audits in the U.S.

Consider lawyers: there are over 1.2 million licensed attorneys in the United States, more per capita than in 28 of 29 countries (Greece being the 29th). The cost of the tort litigation system alone in the United States is over $250 billion—or 2% of GDP. It’s estimated that tort reform in health care alone could trim medical costs by 27 percent.

All these are examples of transaction costs: costs we incur to protect or gain (we hope) larger economies of scale, markets, or hierarchies. Transaction costs add no value to the economy per se; they just foster favorable market conditions so that other economic factors (e.g. markets, scale economies) can add value.

But there comes a point at which the addition of more non-value-adding transaction costs ceases to be positive and becomes burdensome. It’s clear to us today that we are well past this point. A Harvard Business Review article from 8 years ago (Collaboration Rules by Philip Evans and Bob Wolf, July 2005) suggests that nearly 50% of the U.S. non-governmental GDP was, as of 2005, comprised of transaction costs. Imagine the impact of redirecting even a small proportion of these monies to value-adding actions.

Their research goes on to say that, in such an economy, the most productive investments are often not those that increase scale or volume, but those that reduce transaction costs. And the most viable strategy for reducing massive transaction costs? Trust.

Low Trust and Employee Disengagement

Disengagement occurs when people put in just enough effort to avoid getting fired but don’t contribute their talent, creativity, energy or passion. In economic terms, they under-perform. Gallup’s research places 71 percent of U.S. workers as either not engaged or actively disengaged. The price tag of disengagement is $350 billion a year. That roughly approximates the annual combined revenue of Apple, General Motors and General Electric.

According to The Economist, 84 percent of senior leaders say disengaged employees are considered one of the biggest threats facing their business. However, only 12 percent of them reported doing anything about this problem.

What does disengagement have to do with trust? Everything. In a Deloitte LLP ethics and workplace survey, the top three reasons given for employees planning to seek a new job were:

  • A loss of trust in their employer based on decisions made during the Great Recession (48 percent);
  • A lack of transparency in leadership communication (46 percent); and
  • Being treated unfairly or unethically by employers over the last 18 to 24 months (40 percent).

A lack of trust in the employer is at the heart of each of these reasons. To the extent that plans to find a new job are a proxy for disengagement, the case is clear. Lack of trust drives away employees.

In discussing the survey, Deloitte LLP Board Chairman Sharon Allen notes:

Regardless of the economic environment, business leaders should be mindful of the significant impact that trust in the workplace and transparent communication can have on talent management and retention strategies. By establishing a values-based culture, organizations can cultivate the trust necessary to reduce turnover and mitigate unethical behavior.

The survey also provides some interesting data on the business case for organizational trust. When asked to rate the top two items most positively affected when an employee trusts his or her employer, employed U.S. adults made the following top rankings:

  • Morale (55%);
  • Team building and collaboration (39%);
  • Productivity and profitability (36%);
  • Ethical decision making (35%); and
  • Willingness to stay with the company (32%).

As Mary Gentile eloquently states later in this book, “Very often the most visible, most costly challenges to the public trust in business are fairly predictable: deceptive marketing practices; falsified earnings reporting; failure in safety compliance; lack of consistency in employee relations; and so on.”

In other words, the ability to manage the costs of low trust –whether arising from society, from business practices, or from management practices—is to a great extent within the control of the corporation. And yet, it is largely not being done—with sadly predictable results.

Continue reading:
How high trust improves stakeholder outcomes
A framework for assessing trustworthiness
Trustworthiness in Action

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.

Nice Place Here, Shame if Anything Happened

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copyright Nate Osborne 2013It’s the opening to dozens of gangster movies. The mob guy with a rakish hat and a sneer sidles into the hard-working good citizen’s retail establishment, knocks some cigarette ash on the floor, and says, “Nice little business you got here, mister. It’d be a shame if something were to happen to it, know what I mean?”

And we do know what he means, and so does the terrorized citizen. It’s the protection racket. If you pay, then indeed, nothing happens. If you don’t pay, well, it’s amazing how bad stuff just happens.

Of course, that doesn’t happen in business today.  Right?

The White-collar, Fully-legal, Hands-clean Shakedown, Corporate Edition

In fact, something much like that does happen – though it’s highly sanitized. It’s legal; no individual has bad or evil intentions; and it’s justified as a business best practice. But the effect is the same – the business at the end of the food chain pays a lot of “insurance” for bad events that don’t look like happening. And instead of mobsters getting rich, it’s lawyers and insurance companies.

A simple example. My firm recently sold a single, one-day, off-the-shelf learning program to a corporate client. The contract and statement of work proposed by the client ran to over 10 pages of fine print.

On our end, it went through the hands of four people, including our lawyer, who I struggle mightily to keep under-employed. On the client side, we know personally of three people with whom we interacted, and I am guessing there were more. Total elapsed time was 2-3 months.

The contract included fairly typical clauses to the effect that we would not steal their intellectual property, lists, or secrets; generously they agreed to return the favor.

It also included clauses saying that we would generally indemnify them against everything from lawsuits about IP to people falling on their sidewalks to taking bad advice from us. (And here I worry about trying to get clients to take my advice!)

Most interesting to me was the clause that – at their request – we would submit our trainers to drug testing and to criminal record searches, through whatever such means as the client would dictate, of course at our expense. Moi? Nous? I mean, we’ve got our faults, but…

All this in order to gain the privilege of giving a workshop on – wait for it – how to establish trust-based business relationships. (And yes, I am painfully aware of the irony, even if the client is not. But you go where you are most needed, and agreeing to a training session on trust is actually a pretty good first step.)

Sadly, this is not a unique story. In fact, about 80% of it is standard operating procedure these days. In this case, I sent an email protesting that we felt mildly insulted about the drug test thing. I received back a most polite and apologetic note assuring me that that was surely not the intent, and that they felt badly about it – it’s just that, this is just how business is done – you know, it’s not personal, it’s business.

And voila, we’re back at the movies. See what I mean?

What’s Going On Here 

I want to emphasize, there are no bad intentions here; there are no laws being broken. To use the business vernacular, this is risk mitigation. But it’s risk mitigation gone rogue.

It starts with companies themselves as victims of a shakedown. A lawyer – perhaps their own internal counsel – tells them that they are subject to grave exposure from a lawsuit by some wild-eyed plaintiff’s attorney. Since lawyers vastly prefer to err on the side of caution, they like to be armed with shotguns when they go to hunt fleas.

One form of protection, conveniently served up by insurance companies (who love their lawyer friends) is straight-up insurance. But, apparently cheaper than buying your own protection is to lay off that protection cost onto those who are employed by the company: their suppliers, their employees, and their customers.

And so we get oppressive do-not-compete clauses for employees; mandatory arbitration in the fine print for customers; and send-that-indemnification-downstream to contractors for any risk you can think of.

The Extortionate Impact on the Economy

I welcome the comments of those better versed in economics than I to more accurately describe this, but I can suggest the outlines of four broad effects.

One is simply over-insurance. If I have market power over you (as big companies generally do over little companies, and buyers generally do over suppliers), then I can force you to pay for my insurance. And, I’d prefer to be over-insured rather than under-insured thank you very much, and frankly I don’t care if you have to over-pay for it. In fact, I’ll get it back in nice lunches from my professional partners-in-crime.

I have no idea how to quantify this effect, but since the phenomenon covers every industry, my tummy says it’s Big.

Second, this kind of burden massively adds to the level of transaction costs in our economy.  Initially described by Ronald Coase in the 1930s, transaction costs are non-value-adding costs which enable value-adding through other means, e.g. economies of scale.

But there comes a point when transaction costs begin to overwhelm the possible value they can enable, and cutting transaction costs themselves becomes a more sensible way to achieve economic success.

Are we at such a point?  Consider that the US has the highest ratio of lawyers per capita of any country in the world.  And that the lawyer-per-capita ratio in the US has gone up by 250% since 1950. (Personally, I can assure the reader that the contracting process for training sessions like the one I describe above was vastly simpler 20 years ago. And I sincerely doubt clients got burned, whether by drug-addled trainers or via other means.)

Third, this shakedown amounts to a massive, systemic substitution of check-boxes in place of management to govern the natural friction that exists between contracting people. For example, it substitutes a gigantic system of criminal record checks in place of a few personal phone calls for references. Among the costs of such substitutions is a decline in trust. A big one.

Finally, when you pile on so many transactional, impersonal “risk-mitigation” steps, you open up wide opportunities for corruption of various types. Corruption isn’t just handing over bags with cash. How many times have you heard, “Oh don’t worry about that phrase, we never pay attention to that anyway, it’s just part of the standard form.” How many times have you read the fine print at the bottom of every online purchase you make?

Where there is such casual, wholesale and willful ignoring of agreements, there is a ton of room to become cynical and unobservant about said agreements.

The next level up is easy – think of robo-signing mortgage agreements. And note all the irate protestations by bankers about how this was really no big deal. It’s not such a long step from there to the bags with cash. (Some readers might enjoy Mark Twain’s tale The Man That Corrupted Hadleyburg).

The parallel with moving from locally-made mortgage loans to globally aggregated, tranched and securitized packages is evident. When you depersonalize, you desensitize, and you de-ethicize.

Shades of Shakedowns

Of the two, the gangsters’ shakedown is more honest. It is authentic; you know what you’re being told, by whom, and for what purpose. You know that the threat is real, the intent unmistakable. By contrast, in the modern corporate shakedown, there are no villains, everyone has plausible deniability; they all have clean consciences and clean hands.

The mob had corrupt lawyers who could game the system. In the modern corporate shakedown, it is the system that is doing the shakedown.  We have MBAs, lawyers, and actuaries all soberly attesting that they have lowered the risk of our business contracting system at every stage.

Does anyone else smell a Black Swan here?

The Alternative

A major issue with trust is how to scale it. But maybe an even bigger issue is forgetting what it’s all about in the first place – what we have lost. Here’s a reminder.

I had a conversation with a solo consultant the other day, a disgusted emigrant from corporate America. He now does consulting and coaching for small business clients. His entire contracting process is as follows:

At the beginning of every month, you will send me a check for $5000. For the rest of that month, I will answer the phone all the time whenever you call. Should I ever not receive my check by the fifth day of the month, I will know that you’ve become unsatisfied with my services,  and we shall both expect further conversations to cease.

He has never had a dissatisfied client. His cost of sales is minimal. His legal fees are zero. His risk is pretty much nothing – because he has created a trust-based relationship.

I find that completely unsurprising. That’s just how it works – if we remember to let it.

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.

Why We Don’t Trust Companies, Part II – the Three M’s

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light bulb: Mission, Motives & MindsetsYesterday I wrote about three fundamental reasons that most companies aren’t trusted: trust is mainly personal, most companies don’t understand trust, and they make bad choices of tools to enhance trust. Let’s call that Level I of  the Corporate Book of Being Trusted. Now let’s look at Level II.

Most companies, even if they do reasonably well at Level 1, are still not very trusted. It’s often due to what we might call the three M’s – mission, motives and mindset. If your goals, beliefs and attitudes are all anti-trust – even if you think you mean well – then no matter what you say, it will bleed through. People can tell. And it’s people that do the trusting.

Mission.

I’m using the term “mission” loosely here, to include terms sometimes defined as distinct – vision, goals, and the like. Basically, what a company says it’s trying to do.

And despite the ringing statements of companies like Coca Cola (“…to inspire moments of optimism and happiness…”) and Enron (you really must read it for yourself), most companies in the past few decades would cop to “achieve sustainable competitive advantage,” (often dressed up as “be the best X in the Y business”).

Sustainable competitive advantage. Never mind whether that’s true, or whether the true underlying motive is to maintain the bureaucracy until the incumbent management has had its way. Let’s assume it is true. What does “sustainable competitive advantage” (hereafter, SCA) imply?

It says above all that business is a contest, and a largely zero-sum contest at that. It’s about winning, and what I win, I win by dint of you losing. And vice versa. As was very well articulated by the strategists from the 70s and 80s, this is a Hobbesian view, in which everyone is a competitor lying in wait to conquer us. And so we must conquer them first.

Much more could be said about this as a mission, but let’s stick with one observation – it is extremely hard to believe in all that and believe at the same time in the power and desirability of trust. People who believe in SCA are hard-pressed to believe that they might make alliances with suppliers, customers and even competitors, that they might benefit by greater transparency, that taking risks can be desirable, and that another goal besides winning might actually exist.

Most corporate people  just can’t wrap their heads around that.  And so they, and their companies, behave in anti-trust ways.

(There is, of course, a great irony here. Companies which actually do a better job of being trusted end up being more profitable and successful. But the power of the ideology is such that most corporations refuse to believe it).

Motives.

It’s almost an axiom in business that the purpose of a company is to make a profit. And even though few people now believe it as dogmatically as Milton Friedman asserted it’s pretty much an important goal, and rightly so. The problem comes from those who have boiled it down, stripped it to the bones, and turned it into Management Mantras Lite.

They have put a lot of emphasis on two beliefs: the primacy of shareholder value, and the short term perspective. As to shareholder value, Cornell Law School Professor Lynn Stout says, “the ideology of shareholder value maximization lacks any solid foundation in corporate law, corporate economics, or the empirical evidence.” So the belief is unnecessary, and unfounded. Yet it continues.

It is also anti-trust, because it subordinates the goals and desires of all other stakeholders.  Who can trust an entity that uses others as means to its own ends – and brags about it!

Short-termism is a long topic in itself. Let’s just note that the passage of time is a requirement for many forms of trust. Game theory shows distinctly different results if a game is played once, vs. many times. Over time, we can establish patterns, mutual obligations, track records and character.

Short-termism hobbles trust considerably; the accompanying belief in transactions rather than relationships is enough to strangle trust.

Mindset.

Some mindsets flow naturally from the missions and motives outlined above; see how many you have heard:

  • I’ll be gone, you’ll be gone – do the deal
  • Do unto others before they do unto you
  • It’s a dog eat dog world.

There is one other mindset I want to identify; I’ll write about it separately in this series. It is risk. In the Hobbesian corporate world we have created, risk is a no-no, a negative, something to be mitigated and hedged. Risks are to be laid off, written into supplier contracts so they’re transferred, and are not to be taken if they might result in legal or financial exposure – hence never admit guilt. Hence “nobody ever got fired for hiring IBM.” And so forth.

Yet trust requires risk. There can be no trust without risk. And a mindset that abhors risk is not a mindset that will easily tolerate trust.

=============

In short: at Level I, we saw that most companies are impersonal, and don’t understand the workings of trust. At Level II, we see that many mental constructs in today’s corporations are inimical to trust.

Is it any wonder that most companies are not trusted?

 

Sales, Surgeons and Profits

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iStock_000002256780XSmallThe NYTimes recently published Salesmen in the Surgical Suite, a look at some questionable sales practices in the US surrounding a robotic surgical technology called the da Vinci Surgical System, a product of Intuitive Surgical Inc. The article cites a case of severe damage to a patient due to inadequate training of surgeons, and a variety of documented practices by Intuitive pushing the limits of proper training and supervision.

My point is not to argue the case for or against the company; that’s being done already in a case filed against them. What I do want to touch on is how we should think about issues like this. In other words – just what kind of a problem do we have here?

Profit vs. Patients?

The ultimate issue, I suggest, is the relationship between a for-profit business and the well-being of the end-user customers. Health care is an extreme case, because of the direct link between the two; but in a sense, this is the same issue we face in a capitalist society for any good or service. Healthcare, and surgery in particular, are extreme cases, thus useful for clarifying issues.

There are three commonly heard points of view:

1. There is an innate conflict between the interests of the profit-seeking business sector and the ultimate good of the patients; this conflict must be regulated by a third party of some sort.

2. There is no innate conflict between business and patients, except insofar as business is regulated by governmental and other third parties, who inevitably just distort the ideal workings of pure markets.

3. There is no innate conflict between business and patients, except insofar as business misreads its own long-term self interest by being addicted to short-term fixes, leading to regulation – a self-inflicted shooting in the foot.

The first two arguments are endlessly hashed over, with much heat and little light, in all the various venues of the day: from Congress to HuffPost to talk radio to coffee shops. (I suspect this debate is largely a US debate, as most other developed economies have tilted toward the first viewpoint, far away from the second). I’m not going to change anyone’s mind about the relative merits of one and two.

But number three is interesting: it suggests that the business-society conflict is unnecessary, and that the solution lies largely within the hands of business itself. All that right vs. left, redneck vs. socialist shouting is nothing more than noise.

Is this a utopian, pollyana-ish view? Or is it very real?

The Best Interests of Business

We can reframe the issue as simply, “Is there or is there not a long-term fit between the interests of business and consumers?” Karl Marx answered in the negative, and claimed that the tension would ultimately result in revolution. I suggest that any right-thinking capitalist must answer in the affirmative – there must be a commonality of interest, else the doctrine of capitalism is of little use or interest.

But if that’s the case in the long run – why then isn’t it in the short run? Why do we see salespeople play with endangering people’s lives in order to get the order in before the end of the quarter? Why do companies fight for less regulation, commit economically foolish acts in order to smooth quarterly earnings, and prefer the net present monetized value of almost anything, rather than the longer-term asset that comes from brand, history and culture?

We live in a very imperfect business world, I suggest. We do not do a good job of assessing economic good, or even of assessing business value. We rely on definitions of value which are narrow, solely financial in nature, and short-term. The tyranny of the discount rate leads us to forego thinking about the next generation – it’s just un-economic to worry about something 40 years out, there’s not enough present value in it to justify it.  The Chinese have a history of looking at hundred-year timeframes; the US struggles to get past quarterly, and three years might as well be a lifetime.

The poverty of our financial calculus can be described several ways. Economists would say we do not take into account externalities, so we delude ourselves about the costs of degrading the environment. Social scientists describe it as resulting in a poverty of the spirit (a tone we hear echoed by those who preach ‘the final days of the empire’).

This poverty of calculus is supported by impoverished thinking. Adam Smith was brilliant; the caricatures of him that came down through Ayn Rand and the Chamber of Commerce retain nothing of his focus on the good of society, much less his work on the moral sentiments. Even business theory is impoverished – NPS and Five Forces just don’t have the sweep that we saw from Peter Drucker or even Sun Tsu.

What I’m suggesting is that business needs to radically re-think itself, across the board, into a long-term partnership with the rest of society. The commercial instinct of mankind ought to be a driver of value and wealth creation for all of society, and not hostage to an ongoing battle between haves and have-nots. Whether we need more or less government, more or less regulation, should not be the issue.  The issue should be how can business and society line up on the same team?

We really should be able to do better.

Trust is Down? Wait – What Does That Even Mean?

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We hear it all the time. Trust in banking is down. Trust in Congress is down. Trust in the educational system is down. We hear these statements, we say, ‘tut-tut what’s the world coming to,’ and we go on about our business – in large part, because we don’t know what to do about them.

Well, no wonder.  These seemingly obvious statements mask a fundamental confusion about the nature of trust – a confusion that prevents us coming up with basic solutions.

The problem is this. When trust in banking is down, does that mean:

a. that banks are less trustworthy than they used to be?  Or,

b. that people are less inclined to trust than they used to be?

Those are very different problems. Typical solutions to the problem of trustworthiness have to do with ensuring the behavior of the trustee.  Think regulations, penalties, enforcement, behavioral incentives and the like.

We too often neglect the other side of the equation – the propensity to trust. The problem is simple enough to state: you may be the most trustworthy partner in the world, but if the other party is unwilling to trust you, nothing will happen.

The propensity to trust is critical. It amounts to risk taking. Despite Ronald Reagan’s famous quote to the contrary, there is no trust without risk. The dictum to “trust but verify” in fact destroys trust by sanctioning acting on suspicion.

The Hitchhiking Problem

In the 60s, hitch-hiking flourished. By the late 1980s, it was dead.  Partly, hitchhikers were afraid to hitch; but mainly, drivers were afraid of hitchhikers. And it wasn’t due to an epidemic of violence; it was due to a fear of violence.  We lost a great deal when we lost hitchhiking – economically and culturally.  (The move to collaborative consumption, interestingly, is a contemporary resurrection of that idea).

Why is hitchhiking relevant to trust in banking?  Because one common response to low trustworthiness – perceived or otherwise – is a reduced propensity to trust. Which will kill trust just as surely as will low trustworthiness.

There is a huge cost to low propensity to trust; look at The Cost of Fearing Strangers by the Freakonomics folks. We are great at articulating the risk of doing something; we are awful at noticing the cost of doing nothing.

Want a really Big Example? Next time you’re in an airport, look at the social cost of us not being able to trust grandmothers from Dubuque on their flight to Grand Rapids.

The Laws of Trust

To people schooled in free-market economics ways of thinking, trust is hard to make sense of. If the propensity to trust declines, you’d think the market would respond by creating more trustworthy offerings. In fact, just the opposite happens. Suspicious people tend to attract con artists; skeptics get sucked in by fakes.

The reason is simple: trust is not a market transaction, it’s a human transaction. People don’t work by supply and demand, they work by karmic reciprocity. In markets, if I trust you, I’m a sucker and you take advantage of me. In relationships, if I trust you, you trust me, and we get along. We live up or down to others expectations of us.

We have been teaching and practicing business according to the wrong Laws of Trust. The solution for low trustworthiness is not necessarily to trust less, but to trust more, and more intelligently. Maybe you’ve heard, “The best way to make someone trustworthy is to trust them.”

We’re Teaching the Wrong Laws

Our public education and culture is loaded with the free-market versions of trust. We teach, “If you’re not careful they will screw you.” We passcode-protect everything. We are taught to suspect the worst of everyone, be wary of every open bottle of soda, watch out for ingredients on any bottle.

Then in business school, we are taught that if customers don’t trust you, you need to convince them you are trustworthy – partly by insisting on our trustworthiness.  You can’t protest enough for that to work: in fact, guess the Two Most Trust-Destroying Words You Can Say.

By teaching distrust and confusing trust recovery with messaging, we are teaching entire generations to be suspicious of anyone and everything. By teaching suspicion and distrust, you can make book on it: what we’ll get is a reduction in trustworthiness. Read the Tale of the Thieving Convenience Store Managers.

This doesn’t mean we shouldn’t teach trustworthiness; much of my career has been built heavily around that. But by itself it’s not enough.

We need also to be teaching risk-taking, relationships, and the values of being connected to other human beings –not just than calibrating the dangers of hitchhiking.

Don’t tell me there’s no data.  The General Social Survey has been collecting data on the propensity to trust since 1972. One interesting finding: the propensity to trust is strongly correlated with educational attainment.  What does that say about the social and economic costs of cutting educational investment in the name of lowering taxes?

And don’t tell me I’m naive. I was in Denmark a few months ago. I left my wallet in a taxi. By the time I discovered it, my client had left me a message to say the taxi driver had returned it to their offices, and they’d paid him to bring it to my hotel. Which he did.

I expressed amazement at how well it had all worked out. My client said, “Nothing to be surprised at. Anything less would have been surprising.”

I bet the Danes hitch, too.

Trust is Not Reputation

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I trust my dog with my life – but not with my ham sandwich.

That is but one of dozens of humorous ways to indicate the multiple meanings we attach to the word “trust.” It’s remarkable how good we are at understanding the word in context, given its definitional complexity.

One interesting aspect of trust is its relationship to the concept of reputation. This issue is coming to the fore in the so-called “sharing economy” or “collaborative consumption” movement.

Who can you trust on the Internet to deliver the goods they said they would deliver (think eBay), to leave your apartment in good shape if you lease it on Airbnb, to not be a creep if you offer someone ride-sharing?

It’s tempting to look at the concept of reputation as the scalable, digital badge of trust that we might append to all kinds of transactions between strangers, rendering them all as trustworthy as your cousin. (Well, most cousins.)

Tempting, but not exactly right.  Because trust, it turns out, is not reputation.

Greenspan’s Folly

William K. Black has written about the dire consequences of Alan Greenspan confusing trust and reputation, saying:

Alan Greenspan touted ‘reputation’ as the characteristic that made possible trust and free markets. He was dead wrong.

Greenspan believed that Wall Streeters’ regard for their own reputation meant that markets were the best guarantor of trust – because they would perceive their own self-interest as aligned with being perceived as trustworthy.

Unfortunately, Greenspan’s belief was probably based more in ideology than in history or psychology, as the passion for reputation was overwhelmed by the passion for filthy lucre, immortalized in the acronym IBGYBG (“I’ll be gone, you’ll be gone – let’s do the deal”).

Early Social Reputation Metrics

Think back, way back, to November, 2006.  A company called RapLeaf was on to something. Here’s how they described their goal:

Rapleaf is a portable ratings system for commerce. Buyers, sellers and swappers can rate one another—thereby encouraging more trust and honesty. We hope Rapleaf can make it more profitable to be ethical.

You can immediately see the appeal of a reputation-based trust rating system. And with a nano-second more of thought, you can see how such a system could be easily abused. (“Hey, Joey – let’s get on this thing, you stuff the ballot box for me, I stuff it for you, bada-boom.”)

Then there’s Edelman PR’s pioneering product, TweetLevel. It does one smart thing, which is to avoid a single definition of whatever-you-wanna-call it. Instead, it breaks your single TweetLevel score into four components: influence, popularity, engagement, and trust.

Edelman says:

having a high trust score is considered by many to be more important than any other category.  Trust can be measured by the number of times someone is happy to associate what you have said through them – in other words how often you are re-tweeted.

According to TweetLevel, here are my scores:

  •             Influence        73.4
  •             Popularity      70.1
  •             Engagement   56.4
  •             Trust               46.9

So much for my trustworthiness.

Guess who owns the number one trust score on TweetLevel: it’s Justin Bieber. Now you know who to call for – well, for something.

The KLOUT Effect

It’s easy to poke fun at metrics like TweetLevel that purport to measure trust; but in fairness, because trust is such a complex phenomenon, there really can be no one definition. What TweetLevel measures is indeed something – it’s not a random collection of data – and they have as much right to call it ‘trust’ as anyone else does. Indeed, I respect their decision to stay vague about what to call the composite metric.

KLOUT raises a more specific question: it directly claims to measure Influence, and is clear about its definition, at least at a high level:

The Klout Score measures influence [on a scale of 1 to 100] based on your ability to drive action. Every time you create content or engage you influence others. The Klout Score uses data from social networks in order to measure:

  • True Reach: How many people you influence
  • Amplification: How much you influence them
  • Network Impact: The influence of your network

I find that to be a coherent definition. If I’m a consumer marketer, I want to know who has high KLOUT scores in certain areas, because if they drive action, I want them driving my action.

Note that Klout doesn’t mention reputation at all – just influence. Where does trust come in?  Klout says, “Your customers don’t trust advertising, they trust their peers and influencers.”

Well, I wouldn’t go there. On TweetLevel, the top three influencers are Justin Bieber, Wyclef Jean, and Bella Thorne. Influencers – definitely. People to be trusted? What does that even mean?

Trust Metrics

One problem with linking trust to reputation is that it can be gamed. One problem with linking trust to influence is that notoriety and fame are cross-implicated. Bonny and Clyde were notorious, so was Bernie Madoff and the Notorious B.I.G. – that doesn’t make them trusted.

Take Kim Kardashian. Is she influential? You betcha: her Klout score is a whopping 92. Does she have a reputation? I bet her name recognition is higher than the President’s.

But – do you trust Kim Kardashian? Well, to do what? (By the way, TweetLevel gives her a 70.1 trust score – way higher than mine. Now you know who to ask when you need a trustworthy answer; I’m referring all queries to her).

So here are a few headlines on trust metrics.

  1. They’re contextual. You can’t say you trust someone without saying what you trust them for. I trust an eBay seller to sell me books, but I’m not going to trust him with my daughter’s phone number.
  2. They’re multi-layered. Both Klout and TweetLevel correctly recognize that social metrics can’t be monotonic – a single headline number is useful, but it had better have nuances and deconstructive capability.
  3. Behavior trumps reputation. You can get lots of people to stuff the ballot boxes for you; it’s a lot harder to fake your own  behavioral history. Trust metrics based more on what you did, rather than just on what people say about you, are more solid.
  4. Good definitions are key. When people say ‘trust’ and don’t distinguish between trusting and being trusted, they’re not being clear. There’s social trust, transactional trust – it goes on and on. Good metrics start by being very clear.

So what’s the link between reputation, influence, and trust? There is no final arbiter of that question. Language is an evolving anthropological thing, and as Humpty Dumpty said, words mean what we choose to say they mean. So job one is to be clear about our intended meanings.

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Full disclosure: I have a small interest in a sharing economy company, TrustCloud. I have written more about the sharing economy and collaborative consumption in a White Paper: Trust and the Sharing Economy, a New Business Model.