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Restoring Trust and Confidence in Business: Part II

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In yesterday’s blogpost, we critiqued the performance of a CNBC-selected all-star business panel. Their assigned subject matter was “Restoring Trust in Business.” 

We said their answers were largely non-responsive, and mainly boiled down to two: jobs and tax cuts. Make that one, actually, because the panel’s preferred route to jobs appeared to be tax cuts.

Suppose someone asked you, “How should we go about restoring a decades-long decline in confidence in business and the markets?” How many of you think the obvious answer is “tax cuts?” That’s not what first occurred to us.  

Of course, it’s easy to criticize, hard to be constructive. So here’s our attempt to answer the very serious question that CNBC posed: How can trust and confidence in business and the markets be improved?

1.    Communications. Let’s start by suggesting how you should behave when facing the public: for example, if you’re invited to speak on CNBC. 

Years ago, Robert McNamara gave this advice to dealing with reporters: “Never answer the question they asked you; answer the question you wanted them to ask you.” That may or may not be good advice for politicians, but it’s 100% wrong for businesspeople that want to increase long term trust in business.

Instead, give a direct, responsive and thorough answer to the question asked. Then, if you think the question is off-point, say so directly and quickly—and resist the inclination to speechify.

How does this help build confidence in business? Because business is often seen as lacking integrity. You don’t regain integrity by spinning people; you get it by behaving with integrity. 

Let’s define integrity as being integrated, or whole; in short form, being the same person to all people at all times.  If you’re going to treat the press antagonistically, we can only assume you do the same with employees and customers. If you tell truth to one party and lie to another, you aren’t a 50% truth-teller; you’re a 100% liar. 

Role model the trustworthy leaders you want us to see—don’t emulate Sunday morning politicians doing the spin thing. (Remember, they rate even lower than you do in the confidence ratings).

2.    Leadership: Why not step out from the crowd and acknowledge that business success is dependent on the quality of goods and services you deliver and not the difference in the marginal tax rate paid by corporations or highly compensated individuals?

Are you delivering the value you promise to customers and honoring the deal you make with employees? Are you treating your employees as ends in themselves, fellow-human-citizens to be treated with dignity? Or are you treating them merely as “human capital,” evaluating them via return-on calculations that can be monetized and compared financially with other asset classes?

3.    Incomes. Here’s what perhaps the leading academic student of trust, Dr. Eric Uslaner, has to say: “[taking] steps to reduce the gap between the rich and the poor is the single biggest factor in whether societies are more or less trusting.” Another key driver, Uslaner says, is education. Education leads to greater acceptance of others, more income equality, and a lessening in corruption. All of which help business’s reputation.

We in the US like to think we live in a meritocracy. But the data say otherwise. One survey concludes, “In the U.S., 50% of a boy’s chance of climbing the ladder is the result of his father’s income. In Denmark, it’s only 15%.”

Do the few billions extra paid to top executives for beating the street justify the health care cutbacks, layoffs or pay freezes imposed on average workers? Will your executives truly put forth less effort or will you sacrifice the quality of your leadership? Will your employees’ greater purchasing power and loyalty outweigh any difference?

4.    Time. It’s time to break the back of our epidemic of short-term thinking. Don Peppers and Martha Rogers say, “The Crisis of Short-Termism is the Mother of All Problems.“ Business people need to apply a systematic focus on longer time frames across all aspects of business: Why not pay for performance over the longer term, recognizing that “long term selfish” provides an equal if not greater reward than beating the quarterly expectations? 

Are you building a one-season team or creating a dynasty? Short-termism needs to be attacked in pension fund management, securities analysis, accounting policy, and in the curriculum of MBA programs. No one supports short-termism in theory—yet so many support it in their actions. It’s time to unveil the curtains and act on principles.

5.    Strategy. For decades now business’s focus has been on Competitive Strategy. We are now living in an age that demands Collaborative Strategy. From outsourcing to global capital flows to global terrorism to environmental issues—we are integrally connected for better or worse at this point. The critical issue is no longer how to beat one’s competitor, but how to thrive in a world of inter-dependencies. 

Treat your customers as allies, not as guardians of their wallet or as your competitors. Treat your suppliers as part of your team, not competitors to be dealt with through sharp contracts. Treat your industry association as a force for better quality and customer relations, not as a lobbying tool to gain competitive advantage. Stop going to leadership programs on competitive advantage, and start going to ones on collaboration.   

6.    Motivation. Reduce extrinsic incentives, increase intrinsic incentives: An HBR study recently pointed out that the top motivational factor is the one rated dead last by participants in a major survey on motivation: the number one factor is progress. This is astonishingly simple and obvious: people want to succeed at their work. Yet business insists on perpetuating the carrot/stick rats-and-cheese models of behavioralism from Pavlov and Skinner.  

Why not recognize that most employees (including leadership) take their greatest rewards from achievement and recognition, and that compensation beyond what it takes to meet primary needs is about scorekeeping rather than true reward? We all have mirrors in our homes…think how good it is to look in them and feel good about what we have contributed? No one’s epitaph says, “I should’ve spent more time at the office.” Stop treating workers otherwise.

So there you have it: our answers to “How can trust and confidence be restored to business and the markets.”

But, what do you think? Is it better, or worse, than “tax cuts?”

CNBC Asks Experts How to Improve Confidence in Business: Hmmm..

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On July 22, the Gallup organization released their 2010 poll on US Confidence in Institutions. As Gallup headlined it, Congress scored an all time low (for all 16 institutions ranked, not just for Congress). 

Barely beating Congress for lowest confidence ratings were, in order, HMOs (15th out of 16), Big Business (14th), organized labor (13th), and television news (12th). The Presidency, which also shows declines, still ranks 7th out of 16.

So it was fitting that CNBC (that would be in the 12th out of 16 group) put together a three part special panel discussion on “Restoring Trust in Business” (that would be in the 14th out of 16 group). The panelists included Gordon Bethune, Bill George and Myrtle Potter (representing the 14th out of 16 group), and Christie Todd Whitman (there wasn’t a category for ex-State Governors and Bush cabinet secretaries, but I’d hazard a wild guess she generally fit in).

Interestingly, there was consensus on the panel about how to restore trust in business. 

Answer: It’s the government’s fault.

How Good Shows Go Bad

Given Charlie’s blogpost of yesterday about the hazards of relying on those-who-summarize (including me), here are links directly to the show so you can make up your own mind.

The show—originally advertised (we recall) as “Restoring Trust in Business,” ended up after broadcast on CNBC’s website in three different sequences: “Leadership in Government,” “Leadership in Corporate America,” and “Leadership and Trust.” As CNBC’s John Harwood points out at the outset, the declining trends are long-term—since the 1970s, and particularly since 1994–and they apply across nearly all institutions. (See Gallup’s historical data, here.)

The four leaders invited have some fine credentials. Bethune was a revered CEO in the airline industry, where it’s very hard to be revered by anyone. George was a successful CEO, and writes on leadership. Potter was a COO at Genentech, and Whitman ran the State of NJ and the EPA. Good choices to opine about how business can regain confidence.

Give CNBC credit. Not only did they tee it up right, but nearly half the questions they asked more or less rhymed with, “how has business lost confidence?” or “how can business and the markets regain confidence,” or “what must be done for Americans to regain confidence in business?”

We would expect that the first thing we’d hear from any one of these leaders on the subject of restoring confidence in their institutions would be a straightforward acknowledgment of what was lost, and a statement of responsibility for having lost it. Is that not unreasonable to expect of distinguished leaders?

And indeed, every leader did get off at least one direct acknowledgment that business might have to improve itself—but having done the curtsey toward the question, the bulk of their comments were reserved for tax policy, government regulatory foibles, and flawed federal government policy. 

Instead, here’s what we got (we’re paraphrasing: go ahead, check our interpretation here.)

Q. If you look at the data Hartman reviewed before for us, the congressional approval rating is low. Yet contrast that with the issues that got accomplished this year; various reforms—what is it that isn’t connecting here? 

Whitman: You’ve seen a move in government away from policy to politics; everything’s partisan now. (She then proceeds to attack Nancy Pelosi).

Q. What do you think needs to be done to restore trust in business?

Potter: Business needs to take responsibility for stewardship and its own governance. We can think of examples where that didn’t happen. We also have to think carefully about how we’re paying so we can drive innovation. Innovation used to drive the world from the US, but not now.

Q. I’m interested in your view, Mr. George; you say the crisis wasn’t caused by subprime or derivatives. Wasn’t it caused by flawed leadership putting its own interests before its clients or its people?

George: No question about that; we saw flawed leadership in Enron and all the companies that blew up back in 2003, we saw it on Wall Street. Most of those leaders and their companies have gone away. But it is about leadership in government. We need to emphasize policy not bickering; we need a jobs policy. I’d like to see the President step up to a rebuild America program. 

Q. In terms of business’s relationships to government, why doesn’t it seem to be working? 

Potter: Well everyone’s feeling the crunch, but what stands out is jobs. Jobs are so critical to America feeling more confident about the country, and yet this chasm has to be closed between government and business.

Q. What is your best advice to the administration on what can be done to restore trust and confidence in business and in Wall Street? 

Whitman: Clearly we need a rigorous regulatory policy, but we need to stop this gotcha attitude of blame-throwing in congress. The BP disaster turned into a criminal investigations instead of focusing on how to fix things. Clearly there was a problem on the regulatory side as well. We need to show respect for each other.

Bethune: You have to demonstrate some performance, not talk. No one in our government ever ran a business. The administration shouldn’t have focused on health care or regulatory reform, but on jobs…business doesn’t like uncertainty.

Q.  Most people don’t expect as good a world for their kids as they had.

Whitman: The main thing is we’ve got to do is get deficit spending under control.

Q. One reason people don’t have trust in business is that, at the height of the crisis, big financial companies took big bonuses and were bailed out: what’s your take on that, Mr. George? 

George: Goldman didn’t pay any bonuses last year. Trust is the fuel that enables society to run….but we need policies from government that create incentives. Goldman, JPMorganChase and are rethinking compensation to have pay for performance….investing in America….lower capital gains tax. But that won’t solve this jobs crisis. We’ve got to get back to investing in America.

Q. What is your one piece of advice that would reassure people that the future is going to be better for them?

Bethune: Tax policy; articulate it, make it pro growth, pro business, put cash to work, make the future clear in order to get confidence.

You be the judge, but let us suggest a simple headline. 

When the institution that ranks 14th out of 16 shows up to talk about restoring confidence in their institution—given a decades-long decline—we ought to expect something more than a short-term political bashing of the 7th– and 16th-ranked institutions, a la the Sunday morning interview shows.

Business, heal thyself.

(At this point, you might be thinking, "Oh yeah? Think you guys could do better?"

Well, yes we do, and that’ll be tomorrow’s blogpost.  Tune in again.)

The SEC Chose Wisely in Goldman Case

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The SEC earlier today announced a civil suit against Goldman Sachs.  This act was the talk of Wall Street—the DJIA dropped 125 points, Goldman’s stock lost 12.6%, and CNBC broadcast a special evening show called “Fraud on the Street.”

The suit charges Goldman with not disclosing information. I won’t bother with the detail, you can read that in the above links—the point is, the charge is non-disclosure.

Now, that’s an interesting charge. It amounts to some form of misrepresentation. In the non-legal world, that’s generally known as lying. In that same world, the teenager defense of “I didn’t actually tell a lie, I just let you think what you thought” is considered a distinction without a difference.

The point is, the SEC chose to charge Goldman with something that’s not only illegal, but resonates easily with Main Street as also being unethical. Since the gap between the illegal and the unethical is one of the main casualties of the recent financial debacle, this is a welcome sign—a charge that re-unites the legal and the ethical.

The Spin–Red Herring Issues

Goldman itself responded that the charges are “completely unfounded in law and fact.” Look for a splitting hairs defense a la “it depends on what the meaning of the word ‘is’ is.”

Goldman and others make several arguments that are pointedly red herrings. One is that they didn’t do this transaction to short the market (non-responsive). Another is that the buyers of the CDOs were big boys, and should know what they were getting into (ditto). Another (by Goldman) is that they themselves lost money on the deal (again…).

The pro-Wall Streeters are not alone. NBC News led with “if the government is right, people all across the country are still paying the price for schemes like this that we’re only learning about this now.” Their commentator presented the charge as betting against a carefully constructed product; not the SEC charge. Lisa Myers said, “essentially Goldman Sachs is accused of helping rig the game against investors.” And Robert Reich said the real crime is not what was done illegally, but what was done legally. Fair point, but not a commentary on the crime. CNBC’s Erin Burnett tried to get commentators to say it was suspicious timing, to buttress financial legislation in Congress or to deflect press attention from the SEC’s shortcomings in the Stanford case. Again—not on point.

What the SEC Did Right

I’m no lawyer, but I’m guessing the SEC could have pursued many other charges. It chose to pursue this one—the legal equivalent of what laymen call ‘lying.’ Lying is the most trust-corroding thing that can be done. It not only ruins credibility, it casts motives into doubt. Lying kills trust.

A charge of failure to disclose is exactly the kind of charge a responsible regulator should be pursuing. It reunites the legal and the ethical—a casualty of Wall Street’s actions—and aims at restoring trust.

Greed is not illegal, though it may be unethical; ditto for fleecing one’s customers. But misrepresentation—or the near-equivalent of selective disclosure—is both.

Good for the SEC for taking this route.
 

Charles Green on CNBC and BusinessWeek.com This Week

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GodzillaIt’s been an interesting week for trust.

BusinessWeek.com Article

First, Businessweek.com chose to print an article of mine titled Wall Street’s Run Amok: Harvard’s to Blame.  In it, I argue that the usual explanations for business malfeasance–greed, poor regulation, badly designed incentives–miss a much more fundamental cause.

For several decades now, our business schools have been teaching competition rather than collaboration, and contracted-out processes rather than partnership-based relationships.  With such beliefs at the heart of business, it’s not surprising that we find a dearth of things like trust, ethics, and generally getting along.

In fact, if you design a system based largely on self-aggrandizement (think sustainable competitive advantage, maximum shareholder value) as ends, it’s not just unsurprising–it’s downright predictable.  There’s no such thing as ethics if there is only self-involvement.

These belief systems worked well in the 1980s. Today, in a world where six degrees of separation is a vast overstatement, we can no longer afford ideas that encourage competing with our suppliers, customers, employees and partners.  We need a new belief system.

I’m not teeing off on Harvard Business School per se.  It’s just that, well, it’s the Harvard of Business Schools.  And it had more than its share of the designing of the competitive/contractual/process ideology.  If it can be as successful at teaching the new beliefs as it was at the old, it will continue to fulfill the powerful and positive role it used to.

Watch Me on CNBC Today

The good folks at CNBC apparently read BusinessWeek.com.  They were chatting about the article, and invited me in for today, Wednesday the 7th, on the Street Signs show (Erin and the boys).  The plan is for a slot at about 2:20PM.  Plans, of course, change, but plan to tune in.  And, as they say on the Bravo Channel, watch what happens.  [Later: here is the link to the video–have a look-see, it was fun!]

RainToday Article and Webinar

Also this week, RainToday publishes my article How Poor Cross Selling is Ruining Your Business in today’s issue.  Another very practical example of how the ability to manage trust–in particular, your trustworthiness–is a key driver of effective performance. 

Finally, I’m doing a webinar this week with the good folks at St. Meyer & Hubbard.  You can sign up here, and though the session is aimed at building trust in retail and commercial banking, it’s got a lot to say about other industries as well.