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You Lying, Cheating Dog, You

Most of us lie, at least a touch.  Maybe cheat a little bit, too.

But it’s interesting to explore just why, and when, we do so. That’s the subject of a charming little piece in the current Harvard Business Review (February 2008, paper only) called “How Honest People Cheat,” by Dan Ariely.

A simple experiment. Give a few thousand people math problems to solve for money. Use a control group to establish average scores. Then rip up the exams in front of the test groups, and ask them to self-report how well they did.

The control group got 4 of 20 right. The test groups, on average, reported getting 6 of 20 right. By one measure, they cheated by 50%. By another, they cheated 12.5% of the available opportunity to cheat.

Then the researchers made it interesting.

1. They varied the risk of getting caught. Result? No change at all.

2. They substituted poker chips (redeemable later for money) for money itself. Result: a doubling of cheating.

3. They preceded the test by having participants reflect on their own standards of honesty, e.g. the Ten Commandments or an honor system. Result: complete cessation of cheating.

Ariely draws three conclusions:

1. Most of us will cheat a little, given the opportunity
2. Our consciences impose limits even when there’s no risk of sanctions
3. Non-monetary exchanges allow people to cheat more, e.g. backdating stock options.

Ariely seems to make the most of the third one, suggesting it explains Enron, for example.

I would emphasize it another way.  This elegant little study suggests that the threat of individual punishment carries far less weight than does the exhortation to do right by a group norm.

Now, it’s quite a leap from a small study to suggesting that prisons should focus on rehabilitation rather than punishment and retribution—but that’s the direction.

It’s a leap to say that white collar crime will be deterred less by Elliot Spitzer-like prosecutions than by airing criminal behavior to the disapproval of a broad public—but that’s the direction.

If you can’t trust someone, do you follow Ronald Reagan and “trust, but verify?”  Or do you have a sit-down with them about their responsibilities to be trustworthy? Let’s just say this study is anti-Reagan. 

At root, this study reminds us that much of individual behavior is not explained by that old economist standby, the “rational, self-aggrandizing homo economicus,” who does all that he does in order to improve his own economic well-being.

It suggests that human beings are also—very much—social creatures. We even build our own personal values systems (aka consciences) based on our sense of what furthers our relationships to other human beings.

Is that so hard to understand? 

Lessons in Sales from John McCain

As far as I know, John McCain has never sold for a living. Though you could argue that insofar as he’s a politician, he’s never done anything else.

Whether or not you believe all politicians are salespeople, some do it differently than others. McCain “sells” in a particular way.

It’s an approach to selling that most salespeople instinctively avoid, but that many of the best salespeople have learned to seek. It’s an approach Hillary Clinton is belatedly coming to recognize.

It’s simple: be transparent.

As Howard Kurtz writes in Accessibility Opens Doors to McCain in the Washington Post,

Reporters rarely quote his aides because the man himself is available to react to just about everything. And that "infinite" access, says Boston Globe correspondent Sasha Issenberg, helps the Arizona senator.

"He’s pretty good road-trip company," Issenberg says. "The guy stays up on sports, movies and what’s in the news. I’ve had the ability to have extensive conversations with him — often Socratic dialogues — about the issues. He’s a richer candidate in stories written about him than other candidates are in stories written about them."

How candidates treat reporters shouldn’t matter in the coverage, but it does.

William Kristol, writing an ope-ed for the NY Times called Thoroughly Unmodern McCain, makes a similar point:

John McCain is a not-so-modern type. One might call him a neo-Victorian — rigid, self-righteous and moralizing, but (or rather and) manly, courageous and principled.
Maybe a dose of this type of neo-Victorianism is what the 21st century needs. A fair number of Republican and independent voters seem to think so, if one can infer as much from their support of McCain at the polls. But, amazingly, a neo-Victorian straightforwardness might also turn out to be strategically smart.

McCain has been the only Republican candidate who hasn’t tried to out-think the process. Perhaps out of sheer necessity, after his campaign imploded last summer, he simply picked himself up and made his case to the voters in the various states.

Meanwhile, the other G.O.P. candidates are creatures of our modern age of analysis and meta-analysis, and their campaigns have sometimes been too clever by half.

There’s a reason transparency works: and a lesson for those would would fake it.

The reason transparency works is it reveals motives. Unlike appeals to qualifications, credentials, experience, testimonials, track records and competence—transparency speaks to intent.

If we see someone as being transparent, then nagging questions about motive disappear. We no longer speculate about what’s in it for him, what’s the hidden meaning, why’d he say that, is he lying, and so on. We accept the person at face value for what they say, even if—sometimes, particularly if—what they say reflects imperfection. That works in sales, and in politics.

And here’s the lesson for those would would fake transparency: you had better be really, really good at it, because, if you are caught faking transparency—all bets are off. There’s virtually no recovery from being found out intentionally lying about being truthful.

The best way to be transparent about your motives? To be sure your motives are clean in the first place. We don’t like someone who’s being transparent in order to gain something (like the Presidency). We want transparency as an end in itself—a principle, a value, not a means to end.

Here’s how it’s done, from Kristol again:

There was a serious moment when BBC correspondent Justin Webb asked why McCain kept bringing up global warming — not a popular cause with many Republicans, particularly in Michigan, where resistance to fuel-efficiency standards is strong.

"You’ve got to do what you know is right," McCain replied.

"You could lose as a result," Webb said.

"There’s a lot worse things than losing in life," the former POW said.

Transparency sells. The “trick” to using it is to live your life in a way you don’t mind being exposed.

Then just be who you are.

Property Theft or Generation Gap?

David Pogue  is the personal technology columnist for the New York Times. His Wall Street Journal counterpart, Walt Mossberg, plays the practical, straight-shooter  to Pogue’s edgier and more expansive ruminations.

Case in point: Pogue’s article “The Generational Divide in Copyright Morality.”

 Pogue sometimes speaks to audiences who are outraged at copyright thievery, $2.00 DVDs of first run movies or $10 copies of Windows hawked in Hong Kong, knock-off designer bags in New York, scams, con men and property theft in general.

He asks them; “if you own a CD and it gets scratched, and you borrow one from the library to burn a copy—is that wrong? If you make CD copies of old vinyl LPs you own? What if you burn a copy of a movie you rented from Blockbuster?”

He leads listeners down a garden path of increasingly discomfiting examples, with more people at each point willing to call it “wrong.” His point: “wrong” is a nuanced view, not black and white. And it’s a powerful example.

Until—he spoke to a college audience of 500.

 

Pogue went all the way down his usual garden path, and got only two people—in an audience of 500—who characterized his endpoint as “wrong.”

…to see this vivid demonstration of the generational divide, in person, blew me away.
I don’t pretend to know what the solution to the file-sharing issue is. (Although I’m increasingly convinced that copy protection isn’t it.)
I do know, though, that the TV, movie and record companies’ problems have only just begun. Right now, the customers who can’t even *see* why file sharing might be wrong are still young. But 10, 20, 30 years from now, that crowd will be *everybody*. What will happen then?

Pogue is on to something—but it’s not generation gaps. Generations are the second-order indicator of something much bigger.

It’s the disconnect between old belief systems—forged in a different business and technology world—and the new reality.  We are inhabiting an inter-regnum, a period where old beliefs don’t fit the new reality—and the new belief systems as yet unformed.

Emile Durkheim wrote about the shift from one mode of civilization to another; the result, if I recall correctly, was what he called “normlessness.” And it created anomie—a sense of disconnectedness, a lack of cohesive social principles, manifested in individuals as a sense of not belonging.

This disconnect between old beliefs and new reality shows up in several places: the purchasing function is one (old belief—compete with suppliers to squeeze costs out of them; new reality—collaborate with suppliers to create cross-corporate supply chains).

But Pogue’s example is the most vivid. It’s about property rights—the intellectual rights of music, movies, books, software—but also “hard” property like art or design as they become “copied” or digitized.

Technology relentlessly drives toward communalization of property. “Information wants to be free,” was the anarchic claim of the early digerati, and I think they were right. And the more free it becomes, the more Pogue will get blank stares from new generations.

Property owners can partly blame themselves. When videocassettes were introduced, movie companies’ first impulse was to sell, not rent, thereby implicitly degrading their rights to the content.

Remember Microsoft howling about counterfeit Windows in China? But Bill Gates knew full well that every counterfeit Windows user meant one less Unix user; tolerating counterfeiting wasn’t a Faustian deal, it was a plain old one.

We live in a normless time regarding digitizable property. We continue to infinitessimally slice “rights” of music artists, writers and producers to allocate tiny revenue streams from other artists’ 2-second samples sold through DVDs, online streaming media and media yet to be dreamed up. Counting angels on the head of a pin? The Lawyers’ Full Employment Act.

Lawyers will howl.  Software producers, artists, record companies will howl. Moralists will howl. And data will continue to become freer.

The howling will stop when we develop a new set of norms, appropriate to the new conditions on the ground. Pogue’s generational comment is accurate, as far as it goes. And normlessness does rhyme a bit with adolescence and punk rock, for that matter.

But ultimately it’s not about age. It’s about the changing of the social contract.

Change on the ground precedes and drives business models.  Business models then drive ideologies, belief systems, norms, laws.  Ideologies get enforced by lawyers, and lawyers get hired by those who benefit from the status quo.  Until change on the ground starts the whole cycle all over again.

Pogue is correct that “wrong” is a nuanced word.  So is “rights.”  Property rights are not absolute.  We have made "property" of women and black people, air and water—and un-made them.  In the scheme of things, re-thinking the status of a Wu Tang Clan track or an Adam Sandler flick might be just a tad easier. 

Who Do You Trust? A Snapshot in Time

That’s the title of a recent blogpost  by Barry Ritholz, in his delightfully eclectic blog The Big Picture: Macro Perspective on the Capital Markets.  (Though, as one of his commentators snarkily reminds us, it should be “whom” do you trust).

Together with forty-odd literate comments, this post provides a perfect snapshot—a social Rorschach test—of the application of trust, the nature of trust, and the state of trust in business today. (Plus, it’s a fun read).

The application of trust.  As Barry points out, we apply concepts of trust to personal and business relationships alike. He implicates trust in the decline of mainstream media readership. “Trust” in the comments gets applied to products (ETFs over mutual funds), broadcasters (Kudlow, Kramer), directors (Spielberg), institutions (the IRS more than the Fed), and even “humanity” or “myself.”

Much of his post—and the comments—focus on the notion of trusting companies—as in, “I trust Amazon and USAA,” or “I don’t trust Microsoft.”

In turn, reasons for trusting (or not trusting) companies include:

• concerns about data security leading to identity theft
• customer service
• attention to customer experience, e.g. spam prevention
• reputation, e.g. linkage to one’s past.

Barry neatly sums up the range of trust applications in a series of questions:

Who do I trust? Who can I rely on, confide in, bank on, have faith in?
Who do you read? Who do you let get inside your head? Who do you believe? Who are you sure about?
What companies do you entrust with your personal files and passwords? Your social security number, bank account data, personal financial info, data?
Who do you trust?

The nature and state of trust. A blogpost is the furthest thing from a statistical study; then again, we’ve just seen the feet of clay of polling statistics.

The post and comments are more like a focus group; they have the ability to state a particular insight "just so." 

Barry says, “I am naturally sceptical. I see too much bullshit everywhere,” and his commenters continue the tone. One says, “People are, by nature, liars, thieves, and fast buck con artists.”

In other words, truth-telling is an indicium of trust—and the general view is bearish on truth-telling these days.

Barry says, “Yahoo (YHOO) still has some residual trust — but its waning fast. I still use Yahoo as a home page, but their inattentiveness to some of their properties is shameful.”

In other words, trust is about taking responsibility.  And how Yahoo isn’t doing it, nor is Dell, nor AIM. 

He also doesn’t trust social networking sites, because they abuse data—in turn, either because of sloppiness, and/or venality.  Trust is about motives, and about focus on something other than oneself.

One commenter says he trusts someone through their blog. Another says it amounts to risk management. One talks about trusting a very small circle of friends and family. Another talks about the essential role of trust in capitalism.

And many have hilarious lists of who and what they trust and don’t trust.

All in all, a rich real-world sample of the meaning of the word trust; not in a dictionary sense, but in an active, anthropological, here-now on-the-street sense.

It’s a great snapshot of trust in America circa January 2008. Thanks to Barry for posting.

Covey on Trust

I am remiss in reviewing Steven MR Covey’s The Speed of Trust: the One Thing that Changes Everything
Remiss because it came out over a year ago, because the book (and associated events) has been quite a success—and because it deserves that success.

The book itself is organized according to “waves”—from self-trust, to relationship trust, then on to organizational, market and societal trust (at this last level, it echoes  Francis Fukuyama’s seminal work, Trust, from a decade earlier, subtitled "the social virtues and the creation of prosperity.")

Covey’s section on self-trust—what I would call the realm of “personal trust”—centers around credibility, which he suggests consists of integrity, intent, capabilities and results.  This covers territory similar to my own (with Maister and Galford) in The Trusted Advisor:  (credibility + reliability + intimacy, all divided by self-orientation), except for his inclusion of integrity.

His linking of integrity and credibility remind me of another interesting piece of work—Integrity: a Positive Model…, by Michael Jensen and Werner Erhard.  Both take an end-run around “ethics” toward a more practical approach which still yields similar results without the whiff of theology.

But while Covey is theoretically sound, his real focus is on the practical, as befits someone who ran his father’s highly successful business (as in  Seven Habits of Highly Successful People).

Most of the book, and I suspect most of his lectures and seminars, are aimed at corporate audiences—in particular, what people can do to become more trusted. He lists 13 behaviors, all of which make perfect commonsense (which is not to say they are common): listen first, talk straight, meet commitments, etc.

It goes without saying—though I’ll say it—I couldn’t agree more with him.

I think Covey’s greatest contribution, however, may lie in his forcefully advancing the simple proposition that Trust Matters.  In one of his emails promoting a webinar, he rhetorically asks, “Is Trust more important than Vision? Strategy? Systems? Structure? Skills?” and proceeds to answer in the affirmative.

Linked with some effective framing (don’t pay a trust tax, earn a trust dividend), he makes a case that business hasn’t heard often enough: trust pays off, not just in some mufty-flufty New Age calculus (though that’s true too), but as well in the conventional, traditional business language of ROI, efficiency and effectiveness.

I have some minor quibbles—his emphasis on measurement, for example—but they are not critical to his contribution.  It’s a fine piece of work that moves forward our understanding and appreciation of the critical role of trust, particularly in business.

Selling in Three-Part Harmony

I am fascinated by sales.

The sale is the point at which the personal meets the commercial. How we view the personal / commercial relationship informs how we look at business in general.

So it’s instructive to read those who write on sales. The reigning sales author of our time has to be Jeffrey Gitomer. As of this writing, on Amazon’s best-seller list of Sales and Selling, he has books at the numbers 5, 9, 13, and 17 slots.

Popularity doesn’t necessarily mean quality, nor does quality guarantee best-seller status.  But both hold true in Gitomer’s case.

Some sales people write about sales process, management and strategy. Gitomer is an unabashed throwback to the “old” sales gurus—he speaks to the individual who sells. He speaks about the intersection between the commercial and the personal.

Here’s an excerpt from his new Little Platinum Book of Cha-Ching!

I’m certain you have seen or heard the information about “typing” people. Driver, amiable, creative, whatever. And then you’re told ways of manipulating what you do or say to be able to communicate with them.

Go back to the Dale Carnegie book How to Win Friends and Influence People, and you’ll see the two words that explain harmony: “Be yourself.”

Selling is about understanding the other person. Each person has different motives to buy based on personality and needs. Salespeople cannot give the same presentation all the time. You’ve got to adapt the presentation to meet the needs and the personality of the potential customer without compromising your standards or altering your personality to a point where you have to remember the way you acted or spoke.

I’m against systems of selling. They teach you a way, usually a manipulative way. And you gotta use that way. The problem is the probable purchaser may not want to buy that way. Which way do you sell?

Why people buy is ONE BILLION times more powerful than how to sell…

Harmony is understanding, sensing the tone and comfort level of the customer, and using your character skills and interpersonal skills to harmonize. Your job is to take the characteristics of the probable purchaser and blend them with the reason they are buying so that it motivates them to act and gives them enough confidence to buy.

THINK! about harmony in music. Your notes blend with other notes to create harmony.

Think of it the same way in sales. Think of it the same way in business.

If Gitomer is in your town (and he will be), treat yourself to a ticket to one of his seminars.  He’s a showman.  His schtick is a working-class, red Staples-type sweatshirt gruff cigar-chomping straight talking regular guy. The last guy to get all philosophical on you. But he does get philosophical on you; he just does it in the vernacular.  (He is a regular guy—and regular like a fox).

Gitomer’s view is clear. Business is personal. It is not just about systems and forces and corporate battles.  It necessarily involves people relating to people—as full people, not just as cogitating neurons.

And his metaphor is powerful. Business as music. In particular, the harmonic element of music; the element that speaks to collaboration. Business in his view is inherently about collaboration, interaction—not a series of parallel solos.

Think of business as commerce—a relationship that is either competitive or collaborative.

It’s up to the seller, more than anyone else, to choose which it shall be.

Trust with the Ex: Taking Insanity Out of Divorce

 

A good rule of thumb if you’re going through a divorce: at this time, every thought and instinct you have is wrong.

Most divorces I know of are breeding grounds for resentment and bad behavior. The desire for revenge overwhelms most decent and sensible instincts.

There are two reasons divorce so often turns out this way: human nature, and legal nature.

Our baser natures, I think, are focused on self-preservation—including psychologically. That means we react from fear—never a good thing. And nothing hurts like the one who said “I do” saying “I don’t.”

Lawyers operate in a profession where there is no concept of truth—there is only evidence. And marriage—being a civil contract—has grown to be subject to the usual legal framework—opposing interests, plaintiffs and defendants. Husband meets wife in a court of law, to determine a winner and loser. A worse formula for amicable separation is hard to imagine.

Some argue this is fine: it is in society’s interest for it to be difficult to divorce. Maybe—but when you’re the individual, it doesn’t feel good taking a bullet “for society.”

Paradoxically, divorces—if navigated well—can be enormous opportunities for personal growth. To retain one’s self-worth, to choose the long-term over the short, to remain magnanimous under stress, and to choose compassion over revenge—these are all higher-order acts.

Some initiatives within the legal profession move in a more human direction—in particular, mediation and collaborative divorce. In Keen Interest in Gentler Ways to Divorce, AP reporter David Crary lays out the case.

Both mediation and collaborative divorce are far cheaper, for one thing:

[The Boston Collaborative] analyzed 199 of its recent divorce cases, and found that mediation, collaborative divorce and litigation all produced high rates of successful settlement. Mediation was by far the least expensive option, with a median cost of $6,600, compared to $19,723 for a collaborative divorce, $26,830 for settlements negotiated by rival lawyers, and $77,746 for full-scale litigation.

It also gives lawyers a way out of a nasty business:

Most of us had that moment where we realize the adversarial process is so damaging for our clients — and there’s a recognition that we can do better," said Talia Katz, a former divorce lawyer who is executive director of the International Academy of Collaborative Professionals.

The forces of Good also seem to be winning a few rounds:

Supporters of collaborative law were dismayed last February, when the Colorado Bar Association declared such arrangements unethical on grounds that they prevented a lawyer from exercising undivided loyalty to a client. But in August, the American Bar Association’s Ethics Committee weighed in, endorsing the collaborative process as long as clients were fully informed about its provisions.

People have written that divorce is bad for children; I think it’s the typical divorce that is bad for children. A mediated or collaborative divorce offers the possibility of continued respect between mother and father, thereby not confusing their children for life.

I’ve written elsewhere (Trust in Business: the Core Concepts) that trust can be deconstructed into four components. The most powerful of them is a low level of self-orientation of the one who would be trusted.

I can think of few things that drive us more toward self-orientation, and therefore untrustworthy behavior, than the whirlpool of divorce—as usually practiced.

Sometimes Spouse A suggests collaborative or mediated divorce; yet because of resentment, low trust, etc., Spouse B rejects the opportunity—precisely because it was suggested by Spouse A. Little do they know how much that first sip of poison will infect the rest of their lives.

If you know someone who’s getting divorced, urge them—strongly—to read up on mediated or collaborative divorce.

If you’re getting divorced, and your spouse has suggested it—thank your stars that the one you used to be in love with still has enough respect for your marriage to consider ending it decently.

If you’re the one in a position to initiate it, do yourself and everyone else a huge favor. Mediate, collaborate—don’t litigate.

 

 

European Fish, the Commons, and Business

The sea and its denizens have long been fertile subjects for myth and metaphor. That tradition continues in The Economist, December 15-21, “A Fishy Tale”.

Excerpts:

The [EC’s] Court of Auditors recently found that the European Union’s Common Fisheries Policy does not work…A survey found 81% of fish stocks to be dangerously over-exploited.

…the commission proposes quotas that are larger than those recommended by its scientific advisers. National ministers then expand the quotas once again [by about 50%]. And then national fishing fleets break even these higher quotas.

To most Eurocrats, the problem is selfish national interests, and the solution is tougher EU-wide controls…but if countries parceled out the fish among themselves there would be none left, says one official…some fishermen quietly discard lots of fish so as to pack their holds only with the most valuable.

Many fishermen cheat because they believe the scientists are wrong, or because everyone else is, or because they cannot make a living otherwise.

And so it goes.

Economists know this as “the tragedy of the commons,” based on the problem a few centuries ago of sheep overgrazing the town lands held in common. The problem is that people’s individual search for economic self-interest ends up, paradoxically, destroying everyone’s self-interest.

The airline industry knows this dilemma well. Any given airline on any given route is incented to have a plurality of available-seat-miles. This leads to endemic over-capacity, hence lower profitability for all. The only sure-fire route to airline profitability is not clever marketing, a la Southwest Airlines—it’s domination of routes, something Southwest also knows a thing or two about.

But back to fish. Issues of the commons show up first in government, later in business, because government by default gets the un-economic propositions. But the issues are increasingly not unique to government.

The business world has its own version of the commons. When every company seeks to gain sustainable competitive advantage, maximizing its own shareholder value, driving that logic into every transaction, you end up with systemic suboptimal results.

Example: mortgages. In the old days, savings banks held the loans, lived in the community, knew the borrowers; the borrowers kept the house, and kept the mortgage company. Inefficient, yes; but the common interest was enforced.

Today, we got efficiency—but at the cost of a common interest. The players in the subprime mortgage game ended up just like Portugal, Britain and Poland duking it out over declining fish stocks. The only losers were the fish. Until the fish disappear.

Business is diving headlong into certain practices—the slicing and dicing of business processes, the slicing and dicing of securities into finer and finer tranches of ownership, the rapidly diminishing time of ownership, and the establishment of myriad markets where ownership and time can be freely exchanged.

Lots of markets, lots of efficiency—and very little overlap of the common good.

The ideology of competitive separateness is precisely the wrong ideology in a world of increasing interdependence.
Ironically, since the “commons” problems first show up in government, it is government that must provide examples for business to follow—yet we are saddled with an ideological bias that says business has nothing to learn from government, only the reverse.

The Economist’s conclusion about fish is as right as it is predictable: Europe needs to “ponder the example of one of the EU’s few uncontested triumphs, the single market, and apply its lessons to the seas. That would be rational. It might even be good for the fish.”

And for business at large. It’s difficult to believe that a global economy built on the theory of sustainable competitive advantage is going to solve the energy problem. Or the health care problem. Or the immigration problem. Or the trade problem.

We need an ideology of trust. A set of beliefs that link, rather than divide.

Destroying Shareholder Value: One Quarter, One Customer at a Time

I spoke with a mid-level consultant at a medium-large American consulting firm. His project had an overrun. Question was, how to handle it.

Me: How big an overrun?

Him: $80K—a 50% overrun.

Me: A big percent, but not a big dollar number. Tell me about the client.

Him: Medium sized for us; decent relationship; we do 5-6 projects a year with them.

Me: What do you each say?

Him: They agree they signed a contract saying they were responsible for the disputed work. We thought their interpretation was wrong. We ended up doing the work, but disagree about who’s responsible.

Me: Of the $80K, how much would they agree is their fault?

Him: Maybe $20K of the $80K.

Me: And you?

Him: We think $70K of the $80K.

Me: That is a mere $50K issue. You’re a big company, this is a good client relationship—$50K is chump change.
Why don’t you go to them and say, ‘Look, we value this relationship. There is an $80K overrun here; why don’t you pick the number between $0 and $80K that you think is most fair, and we will pay it.’ Give them total choice. Let their choice reveal their character and their intent, and show good faith on your part. Work the relationship, not the negotiation.

Him: Well, they might take advantage of us.

Me: Of course they could. And if they do, you’ll know if these are people worth trusting in the long haul, or whether henceforth you get tighter controls and/or give this client over to a competitor. Do you want a relationship, or a petty quarrel? How much do you think they would offer?

Him: I’d guess they’d offer us maybe $40K. And I think what you say is the right thing to do. But my [service offering] leadership team won’t go for it.

Me: Why not?

Him: They think we deserve more, and they can get most of it by holding out.

Me: For how much?

Him: They think they can get $70K.

Me: You realize, that is only $30K of difference between the two of you.

Him: Yes, but they are really under pressure to make their profit bogeys. There’s really nothing I can do.

If you’re not sickened by this dialogue, let me break it down.

It sounds like a bad divorce settlement. Two large firms wasting time and creating bad blood—over $30K. A true imbalance.

But it’s worse.

This was probably a good relationship.  Let’s assume it might have generated five projects a year for 8 years going forward. Further, that benefits to the client would have increased as the consultants gained more familiarity and expertise over the years.

Suppose that amounts to a present value of, say, $10M in fees.

Assume that the bad blood generated results in lower trust—more haggling over fees, lower fees, more competitive bidding, more audits, more skepticism over advice—all resulting in, say, 30% reduction in the present value of expected fees.

That’s $3M reduction in present value. For $30K on a quarterly P&L.

Many think it doesn’t matter because it doesn’t hit the P&L. It’s true that FASB rules don’t book present value, at least not through the income statement.

But it is real. The eagle eyes on Wall Street know very well how to discount future streams. Private equity firms know the value of customer retention rates.

In other words, the financial metrics that matter most—those of the market, not of the accounting books—do know the cost of this firm’s decision.

You may think the young manager is at fault for not standing up for what he knew was right. Or, you may think his bosses are to blame.

I think the real culprit is endemic bad business thinking. Business thinking that mindlessly focuses on short-term metrics of short-term behavior, linking the two by short-term incentives. The solution doesn’t lie in more short-term thinking ("I know, let’s analyze imputed market discounts and allocate them across quarterly bonus pools for each decision!").

The resulting behavior is value destruction by any sensible definition. Bad business. They call it financial management. It is anything but.

Yet this way of thinking, as anyone in the corporate world knows, is the rule, not the exception. Anyone who believes in perfect market theory need only look at daily management behaviors to find their disproof; everywhere managers behaving in ways that destroy value. Believing that they’re creating it.

Bad thinking.

Trust and Corporate Change

Close your eyes and make a mental list of models for corporate change.

There are models of “what is needed.” One such model posits three needs: pressure, vision and first steps.

There are models of “types of change.”  For example, linking participative management to incremental change, and directive leadership to transformative change.

There are models of tools to leverage for change: a favorite of mine is People, Structure, Systems, Culture.

There are "how to" models.  One  emphasizes leadership; another, vision or intent; a third, alignment.

Then there are descriptive models—they use OD frameworks, or industrial economic models, to classify and distinguish types, levels and genres of corporate change.

But you don’t hear much about linking trust to corporate change. Nor is corporate change the first thing most of us think of when we think of trust in business.

Which is curious, because the presence or absence of trust within an organization can greatly affect a company’s ability to change.

Let’s say you need to make an acquisition; or enter a new business; or up your growth rate by four percentage points. How would a low-trust organization go about it?  How would a high-trust organization go about it?

Low-trust organizations are typically run on the basis of either consensus, fear, or contracts. All three have their problems.

—Consensus-based organizations can be very thorough, but slow to adapt—since trust doesn’t exist between parties, it has to get re-created by consensus each time.   If fast change is required, that’s a drawback.

—Fear-based organizations can be efficient at implementing change, but there is a big burden on the few fear-drivers to be right—they are deprived of the value of direct input from others, who fear them. The more complex and fast the change, the greater the risk of the leader getting it wrong.

—Contract-based organizations substitute a market in place of consensus. For any given transaction it may be more efficient than consensus.  But there get to be an awful lot of contracts and transactions made, all of which require time and people to track them.  It’s an expensive model to maintain, and even more expensive to tweak.

Then there are trust-based organizations. In such an organization, if your partner says he’ll do something, that’s it.  You don’t need a consensus session. You just trust he’ll do it. And your partner  will do what he said, because that’s how you get to be trusted.

You also tend to trust your partners’ judgment—because you trust they will tell you if they don’t know something. You take their word at face value.

Unlike a fear-based organization, you trust that you partners will raise issues that need raising; and they won’t raise issues not worth it.

Best of all—unlike a market-based organization, you trust that everything your partners think and do will have your interests at heart for the long run; they will not be distracted by the short-term transactional commissions, bonus points or other "incentive" schemes based on the improvement of an individual’s own short-term self-interest.

In such organizations, you don’t need nearly as many contracts to make sure your partner will do what he says. You don’t need so many measurement systems to track and distribute agreed-upon incentives and outcomes.  And the whole organization is not hostage to the judgment of a few people.

Which kind of organization will most easily change on a dime, and get it right? The answer is pretty clear.

Trust pays off when it’s time to change.