Are Business Ethics & Trust Important For Profitability?

According to Stephen M.R. Covey, the answer is yes. Covey was former CEO of the Covey Leadership Center, which under his stewardship became the largest leadership development company in the world. He was also co-founder and CEO of CoveyLink, through which he counseled corporate leaders around the world on the topic of leadership.

One of his books is “The Speed of Trust: The One Thing That Changes Everything.”

Ethics and trust are inextricably linked. We are interested in ethics in large part because we are concerned, even obsessed, with the question of who we can trust is a world where there is risk and uncertainty.

We were fortunate enough to sit down with him to discuss how a lack of trust can undermine corporate performance — and how companies can foster trust through more transparent performance management processes.

“The Speed of Trust” emphasizes the importance of trust in corporate culture. What, exactly, do you mean by “trust”?

Stephen M.R. Covey: I mean confidence, and it’s a confidence that’s born out of two things: character and competence. The presence of character and competence enables me to have confidence. One of the best ways to define trust is by its opposite, which is distrust and suspicion. I don’t trust someone when I’m suspicious about their agenda or their integrity or their ability to perform, and I hold back because of how I feel about them.

Do you think trust is lacking in a lot of companies?

Absolutely. The data on this is overwhelming. There’s a basic societal trust measure — “Do you believe other people generally can be trusted?” — and only 34 percent of Americans do. In Great Britain, the number is 29 percent. It was 60 percent just a few decades ago, so there’s been a precipitous decline in trust. There are societies that have higher trust. In Scandinavia, the societal trust is at 68 percent. But in the U.S., we’ve also seen a decline in trust in media, trust in government, trust in political parties, and trust in large companies. In some cases, trust in these institutions sits at historic lows. A recent Watson Wyatt study showed that only 49 percent of employees trust their senior management. So less than one in two trust their leadership.

I believe that when trust is this low, there are consequences. My experience is that significantly low trust doubles the cost of doing business and triples the time it takes to get things done. That is what I call a low-trust tax. We may not even be aware of it, but it’s extremely real. The data strongly indicates that trust is relatively low today in most organizations. And anytime you’re leaving that much value on the table — where fewer than half of your people trust management — that seems to me like an opportunity to improve by increasing the trust.

What do you see as causing the decline in trust in society and the lack of trust in corporate leaders?

There are many causes. In many cases, the leaders don’t trust the employees. Trust tends to get reciprocated. If I’m an employee and management treats me as if I can’t be trusted, well, they’re distrusting me, and I tend to reciprocate how I’m treated. I tend to distrust back.

There’s also the fact that distrust can become a vicious, downward, self-perpetuating cycle. When we see a corporate scandal, for example, we may bounce back, but we become a little bit more suspicious, and we wonder, “What else is out there? When’s the other shoe going to drop?” Some people may begin to wonder about their own company when they see these external scandals, and the very act of becoming more suspicious and cynical helps perpetuate the mistrust. Then you start to see other behavior within companies that might not be an outright lie but might involve manipulation and twisting of data. You see a lot of blame and finger-pointing. These are what I call “counterfeit behaviors.” You see them in a variety of different arenas: spinning instead of straight talk, blaming instead of taking responsibility, having hidden agendas instead of transparency, things like that. The cumulative effect of these counterfeit behaviors is significant distrust and suspicion.

It seems to me that the typical company’s budgeting process — whereby senior management asks people to develop a budget, they put something together but pad it to ensure they will have enough resources, then senior management assumes they’ve padded it and shoots that down — makes the counterfeit behavior expected.

Expected and sometimes even rewarded, right?

Right. Have you seen that? Have you looked much at the budgeting process?

Yes, I have. I’ve been part of it, both as one driving a budget for a team or division and as the CEO of a company. I’ve also observed many large companies in this process. So I’ve seen how this works. Jack Welch wrote about this in his book “Jack: Straight From the Gut,” where he calls it “the drill.” The business team in the field starts to prepare a budget for headquarters, and they come up with all the reasons why the economy is weak. If they really work hard, with the weak economy and the tough competition, they say that they can produce 10. But top management comes in that morning, and they want 20. And so they go through an iterative process and they end up setting the budget at 15. Each team feels like they got what they wanted; the field didn’t give everything they could have, and management got the cushions they needed. Welch calls it “an enervating exercise in minimalization.” It’s a game, and if you don’t play the way everyone else is, your budget’s not going to be nearly as good as other people’s budgets in terms of your ability to perform against it. By approaching the process straight up when no one else is, you can get penalized. That makes the budgeting process a real challenge when you’re trying to reduce manipulation and hidden agendas in a company. I’m not naive to how difficult this is.

But let’s talk about the flip side of this: When everyone in the company is playing this game, then the company really is filled with a lot of counterfeit behavior, where people are not completely talking straight. There’s spin built into this core corporate process. And manipulation, withholding of information. People are expected to not really be completely transparent. The danger is: When you get into a pattern of spin, of hidden agendas, of posturing, and the like, does that pattern start and end with the budgeting process, or does it extend to the other parts of the business? Do you start to also feel like you can spin and posture and have hidden agendas as you work internally with other stakeholders, and then maybe even externally with customers, as long as you’re not doing anything “evil”? You may begin to go down a slippery slope. This counterfeit behavior is the primary culprit as to why trust is so low in our companies. So there’s some real danger with how budgeting is typically done and no easy, obvious solution.

What’s the alternative?

What would be terrific is if we could change the dialogue here and get to where all of us — not just a few — are actually confronting reality, talking straight, creating transparency, and clarifying realistic expectations. Institutionalizing that type of straight-talk approach could change everything. Now, I don’t want to cast too wide a net and say all budgeting processes are broken, because they’re not. In some companies, they actually may be working well; there may be a lot of straight-talking candor built in, even if there’s still a little bit of institutionalized negotiation. It may be healthy if it’s up-front and there’s genuine discussion about it.

So you think a company could develop a high-trust environment that reduces suspicion in other areas if it still has institutionalized gaming as part of its budgeting process?

Yes, I think it is possible, because my premise is this: Trust doesn’t mean you abdicate and just say, “Look, I trust you; whatever you say is fine.” Trust includes confronting reality, including perhaps the reality that the company has to grow, that that’s what the market’s asking of it and what its leaders are expecting of their people. Trust also includes the need to clarify expectations, and those expectations are two way. They’re expectations around what we’re expecting of you, but also what you’re expecting of us in any circumstance. And then trust also includes accountability to those expectations. Practicing accountability is a behavior that builds trust. Sometimes people think, “Well, if they hold me accountable, they don’t trust me.” No, it’s just the opposite. Being accountable is part of how you build the trust.

The best accountability is where people hold themselves accountable against the standards that they mutually agreed upon, in a process that is not the traditional tit-for-tat kind of negotiating gamesmanship, but rather a genuine, open, candid discussion around what we’re trying to do and setting targets that may evolve as things change in real time. The point is that there’s real, open dialogue, and there’s a sense of: Here are our targets, let’s set these together, then let’s be accountable to these targets. You report back, including reporting back on things that are changing.

Now, if you had confidence and complete trust in people, you would budget quite differently than if you didn’t. The problem, especially in a big company, is that maybe you trust some people but don’t trust everybody. So we tend to put the lowest common denominator in place for everybody. Even the typical budgeting process works better in environments where there’s high trust. I know this isn’t something that’s a quick fix — “Just go out and trust your people.” In some cases, that may, in fact, be the problem: We really don’t trust them. But remember that when we put in place systems that say “We don’t trust you,” we tend to get that same distrust reciprocated back to us, and we perpetuate the culture of gaming.

I believe there is a third alternative, in which the company has the clear objective of building a culture of trust. The key is to try to shift the locus of responsibility from “You’re accountable to me; you report to me” to “You’re accountable to yourself; you do give an accounting of your stewardship to me, but you do it yourself, of yourself.” The truth is, people know the most about themselves, and they know how they’ve really done. If you can really get into discernment and not just how they did against the numbers, they actually might say, “I hit the numbers, but I didn’t do nearly as well as I should have.” If you could have that level of trust — which maybe you only have with a few line managers in the company — you could really get places.

And so I don’t think it’s either/or. What I’m suggesting is taking a low-trust environment and creating an explicit objective: the building of trust. Be candid about the fact that some of the processes you’re going to put in place may appear distrustful, but in fact they’re designed to increase the trust. The very process of accountability is one of the behaviors that will build trust and confidence. By taking this approach, I think senior management can begin to transform the budgeting process. Leadership obviously is vital. If you could start right at the top, it would be magnificent.

But if gaming is very much a part of the corporate culture, how would the CEO approach the details of budget negotiations if he or she felt people were still going to be padding their budgets?

Well, the CEO is usually trapped in this, too, with Wall Street. They’ve got earnings guidance they have to give, or that they or their predecessor has already given in some cases. And so they often are kind of complicit in the counterfeit nature of these processes.

People, including the CEO, really have to ask the question: “Is what we’re doing working? Is it giving us the results we want?” They might say, “Hey, this is working fine.” But they also might say, “There’s got to be a better way.” Or “I don’t like the process that this is causing; I don’t like the behavior that’s happening because of how we are playing the game.” Perhaps the CEO will decide that they want to change the game. I think that if it happened at the very top, they could go into a different process more easily.  Many have demonstrated an alternative approach to budgeting, and I buy completely the notion of trying to take an approach that’s different, that’s based on high trust versus low trust. The traditional budgeting process fundamentally says that because we can’t trust everybody, we have to put in place this process that promotes manipulative behavior companywide.

If you started at the very top, with the CEO, could you reframe the game? I think you could. It would take a lot of discussion and communication, because I think most people at first would be skeptical. They’d be saying, “I don’t want to get burned. I don’t want to find that I’m biting the hook and I’m the only one submitting a budget with straight talk, and I’m not building in a cushion while everyone else is, and then I’m stuck holding the bag.” They’d have to really believe in the process. It wouldn’t be enough for the CEO to send an e-mail saying, “Hey, this year I want the budget to be real.” It would have to be a real paradigm shift that was articulated in different ways over time. Top managers would have to name what’s been happening. They’d have to describe how that’s hurting the company, why they want to change the game, how they expect the game to be played, and how they — as the leaders — are starting by saying, “Here’s how I’m going to communicate to our board and to Wall Street.” When that becomes open and transparent, lower-level managers in the company will see that senior leaders are talking and behaving differently.

At first, people still might say, “What’s the CEO’s agenda here?” When you change an institutionalized process like this, there’s a lot of skepticism; people wonder what their leaders are really up to. But if you stick with it and begin to institutionalize a new process, clearly describing the new behaviors you’re expecting to see and labeling the old behaviors that are no longer acceptable, then you can begin to change the company’s planning processes. When people see a few mentors and models of better budgeting, both internally and externally, they will begin to believe it more.

Is change possible if the CEO isn’t driving the reform effort?

If the CEO is at the very heart of the initiative, you can really do it right. It will be a much bigger challenge if you’re not sure whether the CEO is on board and the reformers are in the middle somewhere. If you’re trying to change it from the middle because you recognize the waste of time and energy in the current process, and how the budgeting process is helping perpetuate a culture of spin, it’s harder. If you’re in the midst of it, you may become the so-called sacrificial lamb if you go out and try to do it by yourself and no one else is playing. That might not be the best approach in the middle. It may be better to focus on improving your own credibility, and that includes achieving your own numbers. The person who is in the best position to articulate that the system needs to change is the person who’s doing extremely well in the old system, who is hitting their numbers but also is seen as extremely ethical. If they have both high character and competence, then that gives them great credibility, and they’re in a position to say there’s a better way. When the person who is saying “This process is broken” has high character but isn’t hitting their numbers, no one’s going to listen to them. They don’t have the credibility. Always start from a position of credibility. If you don’t have it, rather than trying to change the world, try to gain credibility, which includes hitting the numbers and getting the results.

This seems like a bit of a Catch-22. A person who’s doing really well in the old system, with the gaming, may not do as well if the system changes. What are the benefits to successful gamers of putting themselves on the line and leading a change effort, other than a general feeling that it’s inefficient and they’re wasting some time every year?

The benefits could be manifold. They might be doing well in the old system, and they might be optimizing their bonus. (That’s a big part of this process, isn’t it? It’s not just managing expectations, but it’s also bonus optimization.) But they might also recognize that there’s an enormous cost to the game. It’s a huge drain not only of time, money, and resources, but also of energy, of creativity. And also of integrity, of ethics. Because they might see that they’re having a hard time convincing people in their division or group to differentiate between the manipulation in the budgeting game that they play with corporate management and the real candor they want to see in the rest of the business. Why is it OK to play the game in budgeting but not when you’re communicating with the customer? Where do you draw the line?

And so gaming can have a real effect beyond efficiency. It gets into the qualitative nature of the relationships, the culture — it can literally affect everything. Someone might say, “Look, it’s not just about me doing well. We could all do better. The company could do better, the culture could do better, and our brand could do better if we could build a greater sense of integrity and character, as well as competence. If planning and budgeting and reporting processes could be improved, that could help build the brand as well as improve performance.” It’s a matter of someone thinking long-term, and thinking qualitative as well as quantitative, and thinking whole company as well as their own bonus. I acknowledge that that’s not everyone. But there are many for whom the current system isn’t working, even though they do well in it. They feel marginalized by it; they feel like they sell their soul a little bit. They don’t like it, but they’ve learned that you have to play the game.

Do you have any evidence of financial returns from increasing trust?

Absolutely. A Watson Wyatt study of over 11,000 managers from a variety of companies showed that high-trust organizations outperform low-trust organizations in total return to shareholders (stock price appreciation plus dividends) by 286 percent — nearly three times. Research by the Great Place to Work Institute has found that the primary defining characteristic of what makes a great place to work is mutual trust. In these companies, there’s trust between management and employees, between employees and management, and among managers on teams. That criteria is heavily built into the list of the 100 best companies to work for in America that’s put out every year by the Great Place to Work Institute and Fortune Magazine. You don’t appear on that list unless you have a culture of relatively high trust. And the companies on the list outperformed the market by over 400 percent in a seven-year study.

You also see it in schools. High-trust schools are three and a half times more likely to improve test scores than low-trust schools, according to research by Stanford’s Tony Bryk. You see it in outsourcing relationships. A Warwick Business School study showed that outsourcing relationships based upon establishing a relationship of trust — versus those that rely upon service-level agreements and the contract — experience up to a 40 percent “trust dividend,” which is to say they perform 40 percent better than those that don’t operate on trust.

The data’s compelling and abundant. It really shows there’s a correlation between high trust and high performance. And if you think about it, it makes sense. I call it the economics of trust: Trust always affects two measurable outcomes, which are speed and cost. When trust goes down in a relationship or on a team or in a company, speed will go down and cost will go up. That is a tax. When trust goes up in a relationship, on a team, or in a company, speed will go up and cost will come down. That is a dividend. It is that simple, that clear, that predictable.

Let me just give a simple example. I was consulting with a restaurant chain that had approximately 1,000 stores. At one time, they had six store managers reporting into one regional manager. That was not a very high span of control, and when I pushed them on this, the company’s senior managers revealed that the organization was structured that way because they didn’t trust these store managers to be terrific at their jobs, so they had to have more management watching over them. This led to excessive layers of management and hierarchy, all of which cost money and slowed things down. They changed their approach by improving the quality of their store managers. They changed who they brought in, how they trained them, how they mentored them, how they paid them, etc., so they could attract and retain capable people whom they could trust more. As a result, they went from a ratio of one regional manager for six store managers to one regional manager for 20 store managers. If you think about that across 1,000 stores, that’s a radical flattening of the organization. They eliminated a huge number of management roles whose job was primarily to check and verify others. The net effect of this was they increased the speed of planning and decision-making, as well as the speed of innovation and execution. Moreover, they decreased the costs of staffing, redundant processes, and bureaucratic systems because they increased the trust in the system and in the people.

Trust always affects speed and cost, so since you can measure speed and cost, suddenly you can measure the economic impact of trust. You can take this so-called “soft,” social virtue and show that it’s a hard-edged, tangible economic driver because of how it affects the speed and cost of operations.

Is there any risk to a company of increasing its overall level of candor and transparency?

Well, I’m not advocating a Pollyanna approach, where companies just go out and trust everybody. That’s blind trust. It’s being gullible. The net result of that is, you’re risking everything, and you’ll probably end up getting burned somewhere down the line, which may cause you to swing the pendulum in the other direction so that you no longer trust anyone. But we shouldn’t let the fact that we can’t trust everyone tell us about the vast majority of people, whom we can trust. Don’t let the few define the many.

What I’m advocating is what I call “smart trust.” It’s neither blind trust nor the distrust of everybody. It’s a third alternative that always looks at three realities. First, you’re looking at the situation, the job to be done. Second, you’re looking at the risk involved, the likelihood of various possible outcomes and the importance and visibility of those outcomes. And third, you’re looking at the credibility of the person or people involved. Based upon those three factors, you make judgments about extending trust. In some cases, you may extend it abundantly because they’ve really proven themselves. In other cases, the risk may be higher and they may only have demonstrated a little trust, so you might extend it conditionally.

The whole premise is, you start with a propensity to trust and add verification, versus the other way around where you start with “I don’t trust anyone until verified.” Trust but verify, as the expression goes. I think the sequencing matters. Assuming that people deserve your trust until proven otherwise is a better starting place than the other way around. You don’t throw away the analysis; you just suspend it. You begin with a propensity to trust, and then you add to it good analysis around the job to be done, the risk, and the credibility of the people involved. Then you use your good judgment about how much smart trust to extend.

Warren Buffett is able to extend trust abundantly because he’s built such a high-trust culture at Berkshire Hathaway that the risk has gone down. Warren Buffett is a highly credible businessperson with a sterling reputation, Berkshire Hathaway is a high-performing company, and they’re at the top of their game. Besides great business judgment, which Buffett clearly has — that’s his competence — there’s a secret that they describe as a huge competitive advantage, and it’s that fundamentally they operate on the premise of “deserved trust.” It’s a smart trust, not a Pollyanna trust. But, boy, look at those efficiencies, look at the economics of trust. They’re extraordinary.

Nothing is as fast as the speed of trust. Nothing is as profitable as the economics of trust. Trust truly changes everything.

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