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The Dance of Trust

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Much has been written recently about trust.  Not so much, however, about just exactly how it gets created. Think of it as a dance—the dance of trust.

Trust is the end result of a dance between two people. Like ballroom dancing, the roles are not the same. In ballroom, one person leads, the other follows. If each plays his her role, it’s a beautiful thing. If, however, both people try to lead, you get feet stepped on and general ill will.

Trust also has two differing roles. One is the role of trustor—the one who does the trusting. The other is the role of the trustee—the one who is (more or less) trusted. And just like in ballroom, if the roles aren’t played cleanly, you get something of a mess. (And if both follow, well, you get nothing.  No risk, no gain).

The Dance of Trust Starts with the Trustor

The dance of trust is initiated by the trustor—the one who does the trusting. It is (s)he who takes the first step—and the one who takes the biggest risk.

By contrast, the trustee role (being trustworthy) is low-risk, but requires more work. It’s also more passive; being trustworthy is a strategy of attraction, not action.

An example: Let’s say BioPharm wants to hire an accounting firm to do some systems work. BioPharm interviews several candidate firms, and ends up deciding to choose Jones&Jones. BioPharm can justify the decision, but also says that “it was basically because we trusted these people to know us and to be straight with us.”

BioPharm is the trustor, initiating the dance and taking the larger risk–the risk of time, money and commitment spent on a new relationship.  Jones&Jones is the trustee, having been (successfully, in this case) trustworthy enough that it got asked to dance.

At this point, we have to lose the pure ballroom dance metaphor, because in trust, the roles have to change.  In ballroom, one person generally leads.  Not so in trust: you have to swap roles constantly.   So if not during the sales process, then shortly thereafter, Jones&Jones is going to have to take some risks and trust BioPharm.

If Jones&Jones doesn’t go out on a limb with some ideas, share its technology, offer a point of view, prepare to collaborate and be transparent, then BioPharm will pretty quickly be unsatisfied. Because once the initial trustor action is taken, it is up to the trustee to reciprocate, and offer to take some risks as well.

The Dance of Trust Requires Shifting Roles Between Trustor and Trustee

This frequent change of roles—back and forth—is what distinguishes the dance of trust. If Jones&Jones never takes a risk or trusts BioPharm, it will wear out its welcome quickly. And if Jones&Jones does take risks but BioPharm never reciprocates, it may be a mildly successful engagement, but it’s not likely to generate repeat business.

Here another metaphor applies: personal relationships. No good relationship lasts long (or stays healthy) if one side always gives and takes the risks; any good relationship needs the healthy back and forth provided by reciprocity.

Trust is, after all, a mutual relationship. But it is one generated by constantly shifting roles. The dance of trusting and being trusted is what generates the state of trust we hear so much about.

 

Trust and the TransAm

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My husband Mark doesn’t come to trust easily in the everyday world, but in some special realms he can build surprising bridges of trust with total strangers. Take the selling of one of his treasured Trans Ams to someone 2000 miles away, whom he never met.

Mark had his last two in a long line of muscle cars – all Trans Ams – in the garage, a ’71 and a ’78. He concluded one day that they deserved better homes because he wasn’t driving either of them more than a few hundred miles a year. The ’78 he sold immediately to a neighbor; we can still see it in their garage by looking from our front porch. The second one he held onto while he debated about keeping or selling.

In October, in the course of his “sell” research, Mark found a ’72 Trans Am for sale on e-Bay and contacted the seller to talk about how he, The Seller Guy, had set the price. (All the sellers and buyers in our e-Bay world are “The Guy”, as in “The Guy selling the Trans Am.”) As it turned out, The Guy was only selling a Trans Am for a friend, and was himself interested in buying Mark’s ’71. They continued their dialog offline.

The Guy then sent a hundred dollars or so – earnest money – as they negotiated. The Guy wanted to see more pictures; Mark posted 172 shots of the inside, outside, underside and every inch under the hood on his FTP site. The Guy sent another $3000 as they concluded the deal and tried to make arrangements for shipping the car and a considerable assortment of parts from New Jersey to Montana.

I don’t know how many cars you’ve shipped, but it seems that shippers take either parts or cars, but not both.

Months ticked by, and nine months later, in July, Mark got an email that The Guy had found a friend delivering a car to PA who was going to stop and pick up the ’71 in NJ to haul it back to Montana. The Guy wired the rest of the money. In August The Pick-up Guy showed up and the car and parts were lovingly handed over to the care of another stranger.

If you asked Mark (I did) what made him trust The Guy he’d never met, hold onto the car for months, and then load the car onto the truck of another stranger, he’d say it was that he didn’t do anything until he had money in hand. The Guy had to do all the trusting (and Mark was of course trustworthy.)

I think it goes deeper: they were members of the same tribe, who spoke the same language, and could be trusted because they established that each was what he said he was – part of the Trans Am tribe.
 

A Case Study in Low Trust: NAPFA

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Industry associations occupy a rare and privileged status in our society. Associations serve two masters: their industry membership, and the consumers those industries serve. 

Largely unregulated themselves, if they do a good job they can avoid regulation for their industry.  If they do a bad job, they can accelerate abuses–and end up getting regulated.  You’d think most associations would want to avoid regulation.  And so, they trumpet their service to the consumer.

The question is, what do their actions say? 

All too often, it’s food for cynicism.   The National Association of Personal Financial Advisors  has lately exhibited such cynical behavior. 

Last week NAPFA’S chairwoman Diahann Lassus represented the Financial Planning Coalition in front of the House Committee on Financial Services.  She testified strongly in favor of a fiduciary standard for all individual financial planners.  So far, so good.

Then yesterday NAPFA issued a press release sounding a different tone, commenting on proposed custody-related SEC regulations put in place partly to curb Madoff-like abuses.  One clause in particular proposes spot-audits of RIAs (registered investment advisers) who deduct their fees directly from clients’ accounts.  

NAPFA Says It’s Pro-consumer, but it’s Hard to See How.

To read NAPFA’s press release headline, you’d think they were the Consumer’s Friend:

NAPFA Believes SEC Mission for Custody Rule Changes is Commendable, but views Commission’s Proposed Changes as Not a Proper ‘Means to an End’

OK. The SEC would like to audit certain advisers.  NAPFA thinks that’s a bad idea.

Why?  Get this.  Because, NAPFA says, audits:

1.    won’t protect consumers
2.    would cost more than they’re worth
3.    will cost consumers additional expense and inefficiency.

Are you kidding me?  In this post-Madoff  environment you’re telling us that spot-auditing some RIAs won’t help consumers?  Tell it to Madoff whistle-blower Markopolis, who clearly disagrees. Cost more than it’s worth?  I think a few Ponzi schemes prevented or uncovered would easily cover costs.

NAPFA’s better idea?  Leave it to NAPFA.

The industry, including NAPFA, suggests that instead of the SEC, we rely on a professional oversight board made up of–the industry.

A little problem with that.  There are NAPFA members out there today who have been convicted in court of professional malpractice–with no NAPFA action taken.  There are RIAs out there who violate ethics guidelines by lending to their clients.  In fact, just recently a former NAPFA president was sued by the SEC for accepting $1.2M in kickbacks. 

The response of NAPFA chairwoman Diahann Lassus to that last one? “’The reality is that this situation, in comparison to the Madoff scheme, and many other things that have happened out there, is very small,’ Lassus said.”  Well that’s a relief.  And Nixon wasn’t a crook.

Not a good track record.  So just what does NAPFA suggest?  Hold on to your hats.

  1. Encourage consumers to thoroughly read and review all statements to identify all questionable account activity
  2. Offer incentives for whistleblowers who bring to light dishonest advisor activity
  3. Provide means for consumers to report fraudulent activity anonymously

In other words: the way to protect consumers is to encourage the consumers to read more fine print, find financial Dog the Bounty-Hunters, and offer an anonymous tip line.

Enforce ethical and fiduciary standards?  Do audits themselves?  Nah, that’d cost the planners too much.

Suppose this were legislation about child abuse at daycare facilities, and the government proposed spot-audits to prevent it.  How would parents react to a daycare association recommendation that, instead of audits, parents read the fine print of their daycare contracts, and phone any concerns into a tip-line?

If NAPFA won’t even discipline its own court-convicted members–arrogantly flunking a rather basic test of ethical self-enforcement–what right do they have to claim that they’re better qualified to protect consumers than the SEC?  I cannot see it.

There are many very fine, ethical financial planners.  There are of course a few bad apples as well (Lassus herself says she hears "nightmare" stories, and "sadly, these stories are not unusual").  But when it comes to NAPFA, you can’t help but notice the rot in the barrel itself.

Can Financial Planning Avoid More Regulation?

I’m all in favor of industry associations behaving responsibly, realizing that the long-term health of the industry depends on feeding the long-term and short-term health of the consumer, rather than serving short-term member greed.  That means self-enforcement, and I would love to see it happen. 

But at some point, an industry forfeits its right to be trusted anymore on its own.  The financial planning industry–as represented by its associations–has about crossed that line.  It’s hard to take seriously the idea that they have earned the right to self-enforce.  Bring on the SEC.
 
 

Trust as Risk Mitigation Strategy

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Forget how you usually think of the word ‘trust.’ Think instead of ‘risk mitigation.’

“Risk mitigation” means reducing risk to an acceptable level. You’re familiar with it if you work in insurance, investment banking, natural resources, infrastructure, contracting, outsourcing, or deal internationally.

It usually comes packaged as high doses of things hard and practical: legal, financial, statistical. Here’s a typical example, this one from IASTA, a supply and spend management firm, lists seven strategies for risk mitigation. Seven ways, that is, to reduce the riskiness of your supply chain.

No surprise, it includes things like dual-sourcing, price hedging, performance-based contracts, and capacity assurance. Basically, ways to make sure your supplier does what you want them to do.

Risk Mitigation is Usually Based on Control

They are all based on the assumption that unless you control your supplier or the conditions surrounding the deal, you are at risk. And the solutions all involve controlling that risk: mainly controlling that supplier.

What’s surprising about that list—shocking, if you think about it–is the absence of trust. (I’m not picking on IASTA; it’s a good list for what it is—a list of controlling strategies). It generally beats the heck out of all the other seven.

What if you could trust your supplier? What if your supplier behaved toward you in a trustworthy manner? In general, your risk mitigation efforts will then cost a lot less, and will be more successful.

Agreement by legal negotiation, and enforcement by legal, process and accounting argumentation is costly. It causes bad blood. It reduces the felt moral obligation of each party to live up to an agreement. It causes delay. And it sure is expensive.

Risk Mitigation by Trust is Cheaper, and Creates Value

By contrast, trust creation costs less than lawyers and accountants. It can often be created more quickly. And it can be far more dependable.

More importantly: if a trustor-trustee relationship is developed, it doesn’t just cut risk mitigation costs, it positively creates whole new levels of value possibilities. Things you’d never do with an arms-length supplier suddenly become possible.

This is not crazy stuff. The truth is, it happens every day: we just don’t think of it as trust. Trust as risk mitigation happens whenever a customer and a supplier keep an informal rolling ‘tab’ of who owes whom. It happens when a client and a professional honor the spirit, rather than the letter, of an agreement. Warren Buffet did it on a grand scale when he bought McLane Distribution.

Simply put, trust is as hard-nosed a business strategy as any involving the usual suspects. There is no trust without risk: trust truly is at the heart of risk mitigation.

And it’s not that hard to do.

Trust-based Risk Mitigation Requires a Change in Belief

The main thing it requires is a belief in the massively predictable human phenomenon that people do as they are done unto. If one party behaves in a trustworthy manner, the other comes to trust. And if one party behaves in a trusting manner, the other party becomes trustworthy.

The predictability of that behavior is way better than any stock market algorithm. Yet it is astonishing how many businesses have been seduced into inherently untrusting relationships. At great cost to themselves, their supply chain, their customers, and even their shareholders.

It is far more profitable to depend on the rules of trust in human behavior, than to always rely on the rule of ‘do unto others before they do unto you.’ (Which, after all, produces an equally predictable negative counter-reaction). 

The amazing thing is that so many businesses, which claim they are focused on financial returns, continually miss this huge opportunity.  I think it’s because they are also bad at personal risk mitigation: the people who run those ‘hard-nosed’ businesses are personally fearful of constructively confronting other human beings, and of speaking the truth about themselves and others. 

People vastly overrate the risk of doing the wrong thing, while they underrate the risk of not doing the right thing.  In business, as in life.  Fear, to many, seems like the sensible attitude.  In reality, trust pays far higher returns.  In life, as in business.

The Real Meaning of L’Affaire Madoff

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It is tempting to dwell on the horror of Bernard Madoff. (Thanks to Robert Scheer for teeing up this issue).  How could he have done it?  What kind of a man does that?  Is 150 years in prison enough?  And so on.

Tempting—but largely wrong. If we lay all the blame at the feet of one aberrant individual, then we avoid taking a hard look at broader issues of institutional trust. 

Remember: Madoff was once the Chairman of NASDAQ and served on SEC advisory committees—he was the ultimate insider.  So it’s relevant to ask: if Madoff was such Evil Incarnate, what does that say about the sea he swam in?

Is Madoff a Bad Apple?  Or From a Rotten Barrel?

Recently the former CEO of the National Association of Personal Financial Planners was sued by the SEC for participating in a kickback scheme.   The current president missed a great opportunity to condemn or announce new initiatives; instead, she sadly bemoaned the negative impression this might cause of the character of others in the profession. 

The bad apple argument begs the question: just who elected the Bad Apples head of the barrel?

One single piece of data convinced me that Madoff was not evil incarnate, but a cheap two-bit hustler who hit it big.  It was his taped conversation with Fairfield Greenwich feeder fund starting with, ‘First, this conversation never happened, OK?”

What industry elects a man like that to positions of high influence? 

Some say financial excesses were caused by misaligned incentives.  But an industry doesn’t become trustworthy by un-tweaking incentives.  Remember Chris Rock’s statement of marital fidelity: “A man is as faithful as his options.”  There’s truth to that, but let’s not confuse it with ethics or trust.

The whole point of being trustworthy is that you have just enough moral backbone to resist temptation.  We expect dogs to eat the roast if left on the counter; fixing the Madoff issue by aligning incentives is the equivalent of moving the roast to the back of the counter.  It may save the roast this time, but the dog gets the message—we are now playing a game of “who gets the meat,” no longer a game of “don’t eat the meat.” 

Which is precisely the problem with too much of the financial sector—the proposed options too often suborn more untrustworthy behavior by focusing only on consequences.    

How Not to Fix the Barrel

The real drivers of trust have got to be the personal beliefs about one’s relationship to others.  Are you in it for them, or are you only in it for yourself?  Are you an individual existing in a state of nature with no obligations beyond self-aggrandizement?  Or do you feel some connection and obligation to others, to society?

If you believe others exist mainly for you to make money from them, then you will find ways to exploit them, within (or slightly outside of) the law.  You will devise short-term transactional behaviors to lower the risk of exposure to others, and to help you do unto others before they do unto you.  You will seek to hide, and to prevaricate. 

You will, in short, violate the (four) basic principles of trustworthiness.

But if you believe you and your business and your industry exist to serve customers, and that you too will benefit in the longer run by doing so, then you’ll behave differently.  You’ll understand the word ‘fiduciary’ is critical to trust. You’ll understand the connection between being trusted and being financially rewarded.  You’ll have nothing to hide because you’ll have no reason to hide.  You’ll welcome long-term relationships, because that’s what it’s all about.

And you’ll never begin a sentence saying, ‘First, this conversation never happened.’

How To Fix the Barrel, and Apples as a byproduct.

I have said before that mass, public shaming is a more effective antidote to low trust than most other solutions being bandied about.

Erecting more airport security measures, more Sarboxes, more Chinese walls, and aligning incentives are all ham-handed, expensive ways to reduce exposure to bad people.  They do nothing to exert social leverage to reduce badness itself.

Social virtues are built by societies.  If we limit our social solutions to imprisonment and walled communities, we’re using our social capital to create criminals.

Principled enforcement—surprise audits and large penalties–is one way society teaches virtues: the IRS uses it very effectively.

Public shaming has a great history too: the muckrakers and activists have achieved great things—think Sinclair Lewis, Gandhi, ML King, the kid in front of the tank in Tiananmen Square, and investigative journalism. All have called on our innate sense of goodness to cause change.

Trustworthiness worthy of the name is an internally felt response to an externally-taught relationship. Don’t cheapen it by just moving the cheese.
 
 
 

Four Principles of Organizational Trust: How to Make Your Company Trustworthy

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Trust, in case you hadn’t noticed, has gotten “hot” lately. But much of it sounds very vague—soft, fluffy, nice-to-have, the buzzword du jour.

I’d like to do my part to make it real.

To me, that means breaking it down and making it sound; tapping into the strategy and mysticism, but also staying grounded in the tactical and the practical.

So let’s review some context; then talk about four specific operating principles a business can hone in on to improve its trustworthiness.

Putting Trust into a Workable Context

I’ve suggested elsewhere that “trust” is too vague a term to work with. To do something practical, we need first to identify the trust realm: are we talking about personal trust, or business/organizational trust, or social/institutional trust?

The next question is about the trust role: are we working on being more trusting? Or more trustworthy? They are not the same thing.  And “trust” is the result of them both interacting.

Building a Trustworthy Business

In the realm “personal” and the role “trustworthy,” we can point to personal beliefs and behaviors as indicated in the Trust Quotient. But in business, trustworthiness is built through a set of daily operating principles. Trustworthiness is built from habitually behaving in accordance with a set of commonly shared beliefs about how to do business.

I suggest they can be boiled down to four.

The Four Trust Principles

1. A focus on the Other (client, customer, internal co-worker, boss, partner, subordinate) for the Other’s sake, not just as a means to one’s own ends.  We often hear “client-focus,” or “customer-centric.” But these are terms all-too-often framed in terms of economic benefit to the person trying to be trusted.

2. A collaborative approach to relationships.  Collaboration here means a willingness to work together, creating both joint goals and joint approaches to getting there.

3. A medium to long term relationship perspective, not a short-term transactional focus. Focus on relationships nurtures transactions; but focus on transactions chokes off relationships. The most profitable relationships for both parties are those where multiple transactions over time are assumed in the approach to each transaction.

4. A habit of being transparent in all one’s dealings.  Transparency has the great virtue of helping recall who said what to whom. It also increases credibility, and lowers self-orientation, by its willingness to keep no secrets.

Executing on the Trust Principles

What are the tools an organization has at its disposal to make itself more trustworthy? Any good change management consultant can rattle off the usual suspects, but for trustworthiness, the emphasis has to shift somewhat.

The usual change mantra includes a heavy dose of behaviors, metrics and incentives. Some of that works here, but only to a point.

For example, Principle 1, focus on the Other, is contradicted by too much extrinsic incentive aimed at leveraging self-interest–it undercuts focus on the Other.  And Principle 3, relationship over transaction, forces metrics and rewards to a far longer timeframe than most change efforts employ. 

Another great shibboleth of change is that it must be led from the CEO’s office. But with trust, it ain’t necessarily so.  Trustworthiness is a great candidate for infectious disease change strategies; guerrilla trust strategies can work at the individual level, and individual players can lead. Behavior in accord with these principles cannot be coerced; the flipside is, it can be unilaterally engaged in.

The most powerful tools to create a trustworthy organization are things like language, recognition, story-telling, simply paying attention to the arenas where the principles apply—and the will to apply them.  Role-modeling helps; some skill-building helps.  But most of all, it is the willingness to notice the pervasive opportunities to work in accordance with this simple set of four principles.

Trustworthiness breeds trusting (the reverse is true too); the combination is what leads to trust. Which, by the way, is quite measurable in its impact on the bottom line.
 

Trust and Pornography: The Supreme Court’s Lesson for Business

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In 1964, US Supreme Court Justice Potter Stewart famously opined in an obscenity case that it was exceeding difficult to define obscenity, “but I know it when I see it.”

It wasn’t a casual comment, but a carefully reasoned statement, which did and still does make a lot of sense.  Certain things—like obscenity—vary considerably across time, locale, and situation.  And another such thing is trust.

Trust Doesn’t Mean Much Without Context

I can’t think of another concept which carries with it such a wide range of meanings.  In context, we nearly always understand the concept being referred to—but the reference varies situationally.  Just consider:

– I trust my dog with my life—but not with my ham sandwich.
– I trust a stranger to sell me a book on Amazon—but that doesn’t mean I’ll introduce my daughter to him.

But business these days doesn’t like subjectivity.  The business community has come to insist on things like best practices, diagnostics, rankings and ratings, and—above all—behavioral indicators that can be metricized.  Because we all want to know how we’re doing, where we’re going, who’s doing best at it, and just how you know if you’re doing it right.  You can’t manage it, after all, if you can’t measure it. 

The business community has gotten hooked on the corporate equivalent of self-help manuals.  You know what’s next.  Ten Easy Steps to being a Highly Trustworthy Company.  Sign up for your Corporate Trust Ratings.  Become a Certified High Trust Company.  You get the picture.

Who Are the Most Trusted Companies?  It Depends

Beneath this rush is almost always the notion that One Size Fits All when it comes to trustworthiness at the corporate level.  Trustworthiness is a "thing."  Someone has the key to it, and others don’t.  For the philosophers out there, the operant belief is that there are Platonic Forms for things like Trustworthiness, Engagement, and Leadership. 

But in these matters, Potter Stewart was more right than Plato.  The bigger truth is–it depends.  It’s not that the emperor has no clothes–it’s that he has more than one wardrobe.

Who is more trustworthy: Apple Computer or Amazon?  Fidelity Investments or American Express?  Singapore Air or Dell Computer?  These are not sensible questions, I suggest, taken out of context.

It depends–on whether you’re talking to customers or to employees.  On whether you’re talking about reliability or other-orientation.  About transparency or collaboration.  About last year or about this year.  About a major transaction or about a corner-store impulse purchase.  About your car or about your oncologist. 

One attribute commonly associated with trust is transparency—but that’s not Trust Virtue One if you’re the CIA.  Teamwork may be a trust virtue for the US Army—but not for a law firm of litigators. 

At a personal level, you can make some generalizations about trustworthiness: I’ve done so myself in my Trust Quotient self-assessment survey.  But even there, I caution against reading the raw results without the context.

At a corporate level, trying to define the most ‘trusted company’ with a one-size-fits-all set of metrics is a fool’s errand.   That doesn’t mean it isn’t a useful, valid, and meaningful exercise. It just has to be done situationally, in context.

Like obscenity, we regular plain old human beings have no trouble recognizing trust when we see it.  We don’t need a scalable model to understand it.  Attempts to force-fit trust into behavioral indicators that can be rank-ordered, weighted and incentivized are akin to the US movie ratings system.  The ratings tells you more about the rater than the thing being rated.

The Supreme Court already figured this one out and wisely gave up the force-fit approach.  At higher levels, such as trust, life overflows the petty boundaries we try to impose on it in the vain belief we can “manage” it.  Like a giant wave, we’re far better off surfing it than trying to control it.
 

Why Trust is Asymmetrical, and What that Means for Trust Strategies

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Much of the talk about trust is just that – talk about “trust.” We forget that trust is a word for a relationship between two parties, each doing different things. Further, it’s an unequal relationship.

What we call “trust” results from one person (or entity) trusting another. One party trusts; the other is trusted. The result is what is properly called trust.

Unlike other relationship words (like ‘love’) the quality of trust is asymmetrical. To trust is very much not the same thing as to be trusted.  Just ask a traveler in a new foreign country.  Or a Madoff client.

The asymmetry is all about risk—the one taking the risk in a trust relationship is the trustor, the one doing the trusting—not the one being trusted. 

When we describe degrees of trusting, we use precisely that word: ‘He is very trusting.’  While an adjective, ‘trusting’ derives from a verb—it tends to describe a behavior, the act of trusting.

When we describe degrees of being trusted, we use a different word: ‘She is trustworthy.’  ‘Trustworthy’ is also an adjective, but it tends to describe character, an attribute one possesses.

If we’re going to be precise in talking about trust in a useful way—whether it’s personal trust, business trust, or social trust—we need to clear about the risk-asymmetry between the two parties to trust. Absent that simple clarity—who’s doing the trusting, who’s being trusted, and in what realm—there’s not much that can be usefully said.

Here are some examples.

Trusting Strategies.

Trusting someone is very useful—if your trust is justified. Things happen faster, better, with higher quality and lower cost.  Life is richer.  Of course, if your trust isn’t justified, you get burned. Reasonable risk assessment, then, is a valuable skill in trusting.

But trusting cannot obliterate risk, and risk management alone has its limits. To trust only those we have vetted as trustworthy is to make a mockery of trust. Ronald Reagan’s statement “trust but verify” was cynically manipulative. If you can verify, you don’t need trust–you just need an auditor.

Trustworthiness Strategies.

Being trusted by others is at least equally useful, and of course the combination is best of all.  How can one become more trusted—by customers, employees, friends? There are two basic strategies: the first is to trust the other party, the second is to become more trustworthy.

Oddly, the most powerful strategy for driving increased trustworthiness in others may be the act of trusting them in the first place.   Marlon Brando’s Godfather character knew this: so do successful networkers.  Like homeopathic medicines, a little trust given can innoculate against large doses of untrustworthy behavior by others. This is due to the deeply embedded human propensity to reciprocate–good for good, bad for bad. 

Being trustworthy toward others drives their propensity to trust you—and it’s a less risky strategy than trusting them, since most risk is borne by the trusting party.  The effect of trustworthiness on trusting doesn’t rely on reciprocity—it is a unilateral action by the trustee that alters the  risk perceived by the trustor.

Remember the asymmetry of trust is all about risk: it comes in many forms, such as asymmetry of information, or of power.  Many trust issues present as issues of the asymmetry of power: think asset managers trusting rating services, or consumers trusting credit card issuers.  It’s what’s behind jokes like, "I’m from the IRS and I’m here to help you." 

There are several ways to manage risk so that the asymmetry is acceptable to both parties. One is simply transparency: the exchange of information.

At a personal level, the decision to reveal information that would put you at a “disadvantage” in a competitive situation is an act of trust. If your client is 58, you are 32, and your client asks your age, do you say, “I’m in my mid-30s?” Or do you say, “I’m 32.” The latter is an act of trusting; it usually makes you seem more trustworthy, and of course it carries some risk.

At a business level, when companies fight greater transparency (presumably to prevent competitive advantage), they are simultaneously destroying the inclination of their stakeholders to trust them, because to withhold information for self-oriented reasons is intrinsically untrustworthy. Too many industries and companies simply do not get this, hence they invite far stronger regulation than need be the case.

I have elsewhere written about the Four Trust Principles: they apply to people and to organizations, and are largely about enhanced trustworthiness.
Personal and business approaches to trustworthiness overlap in the arena of leadership. The general who personally leads his cavalry troops into battle shows that he will take risks on their behalf; the troops’ powerful response is to trust him in return.  Trusting given yields trust returned.

Explored carefully, this simple framework tells us how to better navigate the worlds of romance, business, friendship, business regulation and socio-governmental institutions.

Increasing trust starts with asking: who does the trusting, and who is to be trusted?  Where’s the risk, and how can we manage the asymmetry?

Why Trust Improves Your Bottom Line

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Let’s just face it head on.  Many of you think all the recent hoo-ra about trust is lefty-liberal, softy, wishful thinking. Nice to have, but not the stuff of serious bottom line impact.   

If only the world could be freed of terrorists and Madoffs and Wall Street’s relentless pressure for quarterly performance, then maybe we could afford some trust; but right now, with this economy?  Gwanwidja, Charlie, it ain’t happening.

Or, the most common variation: Hey Charlie, I’m down with the program, but the problem is my boss.  Or the Executive Committee.  Fix them first, then come talk to me.

Well, this is the blog to forward to your boss and the Executive Committee.  Because whoever doesn’t “get” the raw economic power of trust isn’t acting in the best economic interests of the organization.

Let’s break it down into the economic benefits of

•  trusting
•  being trusted (not the same thing)
•  building an organization along trust principles.

How Trusting Adds to the Bottom Line

If you trust someone, you greatly increase the odds of their behaving reciprocally—that is, they become trustworthy.  Don’t trust me on that, read Robert Cialdini, who posits reciprocity as the number one factor driving influence.

If you trust, and the other party behaves reciprocally, all kinds of time and cost can be cut out—mostly time and cost that was engineered in to protect against untrustworthy people.

Specifics?

Trust your suppliers: with advance order information, with cost information, with pricing, with materials requirements, with new design information.  (Don’t, by contrast, create enemies of them by using purchasing as a blunt instrument). 

Trust your customers: develop price and product quotes together with them, share your advance product information, make a point of listening to them, allow them to spend time with you at your offices, get your people to theirs.  (Don’t, by contrast, create enemies of them by surprising them or trying to squeeze the last nickel out of each contract).

What you gain by trusting:  Less due diligence time and cost, shorter elapsed time-to-market, better design quality, higher sales hit rates, lower sales investment cost, more forgiveness of errors, better pricing, higher customer retention.  (Steven HR Covey Jr.in Speed of Trust focuses heavily on the trusting part of trust).

That all adds up to real money.

How Being Trustworthy Adds to the Bottom Line

Take a look at the Trust Equation; take the Trust Quotient self-assessment test yourself.   Being trustworthy means being credible, reliable, safe to be with, and focused more on others than yourself.

Trusting people may be the fastest route to being trusted, though it’s also higher risk.  Being trustworthy also produces reciprocal trustworthiness—it may take a little longer, but it’s lower risk.

Specifics?

Tell the whole truth, don’t just don’t lie.  Don’t over-perform, or under-perform—just do what you said.  Be prepared to recommend a competitor if it’s the right thing.  Don’t manage your earnings, just be transparent about your accounting policies.  Don’t try to control others.  Comment on feelings—yours and others’. Do your level best to actually care—don’t fake it.  Don’t Always Be Closing.  If you don’t know something, say so.  (There are a raft of specific things to do in response to your Trust Quotient, free).

What you gain by being trustworthy: Higher sales closing rates; shorter sales time, more repeat business.  Higher employee retention.  Customer loyalty.  Fewer lawsuits.  More honesty from others.  Fewer competitive bids, more likelihood of your advice being taken.  Higher confidence in your quarterly earnings statements.  Higher customer sat ratings. 

That all adds up to real money too.
 

How Building a Trust-Fostering Company Adds to the Bottom Line

I have suggested  four Trust Principles: these work at the individual as well as the organizational level. The principles are:

1.    Other-focus for the sake of the other
2.    Collaboration
3.    Relationship, not transaction, focus
4.    Transparency

These are not new concepts. If your company conducts all its affairs with these principles in mind, then you live in an organization that creates trusting and trustworthy people, processes and relationships.  And makes a ton of money.

Unless you have brute monopoly pricing power, and don’t care about your reputation or your legacy in the world, then trusting and being trusted at the personal and institutional level is about the best profit guarantee you can get.

It may sound like a Buddhist mantra or a Beatle song, but it’s also an economic model.  Trust pays—as long as you treat profit as a byproduct, not the goal itself.  

Who’s Minding the Store in Corporate America?

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Sometimes you get one of those, waddya call ‘em, iconic moments.  Bush standing at the Twin Towers with the megaphone.  (Bush standing next to “heckuva job” Brownie).

We got a classic on the evening news today.  The Chief Executive Officer.  Of the Bank.  Of America.  Saying with a straight face the most amazingly truthful truth in front of Congress: namely that he didn’t run his own bank—his securities lawyers did.

First, the facts, as reported by the Wall Street Journal:

[lawmakers] pressed Mr. Lewis on why Bank of America did not inform its shareholders of its growing concerns with the losses at Merrill Lynch if the issue was serious enough for Mr. Lewis to fly to Washington and speak with federal officials about abandoning the deal by invoking the "material adverse change" clause.

"If there is an event that you consider so significant that it may allow you to invoke the [MAC] do you not think that same event is of interest of shareholders and requires you in your fiduciary duty to disclose it?" Rep. Peter Welch (D., Vt.), said.

"I leave that decision to our securities lawyers and our outside counsel … I’m not a securities lawyer," Mr. Lewis said.

As one Congressman pointed out, the deal was approved by shareholders in December and cost the US taxpayer $20B the next month.  But, as Mr. Lewis implied, his lawyers advised him what to do, and of course, like a good little CEO, he took his lawyers’ advice.  Don’t tell.  After all, you might get in trouble for leading.

Who’s minding the store in corporate America?  CEOs or lawyers?  Or–is it even worse than that?   

This is a veritable Where’s Waldo book of things wrong: I’ll just focus on one.

Where is Accountability in Business?

Nowhere near Mr. Lewis, that’s clear.  But as we said, he is iconic.  An avoider of truly Madoffian proportions does not achieve that status alone; he stands on the shoulders of previous avoiders and a system of avoidance.

It starts with a “mistakes were made” kind of attitude. (See Charles Baxter’s classic 1994 essay here). 

Lack of accountability gets reinforced by a subtle shift from “ethics” to “compliance,” as brilliantly described by Harry Markopolis, the Madoff whistleblower: “The SEC’s main focus is to mindlessly check to see if registered firms’ paperwork is in order and complies with the law as written.”

But it’s business programs too.  The lack of accountability ironically traces back to a great intellectual achievement—the multi-industry success of business process re-engineering.  In industry after industry, business processes have been broken up into pieces and stitched back together by contracts linking outsourcers to purchasing departments.  All done by lawyers.  And all lacking a sense of commercial commitment or relationship between buyer and seller.  (And taught proudly in business schools as "best practices" and "benchmarking").

I’m fond of quoting Phil McGee’s dictum: all management problems boil down to two: a tendency to blame, and an inability to confront. 

An inability to confront the truth, facts, accountability, responsibility, obligation, fiduciary duty.  All these are terms that are far too visceral and human to be captured adequately in the cold rational phrases of the law.  Which is why the best jurists always know the “rule of law” should leave a lot unsaid.

I am painfully aware that our only MBA president will almost certainly appear more inept at management than the lawyers who preceded and followed him.   But I’d argue that Clinton and Obama each know what Bush—and his contemporary, Mr. Lewis at B of A—did not.  That the law should have limits.  "Leading by the law" is nearly oxymoronic; perhaps it even takes a lawyer to fully appreciate how foolish it is. 

It’s galling enough that Mr. Lewis, I suspect, is being disingenuous.  He doesn’t really follow the opinion of his lawyers in managing the company.  He employs them to provide convenient cover.   What’s really galling is that the lie he tells—that he does manage by following their advice—is a lie that has become socially acceptable.  No one calls him on that lie.  Invoking "MBL" (management by lawyers) has become the unassailable high ground of management and leadership. 

We have moved from a “buck stops here” standard of leadership to one based on “I didn’t commit a crime,” a standard now smugly on display by our corporate leaders.  

Where’s the shame?