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Trusting and Trustworthiness: The Chicken or the Egg?

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Most talk you hear about trust uses that one word—“trust.”  But on closer reading, the talk turns out to be about one of two very different things: either about trusting, or about trustworthiness.

They are not the same.

Trusting is about the one doing the trusting.  Being trusted is about the one who would be trusted, or trustworthiness.

•    When you read about the poor charities who got ripped off by Bernie Madoff, that’s about trust-as-trusting.
•    When you read about how Bernie Madoff pulled off the con, that’s about trust-as-trustworthiness.
•    Surveys that talk about declining trust are usually about a decline in trust-as-trusting.
•    When we read stories about how there are more securities violations, we’re reading about a decline in trustworthiness.

Which is the chicken, and which is the egg—trusting, or trustworthiness? Which causes the other?  Which should drive policy?

Years ago I consulted to a convenience store chain with a serious store manager turnover problem (150% per year).  They wanted us to profile a successful store manager so they could hire to that spec. 

Sounded like a good plan.

Until we found out that each store manager was routinely given a lie detector test every month to see if they were stealing. 

Let’s say you’re a store manager.   After 6 months of being hooked up to a polygraph and asked if you were a thief, you might figure “hmm, someone must be getting away with something—I wonder how he’s doing it?”  So you start experimenting.

And in a few months, you’ve a turnover statistic.

So which was the chicken, and which the egg?  Trusting, or trustworthiness?

The company management thought the trustworthiness came first, that they were being victimized by untrustworthy employees.  They wanted to find trustworthy people, so they could trust.

In this case, it turned out to be the opposite problem.  Management’s mistrust lowered the trustworthiness of the store manager.  People live up (or down) to our expectations of them.

Sometimes it’s the other way. There are real Madoffs out there, and you’d be a chump not too protect yourself against them.

But here’s the thing.  Think of trust as a risk mitigation strategy. Unlike fight or flight—the usual risk mitigation strategies—trust actually alters the risk in question.

If you take a risk and trust someone—or take a risk to show that you are trustworthy—you can influence the other’s behavior.  People tend to respond in like manner to well intended gestures. 

Madoff is not the norm.  To subject every store manager (or any other job) to the kind of scrutiny that would prevent a Madoff can be a very expensive proposition.  (See Sarbanes-Oxley; airport security).  We need to think very carefully about the right responses to unusual events.  
 

The Curious Case of Curiosity in Selling

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What’s the top, number one, single greatest factor affecting success in sales?

There are often multiple answers to questions like that, because all the prime candidates overlap similar territory. You might argue for a can-do attitude, or customer focus, or a committed team.

Let me make the case for curiosity.

Imagine being in a constant state of heightened curiosity when you are with, doing work for, and thinking about your customers. What would that look like?

The answers fall into two broad categories, I think:

1. If you were curious on your customer’s behalf, you would:

• Notice an awful lot of things about their people, products and customers
• Formulate many hypotheses
• Ask a lot of questions to pursue those hypotheses
• Want to know lots of things on general principle: preferences, history, culture, practices
• Be other-focused

2. And while you were being curious, you would spend less time on:

• Worrying about how to get the sale
• Worrying about how to speed a decision, or close, or qualify a lead
• Trying to portray yourself in ways you assume will influence the customer

Now here’s the punch line. Most approaches to selling tell you to ask a lot of questions—basically like the first category.

But they also tell you to worry about that second category. In fact, they say the sole purpose of all questions is to get the sale. Most sales approaches say you absolutely should worry about getting the sale, speeding a decision, qualifying, etc. Which kills curiosity.

Curiosity says, to hell with that. Curiosity says, the purpose of questions is to find out what could be: what could be better, what the right thing is, what the customer should do.

The paradox, of course, is that curiosity-driven selling just plain works better. It works better because the questions are grounded in the customer’s world, not the sales person’s needs.

The linear, process-driven, metrics-based approach to selling that has become so prevalent has many virtues, but one gigantic, glaring defect: By trying to maximize the sale, it has devalued the customer—thereby reducing sales effectiveness (insert ironic music here).

Curiosity may have killed some cat once upon a time; but it serves salespeople well. Curiosity isn’t a sales tactic. Done right, sales are a natural byproduct of being curious.  There’s something very simple and right about that.

Is it Personal? Or Is it Business?

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In The Godfather, Michael Corleone famously says to Sonny, “It’s not personal, it’s strictly business.”

What about trust? Is it possible to separate them? Can you be trustworthy in your personal life, but not in business? Does one imply the other? And what do we think of someone we trust personally who is turns out to be untrustworthy in business?

Cue Bernie Madoff again. (No, we’re not done with him yet; Madoff is a rich vein of material).

Eric Wiener in the LA Times:

the reason so many Wall Street players couldn’t believe their ears was they couldn’t accept that Bernie Madoff, of all people, would have pulled something like this. "Not Bernie!" was a typical refrain.

And, from the New York Times:

Indeed, in the world of Jewish New York, where Mr. Madoff, 70, was raised and found success, he is largely still considered as a macher: a big-hearted big shot for whom philanthropy and family always intertwined with — and were equally as important as — finance.

It seems increasingly clear that Madoff was greatly aided in this by dozens of willing accomplices—aka banks, funds of funds, hedge funds, “feeder” funds. People who took their own percentage for assuring “due diligence” so that the fraud that took place could never take place. People who claim to be anguished "customers," but who willingly sold the snake oil downstream.

And always, they too are characterized by those who knew them as people of integrity, people you could trust. And, I suspect, they believe it of themselves.

Now, there is a code by which you lie to one group and are trusted by another. It is the code you can hear recited in Huckleberry Finn by the Shepherdsons and the Grangerfords. The Hatfields and McCoys. The Montagues and the Jets, the Capulets and the Sharks. Or as it’s taught in competitive strategy and too many sales programs: the Sellers and the Customers.

I continue to be astonished that the largest Madoff “victim,” Fairfield Greenwich Group, who made hundreds of millions from Madoff, is considering suing PricewaterhouseCoopers—its own auditor. Reportedly because, channeling Willie Sutton, that’s where the money is.

How does Fairfield’s Walter Noel explain that to the partner at PwC’s Stamford office in charge of Fairfield’s audit?

Hint, Mr. Noel: you can buy The Godfather here and start rehearsing the line. "It’s not personal, it’s business. It’s not personal, it’s business." Click your heels three times while you say it. And tell him ‘trust me.’ That way it’ll sound personal, even when of course it’s not.

 

Anatomy of a Con Artist: How Madoff Played the Trust Equation

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The Trust Equation  describes the components of trustworthiness.  The equation is:

T = (Credibility + Reliability + Intimacy) / Self-orientation

Of course, any such recipe worth its salt will also serve as a template for reverse engineering—a “how-to” manual for a con man.  Measuring Bernie Madoff by the trust equation shows just what an effective job he did at mimicking genuine trust. 

So let’s do the numbers:

Credibility: Chairman of the Board of Nasdaq, for starters.  Not to mention a Who’s Who client roster.  But an especially nice touch: not just any old lamb could buy in—you had to be approved by the wolf.  Exclusivity adds cache and credibility. 9 out of 10.  Better than Alan Greenspan (hey, he used to be hot).

Reliability: Arguably Madoff’s greatest contribution to the con: don’t go for the jackpot, the Big Win.  Become known for steadily hitting .335 in a league of .285 hitters.  Always just over the average means always just under the radar.  Another 9 out of 10.

Intimacy: courtesy of spoonfeedin, he was described as a gentleman, gregarious, generous, personable, charming, and so forth.  Like a mass murderer, he appears to have been ‘the last person’ one would have suspected.  Give him an 8 out of 10.

Self-orientation: who would suspect the motives of a philanthropist, a giver to religious causes, a man generous with his own (we thought) money?  Not me, not you, that’s who.  An apparent low score (low self-orientation is good, you see); maybe a 2. 

That’s a Trust Quotient score of (9+9+8)/2, or a spectacular 13 out of a possible 15.  (If you don’t think that’s spectacular, try it yourself: take your own Trust Quotient.

There is no such thing as trust without risk; Madoff was an awfully talented con man.

But he couldn’t have done it without his pigeons. 

–A great many people may have suspected him, but felt glad to be in on the “fix.”  No sympathy for them. 

–I am astonished to hear that Fairfield Partners may sue PricewaterhouseCoopers—not Madoff’s accounting firm, but their own accountancy.  Zero sympathy for that Madoffian level of chutzpah. 

–Then there’s all the relatively innocent folks out there who thought they’d found something almost too good to be true.  They learned the distance between “almost” and “definitely” is dangerously thin.
 

Where Caveat Emptor Still Stalks the Land

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I am not generally the dullest knife in the drawer, but when it comes to the subprime, I-mean-credit, I-mean-whatever financial crisis, I often feel like one. I know a few facts, but can’t put them together in a satisfactory way.

Fortunately, for my ego, I’m not alone. Few people seem to understand it all.

One that comes closest is the recent article The End of Wall Street’s Boom by Michael Lewis, author of, among other books, 1990’s Liar’s Poker. I heartily recommend this for anyone wanting to better understand what went on at the heart of the storm.

If you believe there is something hopelessly twisted at the heart of the financial sector of the global economy, you’ll find some support here. The most telling story Lewis relates, I think, is that of a dinner that Steve Eisman had with a fund manager:

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

[Eisman] had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

In other words—‘no problem, I’ve unloaded the toxic waste onto my customers. I’m doing fine, thanks for asking.’

Let’s be clear. If your grocer sold you toxic milk for your child, would they say ‘no problem, I unloaded it onto my customer?’ How about your local pharmacist? Your auto dealer? Heck, if your local drug dealer sold you bad weed, wouldn’t he at least be embarrassed?

Those other industries at least have the good taste to be ashamed. In this sector–well, not so much.

There is a belief afoot in Finance Land, put well in the Financial Times by George Soros last January in Worst Financial Crisis in 60 Years Marks End of an Era :

Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest.

As Soros points out, it’s simply not true. The current crisis was caused by markets, and (sort of, so far) mitigated by governments. I learned in business school the notion that competition leads to equilibrium is a bad economist’s dream: the real point of competition is to bash the other guy’s head in. Du-uh. The only reason it doesn’t reach end game more often is regulation—agencies, anti-trust laws, etc. which say “tilt” and “restart.”

I’ve met all too many people educated in our “best” schools who have come to believe that selling toxic waste to customers is a legitimate part of a noble, even moral, endeavor called ‘capitalism,’ founded by Adam Smith, tweaked by Ayn Rand, and quasi-guaranteed in the Constitution. The customers? Caveat emptor. It’s good for them. Culls the weak from the herd.

No, it’s not. It is simply selling toxic waste to customers, and it is despicable under any code of behavior within 10 miles of the word “ethical.” It is not even good capitalism.  Poisoning a customer is like selling your mother to pay the rent, or stealing the life preservers from your children on a sinking boat.

Congratulating yourself for doing it is simply beyond the pale.

How many banks and hedge funds who sold Bernie Madoff’s funds to their clients will offer to make good? To simply refund the commissions? Or—a novel thought—just apologize? There’s your caveat emptor at work, still stalking the land.

 

The Silver Lining in the Recession Cloud: a Shift Toward the Customer

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Can you feel it? It’s all around us.

No, I’m not talking about the doom and gloom of the stock market or the latest bank collapse. I’m talking about a the subtle changes where you shop, eat, bank, style your hair and service your car. Despite the dark sky of economic woes, there’s a silver lining – a shift toward the customer.

* Chain restaurant staff are more welcoming.
* Safeway has a sale sign on every item (recognizing that people need to perceive a deal before they’ll buy)
* The local Toyota dealership is offering free Cappuccino’s on Monday, Wednesday and Friday and now leaves you with a bounce-back coupon.
* Staples offered 50% off any copy paper (although tied to their rewards program – not very customer focused)

Last night, while I was at the local Target, the floor manager announced (loud enough for customers to hear) that any employee that helped a customer find a “high ticket” item resulting in the largest sale would get a $5.00 Target gift card.

Think back to not too long ago. Didn’t you feel complacency just prior to the storm clouds moving in? I’m guessing Lehman Brothers, Fannie and Freddie all were perched on their porches in rocking chairs before the tornado came. The energy was about to drift to the buyer.

New found energy?

Genuine customer focus?

Desperation?

Here’s the question that pulls at me – what if this customer focus du jour carries beyond the current storm clouds? What if this recent shift back toward customer satisfaction propagates valuable lessons that translate into better service once the sunny days are here again?

Perhaps this is a divine shake up — requiring us to “love your brother as yourself” in order to get back on track.

Those who are truly customer-focused will soak up what works and what doesn’t through these trials. Those that are thinking about these activities as a tactic to wait out the storm will probably revert back to their old ways.

In the short term, buyers benefit. In the long-term both buyers and seller can.

 

Madoff Madness: When Smart People do Stupid Things

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Bernard Madoff’s Madoff Securities lost $50 Billion in an apparent Ponzi scheme.

You can read about the details anywhere—try the Wall Street Journal, for example. But the details don’t answer one question.

How? How could some of the world’s supposedly smartest investors—hedge funds–have been hoodwinked by something that, in the rear view mirror, was a blatant scam?

The answer reveals a common myth about trust in business. The myth is that good businesspeople make rational decisions about trust.

They often don’t. And in the rush for “best practices,” many “good businesspeople” shortchange commonsense for wishful thinking.

I have written about the Trust Equation: the trustworthiness of an individual can be expressed as a function of credibility, reliability, intimacy, and other-orientation. Someone who rates highly on these dimensions, as seen by others, is trustworthy.

But a con man is as good as the gullibility of those who want to believe him. Let’s examine the trust equation point by point.

1. Credibility: the man was the former Chairman of Nasdaq, and remains on their nominating committee. He is known as a leader in the industry. And his own website says he has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark."

Never mind there were complaints to the SEC, questioning articles in Barron’s, unavailable data, and a one-man accounting firm of record. Don’t wanna go there, uh uh.

2. Reliability: the man had a multi-year track record of over-market returns. Regular. Dependable.

Never mind that he lacked the data, or explanations, to back up just why those returns were so steady.

3. Intimacy. Many people knew him personally; he was a regular at toney golf clubs in Palm Beach and Boca Raton.

In language we usually hear about mass murderers, acquaintance Jon Najarian said, “He always seemed to be a straight shooter. I was shocked by this news.”

And in classic Big Brother language, his lawyer stated—after Madoff’s apparent confession to operating a Ponzi scheme—stated “he’s a person of integrity.” And I’m the Pope.

Never mind that “intimacy” may be the easiest factor of the four in the trust equation to fake. It’s probably the favorite factor of con men.

4. Self-orientation. Clearly his customers thought he was generous, a regular attendee of the Red Cross Ball, a desirable acquaintance by virtue of his willingness to share advice.

Never mind his broker-dealer business model was under-powered to take advantage of his supposed insights, casting doubt on his motives. Conflicts of interest were present in the situation of a funds manager using a related broker-dealer.

Trust is a funny thing. Trustworthiness can be analyzed. But it often isn’t. Which means trust is as much about the one doing the trusting as the one being trusted.

In the days to come, the absence of regulatory action will be rightly noted. Where was the SEC?

But at the same time, let’s not forget the willingness of the sheep to be fleeced.

If it looks too good to be true, it is.

There’s no such thing as a free lunch.

An emperor without clothes is just a naked man.

We know that untrustworthy people are often greedy. We can protect against that to some extent.

It’s harder to legislate against greed and willful stupidity on the part of those doing the trusting.

When commonsense takes a back seat to greed, it’s a con-man’s market.

 

 

Do You Trust the Tech Support Folks?

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What is it about tech support?

We want to trust that they will solve our problem. But wanting isn’t getting.

I had lots of time-on-hold to think about this recently – that is – what bolsters trust and what detracts from it? Here are my recent experiences.

1. My computer died in my sleep. It was under warranty. I called the tech support line. When I tested the computer with the agent on the line, the video card ignited in flames!

The agent stayed calm and made sure I was safe, genuinely caring about me and my home. Then he cared about my hard drive – assuring me that it was likely to be safe as well.

Then he addressed the issue – and decided to replace my computer, rather than just the parts. He described the exchange process, and said it could take one to three weeks, but might come even sooner. It arrived in 3 business days.

2. My PDA Calendar was deleting my entries. I called my cellular carrier. I slogged through one automated system and two phone agents–repeating my identification and other security data, in addition to my issue each time. Most of the conversation was scripted apologies about my woes, repetition of what I just said, and thanks for using their service and calling them. Having exhausted the service available, the last agent rightly granted me access to the manufacturer.

At that point, my experience changed. The first person asked about my problem and for my phone number in case we disconnected. Then I was transferred to a person that already had that information on the screen and who didn’t ask me to repeat either my identification information or my issue. He assured me he would stay with me until we resolved the problem – which is what I really wanted – instead of a disingenuous apology. We agreed to break at one point, at my request. He kept his word and called me back right on time, using the number that was logged earlier. And we resolved my problem.

Net net: for my computer problem, I trusted my phone agent, and through him, his company, and will buy from them again. I trust my PDA manufacturer, and will buy another when I’m ready. I’m not so sure about trusting my cellphone service carrier, and may change next time around.

What engendered trust:

• Skipping the unnecessary script and focusing on the problem
• Genuinely caring about me, wanting to help and reassuring me every step of the way
• Being transparent about process
• Keeping promises, showing reliability
• An agent recognizing that he can’t help, and referring me to one who can, as quickly as possible.

What detracted from trust:

• Canned apologies, fake empathy, and useless thank-yous designed to meet some behaviorally observable criteria judged by “management” to serve as a proxy for genuine trustworthiness;
• Asking me for the same information over and over and over…making me doubt either their intent or their competence, or both;
• Multiple transfers without results.

That’s just me. What makes you trust tech or customer service — and what makes you cringe and wonder whether anyone really cares?

Is Trust a Substitute for Risk Management?

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Some financiers say the current financial crisis is a risk management issue. Unwarranted risks were taken; better risk management tools are needed.

They misunderstand the difference between risk management and trust.

Risk management is when we contract that you’ll staff my project with the best people, you’ll use best practices, charge me a fair rate, that I can terminate with 30 days’ notice, and so forth. And if you don’t do those things, you’ll be in violation of a legally enforceable agreement.

Trust is where we look each other in the eye, shake hands, and say, “we’re going to do right by each other, including changing whatever else it takes to do so.”

Risk management is for hurricanes—things, events. Trusting the weather won’t change it one whit, and can be suicidal.

But treating people like hurricanes actually increases the risk. The more you give employees lie detector tests, the more they’ll lie—“someone must be getting away with it, why else would they keep testing us?” More fine print just leads to gaming the system.

Conversely, when you trust people, you increase their trustworthiness. A client once cut short my praise of a proposed subcontractor. “Charlie, enough–if you say he’s good, he’s good—I trust you,” the client said. I instantly felt the weight of the burden of trust.

When people are involved, risk management partially raises risk. Trust lowers it. Why do the financiers have it wrong? Because they think our crisis is about securities capable of being evaluated in absolute terms. It’s not–it’s about people relationships, capable of being evaluated only in subjective terms. It’s not a crisis of derivates valuation–it’s a crisis of trust.

Trust won’t eliminate risk. Some people steal from honor boxes, and take advantage of others. I commonly hear, “Charlie, you’re naive. You need to legally enforce legal rights to copyright, employee behavior, or pricing. There are no sanctions with trust.”

In fact, there are sanctions, both carrot and stick, and they can be more powerful than contracts.

Suppose I trust a French contractor with my intellectual property. I could get a legal contract stating sanctions. If violated, I could enforce it in France. But at what cost in euros, time spent, and time elapsed?

Here’s the trust carrot. “Pierre, think of the great business you and I can do together—new markets, products, opportunities; as long as, of course, you continue to respect my property rights, we can do this again and again. This can be the beginning of a beautiful friendship.”

And the trust stick? “In the inconceivable event that you, Pierre, were to violate this agreement—not that you ever would, of course—then I would be forced to make that fact public. In a blog. In letters, emails, articles, public websites, aimed at your other business partners and potential partners, your customers, your employees. That would be most harmful to your reputation for trustworthiness, Pierre, and we both know that, so we needn’t speak more of such terrible things, now do we? We understand each other, oui?”

The common way to manage risk is with lawyers and contracts. The better way is often to create trust–over a fine French meal and a bottle of wine.

One of those ways is cheaper, faster, stronger, more pleasant. Why would I want to use lawyers when I can use trust? Why manage “people risk” like you manage hurricanes, when you can use trust instead?

(The usual pushback is how to scale trust: more on that soon).

The Cost of Broken Trust

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by Mark Slatin

What happens when an insatiable drive for profits permeates the culture of an organization?

Eventually you forget whose business you should be taking care of.

Consider Office Depot’s current woes. The number two office products "mega dealer" ascended to their position in large part due to their strategic focus on the education and government markets. Now they have lost favor with those same markets amid questions surrounding "pricing and other irregularities."

Consider the following as reported in the Independent Dealer Magazine’s Depot State Contract Watch:

•    After the state of Georgia raised some red flags, an internal audit revealed rampant overcharges. An industry trade publication estimated the overcharges as much as $1.2 million. As reported last February by the Atlanta Journal Constitution, the state canceled their $40 million per year contract. Georgia is not alone.
•    California: The San Jose Mercury News reported that Office Depot has agreed to repay the state of California $2.5 million for over-payments, state officials said, as they released a state audit concluding that state workers routinely failed to get the best value when buying office supplies the past two years.
•    Southeast Florida: Lee County tallied nearly $60,000 in overcharges, according to a report by that county’s internal audit department as reported by the Palm Beach Post.
•    Southwest Florida: Fox 4 News reported that in Collier County, Florida a "whistle blower" from within the company has been terminated after voicing his concern for overcharging that county’s government (WFTX video).
•    North Carolina: The office of the state auditor in Raleigh, NC announced he found overcharges under an Office Depot contract with the state purchasing agency. That audit examined six months of purchases and identified $294,413 in net overcharges through direct testing of purchase orders.
•    Nebraska: State Auditor Mike Foley has concluded an investigation showing the State of Nebraska is paying too much for office supplies because of serious pricing errors and overcharges. Overcharges ranged from less than 1% to over 400% on various items according to the report.
Office Depot’s stock has plummeted from $46.52 in May of 2006 to $1.82 earlier this week, nearly 97% drop as compared with only a 30% – 40% drop in the major stock indexes over the same time frame.

Is there a connection between their B2B pricing strategy and their poor performance?  Sales and operating margin dropped by nearly half in Q3 08′ for their B2B segment.

Time will tell the depth of Depot’s damage as investigations continue throughout the country.  Despite persistent denials by Office Depot officials, the tide doesn’t seem to be going in their favor.  Are they wrongly accused?  Simply out of alignment with their core values?  Or is this part of a strategic pricing strategy that’s become part of their culture?

Office Depot’s website defines integrity and accountability as follows:

Integrity – "We earn the trust and confidence of associates, customers, suppliers and shareholders by being open, honest and truthful in all that we do".
Accountability – "We are responsible for achieving and sustaining unprecedented results that create extraordinary value to our shareholders…"

Maybe it’s just me, but it seems like their failure to adhere to the former is impacting their realizing the latter.

With ever increasing pressure on corporate earnings, the temptation to slide down the slippery slope of profit margin improvement at the cost of integrity will rise.  If your conscience is telling you "this doesn’t feel right," listen to it.  The pennies saved won’t be worth the risk.

How many years and advertising dollars does it take to create a corporate brand built on trust?  Not only does bad publicity cause buyers to question your pricing, it causes them to re-think inviting you to bid in the first place.

What can you do to avoid the high cost of broken trust?

1. Don’t do anything in the short-term that could potentially come back to bite you in the long-term. Ask yourself, "would the buyer think this is equitable?"

2. If you work in an industry in which customers already question the trustworthiness of sellers (guilt by association), address issues like pricing head on. Don’t let pricing integrity become the "elephant in the room" that takes over the room.  Bring it up first and get it on the table.  Transparency is a precursor to trust.

3. Leadership not only has a responsibility to set the tone, it has a charge to sniff out unethical pricing behavior at all levels. Make sure your team knows that you’re not willing to cross the integrity line, not once. 

Restoring broken trust takes a lot longer than building trust; a reputation can take years to build but only seconds to destroy.