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Trusted Transactions, or Trusted Relationships?

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Justice Potter Stewart once remarked, with respect to pornography, that it was virtually impossible to define it, but, “I know it when I see it.”

Ditto for trust. It’s both a verb and a noun. Its objects are implied and contextual, as in “I trust my dog with my life – but not with my ham sandwich.”

Increasingly, we need to make explicit another dual-meaning of trust. We trust relationships, and we trust transactions.  I trust John – to have my best interests at heart. I trust eBay – to create trustworthy transactions with strangers. It does not follow that I trust an eBay customer to go out on a date with my daughter.

Much of the public dialogue today confuses these two distinctions. Is it Congress that people don’t trust? Or is it members of Congress who themselves are considered untrustworthy? To the average voter, it’s a distinction without a difference. I suspect the inability to tease them apart is itself a source of anger. But if we fail to separate them, we doom ourselves not only to nasty public discourse, but to failed solutions.

Lessons from the 2007 Financial Crisis

Back in 1970, the US mortgage industry was still adequately described by the perennial Frank Capra Christmas movie “It’s a Wonderful Life,” with Jimmy Stewart as George Bailey, president of the Bedford Falls Savings & Loan. Bailey (for he and the company were inseparable) made loans to people he knew personally.

The bank’s depositors were Bailey’s friends and neighbors. The depositors were also the borrowers; likewise, the employees. The loans stayed on the S&L’s books, presumably to term. Those who took out mortgages had no intention of doing anything other than paying them off, with burn-the-mortgage parties at the end.  No moral hazard here.

This was relationship trust. The strength lay in personal ties, cemented over time. A man’s word was his bond, and anyway you knew where he lived. His reputation was everything, at least until it wasn’t. Relationship trust served business and society well.

But relationship trust was about the only kind we had, and it had its limits.

Transactional trust in George Bailey’s world was shallow and fragile indeed. The S&L was at risk of being forced out of business by a single competitor, the evil Mr. Potter. It was at risk of the low-tech deposit processes of Uncle Billy. Most importantly, it was at risk of a bank run. It was a good thing George Bailey worked the relationship trust game well, for he had precious little else to depend on.

Trusted Transactions in the Mortgage Business 

Fast forward to 1995, Dwight Crane, Robert C. Merton and others published The Global Financial System: a Functional Perspective. A masterpiece of what sociologists knew as “functionalism,” this book laid out the case for transactional trust, viewing the mortgage business as one part of a complex and, ideally, integrated financial system.

In the chapter on mortgages, they ran down the characteristics of a system you could trust. It would have markets – markets for deposits, markets for mortgages, markets for loan originations. The book listed the costs of not having a systemically integrated system: risk of meltdowns, differential pricing within very narrow geographic regions, low liquidity, gross inefficiencies.

In short, George Bailey’s relationship-driven-trust was considered too risky, too costly, too uncreative and too unresponsive. Above all, it was too expensive. Consumers – the would-be purchasers of mortgages – were subjected to higher prices than necessary, driving up the cost of home ownership, and therefore driving down the economic livelihood of those seeking the American dream.

You simply could not trust such a system, the good professors opined.  “It’s a Wonderful Life” was now half a century old. George Bailey was quaint. (No one noticed that only one year before the 1995 book, contributor Robert C. Merton had become a Board Member of the soon-to-be-notorious little hedge fund called Long-Term Capital Management L.P.)

In business, Progress was synonymous with all these terms: systemic, low-cost, efficient, market-based, liquidity. No one was about to cast doubt on the important and positive nature of all these terms.  The academics and wunderkind of Wall Street were creating institutions you could trust.

The new trust was almost entirely cast in terms of systems and transactions. Transactions replaced relationships. Where markets couldn’t handle the job, models could. Of course, from today’s vantage point, this looks as naïve as the academics’ view of George Bailey a few decades ago.

In a few short decades, the “trust” pendulum swung from a man’s word to the solidity of a system. We went from high personal trust to high systemic trust – each extreme without the moderating influence of the other.

We Need Rich Trust

The transactional revolution in mortgage banking indeed delivered on most of its systemic promises. Markets were established, costs were lowered, liquidity was raised. But it all, as we know, ended very badly.

The confusion over trust went way beyond semantic. Alan Greenspan himself in 2008 famously said:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”

In other words, Greenspan thought that transactional trust would have the same sort of reputational bias that relationship trust had. He was, sadly for all of us, mistaken.

Transactional trust absent relationship trust had its own internal seeds of destruction. The absence of long-term relationships was crystallized in the Wall Street acronym IBGYBG – I’ll be gone, you’ll be gone, let’s do the deal. Just as personal trust doesn’t scale easily, so transactional trust doesn’t easily foster ethical behavior.

George Bailey wasn’t wrong, he just had no system. The professors weren’t wrong, they just assumed relationships. The truth is: we can’t afford just one form of trust or another, we need a rich mixture of both.

Well Beyond Mortgages

The mortgage industry is but one example. The electorate, reflecting it all, ends up exerting single-issue us-vs-them pressure on its own.

The polls are basically right: we do have a crisis of trust. But what crisis? It is not just a failure of morality. We cannot fix it solely by getting back to ‘family values,’ or seeking out leaders of impeccable morality. Those are, in fact, necessary conditions, but they’re not sufficient.

On the other hand, those who insist that the system is sound, it just needs tweaking, are dead wrong as well. This is not a matter of incentives needing adjustment. This is not a matter solely of transparency in markets. Those too are necessary conditions – but not sufficient.

We live in an interconnected world: transactional trust is critical for us to do live a life built on global commerce without it.

At the same time, there is no social structure or business process that can work without humans. There is no lock that can’t be picked, no code that can’t be broken. There is no inhuman system that can’t be perverted by humans.

Did anyone say Facebook? Uber? Airbnb? Zuckerberg and Sandberg today are as enamored of the potential for better algorithms to solve trust problems as Crane and Merton were about the potential of markets to unilaterally fix trust back in their day.

Trusted transactions? Or trusted relationships? Yes. We need ‘em both. Always have, always will.

Why Your Clients Don’t Trust You – and How to Fix It

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Do your customers trust you? Be honest, now, this is not an in-house survey. Do they believe what you say? Will they cut you a break if you goof up?  Are they happy to share information with you? Do they go out of their way to refer you?

Can you honestly answer ‘yes,’ to yourself, in the dead of night, to those questions?

If you’re trying to sell your services, you already know the value of being trusted. Being trusted increases value, cuts time, lowers costs, and increases profitability—both for us and for our clients.

So, we try hard to be trustworthy: to be seen as credible, reliable, honest, ethical, other-oriented, empathetic, competent, experienced, and so forth.

But in our haste to be trustworthy, we often forget one critical variable: people don’t trust those who never take a risk. If all we do is be trustworthy and never do any trusting ourselves, eventually we will be considered un-trustworthy.

To be fully trusted, we need to do a little trusting ourselves.

Trusting and Being Trusted

We often talk casually about “trust” as if it were a single, unitary phenomenon—like the temperature or a poll. “Trust in banking is down,” we might read.

But that begs a question. Does it mean banks have become less trustworthy? Or does it mean bank customers or shareholders have become less trusting of banks? Or does it mean both?

To speak meaningfully of trust, we have to declare whether we are talking about trustors or about trustees. The trustor is the party doing the trusting—the one taking the risk. These are our clients, for the most part.

The trustee is the party being trusted—the beneficiary of the decision to trust. This is us, for the most part.

The trust equation is a valuable tool for describing trust:

But where is risk to be found? How can we use the trust equation to describe trusting and not just being trusted? How can we trust, as well as seek to be trusted?

Trust and Risk

Notwithstanding Ronald Reagan’s dictum of “trust but verify,” the essence of trust is risk. If you submit a risk to verification, you may quantify the risk, but what’s left is no longer properly called “trust.” Without risk there is no trust.

In the trust equation, risk appears largely in the Intimacy variable. Many professionals have a hard time expressing empathy, for example, because they feel it could make them appear “soft,” unprofessional, or invasive.

Of course, it’s that kind of risk that drives trust. We are wired to exchange reciprocal pleasantries with each other. It’s called etiquette, and it is the socially acceptable path to trust. Consider the following:

“Oh, so you went to Ohio State. What a football team; I have a cousin who went there.”

“Is it just me, or is this speaker kind of dull? I didn’t get much sleep last night, so this is pushing my luck.”

“Do you know whether that was a social media reference he just made? Sometimes I feel a little out of the picture.”

If we take these small steps, our clients usually reciprocate. Our intimacy levels move up a notch, and the trust equation gains a few points.

If we don’t take these small steps, the relationship stays in place: pleasant and respectful, but like a stagnant pool when it comes to trust.

Non-Intimacy Steps for Trusting

The intimacy part of the trust equation is the most obvious source of risk-taking, but it is not the only one. Here are some ways to take constructive risks in other parts of the trust equation.

  1. Be open about what you don’t know. You may think it’s risky to admit ignorance. In fact, it increases your credibility if you’re the one putting it forward. Who will doubt you when you say you don’t know?
  2. Make a stretch commitment. Most of the time, you’re better off doing exactly what you said you’ll do and making sure you can do what you commit to. But sometimes you have to put your neck out and deliver something fast, new, or differently.To never take such a risk is to say you value your pristine track record over service to your client, and that may be a bad bet. Don’t be afraid to occasionally dare for more—even at the risk of failing.
  3. Have a point of view. If you’re asked for your opinion in a meeting, don’t always say, “I’ll get back to you on that.” Clients often value interaction more than perfection. If they wanted only right answers, they would have hired a database.
  4. Try on their shoes. You don’t know what it’s like to be your client. Nor should you pretend to know. But there are times when, with the proper request for permission, you get credit for imagining things.”I have no idea how the ABC group thinks about this,” you might say, “but I can imagine—if I were you, Bill, I’d feel very upset by this. You’ve lost a degree of freedom in this situation.”

While trust always requires a trustor and a trustee, it is not static. The players have to trade places every once in a while. We don’t trust people who never trust us.

So, if we want others to trust us, we have to trust them. Go find ways to trust your client; you will be delighted by the results.

 

This post originally appeared on RainToday.com

 

Crime, Fear and Trust

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Most casual readers of the general press know three things: crime is up, public safety is down, and trust is declining.

The problem is: the first two are flat out wrong, and together they cast doubt on the third.

Crime and Fear

(The following data are compiled from the Atlantic, March 2015, Be Not Afraid).

Fear: In the US, Gallup annually asks if crime is up or down from the previous year. Every year, and usually by large amounts (73% vs 24% last year) the public says crime has risen.

Fact: Violent crime has declined by 70% since the early 1990s. The homicide rate has been cut in half, and three years ago hit the lowest level since 1963. Rape and sexual assault rates declined 60% from 1995 to 2010.

Fear: 58% of the public fears another US terrorist attack, down not much from one month after 9-11, when the number was 71%. The Chairman of the Joint Chiefs of Staff declared the world “more dangerous than it has ever been,” and that was two years ago and before ISIS.

Fact: Despite the horrific stories of ISIS, you’re four times more likely to drown in your bathtub than from a terrorist attack. Armed conflicts in the world are down 40% since the end of the Cold War.

And so on.

The point? Fear of crime and of danger are not necessarily linked to actual rates of crime and danger. In fact, myth is often negatively correlated with reality.

I’m fond of the saying, “Just because you’re paranoid doesn’t mean they’re not out to get you.”

But as ee cummings said, sometimes a cigar is just a cigar. And sometimes paranoia is just irrational.

Trust and Statistics

What’s this got to do with trust? Good question.

First of all, ask yourself what the headlines say: Is trust in business generally up? Or is it down?  You all know the ‘right’ answer.

But trust has a definitional problem that crime doesn’t. Determining whether crime is really up or down is simple: look at the crime rate.

When it comes to trust, however there are three conceivable measures:

  1. Trust, the verb – are people more, or less, inclined to offer their trust in principle?
  2. Trust, the adjective – is business more or less trustworthy?
  3. Trust, the noun – is the resultant state of people’s trust in business up, or down?
Verb x   adjective  =  noun
Propensity to trust of trustor x trustworthiness of trustee = Level of trust achieved

All too often, the business press is guilty of mass confusion. When you see precise statistics from sources like the high visibility Edelman Trust Barometer, saying ’Trust in XYZ industry is up (or down)’  – ask yourself just what that oh-so-precise percentage is referring to. Does it mean:

  • People are X% less inclined to trust a given industry or company?
  • Industries/companies have gotten X% less trustworthy?
  • The state of consumer-to-industry trust has undergone an X% decline?

Presumably it means the last – the state of trust has declined. But here we have a problem – because we can’t tell which driving factor drove the decline.

  • Do we have a problem of paranoid consumers?
  • Or do we have a problem of endemic industry untrustworthiness?

If consumer fear-driven low propensity to trust is the root issue, then the financial services industry has got a public relations problem on its hands, and they should hire Edelman.

But if industry misbehavior is the root issue, then we’ve got a social, regulatory and political problem – throwing PR solutions at it won’t help, and may hurt.

Parsing the Data

There do exist some data. Every year the General Social Survey asks some trust questions, which are clearly of the “verb” type, assessing people’s general propensity to trust strangers in principle.

Here there is a clear trend: across the world, and particularly in the US, there is a secular decline in the level of propensity to trust.  So we have part of the answer: paranoia is increasing.

The question is: is the paranoia justified? Has trustworthiness declined, or has it increased?

I only know of two data sources that speak to that, and only partially at that. One is Trust Across America’s FACTS database, which gathers a number of data-points and aggregates them into measures of corporate trustworthiness. And while the TAA data does an excellent job of facilitating cross-company comparisons over time, its five years of data isn’t yet enough to speak clearly to aggregate trends.

The other source is our own Trust Quotient, or TQ, which overtly measures trustworthiness at the personal, not corporate, level.  We have noticed, both anecdotally and statistically, a gradual rise in the average level of TQ over the past 7 years. However, the data is self-reported, and is not a controlled valid sample of a broader population; it may just be grade inflation, or it may be comparing apples and oranges.

The conclusion? Except for the propensity to trust, which is clearly down on average, most trust data is either very specific and qualified, or definitionally vague.

I confess to some irritation on this topic. Trust is a serious issue, with many people seriously studying it, and doing so carefully. There are many more, however, who feel qualified to spout generalities and truisms about trust with no definitional clarity. Simply put, there is a lot of non-sense out there.

Next time you read something about trust being up or down, be critical. Ask whether the ‘trust’ being measured is a verb, an adjective, or a noun.  Ask whether pessimism is justified by data, or whether paranoia is overwhelming reality. Ditto for trust on the upside: if a company tells you their trust levels are up, push for definitions.

Don’t just nod your head: be a discerning student of trust data.

 

 

 

Building the Trust-based Organization, Part II

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The Elephant In The OrganizationIn my last post, Building the Trust-based Organization Part I, I suggested that approaches to trust at the organizational level fell into several categories. Like the parable of the blind men and the elephant, all captured some part of the puzzle, but none grasped the entirety of the issue.  The five categories I listed were:

1. Trust as communication
2. Trust as reputation
3. Trust as recipe
4. Trust as rule-making
5. Trust as shared value.

I suggested a holistic approach would have a Point of View, a Diagnosis, and a Prescription.  Here is my attempt to offer such an approach.

Organizational Trust: A Point of View

Trust relationships are asynchronous – one party, the trustor, is the one who does the trusting, and who takes the risks. The other party, the trustee, is the one whom we speak of as being trustworthy. “Trust” is the result of a successful interaction between these two actors.

Trust is largely an interpersonal phenomenon. Trustworthiness is mostly personal, though we do speak of ‘trustworthy’ companies as having a track record or being reliable. Trusting, however, is a completely human action, not a corporate one.

Risk is necessary to trust: if risk is completely mitigated, we are left only with probability.

It follows that the most powerful meaning of “organizational trust” is not an organization that trusts or is trusted, but an organization that encourages personal trust relationships:

A trust-based organization is an organization which fosters and promotes the establishment of trust-based relationships between various stakeholders – employees, management, shareholders, customers, suppliers, and society.

Organizational Trust: Diagnosis

What is needed to create a trust-based organization? Since ‘trust’ is such a broad concept, it’s clear that themes like communications, regulations, and customer relationships will have a role. But to avoid a mere laundry list, what’s needed is some kind of primus inter pares relationship; or perhaps some necessary vs. sufficient distinctions.

My nomination is simple: an agreed-upon system of Virtues and Values. Virtues are personal, and represent the qualities sought out in employees and managers. Values are organizational, and reflect basic rules of relationship that ought to govern all relationships within the organization.

Some typical trust-based virtues include: candor, transparency, other-orientation, integrity, reliability, emotional intelligence, empathy.

I have suggested elsewhere Four Trust-based Organizational Values. They are expressed below in terms of customer relationships just to be specific, but they apply equally to relationships with suppliers, fellow-employees, and so forth.

  1. Lead with customer focus – for the sake of the customer. Begin interactions with other-focus rather than self-focus.
  2. Collaboration rather than self-orientation. Assume that the customer is a partner, not in opposition to us.  We are all, always, on the same side of the table.
  3. Live in the medium-to-long term, not the short term; interact with customers in relationship, not in transactional mode. Assume that all customers will be customers in perpetuity, with long memories.
  4. Use transparency as the default mode. Unless illegal or hurtful to others, share all information with customers as a general principle.

Advocates for Values.  I am not alone in citing Values as lying at the heart of the matter. McKinsey’s Marvin Bower put values at the center of his view of business, and McKinsey for many years was run from his mold. As Harvard Business School Dean McArthur said of Bower, “What made him a pioneer was that he took basic values into the business world.”

In 1953, Bower said, “…we don’t have rules, we have values…”

In 1974, he wrote, “One of the highest achievements in leadership is the ability to shape values in a way that builds successful institutions. At its most practical level, the benefit of a managed value system is that it guides the actions of all our people at all levels and in every part of our widespread empire.”

Bower’s biographer noted that Bower believed that “while financial considerations cannot be ignored, business goals must not be financial; if they are, the business will fail to serve its customers and ultimately enjoy less profit.”

The alumni of McKinsey – some, anyway – learned well. Harvey Golub said, “[values are] a powerful way to build a business…it worked for McKinsey and it worked for IDS and for American Express.”

IBM’s Lou Gerstner said: ‘“I believe that I learned from [Marvin] the importance of articulating a set of principles that drive people’s behavior and actions.”

[Note: McKinsey itself had some noticeable hiccups post-Bower. In my view, this is not an indictment of values-based management, but a sad example of how it requires constant values-vigilance].

The Case for Values.  The use of values as the basis for management is well-suited to the subject of trust, and this advantage shows up in numerous ways.

  • Values scale, in a way that performance management systems never can do.
  • Values are about relationships, in a way that incentives never can be; this makes them highly suitable to the subject matter of trust.
  • Values are infinitely teachable, in a way that value propositions or communications programs alone cannot aspire to.
  • Values are among the most un-copyable of competitive advantages.

Organizational Trust: Prescription

Managing a values-based organization will center around keeping the values vibrant. This is pointedly not done mainly through compensation and reward systems, corporate communications plans, or reputation management programs. Instead, it is done through the ways in which human beings have always influenced other human beings in relationship.  To name a few:

  1. Leading by example: trustworthy leaders show the way to their followers by their actions, not just their words
  2. Risk-taking: trusting others encourages them to be trustworthy, and, in turn, to themselves trust others
  3. Discussion: principles undiscussed are principles that die on the vine. Discussion, not one-to-many communication, is key to trust
  4. Ubiquitous articulation: trust principles should underpin many corporate decisions and actions; trust-creating leaders seize the opportunity for teaching points in every such case
  5. Recognition: Public praise for values well-lived is intrinsically motivating
  6. Confrontation: Trust-building leaders do not hesitate to overrule business decisions if they violate values, and to do so publicly in ways that teach lessons. Values, not value, are the ultimate arbiter of all actions.

To sum up: it’s a simple concept. Trust in a corporate setting is achieved by building trust-based organizations. Trust-based organizations are built to consciously increase the levels of trusting and of trustworthiness in all organizational relationships. The best approach to creating such an organization is values-based management and leadership. This is different from most approaches to management and leadership in vogue today.

The quotes about Marvin Bower were taken from:
Edersheim, Elizabeth Haas (2007-12-10). McKinsey’s Marvin Bower: Vision, Leadership, and the Creation of Management Consulting. Wiley.

Interview with Trust Expert Eric Uslaner

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ericuslanerEric Uslaner is perhaps the world’s leading authority on social trust. He was recently much in the news, as he is every year, with the annual publication of the General Social Survey on trust.  Here are some headlines from our talk this past fall.

Charlie Green: Thanks very much for speaking with me. We last talked back in early 2010. Now, most of my readers are accustomed to talking about trust in the sense of trustworthiness, like can I trust banks, or how can I get people to see me as trustworthy. Your approach is different. Let’s clarify that first.

Eric Uslaner: That’s right, it is different. You’re talking about people’s perceptions of other people’s trustworthiness. There are two parts to that: part one is it’s a specific person or institution about which you’re having the opinion: the other is that we view trustworthiness as the active characteristic.

I focus differently. I focus not on the perceived trustworthiness of specific individuals (or companies), but on the propensity of individuals to trust strangers, or people in general. It’s more about a worldview than about direct experience. And the GSS, which has included these key trust questions since the  late 60s, consistently asks that kind of question: “Do people generally mean well,” that kind of thing.

CG: What are the differences in looking at trust that way, as opposed to trust in banking, or JPMorgan Chase, or international banking?

EU: There are two big differences, and they’re interrelated. First, social trust – what I’m talking – about  changes far more slowly, over a longer period of time. Nowadays a third of Americans say that people generally can be trusted; 20 years ago that number was half. And in many ways it’s not because of a decline in trustworthiness – crime is down, for example.  But what’s changed is people’s propensity to trust strangers.

The second difference is that social trust, as I’m talking about it, is what we need to drive political societies. You’re not going to get problem-solving done in a pluralistic society by sticking with your own kind. Generalized social trust is what drives our institutions – not whether trust in banking is up or down last month.  And on that measure, we’re in deep yogurt.

CG: And how does social trust play out against these other forms of trust?

EU:  Most of the time trust in institutions (except for the military) tends to go up or down somewhat together. Much of it’s driven by the economy; when things are good, we generally trust each other. An example: Trust in government rose under Reagan, because the economy was doing well.  But trust in people declined over that same time, largely because inequality drove people apart.

CG: So, institutional trust has a shorter time-span than generalized trust?

EU: Yes. Institutional trust is the response to Ed Koch’s old question, “How’m I doing?” You look at the economics of the moment; that’s why presidents always try to have the economy’s wind at their backs going into an election, because people’s political trust is short-term.

But social trust, that’s more a matter of long-term questions. Will life be better for my children?  That doesn’t depend on the Fed, or the stock market.

CG: Say more about that? Has social trust got to do with empathy?

EU: Yes, but it’s much more than just empathy.  You have to have a willingness to interact with people, and to see the world from different perspectives. It’s not that you have to change your mind, it’s just that you’ve got to concede that someone else’s reality may have as much validity as your own.  And in the US, the Congress has come to reflect the same sort of denial of legitimacy that has characterized the Arab-Israeli divide for so long – a denial that the other side has any claim to decency.

CG: Let’s get basic. Is social trust valuable? Do we want it? Do we care?

EU:  Absolutely. It’s what allows social cohesion, national identity, a sense of purpose and mission in a society. You only solve social problems if you feel you own them. Once people start thinking more in terms of their narrow group and less about those “others,” it’s an easy flip from “they’re different” to “they’re wrong.”

It’s not hard to trust my wife, the people in my church, or those I meet at my grocery store or my school. The question is, can I trust those who are different from me, and whose values I may not share?  And by the way, the less those people shop at my supermarket or go to my kids’ schools, the less likely I am to trust them.

CG: I was going to ask – what drives this kind of social trust? Or is that too vague a question?

EU: It’s not too vague, but the answer requires two levels.   First, people who have a high propensity toward social trust are a) optimistic about the future, and b) feel they have control over their lives. And people who have a low propensity toward social trust are the reverse – they believe the world is getting worse, and that it’s largely beyond their control (if not controlled by those “others”).

CG: So – optimism and empowerment.

EU: Yes – and now for the punch line, the second order drivers of those two.  A propensity toward social trust is influenced by a) education, and b) economic inequality.  The less educated people are, and the greater the income dispersion in society, the lower will be the social trust.

CG: That makes some sense.

EU: It makes more than sense. Denmark is one of the highest-trust countries in the world, and also has extremely high education rates, and very low rates of economic inequality. Equally important, economic mobility is far greater in Scandinavia (and even in the UK, these days), than it is in the States.

CG: Why do education and income disparity drive social trust?

EU: Education teaches people that their worldview is not the only worldview. It’s the touchstone of tolerance and appreciation. And economic disparity – at least past some tipping point, indicated by the ability of groups to migrate upward economically – is an indicator of hope, or of hopelessness. Also, the further apart we are economically, the less it appears to all that our fates are linked.

CG: So where do we stand these days in the US, and in other countries?

EU: We have increasingly solidified patterns of racial and economic segregation of housing. Social mobility is now behind that of dozens of other countries.

In the US, the flight of the black middle class has left the double-whammy of economic and racial segregation, with no powerful social institutions to get people out. Segregated communities are dysfunctional across a plethora of indicators – both groups tend to identify more with in-groups, and less with the society at large.

CG: What can business do?

EU: Get involved in the larger society. It’s unfortunate that most business rhetoric has tended to work against any sustained effort to fight inequality. Historically, go look at what Coca Cola did in Atlanta, and what Henry Ford did in Detroit. Coke knew that good people wouldn’t want to move to a segregated city, so they became active in integration of schools. Henry Ford famously paid his people enough to be able to buy cars. If Ford had not been such a rabid anti-Semite, he might have had more influence on public policy on inequality.

The more companies pursue their own interest, the more difficult it is for them to pursue bonds with their own community, which drives inequality even further. The prevailing ideology of business these days is at odds with the creation of a society that nurtures business; it’s very short-sighted thinking.

In the US, I’m reminded of an old CBC comedy skit, The Royal Air Farce, who said, “Things are going to get a whole lot worse before they get bad.”

CG: And on that light note, we’ll have to leave it.  Please come back and chat some more, Ric, this has been extremely enlightening.

A Tale of Two Cities: Trust and the iPad

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photo by Sean MacEnteeSuppose you’re a high school administrator in a metropolitan area. Your district has the opportunity to use a number of iPads at subsidized rates to help in the students’ education.

Would you:

a. Be sure to load up the tablets with educational software and put in some restrictions on social media sites,
or,
b. Leave the devices pretty much the way they are out of the box, with no particular restrictions?

This happened. One district was in Los Angeles; the other, Burlington Mass, a suburb of Boston.  The question du jour is:

Which school district went with which approach?

So Much for Laid-back West Coasters

Westchester High, part of the Los Angeles Unified School District, went with option a.  Let’s just call it, oh, the “We don’t trust you kids” option.

Burlington (in the heart of Boston’s famed Rt 128 tech corridor) did the loosey-goosey thing.

So much for east coast / west coast stereotypes.

But what’s interesting was the result.

The Fruits of Low Trust

Students in LA took only a few days to hack the filtering software, thus getting into the verboten territories of Facebook and Pandora. The school district:

treated the security breach as a crisis. At Westchester High and two other schools where students managed to liberate their iPads, it ordered that all tablets be returned. In a confidential memo intercepted by the Los Angeles Times, LAUSD Police Chief Steven Zipperman warned of a larger student hackathon and suggested the district was moving too quickly. “I’m guessing this is just a sample of what will likely occur on other campuses once this hits Twitter, YouTube, or other social media sites explaining to our students how to breach or compromise the security of these devices,” wrote Zipperman. “I want to prevent a runaway train scenario when we may have the ability to put a hold on the rollout.

There are plenty of folks who see the LA experience as a fiasco, serving the interests only of tablet producers like Apple.

The Payoff of High Trust

But then there was Burlington. Other than installing a porn filter, the district consciously chose to avoid the “lockdown” approach, instead offering “digital literacy” classes where kids could develop a web presence to impress college admissions officers.

The students already intuitively knew how to use the equipment. They took to it like ducks to water, rapidly outpacing the faculty, who then dug in to catch up with their students.

The teachers now go to a student-run Genius Bar.  The English department created an online vocabulary textbook that saved budgeted funds. And the kids behaved themselves.

The program was enough of a success that they’re expanding it to middle school students.

The Moral of the Story

Too often when we speak of trust, we speak only of static components – moral values, credentials, observing rules.  But an enormous amount of trust is governed by the reciprocating, interactive rules of human behavior.

Specifically – one of the best ways to make someone trustworthy is to start by trusting them in the first place. People hugely live up – or down – to what is expected of them. So much of the cure for low trust lies not in yet-more regulations and audits, but in more risk-taking that requires trust!

Are you listening, banks? HR departments? Employment lawyers? Teachers? The cure to low trust is frequently – more trust.

Trust Inc.: Strategies for Building the Trust Asset – Chapter 1

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Trust Inc coverThis is an abridged version of the opening chapter – “The Business Case for Trust” – of the just-published  Trust, Inc.: Strategies for Building Your Company’s Most Value Asset. 

The book is a collection of 30-plus articles by diverse authors on trust in business. Edited by Barbara Kimmel of Trust Across America, the book covers issues ranging from measuring trust, diagnosing its presence or absence, managing trust and increasing trustworthiness, to improving people, companies, industries and societies.

Barbara and I co-authored the opening chapter. Other authors in the book include names like Steven M.R. Covey Jr., Ken Blanchard, James Kouzes and Barry Posner, Peter Firestein (investor relations), Laura Rittenhouse (financial candor), Jim Gregory (branding), and Linda Locke (reputation). And more.

Have a taste of the book, below. And click through here to see a complete table of contents and authors list. Whatever your interest in business in trust, you’ll find something here the addresses it.

The Business Case for Trust

by Barbara Brooks Kimmel and Charles H. Green: from Chapter 1 of Trust, Inc.,publisher Next Decade, November 2013.

Trustworthiness — once exemplified by a simple firm handshake — is a business value that has suffered erosion. We see this in how the public has grown increasingly cynical about corporate behavior—with good reason.

The PR firm Edelman found in a recent “Trust Barometer” survey that trust, transparency, and honest business practices influence corporate reputation more than the quality of products and services or financial performance. And yet, scandals and bad behavior continue to pile up.

Our view is that a company seriously interested in its reputation must increasingly focus not just on “business performance” as it is traditionally understood, but on being seen as trustworthy too.

We believe there is an important, material business case for trust. This doesn’t mean that trust isn’t or shouldn’t be justified on moral or societal grounds. Of course it should. But trust makes for good business as well. This essay will put forth the business case for trust by exploring the gap between low- and high-trust organizations’ performance. We will also offer a framework for assessing corporate trustworthiness, and point the way toward strategies for creating a trust-enhancing business model.

First, let’s look at the costs of low trust.

How low trust affects stakeholder outcomes

Low Trust in Society

Business operates in a social context; because of that, low trust in society-at-large costs business. Indirect examples include the TSA airport security program ($5.3 billion, not to mention the impact on tens of millions of business travelers), and the criminal justice system ($167 billion in 2004). Both of these examples are funded by taxes on individuals and business.

Businesses also shoulder direct tangible losses from crime ($105 billion), where they are often the victims.

A more obvious social cost for business is the cost of regulation. Economist Clyde Wayne Crews releases an annual report entitled “The Ten Thousand Commandments” that tallies federal regulations and their costs. In 2010, the federal government spent $55.4 billion dollars funding federal agencies and enforcing existing regulation. In 2013, The Washington Post reported that “the federal government imposed an estimated $216 billion in regulatory costs on the economy (in 2012), nearly double its previous record.”

Doing business in a low-trust environment is costly. Whether or not you believe that companies can, or should directly impact social conditions, one thing is clear. In aggregate, business bears a lot of weight for the cost of low-trust in our society.

Low Trust in Business Practices

Social costs on business, however, are just the tip of the iceberg. Far bigger costs are exacted by simple business practices. Consider the
need for detailed financial audits. The Big 4 accounting firms’ aggregate global revenue is $110 billion5, of which about one quarter is made up of audits in the U.S.

Consider lawyers: there are over 1.2 million licensed attorneys in the United States, more per capita than in 28 of 29 countries (Greece being the 29th). The cost of the tort litigation system alone in the United States is over $250 billion—or 2% of GDP. It’s estimated that tort reform in health care alone could trim medical costs by 27 percent.

All these are examples of transaction costs: costs we incur to protect or gain (we hope) larger economies of scale, markets, or hierarchies. Transaction costs add no value to the economy per se; they just foster favorable market conditions so that other economic factors (e.g. markets, scale economies) can add value.

But there comes a point at which the addition of more non-value-adding transaction costs ceases to be positive and becomes burdensome. It’s clear to us today that we are well past this point. A Harvard Business Review article from 8 years ago (Collaboration Rules by Philip Evans and Bob Wolf, July 2005) suggests that nearly 50% of the U.S. non-governmental GDP was, as of 2005, comprised of transaction costs. Imagine the impact of redirecting even a small proportion of these monies to value-adding actions.

Their research goes on to say that, in such an economy, the most productive investments are often not those that increase scale or volume, but those that reduce transaction costs. And the most viable strategy for reducing massive transaction costs? Trust.

Low Trust and Employee Disengagement

Disengagement occurs when people put in just enough effort to avoid getting fired but don’t contribute their talent, creativity, energy or passion. In economic terms, they under-perform. Gallup’s research places 71 percent of U.S. workers as either not engaged or actively disengaged. The price tag of disengagement is $350 billion a year. That roughly approximates the annual combined revenue of Apple, General Motors and General Electric.

According to The Economist, 84 percent of senior leaders say disengaged employees are considered one of the biggest threats facing their business. However, only 12 percent of them reported doing anything about this problem.

What does disengagement have to do with trust? Everything. In a Deloitte LLP ethics and workplace survey, the top three reasons given for employees planning to seek a new job were:

  • A loss of trust in their employer based on decisions made during the Great Recession (48 percent);
  • A lack of transparency in leadership communication (46 percent); and
  • Being treated unfairly or unethically by employers over the last 18 to 24 months (40 percent).

A lack of trust in the employer is at the heart of each of these reasons. To the extent that plans to find a new job are a proxy for disengagement, the case is clear. Lack of trust drives away employees.

In discussing the survey, Deloitte LLP Board Chairman Sharon Allen notes:

Regardless of the economic environment, business leaders should be mindful of the significant impact that trust in the workplace and transparent communication can have on talent management and retention strategies. By establishing a values-based culture, organizations can cultivate the trust necessary to reduce turnover and mitigate unethical behavior.

The survey also provides some interesting data on the business case for organizational trust. When asked to rate the top two items most positively affected when an employee trusts his or her employer, employed U.S. adults made the following top rankings:

  • Morale (55%);
  • Team building and collaboration (39%);
  • Productivity and profitability (36%);
  • Ethical decision making (35%); and
  • Willingness to stay with the company (32%).

As Mary Gentile eloquently states later in this book, “Very often the most visible, most costly challenges to the public trust in business are fairly predictable: deceptive marketing practices; falsified earnings reporting; failure in safety compliance; lack of consistency in employee relations; and so on.”

In other words, the ability to manage the costs of low trust –whether arising from society, from business practices, or from management practices—is to a great extent within the control of the corporation. And yet, it is largely not being done—with sadly predictable results.

Continue reading:
How high trust improves stakeholder outcomes
A framework for assessing trustworthiness
Trustworthiness in Action

Trust Quotes: Interview with Barbara Kimmel, of Trust Across America

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Trust Inc bookI got to know Barbara and Jordan Kimmel some years ago when they were forming the initial idea for what became Trust Across America, an organization devoted to improving corporate trustworthiness.

Barbara edited a book which is about to be published (November 1), called Trust Inc.: Strategies for Building Your Company’s Most Valuable Asset. This seems like a good time to interview her on Trust Matters. Enjoy.

Q. Barbara, congratulations on the new book, which is most impressive: I got my advance copy a few days ago. Before we get into that, however, tell us about Trust Across America – Trust Around the World.  What is it, how did you come to found it, and what is its purpose?

A. Very simply, TAA – TAW is an umbrella organization and clearinghouse whose mission is enhancing trustworthy behavior in organizations. We got the program rolling in 2009 in the wake of the financial crisis, realizing that no group was addressing organizational trust from a holistic and collaborative perspective.

Today we sponsor four main initiatives:

  1. The FACTS® Framework measures the trustworthiness of 2500 public companies using 5 quantitative indicators of organizational trust;
  2. Communications efforts, featuring programs like our Trust Talks YouTube Channel, Trust Across America Radio, Blog roll, Trust Breakfast Roundtables, Trust Workshops and a Reading Room, to name just a few.
  3. The Alliance of Trustworthy Business Experts (ATBE) formed in January 2013, is a growing group of global experts working collaboratively, through a number of initiatives, to tackle trust head on.
  4. Most Trustworthy Programs. Every year we name our Top Thought Leaders in Trustworthy Business and our Most Trustworthy Public Companies.

Q. The new book is a collection of 30-plus author-experts on trust. It’s got an introduction by Ken Blanchard and book cover quote from Steven M.R. Covey –

A. – not to mention the opening article by you and me writing together!

Q. – thank you, thank you. Now, where did the idea for the book come from?

A. Well, here are some headlines from 2012 to the present. They serve as a good starting point to answer your question.

The Washington Post reported that “the federal government imposed an estimated $216 billion in regulatory costs on the economy (in 2012), nearly double its previous record.”

The cost of the tort litigation system alone in the United States is over $250 billion. – or 2% of GDP  (Forbes, January 2012)

“Americans are fed up with politics, not government, study says” (trust in government at 50 year low for five years running)- September 2012, Government Executive

The Big 4 accounting firms’ aggregate global revenue is $110 billion, of which between 40-50% is made up of audits. (Going Concern, January 2013)

The six biggest U.S. banks, led by JPMorgan Chase & Co. (JPM) and Bank of America Corp., have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years.  (Bloomberg, August 2013)

I’ve had the honor of meeting dozens of global experts, each with his or her unique perspective on organizational trust. It occurred to me that if I could bring them together to write a series of  essays, perhaps we could collectively begin to provide a new roadmap for organizational trust.

Q. OK. Now, with that as background – tell us a bit about the book itself?

A. There’s a well-documented business case for trust ranging from deepening employee commitment to higher profitability. This book contains a lesson for everyone, from CEOs to Boards, senior management, and small business owners. Trust is a core quality of all great leaders and organizations.

We have 34 experts in all joining forces to tackle organizational trust. In addition to Covey and Blanchard, we’ve got Kouzes & Posner, Patricia Aburdene, and Linda Locke, to name just a few.

Through dozens of case studies, real world situations, models and examples, the book talks about:

  • Why trust matters
  • How trust works in practice
  • What it takes to be a trustworthy leader
  • How trustworthy teams impact business
  • How to restore trust
  • What the future holds in store

The book also has 3 appendices:

  • Definitions of organizational trust from a global perspective
  • Examples of vision and values statements
  • A call to action

Q. We see boatloads of survey data about how trust is down these days, in almost every institution. What should we make of all that?

A. Charlie, you and I have spoken about painting trust with broad brush strokes. Industry is not destiny. There are many organizations that are exhibiting high levels of trust. It all boils down to culture and leadership. We see companies that rise to the top of our FACTS Framework, year after year. Those companies outperform  their peers and benchmarks like the S&P – in terms of stock market performance. This proves that trustworthy companies are not sacrificing profitability.

Q. I have seen some of that data and it is really impressive. In fact, the whole broad basis of the initiative is impressive. Anything you want to add from the bully pulpit here?

A. Thank you for the opportunity to talk about our new book and our goals for TAA –TAW. We are chipping away at the organizational trust issue and plan to continue to create new tools and programs. I urge your readers to drop me a note if they have something to add to the conversation or would like to roll up their sleeves and get involved. [email protected]

 

Barbara Kimmel, Executive Director, Trust Across America – Trust Around the World

 

 

 

Nice Place Here, Shame if Anything Happened

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copyright Nate Osborne 2013It’s the opening to dozens of gangster movies. The mob guy with a rakish hat and a sneer sidles into the hard-working good citizen’s retail establishment, knocks some cigarette ash on the floor, and says, “Nice little business you got here, mister. It’d be a shame if something were to happen to it, know what I mean?”

And we do know what he means, and so does the terrorized citizen. It’s the protection racket. If you pay, then indeed, nothing happens. If you don’t pay, well, it’s amazing how bad stuff just happens.

Of course, that doesn’t happen in business today.  Right?

The White-collar, Fully-legal, Hands-clean Shakedown, Corporate Edition

In fact, something much like that does happen – though it’s highly sanitized. It’s legal; no individual has bad or evil intentions; and it’s justified as a business best practice. But the effect is the same – the business at the end of the food chain pays a lot of “insurance” for bad events that don’t look like happening. And instead of mobsters getting rich, it’s lawyers and insurance companies.

A simple example. My firm recently sold a single, one-day, off-the-shelf learning program to a corporate client. The contract and statement of work proposed by the client ran to over 10 pages of fine print.

On our end, it went through the hands of four people, including our lawyer, who I struggle mightily to keep under-employed. On the client side, we know personally of three people with whom we interacted, and I am guessing there were more. Total elapsed time was 2-3 months.

The contract included fairly typical clauses to the effect that we would not steal their intellectual property, lists, or secrets; generously they agreed to return the favor.

It also included clauses saying that we would generally indemnify them against everything from lawsuits about IP to people falling on their sidewalks to taking bad advice from us. (And here I worry about trying to get clients to take my advice!)

Most interesting to me was the clause that – at their request – we would submit our trainers to drug testing and to criminal record searches, through whatever such means as the client would dictate, of course at our expense. Moi? Nous? I mean, we’ve got our faults, but…

All this in order to gain the privilege of giving a workshop on – wait for it – how to establish trust-based business relationships. (And yes, I am painfully aware of the irony, even if the client is not. But you go where you are most needed, and agreeing to a training session on trust is actually a pretty good first step.)

Sadly, this is not a unique story. In fact, about 80% of it is standard operating procedure these days. In this case, I sent an email protesting that we felt mildly insulted about the drug test thing. I received back a most polite and apologetic note assuring me that that was surely not the intent, and that they felt badly about it – it’s just that, this is just how business is done – you know, it’s not personal, it’s business.

And voila, we’re back at the movies. See what I mean?

What’s Going On Here 

I want to emphasize, there are no bad intentions here; there are no laws being broken. To use the business vernacular, this is risk mitigation. But it’s risk mitigation gone rogue.

It starts with companies themselves as victims of a shakedown. A lawyer – perhaps their own internal counsel – tells them that they are subject to grave exposure from a lawsuit by some wild-eyed plaintiff’s attorney. Since lawyers vastly prefer to err on the side of caution, they like to be armed with shotguns when they go to hunt fleas.

One form of protection, conveniently served up by insurance companies (who love their lawyer friends) is straight-up insurance. But, apparently cheaper than buying your own protection is to lay off that protection cost onto those who are employed by the company: their suppliers, their employees, and their customers.

And so we get oppressive do-not-compete clauses for employees; mandatory arbitration in the fine print for customers; and send-that-indemnification-downstream to contractors for any risk you can think of.

The Extortionate Impact on the Economy

I welcome the comments of those better versed in economics than I to more accurately describe this, but I can suggest the outlines of four broad effects.

One is simply over-insurance. If I have market power over you (as big companies generally do over little companies, and buyers generally do over suppliers), then I can force you to pay for my insurance. And, I’d prefer to be over-insured rather than under-insured thank you very much, and frankly I don’t care if you have to over-pay for it. In fact, I’ll get it back in nice lunches from my professional partners-in-crime.

I have no idea how to quantify this effect, but since the phenomenon covers every industry, my tummy says it’s Big.

Second, this kind of burden massively adds to the level of transaction costs in our economy.  Initially described by Ronald Coase in the 1930s, transaction costs are non-value-adding costs which enable value-adding through other means, e.g. economies of scale.

But there comes a point when transaction costs begin to overwhelm the possible value they can enable, and cutting transaction costs themselves becomes a more sensible way to achieve economic success.

Are we at such a point?  Consider that the US has the highest ratio of lawyers per capita of any country in the world.  And that the lawyer-per-capita ratio in the US has gone up by 250% since 1950. (Personally, I can assure the reader that the contracting process for training sessions like the one I describe above was vastly simpler 20 years ago. And I sincerely doubt clients got burned, whether by drug-addled trainers or via other means.)

Third, this shakedown amounts to a massive, systemic substitution of check-boxes in place of management to govern the natural friction that exists between contracting people. For example, it substitutes a gigantic system of criminal record checks in place of a few personal phone calls for references. Among the costs of such substitutions is a decline in trust. A big one.

Finally, when you pile on so many transactional, impersonal “risk-mitigation” steps, you open up wide opportunities for corruption of various types. Corruption isn’t just handing over bags with cash. How many times have you heard, “Oh don’t worry about that phrase, we never pay attention to that anyway, it’s just part of the standard form.” How many times have you read the fine print at the bottom of every online purchase you make?

Where there is such casual, wholesale and willful ignoring of agreements, there is a ton of room to become cynical and unobservant about said agreements.

The next level up is easy – think of robo-signing mortgage agreements. And note all the irate protestations by bankers about how this was really no big deal. It’s not such a long step from there to the bags with cash. (Some readers might enjoy Mark Twain’s tale The Man That Corrupted Hadleyburg).

The parallel with moving from locally-made mortgage loans to globally aggregated, tranched and securitized packages is evident. When you depersonalize, you desensitize, and you de-ethicize.

Shades of Shakedowns

Of the two, the gangsters’ shakedown is more honest. It is authentic; you know what you’re being told, by whom, and for what purpose. You know that the threat is real, the intent unmistakable. By contrast, in the modern corporate shakedown, there are no villains, everyone has plausible deniability; they all have clean consciences and clean hands.

The mob had corrupt lawyers who could game the system. In the modern corporate shakedown, it is the system that is doing the shakedown.  We have MBAs, lawyers, and actuaries all soberly attesting that they have lowered the risk of our business contracting system at every stage.

Does anyone else smell a Black Swan here?

The Alternative

A major issue with trust is how to scale it. But maybe an even bigger issue is forgetting what it’s all about in the first place – what we have lost. Here’s a reminder.

I had a conversation with a solo consultant the other day, a disgusted emigrant from corporate America. He now does consulting and coaching for small business clients. His entire contracting process is as follows:

At the beginning of every month, you will send me a check for $5000. For the rest of that month, I will answer the phone all the time whenever you call. Should I ever not receive my check by the fifth day of the month, I will know that you’ve become unsatisfied with my services,  and we shall both expect further conversations to cease.

He has never had a dissatisfied client. His cost of sales is minimal. His legal fees are zero. His risk is pretty much nothing – because he has created a trust-based relationship.

I find that completely unsurprising. That’s just how it works – if we remember to let it.

Unconscious (Ethical) Incompetence: The Curious Case of SAC Capital Advisors

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Should Have Seen That ComingNoel Burch is credited with formulating the Four Stages of Competence model. It describes the psychological states involved in a progression of competence, as in:

1. Unconscious Incompetence
2. Conscious Incompetence
3. Conscious Competence
4. Unconscious Competence

The model has always struck me as one of those so-obvious ideas (like spreadsheets) that the miracle is no one ever thought of it before. It just makes sense.

It is usually applied to the mastery of skills, expertise, or knowledge. It is equally interesting, however, to apply it to the concept of moral development in people and in organizations. Which brings us to the curious case of SAC Capital Advisors.

SAC Capital: The Contradiction

Last week, SAC Capital Advisors was indicted by a Federal Grand Jury in New York for insider trading. The firm pleaded not guilty, and of course nothing I say here should be construed as an opinion on the merits (and my legal credentials are zip-squat anyway).

In reporting on the story, New York Times financial reporter James B. Stewart highlights an interesting question:

According to SAC Capital Advisors, the wildly successful hedge fund now accused of systematic crime, the firm not only has “a strong culture of compliance” intended to “deter insider trading,” as the firm put it recently, but may also have one of the most rigorous and “cutting edge” hedge fund compliance programs in the country.
The firm said it spends “tens of millions of dollars,” on compliance, “deploys some of the most aggressive communications and trading surveillance in the hedge fund industry,” has hired big-name lawyers like Peter Nussbaum and Steven Kessler to oversee compliance, and has a staff of “no fewer than 38 full-time compliance personnel.
Which sets up the question: What were they doing?

What indeed.

Two Scenarios for Going Bad

Let me suggest a continuum of answers to that question, with the two extremes reflected in the following two purely hypothetical internal conversations at SAC following the indictment:

Version A: “Can you believe our bad luck? Just when everything was going so great, some flunky up and blows the whistle on the greatest inside deal since Teapot Dome. It was perfect! I guess it was too good to be true, something had to go wrong some day and we’d get found out.  Well, let’s fight the hell out of it and see what we can still walk away with.”

 

Version B: “Can you believe our bad luck? We take compliance seriously around here, nobody spends on compliance like we do, we’ve got the best systems in the business, the best programs, the best communications and the best lawyers to make sure we’re squeaky clean, and – a couple of lousy bad apples come in and ruin it. Not only for us, but for our clients as well. If they only knew the opportunities we pass up… For crying out loud, when is enough; blood from a stone. We are over-regulated to a T already, how much more compliant can you get?”

I don’t know about you, but I’d put money on the B end of the continuum. What looks like clear malfeasance from the outside all too often looks like business as nearly usual on the inside, with shrill grenades of  misunderstanding being lobbed in from the outside. Whether it’s SAC, Enron, WorldComm, or the generals in charge of preventing rape in the military, most frogs sitting in the water don’t notice the temperature rising to a boil.

Which raises the ethics conundrum – Scenario B is a form of Unconscious Ethical Incompetence. The doers of badness do not recognize that it is badness they are doing. Indeed, they often see it as goodness.

In the Four Stages model, unconscious incompetence is the first step in the process. That heightens the contradiction, because the evil-doers in such cases think they are actually at the opposite end of the scale – having already internalized the right behaviors so that they are unconsciously competent. Nothing could be more wrongheaded and insulting, they think, than to suggest they are actually at the bottom of the scale!

Hence the reaction – not guilt, or even remorse, but pained indignation. Moi?  Nous?  Surely you jest.

You Can’t Depersonalize Trust and Ethics

Cases of this sort highlight a vicious circle in managing for trust. Violations of trust are met with new processes or procedures for preventing it in future. Since so much of business is about processes and metrics, this is seen as a perfectly normal response.

However, by turning trust and ethical issues into issues of process, they are robbed of their context in a relationship, and therefore stripped of their human quality. The predictable result of this is to lower the internal standards of conscience and social behavior, which then leads to more violations. And on, and on.

This is the substitution of quantitative, transactional, impersonal focus for qualitative, relationship-based, human phenomena. Unless checked, it only gets worse. Financial services is only one of the most obvious industries in which this happens. You can see it in pharma, in many sales organizations, even in academia.

Unfortunately, most outside consultative solutions to institutional trust issues tend to focus primarily on traditional change management factors – incentives, structures, communications (or culture, which I tend to see as the result of all the other things). But those traditional change management factors, which work so well when introducing quality or customer focus initiatives, have limited range when it comes to issues of trust and ethics. In fact – they make it worse, by implicitly suggesting the issues are ones of incentives, structure and communication.

What is sorely needed is something that sounds too old-fashioned – personal role-modeling of character-based behavior by leaders. Personal actions at the most minute level – comments, reactions, shading of language, confidence of decisions, personal displays of integrity in the moment. These are the things that employees notice, absorb, and emulate.

Former SEC Chairman Harvey Pitt had done some consulting for SAC. He told reporter Stewart that he “Came away from his visit to the firm unimpressed. ‘My sense was that it was a check-the-box mentality, not a serious commitment,'” he said.

Whether he was right or wrong about SAC, the distinction is powerful. As Mr. Pitt also said, “When it comes to compliance, you have to live, eat, breathe and drink it. It has to be embedded in a firm’s DNA.”

And the route to the firm’s DNA (metaphorically) goes straight through that of the leaders (literally).