Trust Quotes: Interviews with Experts in Trust features interviews with experts who deal in exceptional ways in creating higher trust in workplaces, business practices, and society—both in theory and in practice.

Trust Quotes: Interviews with Experts in Trust is a project of Charles H. Green’s Trust Matters blog.

The Biggest Trust Myth of All Time

A lot of casual bloggers out there – and a few not-so-casual writers, even some famous people – are fond of quipping about trust in ways that at first blush sound wise. 

But often, these aphoristic musings turn out on closer inspection to be untrue.  They are pop wisdom, bubble gum sayings, reflecting a failure to apply critical thinking to the subject of trust.  They belong more to the genre of inspirational wallpaper postings on Pinterest

Case in point: the common claim that “trust takes years to build, and only minutes to destroy.”  It may be the Biggest Trust Myth of All Time. 

First, let’s point out some of the myth-purveyors – then we’ll get to why it’s a myth. 

The Ubiquity of the Biggest Trust Myth

A simple Google search finds the following:

“It can take years to create trust and only a day to lose it.”Angus Jenkinson,  From Stress to Serenity: Gaining Strength in the Trials of Life    

“It’s [sic] takes years to build trust and minutes to lose it.” @Relationsmentor, with 66,000 Twitter followers

“Trust takes years to build, seconds to break, and forever to repair.”Amy Rees Anderson, Balancing Work and Family Life Blog

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”Warren Buffett, America’s favorite billionaire

“Trust is not something you can take for granted. It takes months – sometimes years – to build. Unfortunately, you can lose it overnight.”...Michael Hyatt, author, virtual mentor, online leadership platforms

“Although [trust] takes a long time to develop, it can be destroyed by a single action.”…Frank Sonnenberg, author, leadership expert

“It takes time to build trust and just seconds to blow it away.”Dunham+Company, strategic marketing and fundraising services provider

“It takes years to build trust and minutes to lose it.”Vontae Davis, 2X Pro Bowl cornerback for the Indianapolis Colts

“It takes time to earn [trust in leadership] but it takes no time to lose it.”Building Blocks of Agency Development: a Handbook of Life Insurance

“It takes years to build trust and a single moment to lose it.”Steve Adams, Children’s Ministry on Purpose: a Purpose-driven Approach to Lead Kids Towards Spiritual Health

All right, you get the idea. Note there are a few respected names on there, along with all the casual opiners. Now let’s see what’s wrong with it. 

Myth Busting: The Relationship of Trust and Time

Let’s chip away at this myth a piece at a time.

First, a lot of trust doesn’t take time at all. Most trust gets created in step-functions, in moments-that-matter, in our instantaneous reactions to what someone says or how they comport themselves. We humans are exquisitely tuned relationship detectors, finely honed over eons of evolution to rapidly assess a host of factors revealing others’ good or bad intentions toward us. We make snap judgments because we’re built to do so (and we generally do them well).

Second, the kind of trust that does take time is just one very particular subset of trust: the kind of trust that depends on reliability, dependability, predictability. Almost by definition, the assessment of reliability requires the passage of time, because it requires repetition – and repetition only happens in time. 

But reliability is far from the only, or even most powerful, form of trustworthiness. There is credibility, the sense that the other party is smart, capable, expert, competent – an expert. There is intimacy, the sense that the other party understands us deeply, respects our innermost feelings, and is a safe haven for personal issues. There is other-orientation, the sense that the other party has our best interests at heart, rather than just being focused on themselves. 

When time-based trust is up against the other types of trust, it is a weak force. When Bernie Madoff’s clients saw a brief hiccup in results, they didn’t lose all trust in him: after all, he had credentials. He understood them (or so they felt). And he donated to their charities. What’s a little blip in his track record, with all that to  fall back on?

When a West Virginia lab reported that Volkswagen’s on-the-road emissions results varied massively from those in the lab, Volkswagen didn’t “lose trust in an instant.” On the contrary: the Great Volkswagen successfully denied the obvious (credibility), and had a long-standing positive consumer image. It took years for that fatal data to be acknowledged. 

Third, time-based trust is relatively thin trust. I trust Amazon in large part because they have a great track record of delivering my packages correctly and on time. But if my trust is solely based on reliability, it can be overwhelmed – one way or the other – by other factors.  Suppose I have a wonderful customer service experience with Amazon: I’m likely to trust them even more, even if they miss a few deliveries. Suppose I have a terrible customer experience with Amazon: my trust will go way down, even if they continue excellent delivery. Time is not the factor it’s cracked up to be.

The Heart of the Matter: It’s Not Time, It’s Quality

The heart of the matter is this: comparing trust gained and lost isn’t a function of time, it’s a function of quality. 

If I have a deep level of trust in you, and you screw up a little bit – I’m likely to forgive you, give you another chance, cut you a break. Of course, if you screw up a lot – enough to use up the reservoir of trust we’ve developed – then that’s another matter entirely. 

Think about your friends. If you screw up a little bit – forget to bring the salad for the picnic, show up late for the movies, do that annoying thing they asked you not to – do you instantly lose all their trust? Of course not. Only if you betray a deep confidence, or gossip about them behind their back, or conspire to keep them from getting that promotion, will you lose their trust in an instant.  

Because it’s the quality of trust gained and trust lost that matters – not the passage of time.

Think Volkswagen; BP; Wells Fargo. Was trust lost “in an instant?”  First of all, the ‘instant’ was more like months or longer, but never mind – that’s a pretty short time if you’d previously had years of good reputation. So how do we describe that?

First of all, reputation is not trust. Having a “good reputation” doesn’t say much about trust. For most of us, ‘trusting’ a company just means we like their products, or ‘trust’ them not to violate laws. That’s a pretty low bar. 

When a scandal emerges, we lose trust in those companies quickly – not because trust loss is quick, but because there wasn’t much trust there to begin with. 

• If I trust you deeply, you’re going to have to do a lot to lose my trust. 

• If I trust you shallowly, you can easily lose my trust. 

• Whether trust loss happens quickly or slowly is a function of how much trust we had, and how bad was the violation: it is not a function of the calendar. 

The next time someone tosses that platitude about ‘trust takes a long time…” at you, try this:

Tell them they’re dead wrong – but that you still trust them. It’s a great counter-example: because if they’re so wrong about trust itself, then shouldn’t their error mean you’d instantly lose trust in them? 


By the way, Barbara Kimmel has a similar take on this issue: see The Quote that Does Trust a Disservice.

The Trusted Executive: John Blakey

John Blakey is a UK-based author, speaker and executive coach. He just came out with a new book, The Trusted Executive. In this issue of Trust Matters, I chat with him about the book, and about his view of trust.

John, welcome to Trust Matters. You’ve got a new book out – The Trusted Executive. It’s your second book, right? Why did you write this book?

You could say this book is the story of my life! And hopefully, the story of all our lives at least in some part. It’s about how trust is lost and how trust can be regained.

I was reminded of this by the events of the global financial crisis of 2008-2009; a time when trust in ‘big business’ was lost and we all paid the price. A devastating event that jarred our notions of what we expect from executive leadership. Sometimes it’s helpful to forget the impact of such a breach of trust, to move on and to keep yourself busy. But other times we need to stop and think and learn the lessons we need to learn.

My own response was to first write a book called ‘Challenging Coaching’ with my colleague, Ian Day. The purpose of this book was to help the executive coaching profession learn the lessons it needed to learn from the global financial crisis. I then enrolled on an executive doctorate at Aston Business School in 2012, because I wanted to research the lessons that the wider world of business leadership needed to learn from the events of 2008-2009. This research path led me to the work on trust and I devoured the academic literature, before interviewing a host of CEOs on the topic of trust, including those in the UK, US, Europe and Asia. Gradually, my thoughts became clearer and ‘The Trusted Executive’ started to be written.

At the end of the day, I care about the reputation of business and it makes me sad that this reputation has been damaged in recent years. I have committed thirty years of my career to being a business leader, whether that be as the international managing director of a global multi-national or as an award-winning entrepreneur. Like many others, I came into business because I thought it was a force for good in the world. It seems we are at risk of losing that reputation and we need to show we care about getting that reputation back.

Excellent, thank you. I am aware, as of course are you, of the dwindling levels of trust in business these days. Say something about that?

The topic of trust has been brought to the fore by a number of recent events. Not just the global financial crisis I have just mentioned, but also the series of corporate failures and scandals that have occurred since 2008 – the events at FIFA, Volkswagen Group, Barclays Bank and BP.

Against this backdrop, the trustworthiness of business organisations continues to suffer. The 2014 Edelman Trust Barometer found that only one in five public respondents trusted business leaders to tell the truth and make ethical and moral decisions. Furthermore, only 43 per cent of respondents would trust a company CEO (compared to 62 per cent who would trust ‘someone like myself’.)

A recent paper from the Council on Business & Society summed up the mood when it stated ‘Society’s trust in corporations and their executives is dismally low, with the crisis in leadership fuelled by a relentless media cycle and a growing consumer influence through the global spread of information and viewpoints over the internet.’

Give my readers a quick story line of the book, if you would please?

The story goes like this:

In the old model of business, leaders worshipped profit and got things done through intellectual ability and authority. This worked to a degree and for a while. But transparency has broken the old model. Through globalization, diversity, technology and shifting demographics we now see through the opaque lives of organisations. As a result, we have lost trust in authority and lost trust in organisations and leaders who worship profit.

Authority as the glue of organizational life is no longer sufficiently ‘sticky’ to hold it all together. We need a new glue. The new glue of business of is partly a broader sense of purpose (results, relationships and reputation) and partly a deeper bonding of stakeholders through trust. Leaders need to take their trust-building skills to a completely new level if they are to create this new glue of 21st century business life.

Of course, the devil is in the details. What’s your view of how we do that?

Building trust is not as simple as delivering on your promises. I posit trustworthiness as ability x integrity x benevolence. For each pillar of trustworthiness, the book proposes three habits that modern leaders need to master. Typically, our understanding of trust has amounted to solving only 10% of the problem. Successful leaders will master all nine habits.

Some habits are familiar to us, such as choosing to deliver, to be honest and to be open. Others are more radical and challenging such as choosing to be morally brave, to be kind and to be humble.

Through these habits we will architect a new business model populated by trusted executives. This will be a model fit for diverse 21st century stakeholder of business and a model that will drive not just financial results but also inspiring relationships and a positive, long term reputation.

Give me a specific example, if you would? Say, a habit from the integrity section?

Under the pillar of integrity there are three habits – choosing to be honest, choosing to be open and choosing to be humble. If we take choosing to be open as an example, according to a 2014 survey of 1,600 managers in the UK by the Institute of Leadership & Management, openness is by far the most significant driver of trust. This finding was backed up by various CEO comments in my own research interviews such as ‘The first way to build trustworthiness is through open communication.

Consistent, open communication builds a belief that you are being told everything you need to be told’ and, ‘As a Chair going into a company, I get an instinct about the CEO. It’s really important what my gut feeling says about their trustworthiness. I’m testing it out all the time. I’m watching how open they are.’

But openness is not simply about telling the truth. Being open goes beyond being honest; it involves speaking the truth and then giving something more. Being open requires a leader to expose themselves and reveal some vulnerability. As Patrick Lencioni, puts it, choosing to be open involves ‘getting naked’.

In the book, I explore how leaders can show appropriate vulnerability and openness without undermining their credibility in front of their followers. At its root, this involves reframing their perception of vulnerability as a strength of the modern, 21st century leader who is focussed upon building trust rather than a weakness of the 20th century leader who was focussed upon winning battles regardless of the longer term cost to their underlying relationships.

What is your greatest wish for the book?

That it spark a debate in the boardroom regarding the role of trust in a modern business. I hope it will make CEOs and corporate leaders sit up and think again about their individual role in the trust-building challenge and so inspire them to commit to new habits for themselves and their organisations.

Beyond this, it would then be a bonus if the book’s impact leaks further outside the business realm into the worlds of education, politics, sports and parenting, where trust is also a key driver of success and sustainability.

I have a colleague in Slovakia who is writing a version of the book for 10-12 year olds which will convert the book’s messages into a parable for children based on the progress of a sports team competing in a handball tournament. I was initially surprised that he saw the relevance of the book to children, but then I suppose trust is something inherent to all successful relationships whatever your age or your profession.

How can the book help business leaders at a practical level?

It should help them to deliver outstanding results; inspire relationships; and leave a positive long term legacy.

I hope that after reading the book, business leaders will understand why trust is such an important driver of success, and why it is becoming ever more critical in a world where nothing can be hidden. The models in the book will help leaders translate this understanding into practical steps to improve their own trustworthiness and that of the organization as a whole.

On the one hand, this involves role-modelling specific behaviours on a day to day basis. On the other, it involves leading transformational change across the whole organization and instilling a culture of trust. It is both a micro and macro level challenge.

We also know that we all make mistakes. The book will help leaders recover from mistakes where trust has been damaged quickly and effectively through using proven coaching techniques that I’ve practiced myself and taught to over 120 CEOs across 22 different countries in my role as an executive coach.

If you could share only three insights about trust with a business leader what would these be?

First, I’d stress that trust matters. Whether you look at the academic research or listen to the front-line leaders, that it is clear. In 2002, Tony Simons and Judi Parks at Cornell University conducted a survey of more than 6,500 employees at 76 US and Canadian Holiday Inn hotels. They discovered that a one-eighth improvement in a hotel’s score on leadership trustworthiness led to a 2.5% increase in profitability. They concluded that ‘no other single aspect of manager behaviour that we measured had as large an impact on profits’.

Second, you cannot control trust. According to Rousseau, ‘Trust is a psychological state that comprises the intention to accept vulnerability based upon positive expectations of the intentions or behaviour of another’. It is my psychological state and my decision. Whatever you as the leader thinks, says or does, you cannot force me to trust you. However, as a leader, you can influence my decision and what influences my decision is your level of trustworthiness.

Finally, trust and authority are not the same thing. In the past, we trusted people because we were told to trust them by people in authority. When you were a child, you watched the politician speaking on TV and you might have said, “he looks a bit shifty to me”, and, no sooner had the words left your lips, your mother would snap back, “But you should trust the politicians!” “Why mum?”, “Because they are politicians”.

That is how it used to work, but this model is breaking down. As part of my research into trust, I interviewed Ben Page, CEO of the market research company, IPSOS Mori. Ben told me that their surveys reveal the level of deference to authority is dropping with each successive generation. Today, he says, only 29% of us believe that those in charge know best.

Who inspires you as a trusted executive in the business world?

There are some great role models out there, but if I had to pick one it would be Paul Polman, the CEO of Unilever. When it comes to ‘big business’, they don’t come much bigger. They have 172,000 employees, annual revenues of more than $50 billion and sell products in 190 countries.

When Polman was appointed CEO in 2009, he launched the company’s ‘Sustainable Living Plan’, which has since become a benchmark for triple bottom line thinking. The ‘Sustainable Living Plan’ aims to reduce Unilever’s environmental footprint and increase its positive social impact while also doubling sales and increasing long-term profitability. In 2014, a review of the ‘Sustainable Living Plan’ revealed the following progress:

  • Unilever’s ‘Sustainable Living’ brands accounted for half of the company’s growth and were growing at twice the rate of the rest of the business.
  • More than 55 per cent of Unilever’s agricultural raw materials were being sustainably sourced, more than half way to the 2020 target of 100 per cent.
  • CO2 emissions from energy and water in manufacturing had reduced by 37 per cent and 32 per cent per tonne of production respectively.
  • Unilever had improved the health and wellbeing of 397 million people; 40 per cent of the way towards its 2020 goal.

The punchline is that, in the same period, Unilever’s share price rose by more than 40 per cent! The story of Unilever under Paul Polman’s stewardship shows that a company can deliver results, relationships and a positive long term reputation in society as a whole. It is an inspiring story and I was privileged that Paul wrote the foreword to my book because I can think of no-one else who is currently ‘walking the talk’ as well as he does.


Thanks John for taking the time to share your thoughts.


Trust Quotes: Interview with Barbara Kimmel, of Trust Across America

Trust Inc bookI got to know Barbara and Jordan Kimmel some years ago when they were forming the initial idea for what became Trust Across America, an organization devoted to improving corporate trustworthiness.

Barbara edited a book which is about to be published (November 1), called Trust Inc.: Strategies for Building Your Company’s Most Valuable Asset. This seems like a good time to interview her on Trust Matters. Enjoy.

Q. Barbara, congratulations on the new book, which is most impressive: I got my advance copy a few days ago. Before we get into that, however, tell us about Trust Across America – Trust Around the World.  What is it, how did you come to found it, and what is its purpose?

A. Very simply, TAA – TAW is an umbrella organization and clearinghouse whose mission is enhancing trustworthy behavior in organizations. We got the program rolling in 2009 in the wake of the financial crisis, realizing that no group was addressing organizational trust from a holistic and collaborative perspective.

Today we sponsor four main initiatives:

  1. The FACTS® Framework measures the trustworthiness of 2500 public companies using 5 quantitative indicators of organizational trust;
  2. Communications efforts, featuring programs like our Trust Talks YouTube Channel, Trust Across America Radio, Blog roll, Trust Breakfast Roundtables, Trust Workshops and a Reading Room, to name just a few.
  3. The Alliance of Trustworthy Business Experts (ATBE) formed in January 2013, is a growing group of global experts working collaboratively, through a number of initiatives, to tackle trust head on.
  4. Most Trustworthy Programs. Every year we name our Top Thought Leaders in Trustworthy Business and our Most Trustworthy Public Companies.

Q. The new book is a collection of 30-plus author-experts on trust. It’s got an introduction by Ken Blanchard and book cover quote from Steven M.R. Covey –

A. – not to mention the opening article by you and me writing together!

Q. – thank you, thank you. Now, where did the idea for the book come from?

A. Well, here are some headlines from 2012 to the present. They serve as a good starting point to answer your question.

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.”

The cost of the tort litigation system alone in the United States is over $250 billion. – or 2% of GDP  (Forbes, January 2012)

“Americans are fed up with politics, not government, study says” (trust in government at 50 year low for five years running)- September 2012, Government Executive

The Big 4 accounting firms’ aggregate global revenue is $110 billion, of which between 40-50% is made up of audits. (Going Concern, January 2013)

The six biggest U.S. banks, led by JPMorgan Chase & Co. (JPM) and Bank of America Corp., have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years.  (Bloomberg, August 2013)

I’ve had the honor of meeting dozens of global experts, each with his or her unique perspective on organizational trust. It occurred to me that if I could bring them together to write a series of  essays, perhaps we could collectively begin to provide a new roadmap for organizational trust.

Q. OK. Now, with that as background – tell us a bit about the book itself?

A. There’s a well-documented business case for trust ranging from deepening employee commitment to higher profitability. This book contains a lesson for everyone, from CEOs to Boards, senior management, and small business owners. Trust is a core quality of all great leaders and organizations.

We have 34 experts in all joining forces to tackle organizational trust. In addition to Covey and Blanchard, we’ve got Kouzes & Posner, Patricia Aburdene, and Linda Locke, to name just a few.

Through dozens of case studies, real world situations, models and examples, the book talks about:

  • Why trust matters
  • How trust works in practice
  • What it takes to be a trustworthy leader
  • How trustworthy teams impact business
  • How to restore trust
  • What the future holds in store

The book also has 3 appendices:

  • Definitions of organizational trust from a global perspective
  • Examples of vision and values statements
  • A call to action

Q. We see boatloads of survey data about how trust is down these days, in almost every institution. What should we make of all that?

A. Charlie, you and I have spoken about painting trust with broad brush strokes. Industry is not destiny. There are many organizations that are exhibiting high levels of trust. It all boils down to culture and leadership. We see companies that rise to the top of our FACTS Framework, year after year. Those companies outperform  their peers and benchmarks like the S&P – in terms of stock market performance. This proves that trustworthy companies are not sacrificing profitability.

Q. I have seen some of that data and it is really impressive. In fact, the whole broad basis of the initiative is impressive. Anything you want to add from the bully pulpit here?

A. Thank you for the opportunity to talk about our new book and our goals for TAA –TAW. We are chipping away at the organizational trust issue and plan to continue to create new tools and programs. I urge your readers to drop me a note if they have something to add to the conversation or would like to roll up their sleeves and get involved. [email protected]


Barbara Kimmel, Executive Director, Trust Across America – Trust Around the World




Trust, Sales and Getting Real: Interview with Author Mahan Khalsa

Mahan Khalsa is one of the more respected names in the field of complex sales. When I set out to write Trust-based Selling, there were three books foremost in my mind; Let’s Get Real or Let’s Not Play, Khalsa’s 1999 book, was one of them.

FranklinCovey bought his business, and he went on to head their Sales Performance Group. More recently, he has become the head of Ninety Five 5, which combines sales techniques with change management and the science of expert performance.

A Harvard MBA, he splits his time these days between Colorado and Hawaii.

CHG: First of all, Mahan, thank you very much for speaking with us here today. I have long admired your work from afar, and I’m personally delighted to make the connection.

I want to focus mainly on trust as it relates to sales and business change, but let’s start more broadly. I did not start off in sales, and neither did you, if I’m correct? How did you come to be involved in the field of selling?

MK: My first encounters with selling were painful. I was working my way through college and needed a job, and took a position as a door-to-door salesman. I’ve written about it at greater length but I’ll summarize it by saying one of the happiest days of my life was when I got a job in a factory. I promised myself that I’d never be involved in sales again.

What I had experienced was abusive to both buyer and seller. Both were sullied. I don’t project my personal history on others who have had great experience in sales right from the beginning – or overcame early negative experiences in route to great success. That was just my experience.

I actually made it through college, and found myself the director of a residential yoga and meditation community. We arose at 3:30 a.m. each day, took a cold shower, and did two-and-a-half hours of yoga and meditation. I would have been happy doing yoga and meditating all day long.

However, part of the lifestyle was to take what you gained from your morning discipline and apply it in the everyday world. We had a lot of energy and motivation but lacked knowledge of how to run businesses. To remedy that, I was fortunate enough to get accepted at Harvard Business School, which was nearby.

Following my MBA, I founded a computer systems company. When it came to the moment when we actually had to sell something, that was a crisis and a conundrum. On one hand, it was my company, I felt it was up to me to bring revenue in. On the other hand, my experience in sales had led me to believe that you could be either a salesperson or a spiritual person but not both.

The combination was tricky. There were times I felt very honorable—and failed miserably. There were times I was successful in getting immediate revenue—and compromised my values and probably my long-term relationship with the customer. There were times I thought I had it all together—and still fell flat on my face. Yet eventually, everything started to come together. Not only was I successful at that which I once feared and hated, it became what I most enjoyed.

I thought others might benefit from what I had learned. I designed and taught a course for Arthur Andersen partners, which was successful and over time became the firm’s worldwide model for face-to-face selling.

Luckily, one of my later clients was FranklinCovey. They valued what I brought to the table enough to purchase my company in 1999. It has been an excellent relationship for all concerned. My Sales Performance Group colleagues and I have worked with tens of thousands of salespeople and consultants from some of the world’s most successful companies. The Helping Clients Succeed coursework has been taught in over forty countries in nine different languages. We have coached and consulted on initiatives involving many billions of dollars of sales.

Despite our success something important was missing. Companies weren’t getting as much of the sustained improvement we all hoped for. As it turns out, training, by itself, no matter how good it is, starts fading the moment the trainer leaves. Several of us formed Ninety Five 5 LLC. Ninety Five 5 concentrates on execution and measurable results, using training as only one part of a systemic improvement initiative. We’ve been able to build on the well received content developed with FranklinCovey and produce impressive results with companies willing to move beyond sales training to get serious about real world sales transformation.

CHG: The subtitle of your book originally was, “The Demise of Dysfunctional Selling, and the Advent of Helping Clients Succeed.” What did you mean by ‘dysfunctional selling?’

MK:. I count as dysfunctional those actions and behaviors that ultimately serve neither seller nor buyer. Since most people are both sellers and buyers in their lives, most can fill in their stories of what this means. Put in all the things you hate when sellers try to manipulate rather than serve your interests. Put in all the things you hate when buyers ask you to do things that don’t seem to make sense to either party or that aren’t likely to result in them deciding in your favor or even deciding at all. Put in all the things that detract from rather than aid in producing both the results and relationships to which both parties aspire. Unfortunately, the lists can be long.

Most professional sellers have good intent. They know manipulation and deceit hurt rather than build long-term sales success. They know that building trust is essential to both creating and capturing value. So they eliminate a lot of what would otherwise be dysfunctional—no surprise there. Yet most also consistently engage in actions that are not value adding–for them or for their customers. Even when great intent is present, there is a lot of room for improvement in eliminating dysfunctional behaviors.

CHG: I notice your recent editions changed the subtitle to “Transforming the Buyer/Seller Relationship.” Anything noteworthy behind that change?

MK: The new title goes to the essence of what we are about – creating a substantial improvement in the mutual success and satisfaction of both buyers and sellers. We feel there are ways of interacting that better benefit both parties and that doing so is a good contribution to the kind of world we want to live in.

CHG: I asked Neil Rackham if there was one, over-arching biggest single problem in the field of selling, and he said yes—for him it was the tendency to jump to solutions before having completed the questioning process. Do you yourself find an over-arching ‘missing link’ in the field of sales?

MK: I would certainly rank “pre-mature solutions” at or near the top of my missing links list. Almost all of us have room for big improvements in our ability to “seek first to understand” before we “seek to be understood.” And the challenge is being able to gain access to and skillfully develop that understanding with the key decision makers and influencers, many of whom seem to be hidden away from those who are trying to understand them.

Looking a little more holistically we could say the missing link is the ability to successfully blend excellent inquiry with excellent advocacy – to do a superb job of matching our story to the client’s story. Good inquiry is essential and most often the more undeveloped portion of the balance – and it is still only part of the equation. I’ve seen people get good at inquiry and still not be able to convert on advocacy.

I’ve also changed my view a little bit on what the true missing link is. I now feel the biggest over-arching problem is that 80% or so of all salespeople fail to get substantially better, year after year. They may get more comfortable; they may make the minor improvements they need to make just to stay even. However, as Geoff Colvin states in Talent is Overrated,

“Extensive research in a wide range of fields shows that many people not only fail to become outstandingly good at what they do, no matter how many years they spend doing it, they frequently don’t even get any better than they were when they started.”

The need for growth in most companies never stops; unfortunately, the growth of sales people does. That creates a “growth gap” that most companies try to fill with quantity (more salespeople) rather than quality (better salespeople). The missing link is not more good stuff, it is getting good at good stuff.

CHG: A fascinating insight. To that point, you have talked about how you integrated sales with change management and the science of expert performance. How did you come to make that connection? And what is the link with sales and change management?

MK: We hold two beliefs that happen to be backed by considerable data, research, and direct experience:

1. Deliberate practice is the key to improvement.

2. A supportive environment is the key to deliberate practice.

Deliberate practice, while not a particularly sexy phrase, is the term commonly used in the science of expert performance to describe the single most common and powerful attribute of top-flight performance in almost any field. It contends that the quality and quantity of mindful practice and application is what separates star performers from the decent, average, and poor performers. (Geoff Colvin’s aforementioned Talent is Overrated is a good read on this topic).

Deliberate practice is not ordinary practice. As Edward Deming once said, “It is not enough to do your best. You need to know what to do and then do your best.” So the quality of the practice and application is as important as the quantity of practice – and the quantity is essential.

What I find liberating and motivating about the research is that everything, repeat everything, we need to do in order to get really good at sales is learnable – if we are willing to practice. It doesn’t have to do with our DNA, our native IQ, our personality type or social style, our years of experience. If we are willing to engage in a high number of repetitions of quality practice we can become as great as we want to be. That’s powerful.

CHG: That really is powerful. I’ve always felt that people’s capacity for change is grossly under-estimated, but I confess I like hearing your scientific tone in expressing that truth. Reminds me of Gladwell’s 10,000-hour rule. How can companies encourage it?

MK: If an organization feels a strong need for its salespeople to keep growing their performance, and they see deliberate practice as a key lever to realizing that growth, the next issue is how to align the organization to make deliberate practice a way of life that is encouraged, expected, and rewarded.

That’s where the field of change management or “systemic alignment” comes into play. Leaders in organizations have many levers they can pull that will influence what behaviors their people adopt and apply. Coordinating how and when those levers are pulled is a key to moving a sales force rather than just the top 10 – 20% who will make sure they will grow no matter what is happening around them.

CHG: I like the idea that you focus heavily on beliefs: you highlight five (my favorites: ‘move off the solution,’ and ‘world-class inquiry precedes world-class advocacy’). This focus on beliefs, and on relationships—your subtitle is “Transforming the Buyer/Seller Relationship”—seems to me to have, for lack of a better term, a spiritual bent to it. Am I right?

MK: I would say the focus on beliefs is practical, powerful, sometimes transformational, and for most people, under developed. I might go as far to say that sales is the process of understanding and influencing beliefs, our own and those of others. I’ve not thought of it as spiritual per se, though depending on how someone defined “spiritual” it may have a fit.

Most of us have heard the phrase, ‘people buy based on emotion and justify with facts (or rationale).’ Various neuroscientists and cognitive psychologists have given scientific support for this conventional wisdom.

I would modify the statement a bit and say people decide based on beliefs – what they believe to be good or bad, right or wrong, useful or not, meaningful or not important, high ROI or low, and so on. How they see the world through their beliefs determines what they do–which in turn determines the results they get. Those beliefs could be emotional, or based on what a person believes to be fact – whether those beliefs are corroborated by empirical data or not.

For many people, the beliefs that underlie their actions and decisions are unconscious or at least not clearly articulated. And when selling to multiple people, the beliefs may be conflicting as well as unclear. So the better job we do of understanding, articulating the key beliefs the client needs to resolve, both intellectually and emotionally, the better job we are likely to do demonstrating how we and our solution can address those beliefs. Understanding and clarifying beliefs goes to the heart of inquiry and addressing them goes to the heart of advocacy.

Too often both our inquiry and advocacy deal with the so-called ‘facts.’ However, as a University of Michigan study claims, “facts often do not determine our beliefs, but rather our beliefs (usually non-rational beliefs) determine the facts that we accept.”

Or as Annette Simmons claims in The Story Factor, “People make their decisions based on what the facts mean to them–not on the facts themselves. The meaning they add to facts depends on their current story [their beliefs]. Facts don’t have the power to change someone’s story. Your goal is to introduce a new story that will let your facts in.”

So yes; I believe the focus on understanding and addressing key beliefs is critical to helping clients succeed.

CHG: Stephen MR Covey, Jr., author of The Speed of Trust, is a colleague of yours. What do you think is the most powerful point he makes about trust?

MK: I think his most powerful point is that trust can be built on purpose. It doesn’t have to be an accident of circumstance or personality mesh. Trust with others – and in ourselves, for that matter–can be exercised like a muscle. When you apply Deliberate Practice to consciously build trust, trust becomes a reality with more and more people in more and more situations – to the benefit of all concerned.

CHG: Let’s focus on trust. It’s easy to get lost in various permutations of trust, but how do you see trust’s role in selling? In change?

MK: It’s hard to come up with something more original than the obvious – when you have trust everything goes faster, costs less, and produces superior results (usually). Typically, we find that three things flow together, up or down: trust, value, and the flow of meaningful information. If you have two you can usually get the third. Trust is hard to measure, and value is a lagging indicator. However, the flow of meaningful information (beliefs and facts) from the right people (decision makers and influencers) is a good leading indicator of whether trust exists and value will follow.

CHG: Let me just interrupt there, sorry. In my jargon, what I hear you saying is that transparency is a driver for increasing the odds that a would-be trustor will perceive a would-be trustee as trustworthy—thus creating trust. Yes?

MK: A little complex, but yes. As you say, there are many definitions, permutations, elements to trust – it has multiple and complex equivalents. Your trustworthiness equation is certainly a good, well-tested definition. People have to trust that what you will do will really get them the results and relationships they want, they have to trust that you will actually do what you say you will do, and trust that what you do will be performed in their best interests – or that your best interests are best served by helping them get their best interest met, which indeed certainly seems to be the case. Blinding flash of the obvious – to gain trust, you have to be trustworthy.

I think that in inquiry, a key skill is to consciously, with our words and behavior, create a container of safety where people can freely express what they think, feel, believe to be true. And if the container is really strong and expansive, they will allow us to question, examine, and offer alternatives to those beliefs. Most only are willing to do that if they feel the information they share will be used for them rather than against them – they have to trust our intent, our purpose in asking questions.

I sometimes say intent is more important than technique – perhaps another way to express the old axiom that people don’t care how much you know until they know how much you care. The good news is that you can get crystal clear on your intent and how it is mutually beneficial, and you can practice becoming completely congruent with that intent before picking up the phone or walking into a room.

CHG: I find people first want to know the ‘magic phrases’ to use, and it’s really not a matter of words only.

MK: You can communicate your intent without even saying a word. When people can sense that your intent serves their best interests, they are willing to open the trust valve at least a little. If that little bit is rewarded, they can risk a little more, and so on. If the risk is continually rewarded, trust grows. Of course, as you well know, all the hard earned work can vanish suddenly if the bond is broken. So constant attention to language and behaviors is critical – and learnable, and improvable.

As far as the role of trust in change, I feel the key is that if everyone in the organization feels the best way of improving our numbers is to focus first on improving our client’s numbers, the basis of trust will be institutionalized. Jack Welch once said,

One thing we’ve discovered with certainty is that anything we do that makes the customer more successful inevitably results in a financial return for us.”

To create a trust based organization everyone has to believe that our self-interests are served by helping our customers reach their self-interests. When that belief permeates an organization and is backed by action, process, and rewards–not just value statements–trust can become a competitive advantage.

Often, in large organizations, the further away executives are from the customers, the more they focus on salesperson activity or quantity based leading indicators (numbers of calls, number of proposals) versus quality based leading indicators (flow of meaningful information). Perhaps they don’t trust the quality can be improved and that pulling the quantity lever is their best choice. They concentrate on improving the seller’s numbers (high self-orientation) rather than the buyer’s numbers (high other-orientation) and they put into place reward and reinforcement systems to reflect that emphasis. As buyers we can feel where that focus is placed, and ironically, when it is on the seller’s numbers rather than our own, we are less likely to take action to improve their numbers.

Customer focus is not just a tag line. It is a passionate, all consuming orientation that can guide everything we do. Importantly, it helps us stay away from what I called “dysfunctional” selling and push back with both courage and consideration when customers ask us to do–or to not do–things which would help the client succeed.

CHG: You have the ear of a lot of people—some of whom even read this blog! What would you suggest are the top few things people can do as individuals to increase trust in the workplace?

MK: Well, of course before I’d want to give someone any advice, I’d want to make sure they wanted it and would want to understand their specific situation. And I’d want to make sure I was following my own advice before I’d advance it to others. So here are three things I tell myself – and we at Ninety Five 5 tell each other.

1. No Guessing. If people are going to trust you to help them get what they want, need, and value, you have the obligation and right to understand their beliefs as to what that really means. Remember, beliefs are often unclear or not well articulated. If you guess about what they want, don’t have mutual clarity on the outcomes and rewards, don’t understand what has or will stop them, don’t know how they will make a decision, or what resources they will apply to getting a solution that meets their needs, you will likely miss the (undefined) target and trust will suffer.

2. Say it, Do it. Build the power of your word. You don’t have to say, “I promise.” If you say it, it is your Word, and your Word is your bond. If you say it, do it. Period. If you find it is going to be a challenge to meet your word, communicate the difficulty to the other person. Let them agree to a change or say they need you to meet your word. If you need to meet your word, meet it. Period.

3. Be Clear. Be crystal clear on your intent and how it serves the interests of the other person(s)–even as it serves your own. Before any interaction, clear out any internal or external pressures that might cause you to be incongruent with that intent. Let your intent manifest with clarity and congruency through what you say, how you say it, what you look like, and what you do. Be so clear that it becomes easy and natural to be fearless, be flexible, and have fun.

Or maybe just be the kind of seller you would love to have if you were the buyer. One you could really trust.

CHG: A perfect note to end on. Thanks so much, Mahan, it’s been very enlightening.

Trust & Investment Banking: Interview with The Epicurean Dealmaker

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

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

As he puts it:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I have no reason to believe they were exaggerating.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Recent interviews include:

Robert Eccles on Integrated Reporting (Trust Quotes #18)

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

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

Read the complete Trust Quotes series.

Integrated Reporting: Interview with Harvard Business School’s Robert Eccles

Robert Eccles is a Professor of Management Practice at the Harvard Business School. For over three decades he’s been active in management accountability—linked to, but not limited to, more traditional concepts of financial-only reporting. He’s written several books before, perhaps most notably Building Public Trust: The Future of Corporate Reporting with Sam DiPiazza, former Global CEO of PricewaterhouseCoopers (PwC), but he may have finally hit a new level of interest with the arrival of his book One Report: Integrated Reporting for a Sustainable Strategy.

Bob speaks to us here a few months following a 100-person “Workshop on Integrated Reporting: Frameworks and Action Plan” sponsored by the school’s Business and Environment Initiative. You can download a free ebook from the event, The Landscape of Integrated Reporting: Reflections and Next Steps, with papers by about half the participants—it’s excellent.

Trust Quotes

Trust Quotes Series

Charlie Green: First, thanks very much for speaking with us. I first became aware of you from your work with Sam DiPiazza, but you’ve been working in performance measurement and reporting since long before that.

Might we say your expertise is the measurement and management of diverse indicators of corporate performance? How shall we call what it is that you do?

Robert Eccles: I’d say that I’m deeply interested in corporate performance measurement and reporting, with an emphasis on external reporting—a powerful lever for changing behavior and decision making by executives.

CHG: How did you get into this field?

RE: It goes back to my undergraduate thesis at MIT, but we needn’t go back that far! I was an Assistant Professor at HBS when I wrote a book on transfer pricing. After I became tenured in 1989, I started writing cases for a new first year course called “Information, Organization and Control.” I found companies getting interested in performance measures beyond the traditional financial ones.

Based on this I wrote a 1991 HBR article, with Sarah Mavrinac, called “The Performance Measurement Manifesto.” One year later Bob Kaplan published his famous article on the Balanced Scorecard, another indicator of interest in this topic. We both were focused on internal measurement. Bob remains so to this day, but I got interested in what companies were reporting and what information sell-side analysts and investors wanted from them.

This led to a 1995 Sloan Management Review article called “Improving the Corporate Disclosure Process.”

I left HBS to work in the private sector and this included researching and improving corporate reporting. I wrote The ValueReporting Revolution: Moving Beyond the Earnings Game with three PwC partners, including Bob Herz, recently retired as Chairman of the Financial Accounting Standards Board. I returned to HBS in 2007 and wrote One Report which was published in early 2010.

CHG: I’ve been aware for some time of movements like the Balanced Scorecard to integrate non-purely-financial metrics into the rubric of reporting. But I hadn’t heard of Integrated Reporting until just recently. How old is that term?

RE: Good question—I’m not really sure. Allen White used the term in 2005 in a piece for Business for Social Responsibility. That same year Solstice Sustainability Works wrote a white paper called “Integrated Reporting: Issues and implications for Reporters.” But even though Novo Nordisk has been publishing an integrated report since 2004, and Novozymes two years before that, those articles went unnoticed. The times just weren’t ready.

In March, 2010, about the same time my book was published, Southwest Airlines came out with their “Southwest Airlines One Report™.” Neither of us knew about each other’s initiatives until the summer of that year. I think the times are catching up.

CHG: What is Integrated Reporting? How do you define it?

RE: First of all, the term is still gaining acceptance so there is no general agreement on its meaning. Here’s my most basic answer. It is the publication in a single document of the material measures of financial and non-financial performance and the relationships between them.

It also involves leveraging the Internet and the company’s website to provide more detailed financial and non-financial information of interest to particular stakeholders, including shareholders, along with tools for analyzing this information. Finally, it’s about increasing dialogue and engagement with all stakeholders. It’s as much about listening as it is talking.

CHG: That begins to explain the connection with trust.

RE: Right—among other things, it’s about building trust between a company and its stakeholders. This trust comes from being transparent about all dimensions of performance—successes and shortcomings—and from active dialogue and engagement. For stakeholders to have trust, they need to know their expectations and concerns are being heard and that the company is honestly and forthrightly reporting on the meeting of expectations.

Of course, trust is a two-way street. Companies can’t optimize on every performance dimension, especially over short periods of time. Trade-offs are involved and must be accepted. Shareholders need to recognize the legitimate interests of other stakeholders; ditto for stakeholders and the need for companies to make financial returns.

Risk is relevant to trust too. Creating shareholder value requires risk taking. What’s required are candor about risk levels, systems and processes for risk management, and communication about the approach to risk management. Ultimately, risk management is about good corporate governance.

The “G” part of “ESG” (Environment, Social, Governance) typically gets less attention that the “E” and “S” part, because it’s harder to measure. But that doesn’t make it less important. What happens when they’re all missing? Consider big financial institutions in the meltdown of late 2008. Or BP in the Gulf of Mexico.

CHG: If the world had a robust system of Integrated Reporting—what would we have? What are the benefits, what’s the business case (or socio-business case?) for Integrated Reporting?

Trust QuotesRE: The greatest benefit would be a sustainable society—able to meet the needs of a growing number of citizens all over the world, mostly from developing countries, while still being able to meet the needs of future generations. Neither developing nor developed countries can continue consuming natural resources at today’s rate, creating negative environmental and social externalities, and practicing poor risk management and corporate governance.

CHG: But certainly reporting can’t fix that by itself?

RE: No, certainly not. Management practices, technologies, intelligent regulation and individual decisions play an important role as well. But Integrated Reporting is central, because reporting is a major determinant of behavior. It establishes discipline for the integrated management of financial, natural and human resources. It meets stakeholders’ information needs, along with processes of engagement, to help them help the company build a sustainable strategy. A sustainable society requires that all of its companies have a sustainable strategy. Integrated Reporting is central to this.

CHG: I get the sense that recently, things have changed a bit. Is this perhaps an idea whose time has finally come? Are you still feeling quixotic, or are there some genuine causes for optimism?

RE: “Quixotic” is a good choice of words. I have been working at this for over 20 years now and I can relate to Don Quixote tilting at those windmills. But today I feel extremely optimistic. First, companies have started to do it. They came to this largely on their own, and for pretty much the same reasons. No one had written a book and the topic was still fairly obscure.

Prince Charles started his UK-based “Accounting for Sustainability Project (A4S)” a few years ago. Starting June 1 of 2010 all Johannesburg Stock Exchange listees must file an integrated report as their annual report. France and others have passed similar laws, and it’s being considered by the entire European Union.

In August of 2010 the International Integrated Reporting Committee (IIRC) was formed. The Secretariat of this group is A4S and the Global Reporting Initiative. On its Steering Committee (of which I am a member and we had our most recent meeting in Beijing on January 17) and Working Group are prominent experts on corporate reporting from many different disciplines, and from all over the world. We hope to get Integrated Reporting on the agenda of the G20 meeting being hosted by France in November 2011.

Momentum for Integrated Reporting—driven by both market and regulatory forces—is growing and growing rapidly.

CHG: Dean Nohria at Harvard Business School recently opened up your conference with some very clear and strong language about the critical nature of trust to business. You know Nohria personally, but let me ask you institutionally as well: what does it mean for the Dean of Harvard Business School to be talking trust?

RE: I can’t tell you how significant I think it is that our new Dean is talking about trust. Though he’s a close personal friend of mine, I think I can objectively say that he is a man of the highest integrity and with a strong belief of the good business can do in society. The fact that his opening remarks at the HBS workshop on Integrated Reporting you mentioned at the beginning of this interview were focused on the need for business to rebuild trust in society pretty much says it all. His opening remarks are the basis of the introduction he wrote for the EBook and I would encourage all the readers of your blog to read what he had to say.

CHG: I’ve noticed a continued effort on the part of most people in arena of ESG (environmental, social and government issues) to try and justify their work in financial terms. At least one says that’s because business will never listen unless they can clearly see the profit value tightly demonstrated. But the tighter the justification in corporate profits, the less powerful the argument for a non-profit-based accounting, much less ethos, don’t you think? What’s the right way to think about Integrated Reporting and corporate profitability?

RE: I would frame this a little differently. I don’t think the issue is profits per se. Every corporation with shareholders needs to make a profit if it is going to stay in business. Rather, the issue is how those profits are earned, what social and environmental costs are created in earning them, how much risk is being taken and how well it is being managed, and the time frame management is using in making its decisions. The latter is a key issue. A focus on short-term profit maximization and ignoring all negative externalities and excessive risk as long as the letter of the law is being followed does not lead to a sustainable strategy for a company. If most companies have a short-term orientation, and the capital markets are as much at fault as the companies are, we will not have a sustainable society.

The fundamental issue—raised but not answered by integrated reporting itself—is “What is the role of the corporation in society?” There were some very thoughtful pieces on this topic written by some of the HBS workshop participants. Society as a whole needs a big rethink about what it expects out of its corporations, especially the largest global ones that control so much and have such impact on resources.

We need to develop a collective understanding about how companies identify the needs of all stakeholders, the processes they should use to make decisions regarding performance targets and performance trade-offs, and the time frame involved.

What I’m talking about is a massive societal undertaking. But until it happens, trust in business will remain fragile, and easily lost every time we go through a crisis, even when the fault is not business’s alone.

CHG: What role can education play in helping improve trust in business? Is this mainly a role for MBA programs? Or can other programs play a useful role as well?

RE: Business schools can play a role in helping students understand society’s expectations about them as stewards of social assets. This goes beyond “ethics” (I will ignore the age-old question of whether ethics can be taught to 20-somethings if they haven’t already learned them from parents, churches and communities) and gets at the fundamental issue of the role of the corporation in society.

This topic should be part of every business school curriculum, undergraduate or MBA. It will require directly challenging the prevailing view based on financial economic theory in the western world. One hundred years ago “shareholder primacy” was not the prevailing ideology; there is no reason to think that it will or should be in 100, or even 10 years from now, particular since the concept of “shareholder” has become so loose in an age of hedge funds, technical trading programs and relatively short-term holdings by mutual funds and even pension funds.

But remember, trust is a two-way street. Citizens need a basic understanding of the social role of business, how companies work, and the trade-offs they have to make. They must commit themselves to engage as employees, customers, shareholders, and members of civil society. Too often other programs (such as in the liberal arts, engineering, science, architecture, law, and medicine) include nothing about business in their curriculum even though all of these groups are dependent on and must work with business organizations. It’s no surprise they are often hostile to business.

Hostility is not a good foundation for trust. It’s good to be skeptical, but in a constructive spirit with a desire to build trust, not to destroy it.

CHG: What’s the biggest implementation challenge facing Integrated Reporting? And what do you think is the biggest challenge to trust creation in the business world? Do those two overlap?

RE: Challenges exist at the level of individual companies, and of society. I see four major corporate challenges.

1. A company must truly have a sustainable strategy, not just say it has, which is more often the case.

2. The process for producing an Integrated Report must itself be collaborative and multifunctional.

3. Internal control and measurement systems for non-financial information are typically not as sophisticated and robust as those for financial information.

4. Internal skeptics need to be persuaded. Executives need to accept that greater responsibility will entail greater accountability and, when they fail, they will pay the consequences—just as they do with financial performance. Users, both shareholders and other stakeholders, will require a lot of education.

At the level of society as a whole, Integrated Reporting is a necessary but not sufficient condition for creating a sustainable society; that’s a giant collective action problem. Companies are the entities doing the reporting and so they clearly can and should take the lead. After all, no country has any laws preventing Integrated Reporting.

But for Integrated Reporting to be as effective as possible, other groups need to get involved too. Measurement and reporting standards for non-financial information need to be developed so that analysts and investors have confidence in them and can compare the performance of companies, at least within a sector, and over time. These analysts and investors must then incorporate those measures into their financial models, turning them into business models.

Accounting firms need to develop the methodologies and capabilities for doing integrated audits. This may require some liability protection from legislatures and regulators, who also have a codification and specification role to play. NGOs need to collaboratively engage with companies to make the processes work. They also need to take a more holistic view themselves. Educators also have a role, as I’ve already discussed.

Finally, every member of civil society—and that is each and every one of us—needs to commit to a sustainable society and to do whatever he or she can to support the Integrated Reporting social movement. We only have one planet and we’re all in this together. If we don’t work together for the long term, we’ll have no long term.

CHG: This sort of brings us full circle, does it not?

RE: Yes; both Integrated Reporting and trust are about transparency, accountability and engagement. As companies practice it, they will gain trust from stakeholders. Society-level efforts will also help build trust from the shared vision, commitment and understanding that emerges between all groups.

And, as I’ve said, ultimately effective Integrated Reporting and trust in business by society requires a new view and consensus of the role of the corporation in society.

CHG: Bob, thanks again very much for taking this time with us, it’s been fascinating.


Robert Eccles on Integrated Reporting is number 18 in the Trust Quotes: Interviews with Experts in Trust series.

Interview with Trust Across America’s™ the Kimmels: Trust Quotes #17

Nearly two years ago I was approached by a couple, Jordan and Barbara Kimmel. They had an idea for a Most Trusted Company awards program. Initially I was not interested. But the Kimmels have a way of growing on you.

Two years later, they have remained devoted to the cause of promoting corporate trust, and have morphed their efforts across LinkedIn communities, a radio show, a blog, and numerous cross-introductions. Jordan is working on a book and Barbara continues to add to the network. Academic experts on trust they are not: but impresarios, producers, organizers, and aggregators of information—they most certainly are. And they’re finding their way to the epicenter of many trust-related discussions.   

I spoke with them recently.

CHG: Jordan and Barbara—I’ll just call you J&BK for the sake of print space when this interview gets published—why and how did you come to be interested in trust?

J&BK: We have been entrepreneurs and business owners for many years. Our respective professions bring us into daily contact with the media, both on-air and behind the scenes. We have both witnessed a steady deterioration in news, particularly in regard to the frequency and severity of corporate scandals and, along with many others, we have been disheartened by the breakdown in corporate trust.

We began to question whether this was merely negative media bias or something much more pervasive throughout the culture of corporations. Understanding the importance of trust within business, we decided to take a closer look at the measurable components of trustworthy business behavior and identify those companies that are making tangible strides in this regard.

CHG: Okay, but why?

J&BK: Well, a couple of reasons. One is frankly to balance the depressingly negative news on trust that’s so prevalent these days. We’ve both seen some very high-trust aspects of business and wanted to give it some airtime too.

The other thing is to give some publicity to best practices—to point out where trust is being created and companies are behaving in a trustworthy manner and to help other companies understand how they’re doing it.

CHG: Give us a little context please on the two of you; where did you come from, what’s your background?

J&BK: We’re both from the New York area.  Barbara got her undergraduate degree in International Affairs from Lafayette College and an MBA in marketing from Baruch. Over the years, through her firm Next Decade, Inc., she has focused on media campaigns (with a concentration on authors and book publishing) and consulting start-ups on building marketing and communications planning.

Jordan got his BA in Economics and an MS in Urban and Policy Sciences, both from SUNY Stony Brook, and has spent the last 30 years in financial services where he’s made hundreds of media appearances. He’s a regular on CNBC and Fox News and his third book, the Magnet Method of Investing, was released by John Wiley in August 2009.

CHG: Tell us how the name Trust Across America came about?

J&BK: The trust crisis extends far beyond the North American boundaries but we had to start somewhere with something manageable. We decided to begin looking at trustworthy behavior in corporate America, and so created the name that seemed to be the most fitting for what we were trying to do—at least in the short-term. Full disclosure: it was our youngest son Seth, age 13, who actually came up with that particular name

CHG: What does Trust Across America consist of today? Is this the final form you envision?

J&BK: As of today, TAA is divided into five main initiatives:

·      Developing a framework for measuring organizational trustworthiness,

·      Conducting an annual audit of trustworthy behavior in public companies and identifying leaders,

·      Compiling independent and multidisciplinary company and industry audits and reports,

·      Providing media opportunities and access, and

·      Collaborating in educational and policy programs.

CHG: Let’s talk about the first two. You’ve developed a proprietary model for operationally defining the trustworthiness of a company, right? What are the components of that model? 

J&BK: The measurement of organizational trustworthiness integrates five trust drivers that form an acronym called FACTS™, which stands for:

            1. Financial Stability and Strength

            2. Accounting Conservativeness

            3. Corporate Integrity

            4. Transparency

            5. Sustainability

In turn, those five drivers are taken from three separate databases. Each of the drivers is given equal weighting.

CHG: Let’s explain why the equal weighting:

J&BK: Well, you were one of those we consulted with to make that determination, Charlie. We concluded that an objective definition of corporate trustworthiness just does not exist and we felt we had pretty much identified the primary trust drivers brought to our attention by countless other expert sources we had spoken to. So frankly, there was no good reason to give them anything other than equal weighting. That seemed sensible to us, not wrong, and more defensible than any other particular weighting. So that’s what we did.

CHG: I agree, very sensible. And—what has the data shown?

J&BK: Applying these trust drivers, we completed our first comprehensive audit of trustworthy business behavior in November 2010. It identified 59 public companies out of almost 3,000 that reached the “Gold Level” of trustworthy business behavior…above average performance in the five criteria listed above.

This audit is the first holistic dashboard analysis of the trustworthiness of the largest publicly traded companies. It provides C-Suite executives with a trust health checkup that highlights areas of both strength (leverage points) and weakness (vulnerabilities) within their own company and with their competitors.

CHG: Let’s just take a moment to acknowledge just what it is that you’ve done here. This is not a poll, a temperature-taking, a popularity contest, a reputational trend instrument. This is something quite different: this is new. This is an objectively-defined, independently-measured set of criteria for defining and ranking the trustworthiness of corporations. Right?

J&BK: Correct. This is not the Edelman Trust Barometer, or the Harris Poll of trusted industries. Those are polls, measuring the trusting-ness of various constituencies regarding business and institutions. If a poll says people don’t trust banks, you don’t know if people are fearful, or if banks really are objectively untrustworthy. FACTS™ clearly focuses on the second: and company by company too. We can not only tell you how trustworthy banking is compared to the oil industry, but what the scores are for JPMorganChase and Exxon.

CHG: And you can produce individual company results?

J&BK: Yes. Our FIDES™ (Roman goddess of trust) proprietary software lets us generate “trust” audits for several thousand publicly-traded companies, sectors and industries.

CHG: Well, you can’t just fly in and depart without naming a few names. Give us some findings. Who’s tops, for example?

J&BK: We’re not releasing the audit results yet, but I’ll tell you the number 1 company is an oil company.

CHG: An oil company takes the top spot! That’s fascinating! Will people buy that?

J&BK: What’s to buy? The data speaks for itself. They may argue about the definition, but what we’ve done is take data out of the argument game. It is what it is.

CHG: Where can people get access to whatever you release, whenever you release it?

J&BK: Our updated website is set to launch around December 15 at It will have lots of new and useful information.

On December 22 we are hosting our Holiday Festival of Trust on our radio show, Trust Across America, that airs every Wednesday from noon to 1PM EST, and will be “counting down” the Top 10 companies during the show.  You can also join our group on LinkedIn called Trust Across America for frequent updates and to collaborate with us.

CHG: You’re also doing a ton of networking. Tell us about that.

J&BK: We have a growing network (we call it our Trust Ecosystem) of academics, consultants and company experts from a number of disciplines including trust, ethics, reputation, integrity, leadership, governance, CSR (Corporate Social Responsibility), ESG (Environmental, Social and Governance), sustainability and responsible investing. Our main “social network” is our Trust Across America group on LinkedIn. We provide opportunities for discussion and dialogue about trustworthy business behavior among members, with the media, and other interested groups and organizations.

We also host a weekly live radio show and draw many of our guests from our core group.

We develop educational and policy programs: we are collaborating with a growing list of professional organizations. We participated in a program with the Centre for Sustainability and Excellence in New York at the beginning of December.

CHG: Along the way, you’ve met and talked with (and interviewed, and introduced, and blogged about, etc.) a number of people in the ‘trust business.’ Care to drop a few names?

J&BK: Well, the trust business is “big”, meaning that that it covers lots of corporate territory. We continue to be both surprised and impressed by the many different professional perspectives taken when evaluating trust within organizations. We also continue to be just as surprised at how many experts operate within their own silos, examining trust from singular perspectives.

Since we’re a collaborative group, and we don’t want to appear to be playing favorites, here’s a link to our radio show guests. Most of these people are part of our growing trust ecosystem and we certainly want to show all of them equal gratitude for helping us get as far as we are today.

CHG: I’m really curious to hear—what have you learned about trust so far? What are some things that maybe you didn’t know about before, but now you have come to believe?

J&BK: Probably the stickiest thorn has been the lack of a clear definition of trust/trustworthy behavior. It’s hard to get consensus and find solutions for something that cannot be defined.

Also, different stakeholders have different trust “needs.” Companies must find ways to address all of them to be holistically trustworthy. No one thing does the trick.

It seems that corporate culture drives trust. Unlike some of the factors that contribute to corporate trustworthiness, instituting a trust culture is much harder than, for example, implementing a sustainability program. It requires a cultural shift that goes far beyond an individual job title, division or department.

Finally, it’s not uncommon to see a disconnect between public perception of a company’s trustworthiness and reality. Interestingly, this works in both directions.  While there are not many companies that are “hitting on all cylinders,” conversely, those names that do rise to the top may be missing a communications opportunity.

CHG: What do you think of as the value of trust in business?

J&BK: As so many have already pointed out, the value of trust to a business cannot be over-estimated. It’s the lubricant that makes a business run smoothly, efficiently and with long term viability. Without internal and external organizational trust it runs unevenly and its future becomes questionable.

CHG: What are your thoughts about how trust can best be encouraged in business?

J&BK: Increasing numbers of companies are beginning to understand the value of acting in a trustworthy manner. In the words of Peter Firestein, this cannot take the form of a tactical marketing maneuver. It must stem from the underlying values of the firm. Our audit results show that those companies that are embracing trustworthy behavior—as part of their corporate culture—may also have better financial returns and, in the long term, outperform their competitors.

There is growing public awareness and interest in:

1. Companies that aren’t just “doing things right” but are culturally “doing the right thing”: whether you choose to call it a “green washing” or “trust washing” smokescreen, the public is waking up to insincere corporate claims.

2. Companies that treat all stakeholders fairly and with respect: we must move away from the old business model of short term “quarterly” shareholder maximization.

3. Companies that take a longer term view of their business practices and values by integrating various financial and non-financial performance metrics.

Many believe that some of these factors are beginning to drive consumer behavior. If we can help steer media attention toward companies doing it best, those companies will enjoy a virtuous cycle. They’ll attract better employees, increase revenues and garner greater customer and community support. Other companies will emulate them and trust will pull them down a righteous path. Finally, we don’t think that trustworthy behavior should be dictated by more government enforcement and more regulation.

CHG: That’s a big one you dropped there; you’re saying corporations can become more trustworthy without being regulated?  

J&BK: At least to some extent, sure; that’s where we hope our efforts will pay off.

CHG: What do you envision for Trust Across America ultimately; in your wildest dreams, what would you like to see it accomplish?

J&BK: Our goal is to help build trust in corporate America. If we can push enough in the right direction, maybe that’ll be enough. We want to help companies see themselves through a trust lens. If that happens, the actions of consumers and investors will prompt companies to act in more trustworthy ways and our mission will be accomplished. By collaborating with other thought leaders, we believe this can be accomplished. President Ronald Reagan kept a sign on his desk that read: “It’s amazing how much you can accomplish when you do not care who gets the credit.” 

NY Life ex-Chairman Sy Sternberg on Trust in the Life Insurance Business: Trust Quotes #16

Seymour “Sy” Sternberg served as Chairman and CEO of New York Life from the late 1990s until 2008. New York Life is a Fortune 100-sized company in existence since 1845. It is the largest mutual life-insurance company in the US, and one of the largest life-insurers in the world.

I spoke with Sy in his offices atop the New York Life building on lower Madison Avenue in Manhattan.

CHG: Thank you very much for taking time with us to talk about trust, an issue that I understand has some resonance for you.  Let’s start with the company. New York Life goes back over 150 years. Are there some principles or values that have stayed with the company since its beginning?

SS: When I took over, we decided on a very simple set of values for the company; not that the values were new, in fact they represented values we had always had—I just wanted a shorthand for it. Those values were financial strength, integrity, and humanity. Implicit in the integrity component, the way I see it, is trust.

Rich Sternhell recently showed me an interview from about 40 years ago with our then-CEO: let me quote a bit of it:

“These days we’re being constantly reminded of how important are honesty, integrity and dependability. We were founded in 1845 on a remarkably similar premise: Trust us, we said then as we say now, and we will keep our promises…The guarantees we make last a lifetime.”

One of our more recent ads shows an old desk with an old quill pen on it; the text says, “Our promises have no expiration date.” My point is simply, these are themes that have been around for a long time. [Note: the three values are engraved on a plaque inset into the wall on the ground floor of the NY Life headquarters building—across the hall from the company museum].

We’re trying to emphasize this in other ways too. The industry has for a long time sold immediate annuities. We’ve renamed that product to emphasize our values: Guaranteed Lifetime Income. Same product, but it emphasizes we are insuring not mortality risk, but longevity risk.

It also uses the word “guarantee,” which again reinforces the promises we’re keeping. We’re not emphasizing your risk of dying; we’re insuring your “risk” of living, making sure you’ve got enough money. That’s the current market need; but it’s also a simple rephrasing of our basic values that have always driven us.

The word ‘guarantee’ is important in that rephrasing too; just like our guarantees have always been there for life insurance.  We paid every claim in the ’29 crash.  We paid claims under a flag of truce in the Civil War. During the San Francisco earthquake, we were the first to provide loans to survivors. During 9/11, when I chaired the American Council of Life Insurance, we waived all of our war provisions in our policies, and did not enforce clauses on proof of death. We led that drive. That is all values-driven. Do what is right. And that’s where trust comes in.

CHG: How did you, Sy Sternberg, happen to join New York Life?  What brought you into the fold?

SS: I got an electrical engineering degree from City College of New York, then went to work for Raytheon in Massachusetts, and got a masters in Electrical Engineering at Northeastern. At that time, electrical engineering was the one place where you could pursue computer science. I switched from hardware to software, and helped design Raytheon’s first automated drafting systems. We did a purchasing system, and then I was hired away by a consulting firm that had a contract with MassMutual, in Springfield, to automate the entire agency network. It was a great job, so I joined up, and in 1975, MassMutual hired me directly.

I rose up the ranks in information systems, and the president then asked me to take over the health insurance business. (I didn’t realize at the time that they figured that business was dying and there was nothing to lose in handing it to me; fortunately, I was able to turn it around). I left MassMutual for New York Life in 1989, then rose up the ranks and became Vice Chairman in 1995, and president in 1996, and—on April Fools’ Day 1997—CEO.

CHG: What role does the concept of trust play in the life insurance industry? Is that role distinct from the role trust plays in business in general?

SS: I think people expect trust in all businesses.  The need is always there. But I think it’s distinct in life insurance, for several specific reasons.

One reason is complexity. Few people really understand insurance, they cloud over when you get into it. It means you end up having to trust the person who sells it to you.

Another reason is that it’s a high stakes product: there are big consequences. If we don’t get it right, and it doesn’t pan out, that not only hurts you the customer, but the family involved as well. Consequences extend beyond the customer to his or her most important relations.

The third area of trust is that this is a business where it’s fairly hard to switch providers or vendors. You can’t just redo your insurance policy like you can switch restaurants or bank accounts—because the rates have gone up as you’ve gotten older. You may not even be insurable any more. So the consequence of changing vendors is much more severe in this business.

So there are three big reasons why trust is even more important in insurance than in others. And one more: we say in our ads, what we sell is promises; that’s it. If people can’t trust your promises, you’ve got a serious business problem.

CHG. Let’s go back up to big picture for a minute: what does the notion of ‘trust’ mean to you in the world of business?

SS: To me, trust means operating honestly. There is no agreement that can substitute for honesty in this world. There are bad people–those are people without a conscience.

Most of us, we do what’s right because it’s right, because you wouldn’t be able to sleep otherwise. So how could Madoff do what he did? Because he has no conscience, that’s how. I’m not saying you shouldn’t have formal agreements, but the relevant question is: if you didn’t have a formal agreement with someone, would the same thing happen? And if the answer is yes, than that’s someone you can trust.

Most people live by those principles, or at least try to; they may have less of a fine ear about it, but they’re not without a conscience.

CHG: So what’s happened to that ‘fine ear’ out there, how have we gotten less attuned to doing what’s right?

SS: The world lives cyclically, not linearly. We move from overly done self-interest to the opposite. Under certain environmental conditions, one’s behavior becomes more self-interested.

The insurance industry in the 50s and 60s was a Father Knows Best business—the Robert Young character was a life insurance agent. It was not dog eat dog, it was civil. At that time, no life insurance company had a CMO or a CFO—because, honestly, you couldn’t easily lose money. You invested at 5%, and provided an IRR of 2%, so who needs a CFO?  And you only changed your products every 5-10 years, so who needed a Chief Marketing Officer?

Until about 1980, that is, when Jane Bryant Quinn wrote, “Do you know what the internal rate of return on your life insurance is?” Suddenly you had to get a CFO, because suddenly the products and markets all became a lot more complex. Product series started changing twice a year. It became a more competitive market, and some agents took shortcuts.

In mid to late 80s, the whole industry got caught up in promising dividends.  Now, we all had small print saying dividends weren’t guaranteed, but agents would say you know, they’ve always grown. Well, interest rates had gone up for 30 years, that was the truth—it was a huge secular rise in interest rates. But then the 80s came, and suddenly—and for the last 20 years—they’ve gone down.

But because of what the agents said vs. what really happened, we now have compliance departments. At New York Life, we have over 100 people now in our compliance department, making sure that nothing gets said that’s wrong. At first, the agents hated that stuff. The morale of the agent was very low in the 90s. We had to learn to operate as a much more rigid business required by regulations.

So—was that a time of low integrity? I don’t really see it that way: I see it as more circumstantial. 30 years of rising rates, that’s long enough you begin to forget things could be otherwise.

CHG: However: people who get wrapped up in compliance, they end up doing things not because they’re right—because of their conscience—but because of compliance. Aren’t compliance rules in some sense the cause of a decline in conscience?

SS: There’s definitely some truth to that. It goes to the role of principles. Let me give you an analogy. How do you determine what’s a liability on your balance sheet? There’s a whole set of accounting literature to answer that. Well I’ve got a simple definition: you put it on the balance sheet when it is, or could be, a liability of the enterprise. That’s a principle.

PricewaterhouseCoopers came out some years ago in favor of principles-based accounting, rather than rules-based accounting. This relates to compliance—when you work from principles-based accounting, not rules-based accounting, you don’t focus on ways to get around the rules—you focus on the principles.

So—you focus on principles, because of exactly what you said: focusing on rules compliance doesn’t exercise the conscience.

CHG: Well that leads us nicely into talking about what happened in the recent financial crisis.

SS: There are four things that happened. Let me start with the non-unique aspect, which is that this was a natural cyclical situation. This is the credit market. After a bad cycle in the credit markets, you put in strong covenants and you raise the spread, all in reaction to the bad cycle. But then high spreads attract competition, then people start squeezing margins, and covenants get weaker and weaker, and finally it blows up again. So part of what happened is—just another business cycle.

But here are the other three drivers, special ones. Number one was the repeal of Glass Steagall, and that was a serious mistake. Glass Steagall was put into place for a really good reason. It was created because the mindset and objectives of a customer doing business with a bank are different from the mindset and expectations of a customer doing business with an investment firm. Once a bank starts thinking like an investment firm, the risk profile of the bank goes up.

CHG: Help me out here. How is it that the investment banks don’t appear to agree with that? Aren’t they running partly a banking-client business, and partly a casino? How is that?

SS: Well, people see things the way they come to see them. If you’re an investment bank these days, they don’t see a contradiction like you might. Sandy Weill started it with CitiCorp, combining insurance and brokerage and banking, and he founded it partly on the model of European banks. Not crazy, just different.

Of course, then it all ran up to 30:1 leverage ratios, and it all would’ve gone down in flames had it not received TARP funding. Back in the Glass Steagall time, it would have been one thing for Goldman to have taken risks, and quite another for Citibank to have done so. But post Glass Steagall, those distinctions were lost to us.

CHG: OK, back to reasons for the meltdown. Besides cyclical credit and the repeal of Glass Steagall, what else?

SS: Well, here’s what I said to Barney Frank.  You’ve got a broker, with no skin in the game; his whole motivation is to sell. Then you have the originating bank, that used to take that loan and keep it on its books, and that bank was always concerned it was underwritten correctly. Since then we moved to a place where those banks were laying off all the loans. The people making loans these days have no skin in the game. The originating banks shouldn’t be allowed to lay off 100% of the mortgage loans they make.

In our business, you can’t do that—you’re not allowed to. In New York State, you can’t legally re-insure any more than 90%, which means the one who sells the product still has skin in the game. The underwriter needs to sustain a piece of the responsibility; that’ll keep him honest. In the packaged mortgage loan business, we lost that. The lenders did not have skin in the game. ‘Put that in the legislation,’ I said. (And it did, in fact, end up in the legislation).

CHG: And the last reason?

SS: The b-schools and the investment banks pride themselves on the creation of what they called innovation; exotic securities, securities of securities. A mortgage-backed security maintains in it the discrete mortgages that went into the basket. So you could do a credit rating on it.

But once you turn it into a collateralized debt obligation, a CDO, you lose that direct connection with constituent parts. So here’s Moody’s and S&P. Now, people claim they were rating CDOs in bad faith, from self-interest. I don’t think so; I think they rated them wrongly because they didn’t know what they were doing. Ignorance, not venality, was the explanation. Nobody knew how to test these models, including the ratings agencies.

And on top of it all, it was all interconnected—the world of investment banks and credit instruments and global markets had all become inextricably tied together.

CHG: Now, let me push you on that. Sam Hayes, investment banking professor at HBS, is quoted in the movie Inside Job saying (about Wall Street in general,) “Oh, I think they understood what was going on, all right.” So—how do I square his idea with yours that it was just an honest issue of complexity and low understanding?

After all: you guys at NY Life managed to cut your risks a full year ahead of the crash. You saw it coming—why didn’t they?

SS: Let me explain that. Our Chief Investment Officer came to me a year and a half before the blowup and said, “I don’t like what I’m seeing here.” The covenants were coming off, the spreads were compressing, the indicators were clear. He said, “I want to start taking X% of our cash flow every month and putting it in treasuries.” Which meant taking a hit. We didn’t know when it would all fall down, we just knew that eventually it would. Reversion to the mean is among the most dependable principles. So when it did, we were very well positioned.

But that doesn’t mean we knew that a particular CDO would blow up, or that it was a single-A versus AAA. Our business was the general environment, the credit cycle issue I mentioned—we did not have to deal with the complexity issue I mentioned. We could afford to focus on the secular credit cycle.

CHG: Let’s touch on the mutual form of insurance in the insurance business.

SS: Good, because it’s related to this discussion. A mutual insurance company is not owned by its shareholders, it’s owned by its customers, like a co-op. And I believe the natural state of an insurance company is a mutual, not a stock company, and here’s why. And why it brings this discussion full circle.

Back in 1997, a lot of companies were de-mutualizing. One of the arguments was if you become public, you could raise capital and acquire companies. People felt the finance businesses were consolidating (again, think CitiCorp), and the argument went you had to raise capital to acquire, or be acquired.

But we felt is there’s a fundamental conflict between stockholders and customers in an insurance business. In a widget company, a creditor wants to see the maximum amount of equity in the firm, so that there’s a cushion to the debt-holders. The equity holder, on the other hand, wants to have the minimum equity, to maximize their return on equity.

If you’re a widget customer, you don’t have a horse in that race. You really don’t care about the debt/equity balance.

But in the insurance business, if you are a customer with an insurance policy, you are a creditor in that company. Our customers loan us money—called premiums—and in the end, we pay it back—in death benefits. It’s a creditor relationship, pure and simple. Our customers, in other words, are exactly aligned with our creditors. The more capital we have, the more safety there is to pay claims. That’s how we get rated AAA—our ability to pay policies.

Other companies that went stock started buying back stock, because their shareholders wanted higher returns. So in 2008, to take one example, a headline came out from Lincoln National; their earnings were down. And in the same press release, they approved a stock buyback program. When every warning signal is pointing to the fact that they should be husbanding their capital, they were about to use that scarce capital to buy back stock to placate their shareholders. That’s a conflict of interest in our minds.

And a year later—a billion and a half in TARP money went to Lincoln National. To pay back a bunch of the money that frankly had gone to their stockholders a short while earlier.  Obviously that didn’t have to happen with us.

So what’s trust got to do with that? Everything. We are in the business of making promises and keeping them. We have to live by long-term principles of financial strength and integrity—and the mutual form is at the heart of that.

A mutual company has a singular focus—what’s best for our creditors/customers. We have no conflict. That’s why I argue that the natural form for a life insurance company is not a stock company, but a mutual company. That’s all about principles, and all about trust.

CHG: Sy, this has been fascinating. Thank you so much for taking the time to speak with us.


Seymour “Sy” Sternberg on Trust in the Life Insurance Business is number 16 in the Trust Quotes: Interviews with Experts in Trust series.

Recent interviews include:

Ava J. Abramowitz on Essentials of Negotiation (Trust Quotes #15)

Robert J. Kueppers on Trust and Regulation (Trust Quotes #14)

Rich Sternhell on the Evolution of Trust in Business (Trust Quotes #13)

Read the complete Trust Quotes series.

Ava J. Abramowitz on Essentials of Negotiation (Trust Quotes #15)

Ava J. Abramowitz is a lawyer, mediator, and author.  She is also an honorary member of the American Institute of Architects and currently is serving as the first public member of the National Council of Architectural Registration Boards. Not surprisingly, she teaches negotiation at George Washington University Law School; was in-house counsel for the American Institute of Architects; serves as a mediator in the Federal courts in Washington, DC; and lectures nationally on negotiation. 

As befits such an interesting woman, she is married to a man who is quite interesting in his own right, Neil Rackham.

But our main interest in this interview centers around a most remarkable book she has written, titled Architect’s Essentials of Negotiation (The Architect’s Essentials of Professional Practice). While it’s nominally about architects, the fact that it’s so readable outside that profession is a guarantor that she’s talking about universal truths. Let’s dig in.

CHG: Ava, thanks so much for doing this interview with us. I’m excited, because I was so taken by your book. Let me start in a very particular place. Outside of perhaps existentialist philosophers, theologians or therapists, you and I are the only ones I know who refer to the Other—in caps—when we’re talking about the protagonist in a commercial relationship. Why do you do that?

AJA: In all my writing and always in my thoughts, I refer to the "Other" and not the "other side" when talking about those with whom we negotiate. "Other side" implies the people are opponents. "Other" implies they are just not us. It is hard to build common ground with opponents, but a bit exciting, invariably challenging, and sometimes even fun to build common ground with people who, although they want a solution to a shared problem as much as we do, view that problem differently because they have different sets of eyes and experiences. A small change in mindset, but it’s an important and useful one to use and remember. Not a friend. Not an enemy. Just an Other.

CHG: Let’s take the readers right to the punch line: in your view, what is the central message of this book?

AJA: In business and in everyday life, it is far more profitable for all the parties to forge strategic alliances with each other to solve the problems facing them. You need not like the Other. In the early stages of negotiation, you need not even trust the Other. But if you and the Other collectively can solve the problem in a way that meets both of your compelling short and long term interests and needs, you should do it. Solid negotiation skills will get you there. They can be learned.

CHG: Reading your book it seems so obvious that that’s how things should work. Why doesn’t it always turn out that way?

AJA: Sometimes the way people analyze the situation leads them to believe that there is no common ground. I don’t want to get into politics, but right now the United States is so bifurcated that people forget that everyone who is running for office believes in “life, liberty and the pursuit of happiness” and in “truth, justice and the American way.” They may differ on the definitions of those values or how best to achieve them, but at the core the persons sitting across the aisle from them are not an enemy to be destroyed. They are just Others with different views of the problem and the solution.

CHG: Notwithstanding what I said above, this book was written nominally for architects. And in one way, they are unique. Unlike most other professions, there are usually three parties involved in commercial discussions: the architect, the contractor, and the owner. Does that make architecture more complicated than, say, the practice of law?

AJA: Ah, good question, but no lawyer could say yes and survive. After all, the American legal system is not routinely described as “an adversary system” for nothing.  Here lawyers represent parties who may have entered a negotiation with no desire for a settlement. For example, parties may have retained a lawyer to obstruct a solution because they figure that delay is in their interests. Architecture and construction, at least at the outset, are less conflicted. At the start of every project everyone wants the project to come in on-time, on budget, and with no claims. And everyone wants to make a profit.

Additionally, risk is handled differently in the legal setting than on the construction site. Lawyers are taught to think liability first and foremost and to figure out ways to foist liability on the Other, freeing their client to risk without responsibility. Sophisticated parties in design and construction, however, recognize that risk and reward go hand in hand. To them, the easiest way to achieve success is to assign each exposure to the party most capable of managing it, and to give that party all the responsibility and the power—both authority and fee—needed to manage that exposure well. In other words, they forge strategic alliances with and among the parties with mutual success being the overriding goal.

CHG: You know quite a bit about the psychology of sales through Neil. Are there any sales insights that fit with your sense of negotiations?

AJA:  For many a person Getting to Yes: Negotiating Agreement Without Giving In by Fisher and Ury was their introduction to negotiation. There Fisher and Ury set out a staged theory of negotiation that building on common ground should produce a shared solution that meets the parties’ key interests and needs, and solves the problem that brought them to the table in the first place. The book and many of its derivative works, though, are less eloquent on how precisely do you do it.

For me, Neil’s book, SPIN Selling filled in that missing blank. By asking questions, particularly Implication and Need/Payoff Questions, one can uncover the explicit needs of the Other and address them. With that knowledge common ground can be more readily identified and built.

How powerful a tool are questions? Inestimable. Questions reveal the Other’s needs, values, and priorities. They help with elegant option development. They expose problems in your own thinking. Questions are a solid alternative to saying no. They help you manage the negotiation, giving you time to process the information you hear and figure out how you want to deal with it.

Questions help you build trust. There is nothing more powerful than listening and using the information you are hearing to build common ground. Nothing convinces the Other more that you care and are worthy of their trust.

CHG: Part of why this book resonated so well with me is the fundamental stress on relationship; that’s what trust is so much about, too. I know you’ve thought about trust, presumably about trust as it relates to negotiation and mediation. Do tell us what you think about it?

AJA: Trust is a matter of choice.You can choose to trust, or not. You can choose to be trust-worthy, or not. You can negotiate with people whom you trust and with those whom you do not. Trusting appropriately just makes negotiation easier.

Clients use proxy measures when deciding whom to trust. It is clear from research that clients look for competence, candor, and concern in the professionals they retain. The more the client sees the consultant being competent, candid, and concerned about the client, the more the client tends to trust the consultant. It is easy to say, “Be candid, concerned, and competent,” but it is not always easy to do and even harder to prove that you are being candid, concerned, and competent.

Try proving you are trustworthy by saying to someone, “Candidly….” Saying that invariably puts the Other instantly on guard. Additionally, it raises an issue where none existed: Were you not being candid before? When will you deceive again? There are clearly ways to prove you are Other-focused. Asking questions helps prove to the Other that what they say, think, and feel is important to you. Disclosure of internal information helps, too, particularly when it makes your motivations and perceptions transparent.

Your book brings this all home. In one of the best books on earning and deserving trust, The Trusted Advisor, you and your colleagues, David H. Maister and Robert M. Galford, take these earlier findings one step further, developing what you called the trust equation where trust is a function of credibility, reliability, intimacy, and self-orientation. You found that the more credible, reliable, and intimate one is with and about the Other and the less self-oriented they are, the more they will be trusted by the Other. Words to live by.

CHG: Let’s get beyond architects alone here. Is there a Single Biggest Mistake people make in thinking about negotiation? Or a Big Three?  

AJA:  To answer that question, let us pin down the kind of expert negotiator I have in mind. Based on Huthwaite research I have come to classify as “expert” those negotiators who share three characteristics: They have a track record of reaching agreements, a track record of their agreements being implemented successfully, and a track record of the Other being willing to negotiate with them again. In other words, I value, as experts, people who, time after time, successfully resolve their principals’ long-term and short-term problems through negotiation and in such a way that the Other is willing to work with them again.

What do these experts have in common? They prepare and strategize for the negotiation before the negotiation so that when they sit down with the Other they have freed themselves to listen, and they listen hard and well. They use the information they hear to locate an idea they can support and build on, ultimately yielding common ground. And even as they close in on a negotiated agreement, they prod. “How will that work?” What if x happens?” “How will it play out if all things go well, and if they do not?” "Is there anything we can do to build success into the effort?"

These negotiators are committed to long-term success of the parties and the agreement. If the agreement is to fall apart, they want it to fall apart before it is signed, so that they can pick up the papers, shake them off, and try again. And that is why they and their clients succeed and the Other is willing to negotiate with them again.

CHG: Ava, this has been a delight. Thank you so much for ‘stopping by’ to chat with us, and for sharing your wisdom and insights.

Disclosure: I am an Amazon affiliate and receive a very small commission for products purchased through my Amazon links.

Robert J. Kueppers on Trust and Regulation (Trust Quotes #14)

For most of you, Bob Kueppers is someone whose influence (high) is inversely related to the likelihood you’ve heard of him.

As Deputy CEO of Deloitte LLP, Bob Kueppers has responsibility for regulatory and public policy affairs. That means he rubs shoulders with government and industry leaders who determine regulatory and public policy matters in this country and the world. Bob Kueppers was recognized in 2009 by Directorship Magazine as one of the top 100 most influential professionals in corporate governance and the boardroom

Bob is refreshingly direct and candid in his interactions; combined with a mastery of a field both wide and deep, he’s a fascinating interview.

Bob has a number of other additional roles at Deloitte, but we’ll focus mainly on his perspective on trust and regulation.

CHG: Bob, I’m delighted to have you join this series. I hope you’ll forgive us delving into just two subsets of your expertise: trust and regulation. Let’s start with regulation. Regulators aren’t getting great press these days. Is it a necessary evil? Or does regulation play a more constructive role in our business and society?

RJK: Regulation in a free enterprise system is one of the essential checks and balances in three different scenarios:

1) When parties in the market may not be equals;

2) When the nature of the market activity is susceptible to fraud or abuse; and

3) When public health and safety are involved.

Even true believers in free markets must acknowledge that a certain amount of regulation actually helps to preserve the credibility of the markets, which helps the market to operate and thrive. 

The debate over regulation often has to do with striking the right balance—finding the right degree of regulation. Like with “Goldilocks and the Three Bears,” it’s hard to get it “just right.” The appropriate degree of regulation often varies depending on the times, current events, and lessons learned.

The formation of the Securities and Exchange Commission in the 1930s, following the crash and market abuses of the late 1920s, is often viewed as a regulatory success. The orderly functioning of the capital markets provided the financial fuel to fund the post World War II expansion that redefined America in the 1950s and 60s.

When things go wrong, the natural reaction is to call for more regulation. But how can you tell when you’ve gone too far? For instance, critics say the recently enacted financial regulatory reform legislation, informally known as the Dodd-Frank Act, goes too far. Others claim it doesn’t go far enough. The truth is that we still don’t know the answer and likely won’t for several years—until the hundreds of regulations needed to make the reforms operational are written and implemented.

 CHG: What should be the role of regulation in the mixed economies we have today in the US and Western Europe? 

 RJK: It depends on the priorities of the country in which that regulation operates.

For instance, the US is often viewed as having a more litigious environment than other countries; as a result, our regulatory environment can be quite different than that of other countries.

Leaving such differences aside, I see the role of regulation as twofold:

1) Help to protect the interests of stakeholders, or, said another way, help to build and maintain trust in the markets that make up the economy; and

 2) Help to improve or maximize the quality and efficiency of the product or service through the establishment of standards and the related enforcement of those standards, such as through consequences for certain instances of non-compliance.

Regarding regulation beyond our domestic borders: because there is no global government system, a truly global regulatory structure is unlikely in the foreseeable future. Differences among geographies in this increasingly global economy are inevitable. It’s natural for countries to want to reserve the right to do what they believe is in their best interest given the unique circumstances of their nation.

Nonetheless, it’s important to recognize the inter-connectedness of our global markets—reinforced by the recent financial crisis. It’s helpful for regulators around the world to collaborate and work together—through forums, organizations, or otherwise—to achieve consistency in approach. We see such coordination in my profession through IFIAR, the International Forum of Independent Audit Regulators.

Again, my own view is that regulation should serve to assist fair markets to operate because regulation helps foster trust in such markets by the market participants and the related stakeholders.

CHG: Are there several key types or roles of regulation, which vary perhaps by industry? Or is the role of regulation universal and essentially the same, whether it’s the SEC, the FDA, the EPA, or the NHTSA?

RJK:  In theory, while the consequences of failures in regulation and poor execution by the regulated vary (ranging from mere inconvenience to potential loss of money, physical suffering, and health and safety consequences), the role of regulators is similar: to help to protect consumers and stakeholders and maximize quality and efficiency.

In practice, there are differences. Think about regulation of an industry which produces goods or provides a goods-based service—like the airline or pharmaceutical industries, compared to the regulation of a profession, which generally covers standards of behavior or performance.

What these disparate forms of regulation have in common, however, is that stakeholders operate with a level of confidence that compliance with regulation—whether by an airline adhering to safety standards or a public company audit firm following professional standards—builds confidence in the markets.

CHG: Let’s hop over now to trust. What’s the relationship of trust to regulation? How does regulation help trust? Or is it a substitute for trust? Does the presence of one reduce, or enhance, the other?

RJK:   Regulation isn’t a substitute for trust, but the existence of regulation plays a key role in helping to build and maintain trust, particularly in times of crisis. Examples include the creation of the Public Company Accounting Oversight Board to directly regulate my profession following the Enron and Worldcom scandals, as well as what we are seeing now with financial services regulatory reform in response to the recent financial crisis.

This suggests we could view a regulatory failure as one that doesn’t garner trust from the intended beneficiaries of the regulation. Such an outcome may indicate that there is a cost to society, without the concomitant benefit.

Unfortunately, this seems to happen more often than we may realize. Our society goes through cycles of regulation and deregulation. But, regulation tends to be cumulative over time, and the result can be layers of regulation, not all of which may be effective. In some instances, conscious decisions are made to forgo regulation. Is that because a significant level of trust already exists or is it a perception about cost and benefit? Or, is it a combination of both?

Having said that, regulation is a large part of what makes our markets the best in the world. It helped our markets recover well from the loss of investor confidence that followed the scandals that gave rise to Sarbanes-Oxley and is aiding in the recovery from the most recent financial crisis, though we still have a long way to go.

Unfortunately, it’s really in times of crisis when the issues of regulation and trust are considered together the most. That’s when there’s pressure to act quickly, and hopefully strategically, to learn lessons and act on them. The answers under these circumstances may be different than what you’d get outside of a crisis environment.

CHG: What do you find are the biggest misconceptions that businesspeople hold about regulators? Conversely, what misconceptions do regulators typically have about business?

RJK:  Businesses may perceive that the regulator has different objectives than the regulated. They may lose sight of the fact that as a regulated entity, they generally have shared objectives with the regulator.

It is not implausible that regulated businesses may see compliance with regulation as an impediment to success in terms of competitive advantage or speed to market. Businesspeople are largely quite ethical and certainly want their products to be safe for consumers, for example. But at the same time, as a general matter, if you lose sight of the shared objectives and focus more on short-term success, rather than long-term sustainability of the business, you can become frustrated with regulations.

Regarding the regulators, it’s important that they understand the trends and developments affecting the markets or industries they regulate. It can be counterproductive to develop changes in regulation without staying in close touch with the regulated entities and other stakeholders.

This communication helps to inform issues like the cost of implementation, the need to modify proposed rules to make them more understandable, and unintended consequences of changes in the regulatory regime. There needs to be a level of trust between the regulator and the regulated to help prevent the regulator from implementing proposals that are unlikely to work in practice.

CHG: The regulation model for the public company auditing profession is interesting in that there is government oversight, but the PCAOB is a private sector body. Why does this model work?

RJK: The government, through the SEC, oversees the PCAOB, but in the Sarbanes-Oxley Act, Congress explicitly established the PCAOB as a private-sector body. The SEC’s oversight role was effectively reinforced by a recent Supreme Court decision in a case about the constitutionality of the PCAOB.

The SEC oversees the PCAOB through the appointment of PCAOB members and supervision of the Board’s activities.  This makes sense, given the public company auditing profession’s role in the capital marketsand the SEC’s overall mission to maintain fair, orderly, and efficient markets, as well as to facilitate capital formation while protecting the interests of the investing public. The main reason the model works is the alignment of the PCAOB’s mission with the regulatory mandate and statutory authority of the SEC. If there were substantive differences, it probably wouldn’t work as well as it does. 

This private-sector regulation working side by side with government regulation isn’t unique to the accounting profession. The Financial Industry Regulatory Authority is another example of a private-sector regulator that works closely with the SEC on issues important to the markets.

CHG:  Let’s forget about regulation for a moment and talk about another realm of trust—trust between professionals and their clients. It’s something you know a great deal about within your business. What’s the role of trust in client relationships?

RJK: In general, trust and mutual respect form the foundation of the most effective client relationships. Those clients who understand our role and respect it are the clients with the best relationships.

For example, clients who identify issues early in the audit, and auditors who are upfront with clients when they are not comfortable with an issue, tend to have the most effective relationships. A good client relationship doesn’t mean there are never any issues to resolve; to the contrary, it means that issues get resolved on a timely basis because they are identified early and there’s a mutual understanding of the need to work through a resolution process.

Over time, greater trust fosters a stronger and more successful business relationship. When you’re a trusted professional advisor, you can be more effective in your own responsibilities. Let me be clear, this doesn’t mean we always agree with the client. 

To the contrary, we draw the line when necessary.   Sophisticated clients—I don’t mean in terms of size and scale, but in terms of thinking and attitude—not only understand this, but appreciate it, even if it’s stressful at times. In the end, investors benefit from credible information.

Auditing is unique, though; to do our job and fulfill our professional responsibilities, we strive to thoroughly understand the client’s industry, business, and current circumstances. This requires management and the audit committee to trust us.

Yet we cannot take things at face value or trust without support; we must be professionally skeptical. Our independence and objectivity, coupled with our knowledge and experience, are key to the value that we bring as auditors and we don’t put those at jeopardy for any client relationship.

CHG: Are there a few key things that people in business can do to improve trust with their clients?  

RJK:  Here are some lessons that come from my audit background, but which I think hold true in many business relationships:

·      This one is obvious, but first and foremost, deliver high-quality services and bring the right resources to the assignment.

·      Facilitate open dialogue—the earlier, the better—if a problem looms.

·      Don’t be afraid to deliver the difficult news; in my experience, handling that candidly and proactively goes much further in building trust than delivering the good news or raising a problem at the last minute when deadlines loom.

·      Finally, stick to your guns when the going gets tough; clients respect the fact that we have to do that. They may not like it, but they will come to value it when you are clear as to the “why.”

 CHG: What about clients—not just in your service lines, but more broadly. What should they expect in terms of trust—and what should they be bringing to the party as well?

 RJK:  I think it’s the same on both sides of the equation. Both service providers and clients should bring integrity, forthrightness, and strong ethical values to the table. This is especially true when it comes to auditing, but it holds true more broadly in other instances as well. 

Finally, it comes down to people. You could have a company with a great brand and corporate reputation, but if the management team lacks integrity, you do not want them as a client.

I have worked in a partnership for over thirty years. One way I gauge people is to consider whether I would want them to be my partner. Would I trust them with our brand and our reputation? That’s the acid test for me.

CHG: Bob, thank you so much for the gift of your time. Yours is a valuable and unusual perspective, and we appreciate your sharing it with us so forthrightly.

Robert J. Kueppers on Trust and Regulation

is number 14 in the

Trust Quotes: Interviews with Experts in Trust


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