Can Trust Be Taught?

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Let’s not mince words. The answer, pretty much, is yes.

The exception is what the academics call social trust—a generalized inclination to think well or ill of the intentions of strangers in the aggregate. That kind of trust ends up being inherited from your Scandinavian grandparents (or not, from your Italian grandparents).

The rest, let’s break it down. First, enough talk about “trust.” Trust takes two to tango. One to trust, another to be trusted. They are not the same thing.

So let’s start by asking which we want to teach: to trust, or to be trustworthy?

Trusting someone is, paradoxically, often the fastest way to make that other person trustworthy—thereby creating a relationship of trust.  People tend to live up, or down, to others’ expectations. So if you can muster the ability to trust another, you’re both likely to reap big returns quickly from the resultant trust.

However: trusting can also be a high risk proposition. The vast majority of business people, on hearing “trust,” will say “that’s too risky.” In other words, they hear “trust” as meaning “trusting,” and they turn off.

On the other hand, there is being trustworthy. If you consistently behave in a trustworthy manner, others will come to trust you, and voila, you have that trusting relationship. Being trustworthy tends to take longer than trusting, but the results are just as good. And, it’s very low risk.

Let me say that again: becoming trustworthy is a low risk, high payoff proposition. This is not a hard concept for people to get, if explained right.

What does it mean to be trustworthy? The trust equation explains it: it’s a combination of credibility, reliability, intimacy, and a low level of self-orientation. You can take a self-assessment test of your own TQ, or Trust Quotient, based on the trust equation.

So the question is: can people be taught to become more credible? More reliable? More capable of emotional connectedness? More other-oriented and less self-oriented?

The answer is yes. Big picture, there are two ways to teach these things. One is to recall Aristotle’s maxim: "We are what we repeatedly do. Excellence, therefore, is not an act, but a habit."

People can be taught truth-telling, reliability, even other-orientation to some extent by showing them the behaviors—particularly the language–of trustworthy people.

But the deeper, more powerful approach to building trustworthy people starts the other way around: by working on thoughts to drive action. As the Burnham Rosen group articulates this point  "thought drives actions which result in outcomes."

Many disciplines outside of business know the truth and power of this approach: psychology, acting, public speaking, to name a few. Business doesn’t appreciate it enough. But commonsense does.

Trust can be taught: either by teaching trusting, or trustworthiness. The latter is lower risk, hence the most attractive approach for many in business.  And trustworthiness can be taught via a mix of skillsets and mindsets

It makes sense.

 

 

 

Call for Submissions to June Carnival of Trust

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Just a reminder: midnight Thursday June 4 is the due date for submissions to the June Carnival of Trust.

In the nearly inconceivable case that you’ve not heard of the Carnival of Trust, it is a compilation of the Top Ten blogposts of the past month having to do in some way with the subject of trust: trust in relationships, business, politics, or society.

The host-ship of the Carnival is rotated each month. The host plays a critical role not only in selecting the blogposts for inclusion, but in adding some value of their own by commenting or adding context. Kind of like a really concise, insightful movie review.

This month we’re delighted to welcome sales savant Dave Stein.  Reporting from the urban wilds of Martha’s Vineyard, Dave is a big-picture observer of the field of sales and sales training.  Check him out at the cleverly titled Dave Stein’s Blog or at his company, ESR Research (think the JD Powers of sales training).  Dave and I are one of those connecctions made through social media (Social Media Today, to be precise), and we have come to know and respect each other.  I look forward to his being able to share his wisdom with Carnival of Trust readers.

You can submit your post for inclusion here. Good luck!

Have We Learned from the Financial Crisis?

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Most people would agree that something went awry with large parts of the global financial system.  Most would also agree with some broad-brush characterizations of just what went wrong.  A bit too much greed, self-orientation, short-termism.  A bit too little customer focus, ethics, regulation.

Hopefully some of the overheated sectors learned something, or were at least chastened.  Then again: don’t hold your breath.  Here are some anecdotal samplings from the home lending and the financial advisory segments.

Ethical Improvements in the Home Appraisal Business

In an April story the Center for Public Integrity reports:

In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.

How much pressure?  All too often, if appraisers didn’t come up with numbers that fit what lenders wanted, they found themselves blacklisted.  How overtly?

Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it.

Actions taken?  NY Attorney General Cuomo did some vigorous investigation; one results was a Freddie Mac new “Home Valuation Code of Conduct” to go into effect May 1. 

Who opposed it?  Why, the National Association of Mortgage Brokers, of course. 

The same people who, when JPMorgan Chase’s Jamie Dimon said his failure to terminate the company’s mortgage broker business was the “biggest mistake of his career” responded by saying Dimon’s remarks “clearly reflected his poor understanding of the mortgage industry.” 

Uh, NAMB vs. Jamie Dimon? Tthat’s one you lose on credibility alone, NAMB.

NAMB’s excuse for its role in the mortgage debacles?  Others did it too.  So much for ethical learnings.

Ethical Improvements in the Financial Planning Business

There are principled, ethical, customer-focused financial planners; I’ve met many, and know a few well.  At the same time, I think few would argue that the sector is a hotbed of high ethical behavior.  RegisteredRep.com reports:

According to a recent study by Prince & Associates…15 percent of the wealthy left their financial advisors in 20087 and 70 percent took at least some of their assets out of the advisor’s hands.

Why?  False advertising, says Cerulli Associates in the same article: what an advisor says he offers and what he really does aren’t in sync.   Bill Bachrach, a respected (by me as well as by the industry) consultant in this space says:   

“It’s been way too easy for former stockbrokers to gather assets and dump them somewhere and call themselves wealth managers…If asset management is all you do and you can’t point to some other way you make money, you have nowhere to hide when performance goes south.”

What’s the industry response?  Here’s Ken Fisher, a mega-marketer of financial services, responding to two former sets of clients who are suing him for failing in his fiduciary responsibilities:

The lawyers who are representing the clients in both matters are “similarly incompetent."  Both cases “will run into a concrete wall.  The person who will be sorry in the end is the client, who will wind up spending money on lawyers and getting nothing.”  [Fisher said he wanted to teach one lawyer] “a lesson he won’t forget.” 

Now there’s a client-focused kind of guy.  The kind you’d want out front promoting responsible behavior on behalf of your industry. Customer satisfaction?  Let them sue for it, then endear them to you through public insults and threats.  Great strategy, Kenny boy. 

Then there’s the case of Jeffrey Forrest,  fired by his broker dealer, sued by the SEC to keep him from working as an investment advisor.  He continues to run an RIA firm in California, and is licensed to sell insurance there.  In March, he and Associated Securities, for whom he was a top producer, were found guilty by a FINRA panel. 

Associated Securities—surprise surprise—is appealing.  Another great customer lesson: never admit you’re wrong.  Especially when you are.  Goebbels had that one down pat. 

Last but not least.  Finally, after all the Madoff hoopla—some concrete action:

SEC commissioners on May 14 voted 5 to 0 in favor of a proposal that would require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to undergo surprise audits. The move is part of a wider effort by the regulator to crack down on advisers with direct custody over client holdings.

Exactly.  Bernie made off with all the money by skulking in the gray spaces between regulators: for example, he custodied his own investments and no one checked on them. 

So, surprise audits?  You betcha, right on, about time. The industry should applaud this effort to help improve its reputation.  Thank you SEC!

But, wait.  The proposal is opposed by the FPA, NAPFA  and the IAA. 

Why the resistance?  Here’s a taste:

A surprise audit would likely cost his firm about $3,000 a year, said Ben Baldwin…That fee would likely be passed on to clients, he said.

“There should be an uproar because it’s going to hurt a lot of consumers,” Mr. Baldwin said.

Others contend that the proposal would force smaller firms to stop deducting fees from their clients’ accounts — a move that would require them to wait for clients to reimburse them for their services.

A National Board member of NAPFA elaborates further:

“When you deduct your fee from the client’s account, you have no cash-flow problems.”

And that, I guess, would be why NAPFA opposes the SEC’s proposal.  Because it would force advisors to send invoices instead of directly deducting fees.  Thus slowing cash flow.

More Madoffs?  An occasional small price to pay if it helps protect advisors’ cash flow.

There are simply too many players like the ones quoted in this post who still see regulation as a hateful intrusion on their god-given right to extract cash from customers’ wallets unless expressly forbidden by federal law.

And there are simply not enough players who see regulation as the regrettable consequence of the presence of the former group of players.  They do business based on the simple idea that you should treat people, and most certainly customers, decently.  It can’t be easy for you to watch the first group so demean your industry’s reputation.

Many from that first group must have read a blogpost of mine from two and a half years ago: How to Get Your Industry Regulated in 6 Easy Lessons.  They’re executing the six lessons marvelously, and I have no doubt they’ll succeed beyond their wildest dreams very soon now.
 

Ethics and Compliance: What’s Trust Got to Do With It?

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I believe words matter.  They affect the way we think, therefore the way we perceive, therefore the way we act.  Words are not passive things, acted upon by our blind behaviors; they are cultural repositories of memory.  Ontogeny recapitulates phylogeny in language as well as in biology.

So it has always bothered me to hear “ethics” and “compliance” in the same phrase.

I’m aware I’m in the minority; it is casual usage to combine the two. 

  • There is the Society of Corporate Compliance and Ethics and their Institute. 
  • Back in 2005, a speech by the SEC talked about the decline in ethics and compliance.
  • Corpedia Corporation “offers a wide variety of innovative and user-friendly compliance and ethics solutions.” 

So, it’s commonly used.  Then again, we also live in a world that obsesses over Britney Spears.

Defining "Ethics" and "Compliance"

Let’s try the dictionary.  First, ethics:

1. (used with a singular or plural verb) a system of moral principles: the ethics of a culture.
2. the rules of conduct recognized in respect to a particular class of human actions or a particular group, culture, etc.: medical ethics; Christian ethics.

Now, compliance:

1. the act of conforming, acquiescing, or yielding.
2. a tendency to yield readily to others, esp. in a weak and subservient way.

These two words don’t live together easily.  In fact, if we try to substitute “Wall Street” for “medical” or “Christian” in the ethics definition, we get what most people would call an oxymoron: Wall Street ethics. 

I would argue this is a serious issue.  Entire industries—financial and pharmaceutical come to mind—have come to conflate the two words, and we are all the worse for it. 

When “ethics” becomes a soul-less matter of ticking the boxes, when we substitute acquiescence for a conscience and subservience for principles, we have lost a great deal.  In particular, any meaningful sense of the word “trust.”

How can a financial planner aspire to being a fiduciary through procedures alone?  How can a company achieve client focus through quarterly behavioral competencies alone?  How can we create trusted regulatory agencies if all they do is enforce processes and paperwork?  How can you give multiple choice ‘tests’ that ‘certify’ people as being ‘ethical?’  But that is generally how "compliance" programs are executed. 

That way lies Bernie Madoff, and a thousand other example of people who have lost track of simple guidelines like be transparent, tell the truth, serve your clients, and work for the long run. 

You Can’t Comply Your Way into Ethical, or Trustworthy, Behavior

A focus on compliance alone can never create ethical behavior.  Perversely, all it does is incent slightly bent people to become more bent by focusing on exploiting the inevitable gray areas that crop up in any set of behavioral rules.   There are plenty of professionals who are 100% compliant with their industries’ lax standards, and are, by many customers’ judgment, highly untrustworthy, selfish sleazeballs.

Law schools can take some blame here; law is the only profession in which the notion of ‘truth’ is non-existent, replaced by ‘evidence.’ 

MBAs are hardly blameless; their mindless pursuit of markets, transactions, and micro-measurements have fueled the replacement of “character” with “observable behaviors that achieve sustainable competitive advantage.”

But that’s too easy.  We’ve all gone along with it.  We’re all infatuated with “science,” neuro-proof, lawsuits and fix-it drugs. Ethics?  Get with it, dude.  

I know this sounds like an old-fart rant, and in part it is.  But there are plenty of businesspeople who behave well, and even prosper because of it.  And they’re also to blame for tolerating the shades of gray. 

We don’t have a crisis of trust and ethics so much as we have moral sloppiness–a willingness to tolerate mediocrity.  Most of us have remarkably similar instincts about what’s right and what isn’t.

What we’ve all got to do is get mad about how far we’ve strayed.

And compliance is not an excuse.
 

The Trust Roadmap

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While trust is an issue that never goes away, the last couple years have been seen a collapse in the trust that the public, employees and even companies have for corporations and many other organizations. Many organizations recognize that without trust from their key stakeholders, they can’t operate properly.

However, once the leadership recognizes a problem, the next step is often to measure it. And trust is notoriously difficult to measure.

So, here at Trusted Advisor Associates, we’ve been analyzing, well, how to analyze trust. Today we’d like to talk about what we’ve come up with and are planning to introduce in the next few weeks: The Trust Roadmap.

Trustworthiness at the Organizational Level

I’ve been writing recently about a comprehensive approach to thinking about trust. Think of it as a two by three matrix.

On one axis, we have those who trust and those who are trusted; trusting, and being trustworthy. See for example Trust, Trusting and Trustworthiness.

On the other axis is “where” we find trust: interpersonal, organizational/institutional, and social.

We’ve talked a lot about being trustworthiness interpersonally. For example, if you haven’t done so already, click to find your Trust Quotient™, your TQ™.

But how can we trust a business? What can an organization do to be trusted? To regain trust? And so forth. What’s needed is the organizational equivalent of the TQ quiz: what’s needed is a Trust Roadmap. And it’s finally just about here.

For some time, Trusted Advisor Associates have been developing a tool aimed at assessing trustworthiness at the organizational level. We’re announcing it now, even though it’ll be a few weeks before it’s website-deployed and open for business.

Introducing the Trust Roadmap

The purpose of the Trust Audit is to allow a company to take a systematic, high level look at its trustworthiness. More organizationally savvy than a financial audit; more market-focused than an employee engagement survey; and more culture-focused than a reputation survey.

The Trust Roadmap is not:
a. a longitudinal survey purporting to track trust over time
b. a public database
c. a best practices database

It is none of those things because we believe trust is situational, for organizations as well as for individuals. We are interested not in academic research per se, but in teeing up meaningful issues in a meaningful way for our clients.

What is the Trust Roadmap? The Trust Roadmap is private; results are known only to the company contracting for it. The Trust Roadmap is aimed at leadership teams, top management teams and Boards who are interested in taking a serious, objective look at how trustworthy they are seen to be, and at what they can do to improve.

The end result “deliverable” of the Trust Roadmap is a survey-based discussion around a Heat Map—a map of where the organization’s biggest trust threats and trust opportunities lie.

Conceptually, The Trust Roadmap is built from the four Trust Principles (client focus, transparency, medium-to-long term focus, and collaboration), and from a modification of Weisbord’s model of organizations – external relationships, leadership, structure, rewards, processes. Think a 4×5 matrix (come on you, you knew we’re ex-consultants, you knew what to expect).

Mechanically, the Trust Roadmap starts with an online survey—20 questions, just like the TQ, one for each cell in the matrix. Respondents will come from external (customers, suppliers) and from internal (employees, leaders). There is no set number of respondents.

From the survey, the Heat Map is generated, and richer discussions (we have up to five areas to explore in each of the 20 cells) are held around the opportunities indicated.

If you’re interested in learning more, stay tuned to this station, and/or contact Sandy Styer at [email protected]

Collection Agents: Trusted Advisors, or Creepy Hustlers?

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Good salespeople, psychologists and counselors know one basic truth: people are influenced by (and buy from, and take advice from) those who listen empathetically to them before selling, advising, etc.  (This beats approaches like value propositions, for example.)

So what happens when these techniques are used by credit card collection agents seeking repayment from people who are seriously underwater with their credit card? See What Does Your Credit Card Company Know About You?

First, it works. Second, it’s hard to avoid feeling creeped out.

My question: how do we reconcile these two observations? Can you use “good” trust-building techniques for “bad” ends? Does it mean these techniques are manipulative? Or does it mean collection agents are getting a bad rap, and actually raising positive karma in the world?

I mean the question more seriously than you might think.  It has implications for how we try to restore trust by regulation in the financial sector. 

Therapist, or Credit Collections Agent?

Consider Donna Tiff, a 49-year-old Missouri woman who owned $40,000 on multiple cards. Tiff became adept at countering aggressive collection agents by threatening suicide.

And then Tracey came along. She worked for a company that today is a subsidiary of Bank of America. Tracey had talked to Tiff several times and noticed that there was a mistake on her account — an automatic payment was going to be deducted twice from her checking account. If that happened, Tiff’s other checks would bounce.

“I told her, thank you so much for catching that,” Tiff recalled. “And then we talked for over an hour about my problems and raising kids. She was amazing. She was so similar to me. She gave me her direct number and said that I should call her directly anytime I had any questions or just needed to talk about what was going on.”

Over the next three years, Tiff paid off the entire $28,000 she owed Bank of America and spoke regularly with Tracey, she said. And the $12,000 she owed on other cards? Well, those companies didn’t have a Tracey. They never got fully repaid.

It’s a heartwarming story. Unless you’ve seen how people like Tracey are schooled in the art of bonding. What are the odds that the random customer assistant who dealt with Tiff would have so much in common with her and manage to strike such a close bond? I tried to call Tracey myself, using the information Tiff provided. But I was told she didn’t work there anymore.

I asked Tiff if she ever asked Tracey to write off the late fees and the interest charges.

“Oh, no,” she told me. “She was so kind to me. How could I ask her for something like that?”

I remember when Bill Clinton was first running for president in New Hampshire, and his nickname “slick Willy” was brought up. He reportedly asked a friend, with all the sincerity he could muster, ‘am I really a slick Willy?’

I took that story to mean that someone as smart and as good at empathy as he was ultimately had to wonder about his own motives, and whether he himself could tell the difference.

Or, take Bernie Madoff. He flawlessly imitated nearly every aspect of the trust equation. Does that mean that being credible, reliable, intimate and other-oriented are bad things?

Take the classic Turing test.  If you communicate, via a computer keyboard and screen, with two closed boxes—one with a real person inside, and one with a computer—just how do you tell the difference?

And if you can’t, does that mean the computer is human? We want to say of course not—but try explaining just why.

Trusted Behaviors Without Intentions are Empty

In this case, most of us would say the difference has to do with motives.  Does Bank of America intend to help raise the psychic health of credit-battered Americans, and get paid in the process? Or is it in the business of extracting wealth from people to whom BofA sold their credit cards in the first place, cynically using Maslow’s hierarchy as a tool to get there?

It isn’t just hypothetically relevant. It goes to how we regulate trust in society. It shows the bankruptcy of ever and ever-greater reliance on purely behavioral and metrics-based approaches to trust.  Trust without motives is the computer in the box.

If legislators and regulators cannot figure out a way to put integrity into regulation instead of dealing solely with procedural “compliance,” there will always be a Madoff who figures out how to mimic acceptable behavior.  (See Harry Markopolis’ congressional testimony for a far more workable approach).

You can’t strip trust down to behaviors alone without squeezing the soul out of it. When it comes to trust, intent is relevant.

Trust Matters Primer vol. 3

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Announcing Volume 3 of the Trust Matters Primer—the Best of series from the trustedadvisor.com blog. You can download it by clicking here.

I’ve written the ebook series to add more dimensions to the dialogue about trust—to draw connections between otherwise disparate blogposts, to highlight some of the dialogue, and to offer it in a form you can share with others.

What do these three pieces have to do with each other?

  • a random act of kindness on the flight from DFW to Boston
  • a shift in thinking about capitalist theory by a management icon
  • a Harvard Business School study debunking conventional wisdom about cognitive learning.

Hint: they all have to do with interpersonal relationships and trust.

Enjoy.

 

Trust Matters Primer vol. 3

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Announcing Volume 3 of the Trust Matters Primer—the "Best Of" series from the trustedadvisors.com blog Trust Matters.  You can download it by clicking on the link below:

Trust Matters Primer Volume 3

I’ve written the ebook series to add more dimensions to the dialogue about trust—to draw connections between otherwise disparate blog posts, to highlight some of the dialogue, and to offer it in a form you can share with others.

What do these three articles have to do with each other?

  • A random act of kindness on the flight from DFW to Boston
  • A shift in thinking about capitalist theory by a management icon
  • A Harvard Business School study debunking conventional wisdom about cognitive learning.

Hint: they all have to do with interpersonal relationships and trust.

If the interplay of interpersonal relationships and trust interest you in a business context—or any other sphere, for that matter—I hope you will read and enjoy Trust Matters Primer Volume 3. I look forward to your feedback! 

 

  1. Trust Matters Primer Volume 1
  2. Trust Matters Primer Volume 2
  3. Trust Matters Primer Volume 3
  4. Trust Matters Reader

Realms of Trust and Manifestations of Trust

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Most would agree that trust is a hot topic just now.  That’s about the only thing agreed upon about trust, however.  We can’t even decide what it means.

I wrote a post last week called Trust, Trusting and Trustworthiness.  I suggested that much writing about trust confuses these three manifestations.

Think of that post as Managing Trust Part I — Trust Manifestations. Think of this as Managing Trust Part II — Trust Realms.

There are three trust realms in all: interpersonal trust, organizational/institutional trust, and social trust.

The realms of trust are well known to academic trust researchers, not so much to business people. They do make simple common sense, however.

1. Interpersonal trust

Interpersonal trust deals with one-on-one dynamics. Most of my work has focused in this area. It’s the stuff of relationships, selling, advisory businesses, and personal risk-taking.

2. Organizational and institutional trust

This form of trust covers a wide range of issues: the organizational environment conditioning interpersonal trust relationships, the trust of individuals in their organizations and institutions, and the nature of trust relationships between organizations themselves.

Surveys that measure “trust in government” can shift dramatically and quickly, with the election of an Obama, or the humbling of an SEC, for example. In these respects—speed and personalization—organizational trust resembles personal trust. But it also deals with organizational cultures and values—undeniably group phenomena.

3. Social trust

Social trust deals with the generalized beliefs individuals hold about “other people."  Think under what conditions you’re likely to lock your car doors. Unlike the other two realms, this trust doesn’t deal with people as individuals; also, it tends to change only glacially, perhaps across generations.

If we array the realms of trust against the manifestations of trust, as shown below, we can begin to have a structured conversation about trust.

Trust Realms and Trust Manifestations

Manifestation/Realm

 Trusting

Being trusted

State of Trust
Personal      
Organizational      
Social      

 Until then, we are going to have vague, or circular, or meaningless discussions about trust.

When Steven H.R. Covey talks about how trust affects speed and cost, he is largely talking about the manifestion dimension—the presence or absence of a state of trust. But is he talking about the state of personal trust? Or organizational? Or cultural/social?

Gatehouse, a UK communications consultancy, says “business is facing a massive and global crisis of trust right now.”  But what are they talking about?  Which manifestation?  Which realm?  Or are we descending into an inevitable and inescapable downward spiral of rampant anarchy? 

Do they mean that individuals are less trusting of business? Or that more businesses are untrustworthy? Or that the state of economic uncertainty has rendered the state of trust lower?

Paul Seaman’s review of the Edelman Trust Surveys (Would you trust a trust survey?) does a nice job of taking apart the apparent meaning of trust survey data.  A small example: trust in banks is down, trust in government is up: does that mean we want the government to take over banks?

These are not word games.  Intelligent policy formulation depends on being able to clearly define problems. For example:

• When is structural regulation preferable to greater enforcement?
• For what trust issues is transparency an appropriate remedy?
• Do we have any institutions that teach the personal manifestation of trusting?
• If you change personal and organizational trustworthiness, do you have to worry about social trust?

We’re entering a period where trust has gone viral; it’s got buzz. We’re about to see more survey data, telling us with greater and greater precision whether doctors are gaining on nurses in trust ratings, who has the most trusted brand name, and whether trust in Romanian economists went up or down in October. 

Watch out for conflicts of interest: who’s paying for a ranking of trustworthy companies?   What problem is being solved?  What issues are being addressed?

Get ready for many tales, full of sound and fury, signifying—well, just what? That is the question.

 

Day Trader Management

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The NYTimes’ Joseph Nocera  wrote Saturday about the closing of Neil Barsky’s hedge fund, Alston Capital.  Barsky, it seems, is one of the good guys. (The same issue has an article titled “Hedge Fund Manager Accused of Fraud,” just so we keep things in perspective).

One of the reasons Barsky left the hedge fund biz after seven years was:

[he was] “tired of the ways the business had changed. “When I first started in 1998, we used to send out quarterly numbers. Now investors want weekly numbers. Professor Louis Lowenstein” — the iconoclastic and recently deceased Columbia University business law professor — “has a great line in one of his books: ‘You manage what you measure.’ ”

I for one wouldn’t call it a ‘great line,’ but the practice has certainly become widespread—and we are generally the worse for it. Let me explain.

If Measurement is Good, How Much More Measurement is Better?

Nocera provides another example of change, in his fascinating book Good Guys and Bad Guys.  In the mid-1970s (not that long ago for some of us) investors couldn’t be dragged out of bank savings accounts into new-fangled money market funds. Too risky, doncha know.

Fast forward to 1987, the go-go ga-ga days when everyone was focused on—daily mutual fund prices. Awfully risque.

But it’s not just finance. MBA programs and systems consulting firms have been pushing a hot product for some years now. It’s sold as efficiency, liquidity, process outsourcing–but at its heart is Lowenstein’s ubiquitous link between measurement and management.  More measures, more frequent, more detailed: equals better management.

If you can measure it, you can manage it; if you can’t measure it, you can’t manage it; if you can’t manage it, it’s because you can’t measure it; and if you managed it, it’s because you measured it.

Every one of those statements is wrong. But business eats it up. And it’s easy to see why.

I just got an iPhone app that lets me check my QuickBooks account. Now, of course, I crave my receivables data updated instantly, constantly, 24-7. Because I can. And because more is better. Isn’t it?

A consultant friend was about to be hired to help improve engagement survey scores for an executive’s team.  He tells me::

“In no time, you heard middle management’s attitude evolve; ‘OK, this group is going to meet its goals; we are not going to be the ones lagging behind on these numbers. We will be able to show measurable improvement in engagement.’ And so they were about to turn ‘engagement’ into another meaningless exercise in meeting the numbers.”

The ubiquity of measurement inexorably leads people to mistake the measures themselves for the things they were intended to measure. It doesn’t have to be this way–but it too-often is.

Even Malcolm Gladwell feeds the measurement frenzy. In his current New Yorker article How David Beats Goliath, he cites Vitek Ranadive. Ranadive has made a career of turning un-integrated batch processes into aggregated real-time processes—faster, more data-rich, integrated. He suggests the problem with national economic policy is that the Fed has to wait weeks for data.  Presumably if the Fed worked with real-time data, we’d have better economic decisions. Call it day-trading national interest rate policy.

If Barsky thinks weekly investment numbers for his hedge fund are too short-term, let’s hook him up with Ranadive. Set up the databases right, and we could all be day-trading hedge funds! And of course, there’d be an app for that.

Management by Measurement Isn’t Just a Financial Disease

If MBMM—management by massive measurement—actually worked, day-traders would outperform Warren Buffett. I think they don’t.

The US mortgage industry morphed from a web of relationships (banks, bankers, home-owners) into a global impersonal market of short-term transactions. More liquid? Yes. More efficient? Yes. Lower cost of funds? Yes again.

But today’s meltdown arose precisely because replacing lengthy relationships with multiple transactions, substituting markets for relationships, and metrics for management leaves nothing but short term, impersonal money at the heart of business.  The saying on Wall Street became, "I’ll be gone, you’ll be gone–do the deal."  On Main Street, it translates as, "just tell me you’re going to meet next month’s metrics."  It’s seductive, and it’s addictive.  And not good for business.

When hooked up to its kissing cousin incentives, MBMM is a powerful drug.  As incentives critic Alfie Kohn says, "Incentives work.  They incent people to get more incentives."  Like I said, addictive.

There’s nothing inherently wrong with measuring. Or transactions. Or markets. They’re fine things.

But undiluted and without moderating influences, they become not just a bad deal; they can be a prime cause of ruining the whole deal.