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Warren Buffett and Managing Through Trust

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On March 30, Warren Buffett’s Berkshire Hathaway announced David Sokol’s resignation. Buffett’s reputation quickly took a bit of a hit from the likes of Joe Nocera.

Nocera suggests it wasn’t the first time Buffett had tap-danced his way out of a tight spot; he cites the Salomon Brothers’ bond scandal in the 1990s, and the General Re dustup in the mid-2000s.

What’s Nocera’s point? He later elaborated that Berkshire Hathaway is run by “rules that are extraordinarily lax by the standards of good corporate governance…Standards and practices have to change.”

Do Trust Violations Invalidate Trust?

Nocera’s examples amount to once per decade over the last 30 years. Buffett’s reputation is probably pretty safe, because a great truism about trust isn’t true at all: you know, that bit about how trust is hard to gain, but can be lost in an instant? Not true: trust takes roughly as long to dissipate as it took to create (see Toyota, J&J, Madoff).

But Nocera’s reaction is the norm. Ethical problems? Time to double up on compliance, standards and practices, procedures.

Nocera is speaking for business when he sees violations of trust as prima facie evidence of the failure of trust as a strategy.

In this regard, he could not be more wrong.

Charlie Munger and Wisdom of Managing through Trust

Charlie Munger is Buffett’s much-less-in-the-press partner. Buffett credits Munger with at least half the wisdom of the two, and quotes him often.

Munger lives up to his reputation in a trenchant article[1] by Darden Professors Brian Moriarty and Edward Freeman:

In response to a question about whether Berkshire needs more compliance controls Munger said:

…the greatest institutions in the world…select very trustworthy people and then trust them a lot.” He added, “I think your best compliance cultures are the ones which have this attitude of trust, and some of the worst with the biggest compliance departments, like Wall Street, have the most scandals.”

To Munger’s comment: Amen.

The violation of trust by someone who was trusted does not justify giving up on a strategy of trusting. In fact, if you never have a violation, one has to wonder how real your trusting is.

If all of Wall Street ran themselves like Berkshire Hathaway, and had one scandal per decade, we’d all be vastly better off.

Instead, we have an institutionalized belief system that the solution to ethical problems is a set of adversarial business processes. Dealing with ethical issues solely via compliance departments is the best way to take the trust and ethics out of management.

And if the bar is set at once per decade by famous journalists thinking they are acting in service to greater trust in business–well, heaven help us.

[1] The article was in the Washington Post, though the Post will make you jump through hoops to get it. I’ve linked to the hoops.

Trust and Reputation: the Virtuous Link

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I awoke at home on a sunny (!) morning in London last week to the dulcet tones of Bill Clinton’s erstwhile Labor Secretary, Robert Reich, talking about BP on the BBC:

“To start with, it actually helped that they were British. We listen to the accent and think that they are just more intelligent than us! But their reputation has badly suffered. They have lost a great deal of public trust. After all, this is not the first time that BP has had serious safety and environmental problems in North America.”

As a Brit who loves America, I recognize the piece about Americans going all mushy (you would say ‘gaga,’ yes?) about the old British accent!  But this is not to diminish the seriousness of the situation in the Gulf of Mexico and the horrific consequences for the environment, the livelihood of many thousands of people, and the future of the oil industry. The thick clouds of the Gulf disaster will need to carry a very strong silver lining in terms of improved environmental consciousness to mitigate such negative consequences. And no doubt the British accent is now beginning to grate.

The Labor Secretary struck a chord in linking the notions of trust and reputation. I’ve seen both arising in recent discussions with organisations, and it raises a Big Question:

Are trust and reputation the same things? Does one drive the other? And if not, just what is the relationship between the two?

Trust and Reputation

We know that reputations are hard won. They are valuable assets for organisations and individuals. Good will is a major component of corporate balance sheets. And reputations are built for certain characteristics: Helen Mirren for brilliant acting (and a classy British accent!);Tesco for execution; 3M for innovation; Obama for rhetoric, and so forth.

Sometimes those reputations are for being trustworthy, but they are generally for a whole range of characteristics other than trust. We would argue that the role of trust is in the nurturing and sustaining of a strong reputation; this nurturance is essentially a trust-building process.

Observe when reputations suffer and are lost, a painful process caught by Shakespeare in the words of Othello:

“The purest treasure mortal times afford is spotless reputation; that away, men are gilded roam or potted clay.”

As reputations wane, so does trust. As Robert Reich stated above, a loss of public trust in BP comes with their tarnished reputation for safety and environmental protection. The UK has recently seen reduced trust in politicians as their reputation for probity has suffered in the recent expenses scandal. Candidates for the leadership of the UK Labour Party are now saying that the Iraq decision led to an unraveling of trust as the Labour Party’s reputation for principled decision-making suffered.

(We could even go back to the writings of Edmund Burke who, in the early 1770’s, argued that the growing abuse of power in the American colonies by King George and his ministers was leading to a collapse of trust!)

In other words: organisations and individuals earn and retain our trust in their reputations.  Without this trust, those reputations fall away. As child is father to the man, trust begets reputation; and the loss of trust drags the latter down with it as well.

A Principled Approach to Trust and Reputation

For me, it is to the Four Trust Principles that we should turn to guide the process for building and sustaining trust in a reputation:

1.    Focus first on the customer.

Last winter, I had problems in a cold snap with my car brakes. I booked the car into a local garage and set out on a snowy, icy morning, only to slither to a helpless halt on the first corner. Most other drivers ignored me. Some hooted, others shouted out unintelligible advice, while I sat there immobile.

A large van stopped.  A group of young men who spoke no English and an older guy who spoke some all jumped out, took a look, and dove under the car with hammers to free up my frozen brakes. In minutes, the car was fixed.

I looked on incredulous. “We used to see this every winter morning in Poland,” the man said. I asked where they were working and went to have a chat with them later in the day. I found they were builders. I inquired about them; all reports were of outstanding care and attention, so it was easy for me to put them on the tender list recently for some big building work at our house. They won the competition hands down, and we are delighted with the service they are giving us.

Every single encounter we have with them—beginning with the first, when they had no idea we might be possible customers–reinforces our trust and confidence in their reputation for outstanding domestic building work. They sold by doing, demonstrating both reliability and a focus on the customer as a principled part of their behavior.

2.     Transparency.

When working for a large consultancy a few years ago, we hit a critical moment in negotiating the potential terms for a significant deal for a global client. This would involve a very different pricing model for us. Very radically for us, we opened our books to the client (this took quite some persuasion of our leadership team!) and established a shared understanding that led to a mutually beneficial deal.

Our striking transparency strengthened our growing reputation for straight talking, client-centered consulting.

3.     Long term perspective.

A colleague of mine has been working for a global organisation for some time. A couple of years ago he was asked to do something that he could have done but not quite to the quality his client was used to. He also knew others who could do the job better than he. So he introduced them in his place. He has since carried out a number of other assignments for the same client.

By taking a long-term perspective, his client trusted even more his hard won reputation for doing, above all, what was in the right interests of the client. By taking what appeared to be a short-term risk, he actually reduced risk by focusing on the longer term.

4.    Collaboration.

One conclusion about the recent financial services crisis is that some of the banks became too focused on the interests of a narrow group of stakeholders in their pursuit of profit, losing sight of their previous client-based model of which collaboration with a wide range of stakeholders was a key ingredient. They thereby lost our trust in their espoused reputation for looking after the interests of all their customers, many of whom will suffer for a number of years from Governments’ fiscal adjustments.

This need for intense collaboration – with regulators, customers, suppliers, politicians, environmentalists, shareholders and local people – also defines the trust-building process that BP need to mount now to salvage their reputation. As Peter Firestein elegantly argues, it is aggressive, proactive engagement that is needed after a reputational slip.

“There is a short list of companies who have come out of disasters with stronger reputations than they had before. In all cases, they did so because they were able to identify with those who were angry with them. They actively participated in the aftermath to the disaster.”

Reputation and Trust: The Linkage

Reputation and trust are close relatives–but are not one and the same. Organisations and individuals have reputations for a whole range of characteristics other than trust.

The role of trust lies in the process by which organisations and individuals build and sustain confidence in those reputations. By focusing on the Four Trust Principles of putting the customer first, transparency, a long-term perspective and collaboration, reputation-building becomes a practicable endeavor.

With all good wishes for your reputation enhancing work!

Do You Trust a Robot? To Do What?

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Do you trust a robot?

Well, you might say, it depends: that depends on who did the programming. 

We do use the word ‘trust’ that way. We can ‘trust’ a robot to do the same thing, over and over. It doesn’t have bad motives, bad days, or bad blood. It does what it’s programmed to do.

But we would never say we’d trust a robot to “do the right thing,” or to “keep its owner’s best interest at heart,” or to “have a conscience.” That would just be silly. A robot is a machine. And silicon is not protein.

Yet much thinking about social trust amounts to nothing more than programming the robot. Got problems on Wall Street? Tweak the incentives. Oil drillers behaving badly? Rewrite the programmer rules of the MMS.

Much of that’s necessary. But it’s not sufficient. What’s to be done about all the non-robotic parts of society?

Sister Rettinger Uses Non-robotic Trust to Shame a Thief into Restitution

Writing programs for robotic trust is pretty simple. Go read one of the economists or psychologists who boil down all human behavior to the consistent pursuit of self-interest, and borrow their formula. Define a few processes, insert rules and conditional reward/pain payoffs, and voila—robotic trust.

But that won’t explain Pittsburgh’s Sister Lynn Rettinger: or the thief she undid with her voice:

Rettinger didn’t even have to break out a ruler for man who reached into an open window and stole a wallet from a car on Tuesday. She just needed the voice honed by nearly 50 years in Catholic schools.

After a teacher saw the man swipe the wallet, the 5-foot-3 principal of Sacred Heart Elementary School in the Shadyside neighborhood went outside and firmly told the man, "you need to give me what you have."

The unknown thief turned over the wallet, apologized and walked away.

Rettinger says she merely said what she says to students when she knows they have something they shouldn’t.

Let’s be clear: the Sister called out a stranger for misbehavior: and he responded. While strangers, they shared a moral code. While he was a lawbreaker and she just a little old woman, she trusted that he would not harm her, and that he would do the right thing.   And so he did.

The rules of interpersonal conduct—or morality, or trust, or conscience—are often considered to be far ‘softer’ than the rules governing physics, or programs governing robots. But Sr. Rettinger had enough confidence to calmly place a bet on their power. And she was right.

There is a power that exists between human beings, a binding web of mutuality, that we have systematically denied—to our own detriment.

5th Pillar in India Challenges Bribe-takers to Cease their Demands

Vijay Anand, chairman of 5th Pillar, has printed up over a million zero-rupee notes. The notes are to be given by poor people to officials who try to extort them for basic services.

When confronted with a demand for a bribe, the citizen offers up a zero-rupee note. This act turns out to have serious, positive consequences. In one case, “a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.”

When engineered properly, the power of the force that binds people to each other can overwhelm the selfish power that economists presume drives us all.

Selfishness Is Over-rated: Trust is Under-Rated

I’m getting tired of hearing it cited routinely, over and over, as if it were self-evident, that people are selfish and will behave badly unless stopped or otherwise incented, especially if they work for companies.

They are not. People are vastly flawed and far from perfection; but they are also selfless and capable of great acts of generosity.

Dr. Robert Hoyk lists a number of ways we can think about increasing trust, many of which don’t involve behaviors and incentives. David Gebler suggests that culture drives trust , which seems perfectly obvious when you just put it that way. Then we catch wind of a headline and we’re off to the behavioral sanctions route once again.

Programming the robot; what does it get you? The same thing, over and over.   There’s a lot to like about dependability and reliability. Just don’t claim that’s all there is to trust.