Conventional wisdom holds that the economy is suffering from declining consumer demand, insufficient business investment, and the high cost or unavailability of credit.
Government and business leaders need to understand the problems run deeper. I believe that the global economy has been paralyzed by a widespread lack of certainty—about the value of assets, the trustworthiness of borrowers, and the outlook for the economy as a whole.
I call this problem the Certainty Gap—the distance between an individual's ideal vision of stability and security, and the realities of life. I believe it exerts a profound influence on our abilities, both individually and collectively, to pull ourselves out of our slump.
Filling the Certainty Gap requires business leaders to fundamentally rethink the meaning of trust and then do something that may strike some as counterintuitive: give trust away.
By extending trust, as opposed to requiring others to earn that trust, business leaders can help narrow the Certainty Gap. Doing so will get credit, risk-taking, and innovation flowing once more.
A steady flow of studies and news reports reinforce something most business leaders know: Trustworthiness—which differs from trust, as I'll explain later—is extremely low.
The global public relations firm Edelman recently published its 10th annual "Trust Barometer." This survey indicates that 62% of the 4,500-plus global respondents trust corporations less this year than they did last year, based upon a survey conducted Nov. 5 to Dec. 14, 2008. Seventy-seven percent of U.S. respondents say they trust corporations less this year.
A recent survey of 1,200 people conducted by strategic brand consulting firm Siegel+Gale shows that trust in financial-services companies has dropped nearly 40% in the past year. Nearly two-thirds of those respondents also believe that businesses complicate their processes and communications in an attempt to mask real risks. This is a stunning indictment of the financial establishment.
Business leaders need only take the pulse of their employees, customers, suppliers, and shareholders to reach a similar conclusion. Employees remain distracted; they are preoccupied by the fear of receiving a pink slip and the anxiety caused by dwindling retirement accounts. Shareholders worried about the plummeting value of their holdings are selling stock and stashing their cash on the sidelines while "waiting out the storm." Suppliers are reluctant to ship goods because they don't know if they will get paid.
Regulators, meanwhile, are eager to step in. Because of the behavioral lapses in the financial-services industry that helped cause the downturn, people appear hungry for more regulations: 65% of global respondents to the Edelman survey believe their government should impose stricter regulations and greater control over companies across all industries. However, regulations have their limits; indeed, rules alone cannot fill the Certainty Gap.
Cynicism Is One Response
I realize that some uncertainty is inevitable, so the Certainty Gap never disappears entirely; it grows or shrinks as conditions change.
Imagine that a three-legged stool represents a certain life. Each leg symbolizes one pillar of security: physical security, material prosperity, and emotional well-being. When the stool is stable, the Certainty Gap is small; we hardly pay it any attention. When something damages one or more legs, the stool becomes wobbly and the Certainty Gap grows. We then seek to protect ourselves from threats and look for reassurance.
Today our three pillars—physical security, financial prosperity, and emotional well-being—are simultaneously shaking violently. We are experiencing war, terrorism, recession, and a crisis in values that crosses business, society, and government. The Certainty Gap has never been greater.
We can respond to the Certainty Gap with cynicism or trust.
Cynicism—the belief that people are solely motivated by narrow self-interest—creates suspicion and breeds insecurity and fear. It enlarges the Certainty Gap or, worse, makes it permanent. No one trusts anyone.
Cynicism also spawns regulation. Regulation is not necessarily bad, of course. Rules are important. I work in an earthquake-proof building in Los Angeles, and whenever we feel a little rumble under our feet, I can tell you that my colleagues and I believe that building codes and rules are a very good thing. But an over-reliance on rules can be dangerous. Rules are legal minimums. They define what can and cannot be done and not what should and should not be done. They create a culture where people forget about what's right and feel free to walk up to the edge of the line; so long as they don't cross it, they feel their actions are justified.
The Connection Between Trust and Profit
Successful 21st century business leaders strive to fill the Certainty Gap with trust. How do they do that? They literally give it away. Why? Because trust can cure sensations of fear, uncertainty, and disequilibrium.
Of course, giving trust away can be scary and I do realize it has the potential to cause damage. Just ask people who trusted Bernie Madoff—the worst kind of criminal who betrayed people's trust after they gave it to him, along with their money. But trust me, overall, giving trust away pays dividends.
To quiet some of the likely cynics out there, I offer you proof—both medical and financial. The giving away of trust stimulates the release of a bonding hormone called oxytocin in humans, according to research by the Cognitive Neuroscience Group at the Center for Psychiatry & Psychotherapy at Justus-Liebig University in Germany. When released, oxytocin floods the brain with a feeling of well-being, and fear is reduced.
Trust pays dividends in the business world, too. A 2002 study of 350 buyer/supplier relationships among eight automakers in the U.S., Japan, and South Korea identified a direct relationship between trust and transaction costs. The least-trusted buyer incurred procurement costs six times higher than the most-trusted. These additional costs came from the added resources that went into the selection, negotiation, and compliance costs of executing deals.
The researchers, Brigham Young University's Jeffrey H. Dyer and Seoul National University's Wujin Chu, pointed to Nobel Prize-winning economist Douglass C. North's findings that these sorts of transaction costs account for more than one-third of all business activity. Dyer and Chu also found that the least-trusted companies were the least profitable.
Organizations that trust one another set off an upward spiral of cooperative, value-creating behaviors. "This phenomenon makes trust unique as a governance mechanism," Dyer and Chu conclude, "because the investments that trading partners make to build trust often simultaneously create economic value (beyond minimizing transaction costs) in the relationship."
In Tough Times, a Little Trust Can Go a Long Way
A quantifiable relationship between trust and prosperity also exists at a higher level. Research by Paul Zak, the founding director of the Center of Neuroeconomic Studies and a professor of both economics and neurology, indicates that business investment in a given society directly mirrors levels of trust. Where general trust is high, the national rate of investment—gross investment divided by gross domestic product—is commensurately high, and vice versa. The same direct relationship also exists between trust and GDP growth. For each 15% increase in the proportion of people who find others trustworthy, per capita income rises 1%, according to Zak.
As I write in my book, if trust in the U.S. grew from 36% to 51%, for example, the average income for every man, woman, and child would grow about $400 per year from the parallel rise in investment and job creation. That adds up to about $30,000 per individual over the course of a working life, according to Zak.
Leaders who are committed to helping their companies thrive amid extremely difficult macroeconomic conditions should begin extending trust to their employees. You can enable your employees to feel more secure and to get their heads back in the game, and it won't cost a penny.
Here's a concrete example. I think we can all agree that expense reports are a simple reality of business. In the majority of companies, you take time out of your day to complete a report that then gets filtered through a hierarchy of approvals before you get paid. What if companies just trusted people that they were being honest about what they were reporting? What impact would it have on an employee and a culture if we simply said, "We trust you"—and acted accordingly?
We have found that when you tell employees that you trust them—that you believe they will do the right thing when no one is looking, you will get more compliance and need less oversight to ensure it. Random checks are still necessary because there will always be bad apples that abuse the system and you want to catch them before they hurt the company or infect its culture. But if you reinforce trust as the foundation of such transactions between employee and company, people feel good, and they can focus on the task at hand without distraction. Plus, because they feel good, they will start extending trust in other areas as well, making others feel more certain and continuing this fortunate cycle. In my next column, I will provide some example of this and hopefully explain how trust empowers others to take risks and innovate, which we all need in order to build successful businesses and get our economy moving again.
I hope this column begins to help you see why in a connected and transparent world, trusting helps you win over the long term. If we extend trust to someone, that person will likely trust us in return. If as a leader your response is, "I can't do this. I can't give trust away," I would offer that you have either the wrong people or the wrong culture…or both.
Dov Seidman is the founder, chairman and chief executive officer of LRN, a company that helps businesses develop ethical corporate cultures and inspire principled performance, and the author of HOW: Why HOW We Do Anything Means Everything…in Business (and in Life). LRN recently announced the acquisition of leading green strategy firm, GreenOrder.