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corner office-The High Cost of Low Trust-July 2011

Nothing generates more profit than the economics of trust.

corner office-The High Cost of Low Trust-July 2011
A woman brought her very limp parakeet to her veterinarian. She laid it on the exam table and after a brief exam, the vet shook his head sadly and said, “I’m so sorry, but your parakeet has died.”

The distressed woman wailed, “How can you be so sure? You haven’t done any testing on him! He might be in a coma or something!” 

The vet sighed and left the room, but returned a few minutes later with a black Labrador retriever. The parakeet’s owner watched in amazement as the dog sniffed the bird from top to bottom, then looked at the vet with sad eyes and shook his head from side to side. The vet patted the dog’s head and took it out, and returned moments later with a cat. The cat jumped up on the table and also sniffed the bird from top to bottom and then shook its head, meowed softly, and jumped down from the table and left the room.

The vet looked at the woman and said, “I’m sorry, but this is most definitely a dead bird.” Then the vet left the room and returned with his bill, which he handed to the woman.

The woman, still in shock, took the bill. “$150!” she cried. “You’re charging me $150 just to tell me that my parakeet is dead?”

The vet shrugged. “I’m sorry, if you’d trusted my word, the bill would have been only $20. But with the lab report and the cat scan, it’s now $150.”

This little story illuminates the high cost of low trust. At the foundation of every personal interaction, family, organization, economy, and even culture is one fundamental value: trust. Without trust, governments become dictatorships. Without trust, economic transactions cannot occur and leaders lose their ability to lead. Without trust, families become dysfunctional. Without trust, businesses lose productivity, customers, market reputation, brand loyalty, employee talent, creativity, morale—and ultimately revenues and profits. 

On the other hand, high trust can multiply good results. According to a study some years ago by global consulting firm Watson Wyatt Worldwide, companies with high trust levels generated total returns to shareholders at almost 300 percent the return of companies with low levels of trust.

I’m convinced that the lack of trust is the underlying cause of the current economic breakdown and slow recovery from the recession. There is mistrust in the capital and credit markets, and in the financial institutions, government agencies, investment banks, and businesses that all work together to keep the economy healthy. Several factors may explain this. 

A number of crises in 2010 can be attributed to poor business decisions: the oil spill in the Gulf of Mexico, product recalls, the SEC investigation of Goldman Sachs. And prior to last year, we saw “corporate kleptocracy,” in which people like Bernie Madoff and Tom Petters stole millions of dollars from people who trusted them. The consequent lack of trust is directly resulting in a slow economy. 

Just how bad is it? Consider a recent Harvard Business School study, which found that more than 70 percent of Americans now distrust business leaders and boards of directors—a rating lower than that of Congress. 

According to the 2011 Edelman Trust Barometer, an annual global survey conducted by the world’s largest independent public relations firm, when people were asked “How much do you trust business to do what’s right?”, only 46 percent of U.S. responders indicated that they did feel trust, an 8 percent drop from 2010. Of the world’s top 10 countries for gross domestic product, the U.S. now ranks eighth in level of public trust in business—only a few points above Russia.

Speed and Cost

A myth about trust is that it is one of those intangible, “warm fuzzy” things that don’t belong in boardroom discussions. That’s just plain nonsense. Trust is real and quantifiable, and it measurably affects both speed and cost. 

Think about it: When trust goes down, speed goes down and cost goes up. Don’t believe it? Consider the time and cost of airport security after 9/11, or the time and cost required to comply with the Sarbanes-Oxley Act. 

If you want another visible indicator of the high cost of low trust, take a look at your company’s personnel or employee manual. How many inches thick is it?

    Stephen Covey, in his recent book, The Speed of Trust: The One Thing That Changes Everything, offers a theory: that trust, whether high or low, is the variable in the standard formula for organizational success. Rather than the traditional formula that says Strategy x Execution = Results, Covey rewrites the equation as (Strategy x Execution) x Trust = Results. Consider these statistics from Covey that illustrate his theory.

 

Office politics are conservatively estimated to cost $100 billion per year (although many observers believe the cost is much higher).

 

Disengagement, as measured by the Gallup organization and attributed to mistrust of management, costs even more: $250 to $300 billion a year. 

 

Unwanted turnover, often caused by mistrust, costs companies one and a half to two times annual salary to replace the departing employee.

 

Fraud, clearly a breach of trust, is estimated to cause the average business to lose 6 percent of its annual revenue.

 

Losing customers, which usually occurs due to the lack of trust at some level, is also very expensive, as the cost of acquiring a new customer can be as much as 500 percent more than keeping an existing customer.

 

According to Covey, research clearly shows that high-trust companies elicit far greater loyalty from their primary stakeholders: Employees stay longer; customers buy more, buy more frequently, refer more, and stay longer; suppliers and distributors stay partnered longer; and investors hold their investment longer with organizations and people they trust. Plus, these organizations actually outperform with less cost. Those are key competitive advantages in the new economy, which is fueled by partnering and relationships.

High Trust and High Results Can Be Earned

If your business is lacking a culture of trust, the good news is that trust can be built or even regained if it has been lost. Start by understanding the components of trust. David Horsager’s book, The Trust Edge: How Top Leaders Gain Faster Results, Deeper Relationships, and a Stronger Bottom Line, is centered on what he calls the Eight Pillars of Trust: clarity, compassion, character, competency, commitment, connection, contribution, and consistency. 

Horsager cautions that you should resist the urge to think about others and whether or not they deserve to be trusted. Rather, take responsibility for yourself; when you change yourself, you have the best chance of impacting your organization. “Trust is the natural result of thousands of tiny actions, words, thoughts, and intentions,” Horsager writes. “It doesn’t happen by accident nor does it happen all at once. Gaining trust is work. You and I have to do the little things on a daily basis.”

Through all of the systems and structures they create, leaders send messages about trust. Skepticism and suspicion create the opposite of trust. They destroy motivation, teamwork, and results. When business leaders
don’t trust their employees and burden their companies with unnecessary
500-page employee handbooks, for example, they slow down productivity (back to Covey’s theory about speed and cost).  

On the other hand, in a climate of trust, people are creative, motivated, productive, and willing to sacrifice for the team. When there is a high level of trust and loyalty between leaders and employees, the organization performs at its optimal level. The head of consulting firm CLG wrote in 2007 about research showing that employees who were engaged in their work increased revenues by 682 percent and profits by 756 percent over a 30-year span.

Unfortunately, in many organizations, the message is not that the company cares about its employees, rather it’s that “you are expendable.” In fact, one of Covey’s studies showed that only 29 percent of employees believe management cares about them developing their skills; only 42 percent believe management cares about them at all.

For this reason, I like Covey’s idea about measuring trust as a line item on financial statements, either as a tax or a dividend. Companies could apply their resources to eliminate the tax or create a larger dividend. “Organizational dividends” would be attributed whenever the company realized increased value, accelerated growth, enhanced innovation, improved collaboration, stronger partnering, better execution, or heightened customer loyalty. “Organizational taxes” would be assessed for redundancy, bureaucracy, politics, disengagement, turnover, customer churn, and unethical activities. 

While generally accepted accounting principles don’t measure trust today, we can start by understanding that trust isn’t simply applied to interpersonal relationships, but has an impact on businesses, teams, organizations, governments, cultures, and the global economy. Trust is not immeasurable—and low trust has measurable costs. 

For those enlightened organizations that “get it,” high trust results in high results. Nothing generates more profit than the economics of trust!

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