Excerpts from, "Trust Inc.: Strategies for Building Your Company's Most Valuable Asset"

 

by Barbara Brooks Kimmel

Section II:

Trust in Practice

Trust: The Great Economic Game-Changer

How trust can mean the difference between life and death in business

By Robert Porter Lynch

Survival is not a Given

Success in any business venture, large or small, is not assured. Even the combination of a great strategy and a great product will not guarantee success. Nor will a company’s size insure against failure. Startups and venerable giants alike can be struck down by a seemingly invisible disease: distrust.

Banks, airlines, and auto companies are just a few of the industries torn asunder by the distrust disease. Dishonest business practices ripped apart the banking and investment industry worldwide, causing trillions of dollars of economic damage. Every year large airlines file for bankruptcy and the common denominator is nearly always labor strife—a long history of labor-management distrust which causes highly inefficient delivery of services. Sports leagues like the National Hockey League and the National Basketball Association have been stricken by strikes that nearly threatened their very existence.

What’s more, the disease of distrust tends to spread like an uncontrolled virus, soon becoming a plague that feeds on fear and greed.

U.S. Auto Industry Succumbs to the Distrust Disease

One industry that’s dear to everyone is the auto industry—the world’s most visible and best-studied business sector. In 2009, General Motors and Chrysler both filed for bankruptcy and Ford came darned close. Being “too big to fail,” every taxpayer in the United States, through the action of the President, became an investor in GM and Chrysler through a bailout program (as taxpayers also did with the banks that failed).

What is not well known is that in the five year period leading up to the auto crisis, the “Big Three” U.S. automakers collectively had lost over $100 billion in the prior five years running up to the 2008 financial meltdown. The financial cataclysm did not cause their failure; it just put them over the precipice.

How could such large companies, staffed by highly educated management professionals, make such horrific mistakes? What really happened? What can we learn from this debacle?

How Distrust Became Deadly in Detroit

Twenty five years ago, the Japanese auto manufacturers played a very minor role in manufacturing automobiles in the United States. But Toyota’s vaunted “Lean” production model (“Kaizen” meaning continuous improvement) threatened Detroit’s Big Three—Ford, GM, and Chrysler.

As the Japanese manufacturers—Toyota, Honda, and then Nissan—began building cars in the U.S., they tapped into the same supplier base used by the Big Three.

Today, most cars are assembled from components provided by outside suppliers. Typically 70-80% of an auto (such as seats, wheels, radios, and tires) is produced by suppliers, and the remaining (such as engines and transmissions) are made by the manufacturer, who then completes all the assembly.

The Japanese manufacturers on North American soil took a strategy with their supply chain to build trust: high levels of cooperation, respect, mutual sharing of ideas, continuous innovation, and a willingness to share in the cost savings those new ideas would bring. For example, if a supplier could redesign a group of parts to make them into only one part, thereby shortening assembly time, reducing complexity of inventory, and lowering potential warranty costs, the supplier would be rewarded by a 50/50 share in the savings.

Senior VP of Procurement, Dave Nelson spoke of the insights Honda had about human behavior. He said the Golden Rule prevailed—treat people with dignity and respect, don’t beat up on suppliers like lowly vendors, and never play the blame game when something goes wrong. I asked Nelson about innovation with his suppliers, and his remarks were quite insightful:

“When we receive a suggestion from our suppliers, we split the savings 50/50. However, if a supplier is not making their profit numbers, we give them a larger percentage of the savings (in the short term), sometimes up to 100%. It helps them out.”^[1]

Having earlier spoken with GM suppliers who indicated that their relationships with GM were unprofitable, I asked Nelson about costs over the course of model run. He mapped the cost structure on a pad of paper using a target costing approach. (See Figure 1) He smiled and as he said that a product that cost $1.00 to manufacture had been reduced to $.58 by the end of the model run, which put over a billion dollars a year on the Honda’s bottom line.

Figure 1: Cost Reductions by Honda Suppliers

Not totally convinced that this was in the best interests of suppliers, I asked Nelson about supplier profitability over the product life cycle. He assured me everyone gained by this approach. Pressing farther, I challenged him. Honda was committed to ensuring the sustainability of their supply base.

“We regularly monitor the financial condition of our suppliers. I can assure you they are more profitable at the end of the product life cycle than at the beginning.”

The Japanese manufacturers saw their suppliers as critical partners in the whole chain of value creation. Similarly they saw their employees in the same way; along with their newly emerging dealer-distributor-service network that interacted with the customer. Each member in the value-creation process was treated honorably as a cherished partner. Toyota, for example, was not easy on their partners; they expected top quality and continuous improvement. But if a problem arose with a supplier, Toyota’s presumption was: “we” have a problem, “we” must determine the cause, and “we” must mutually solve. ^[2]

During the 1990s, Toyota and Honda gained ground fast, eating away at the Big Three’s once monumental market-share. By building trust with their suppliers and treating them fairly, each grabbed a larger chunk of market share with higher quality, all the while keeping themselves and their suppliers profitable. ^[3]

In stark contrast, Detroit’s Big Three bludgeoned their key suppliers, using adversarial, short sighted relationships with their key suppliers, to the detriment of all. Constant margin squeezing decimated the supply base. GM and Ford saved money in the short run, but at the at the expense of consumer value who received poor quality cars; and the suppliers were financially weakened—a flawed strategy.

My personal experience in the automobile industry illustrates the difference in mind-sets dramatically. Working with a wide variety of auto supply companies in the 1990s was very revealing. Most auto suppliers provided parts for General Motors, Ford, Chrysler. Some were qualified as outsourcers for Honda or Toyota. For those that supplied both US and Japanese auto manufacturers, I would ask about their experiences. The worst buyer was, unquestionably GM, followed closely by Ford. Both were notorious for nickel and diming their suppliers, bullying behavior, and illegally canceling contracts or violating proprietary material of their suppliers.

At one workshop on supplier alliances I conducted in Detroit for CEOs of auto suppliers, I asked what kind of cars they drove themselves? Universally all the CEOs said their personal cars were Japanese. I asked “why?” They all agreed: “Because we know what goes into them!” One CEO meekly raised his hand and said “We have a token GM car which we only drive to meetings with GM for fear of retaliation.”

The lack of cooperation was extremely costly

GM’s Procurement Czar in the 1990s, Ignatio Lopez’ notorious negotiations techniques ran roughshod over every supplier in GM’s supply base; he used ignominious and illegal tactics to pressure every supplier into price cutting that left them either abandoning GM or selling to GM below their costs of production. He’d tear up legitimate contracts in the face of the supplier or illegally take supplier’s proprietary drawings and give them to Chinese vendors for bids. One ploy that irritated every supplier was to demand an immediate price cut of 20% or lose their contract. Suppliers were faced with producing at a loss, or shutting down large production lines, resulting in even bigger losses. Quality slipped, production lines often didn’t have the parts ready for assembly, and GM’s warranty costs consistently outpaced their profits.

Vendors weren’t the only group to receive GM’s wrath; its labor relations fared no better. At one GM plant in California there was a backlog of over 5,000 grievances, the result of a long-standing war between labor and management. Workers were boozed up or drugged up on the job. The absenteeism was often so high (exceeding 30%) that the production line couldn’t be started, which meant production halted. Workers regularly sabotaged cars on the assembly line, putting ball bearings or Coke bottles in the doors and frames so they would rattle around and annoy unsuspecting buyers.

Rancor and distrust was so thick you see, smell, and taste it. Self-esteem was destroyed, and adolescent revolt became everyday adult action.

Ford, not to be outdone, unilaterally changed contracts, reprogramming their computers to reduce the amount of any invoice by 5%. Adding insult to injury, Ford then obtained totally unrealistic bids from unqualified suppliers, which were used to pressure legitimate suppliers to succumb to unfavorable price reductions in order to keep their contracts.

Every part was examined to squeeze out more costs.

Severing Trust with Customers

Here’s a tragic example of price squeezing: The Explorer was one of Ford’s most profitable vehicles, yielding $3-5,000 to the bottom line every time one was sold.

However, customers complained of the Explorer’s harsh ride. Rather than spend money reengineering the suspension’s spring-tension levels to make the ride a little softer, Ford let pressure out of the tires. Firestone, the tire manufacturer shot back that the lower tire pressures were below design specifications and would result in blowouts. Firestone recommended the addition of another nylon belt around the tire to enable it to run effectively at the lower pressures, reducing the failure rate by a factor of five.

Ford vetoed the idea—it was too costly. The addition of a nylon belt would add another 90 cents to each tire’s cost, eating away at Ford’s profit margins.

The tires failed horribly. Ford was forced to replace all 13 million tires on its vehicles, at a total cost of about $3 billion. The recall and associated suits cost Firestone more than $570 million. But worse, more than 100 people died in crashes caused by failures of tires on Ford Explorers; law suits were filed around the world.

“The whole thing just screamed greed,” said La Rita Morales, part of a jury in California that earlier this year awarded an Explorer driver $23.4 million in damages. “I didn’t believe in my heart that a company like Ford would put out a product with question marks over it.” ^[4]

The debacle cost Ford billions of dollars in lost sales and law suits. All for a 90 cent belt. The tire manufacturers blamed Ford, and Ford blamed the tires. The lawyers blamed everyone. Law suits dragged on for years.

Distrust Costs US Automakers their Economic Prosperity

Warning signals were everywhere during the years leading up to the 2008 meltdown and the impending “too big to fail” bankruptcies. The disease of distrust in Detroit had become virile. An annual automotive benchmark study in 2004^[5] sent emergency signals unequivocally:

•  U.S automakers’ relations with their suppliers suggest more trouble if they don’t change the way they deal with their U.S. suppliers …[who] are shifting their loyalties—and resources (capital and R&D expenditures, service and support)—to their Japanese customers at the expense of the domestic Big Three.

•  Supplier trust of Ford and GM has never been lower; conversely, trust for their Japanese counterparts has never been higher. Suppliers are increasing product quality at a greater rate for the Japanese.

•  US automakers have little regard for their suppliers, they communicate very poorly and they generally treat suppliers as adversaries rather than trusted partners. In all the other industries studied such as aerospace, electronics, and computers, no one treats their suppliers as poorly as the US automakers do. 

•  US automakers continue hammering their suppliers for price reductions and multi-million dollar cash givebacks and suppliers are responding by giving them less support.

•  This shift in loyalty is not driven by cost reduction pressures on suppliers, but rather on how the US automakers work with their suppliers across a wide range of business practices.

•  The greater the trust between buyer and supplier, the more suppliers are willing share and invest in new technology, and provide higher quality goods and higher levels of service, which lead to greater competitive advantage and market share.

The author of this study, John Henke, presented this observation:

“What is apparent is that the Japanese manufacturers are applying continuous improvement practices to their supplier working relations just as they have done to their manufacturing processes, and as a result they continue to win the cost-quality-technology race.”

By 2008, things had gone from bad to worse for the Detroit Big Three, who had combined losses of over $100 billion for the prior five year period, while at the same time driving 500 suppliers a year out of business. Their flawed strategy of distrustful relationships took its toll not only on their businesses, but on the surrounding community.

Today, the effects on the City of Detroit’s economy are horrible. The municipality is losing population at the highest rate in the U.S.; housing values are at the bottom. Detroit Mayor Kilpatrick, taking his cues from his Big Three counterparts, extorted money from city contractors, was convicted, and sentenced to jail. In 2009 the median home sale in Detroit was a sickly $6,000. By 2013 the City of Detroit was $14 billion in debt—bankrupt—a “ward of the state.”

Harsh Conclusions

It’s important for every business leader in America to understand that:

Distrust destroyed Detroit by enabling innovation to flow away to other regions where partners focused human energy on innovation, not warfare.

This is the real message of trust and hope for our commercial future. Trust is not just good ethics; trust is about building the relationships that charge the human spirit with the collaborative energy to tackle new problems together; to build bold new futures synergistically; to join forces across the boundaries of supply chains to innovate; to safely know that the one will not be trapped by foolish win-lose gamesmanship; and to challenge the status quo with the assurance new ideas are welcome.

Trust’s Hidden Advantage: Innovation

Lest one be lured into a false sense of hope brought about by the good feelings of trust, believing trust alone will assure business success, there is really much more. Trust, while highly desirable, is not the end or the goal; it’s just the beginning of a larger process.

Toyota, Honda, and Nissan, unlike their U.S. rivals, understood that trust was the foundation of collaborative innovation—the hidden source of competitive advantage. By removing fear, doubt, suspicion, and manipulation from the business relationships, a much more powerful program of joint problem solving, removal of non-valued work (such a redundancy), reduction of waste, and acceleration of work flow could flourish. High trust is not the goal; it opens the pathways to real value creation, which then manifests in competitive advantage and profitability.

Trust enables everything to move faster, more effortlessly, and with less conflict. Mistrust causes everything to be more complicated, slower, and far more fragmented. Because virtually all innovation is a collaborative effort; and there can be no collaboration without trust.

Fortunately for the U.S. auto industry, the 2008 debacles shook the foundations of ill-conceived beliefs. New leadership has made some improvements to their supplier relationships, but so far nothing earth shattering that would make a compelling case for taking advantage of trust as an economic game changer.

How to Channel Trust into Collaborative Innovation

Exactly how important is trust?

Our studies show, time and again, high trust organizations have at least a 25% competitive advantage over their low trust counterparts. Embedding a system of trust into your alliance yields enormous rewards for all stakeholders. Trust unleashes latent human energy and enables it to be aligned on a common purpose. Leaders who want to support collaborative and trigger innovation should keep the “FARTHEST” principles in mind:

Fairness in all your dealings to be sure that everyone gets a fair shake. Successful innovation leaders are perceived as being even handed, good listeners, and balanced in their approach.

Accountable for your actions. When you make a mistake, admit it and move on. Accountability is the external manifestation of internal Integrity. Leaders without integrity are quickly dismissed as hypocrites.

Respect for others, especially those with differences in skillsets and points of view is critical. Without respect for others, trust cannot be built. Giving respect is the first step in gaining respect.

Truth is an absolutely essential component of building the type of trust that triggers innovation. Remember, your emotions or perceptions are seldom real truths. Stick to the facts—things that are measurable or concrete. And remember, a critical comment has about five times the impact as a positive comment. So balance your truths carefully.

Honorable purpose must be the foundation of all your actions. If people perceive your purpose for innovating as strictly for selfish purposes, without a component impacting the ‘greater good,’ you will not be perceived as trustworthy.

Excellence in standards. Innovation is propelled by the idea of always getting better, improving continually, reaching for the highest level of performance. If anyone sloughs off, they must realign to the highest measures, otherwise others will be resentful or fall off in their performance.

Safety & security are essential to all human beings. This includes ensuring that there is “No such thing as Failure, Only Learning.” Be careful not to punish what might look like a failed attempt at creative solutions; encourage learning from failure. And always avoid the Blame Game. Fear does not produce innovation. You will know when people feel safe—they will be laughing. Creativity is not all grinding labor; it’s having fun and laughing a lot, spontaneously creating in the moment—that’s magical. Research shows that laughter releases endorphins that trigger creativity.

Transparency & openness enable everyone to see intentions, share data, and exchange ideas in a culture that supports challenging of ideas and develops new insights.

What’s more is that the real advantage of trust is that it is the deepest yearning of all humans; we were born with it, and it’s our birthright to retain it. Many leadership situations require influencing without authority, which can only happen when those we wish to influence trust us. Trust produces highly effective people, high performance teams, useful ideas and innovations, and people who want to come to work because it is a co-creative experience.

Robert Porter Lynch

Robert Porter Lynch has spent the last twenty-five years formulating the best-practice design architecture of organizational synergy—how exceptional leaders energize collaboration to produce sustainable innovation in alliances. He has written several groundbreaking books on strategic alliances, serves as Adjunct Professor at the Universities of Alberta and British Columbia, and is founding Chairman Emeritus of the Association of Strategic Alliance Professionals. Lynch’s book: Trusted to Lead is scheduled for publication in 2013. 

^[1]  Interview, October 21, 1997 Pinehurst, NC

^[2]  GM, on the other hand was loathe to accept any responsibility for supplier difficulties, and would first place blame on suppliers, who may have been victims of poor planning or communications.

^[3]  Another test of the power of Honda’s quality control is represented by used car prices. A Cadillac, at the ten year point in its life will have lost a far greater % of its original value than a Honda. Typically the Honda depreciates at about half the rate of a Cadillac.

^[4]  Internal Ford Documents about Explorer Rollovers By Peter Whoriskey, Washington Post Staff Writer, May 8, 2010

^[5]  Planning Perspectives, Inc Report, Aug 2, 2004. Responses from 223 Tier 1 suppliers including 36 of the Top 50 and was based on 852 buying situations. Participating suppliers’ combined sales represent 48% of the OEM’s annual purchase of components

You Can’t Take 164 Years of Trust for Granted

By Deb Mills-Scofield

Menasha Packaging Corp (MPC), a 164 year old, 6^th generation family business, has grown from making wooden pails in 1849 to a design-oriented packaging company that today delights customers, employees and their communities with over $1 billion in revenue. How? By leveraging their culture of entrepreneurship, collaboration, and autonomy based on trust and faith in each other.

In Menasha’s history, there have been times of great trust and times of wavering trust. The early 1990s were a time of tension between many corporations and their unions. During that time, MPC, a strong believer in collaboration, started a formal team-based manufacturing program in their plants between management and plant workers, including union representatives. The output was increased innovation from the employees on the floor that improved productivity and the outcome was increased collaboration and trust. While this may be common sense to many of us today, it was not the “norm” 20+ years ago.

Fast forward about 10 years and MPC was not doing very well. As a niche player in a highly commoditized market (“Brown Box”), they didn’t have the economies of scale and scope to compete with the big players. Just prior to Mike Waite (an ‘out-law’ as he is married to the youngest daughter of what was then the current generation) becoming president in 2003, MPC had a formal ceremony burying the old mission statement and announcing a new one. Performance was deteriorating; there was diminished trust in leadership. Employees didn’t have any sense of the company’s future direction, other than it was probably bad and that any commitments could be up in the air. The company was put up for sale.

Early in Mike’s new role, he gave air cover to an experiment by two leaders on an entirely new business model. It was at this time Mike engaged my services to develop a new, ‘bet your career’ strategic plan. The leadership team believed culture was key to success; turning the company around meant they wouldn’t be sold; not being sold and being successful would restore trust and faith, renew autonomy and entrepreneurship resulting in more success, which would further strengthen the culture—a virtuous cycle. The strategy focused on People, Products and Processes with aggressive top and bottom line goals emphasizing the non-traditional new business model. The “AND/BOTH” (not “Either/Or”) strategy allowed MPC to achieve customer AND employee-advantage with increased customer value AND decreased costs (not price).

Because employees’ skepticism about leadership remained high, they were included in the creation of the plan. A rigorous strategic communication program was created, including a letter from the leadership team to all employees. It included leadership’s commitment to the plan and MPC’s core values and gave employees the right to hold the leadership team accountable without repercussions. Mike visited all the plants to share the commitment letter and explain why and how employees were critical to success. HR aligned everyone’s goals from Mike down to the plant floor. This helped employees understand their part in the plan—how they contributed and could have impact. It provided transparency of the Why, What, How and interdependencies between all roles and responsibilities. It confirmed commitment to the plan.

The best demonstration of commitment is always through action. Mike made himself vulnerable, key to gaining trust, by openly saying, “I don’t know” when he didn’t and asking employees for their input and ideas on how to discover the answer. He invested time and money in employee training and education. He invested in equipment to make money not just cut costs. Even now, employees who feel they need new equipment or capabilities create and present their own business case, including the ROI, to their management. If the case is compelling, it gets funded. Mike’s willingness to spend money to make money has increased employees’ passion to try new things.

New communication and recognition/rewards programs were put in place, and still remain. Frequent transparent communications, including recognitions, awards, customer testimonials, product awards etc., still stress leadership’s steadfast commitment. Even achievements of employee’s families’ are recognized, including scholarships from the Menasha Corporation Foundation. Profit sharing plans were changed to give a more meaningful (higher) amount to employees. And, Mike still hand writes notes to employees for special occasions and events, which to many means more than money.

The results? Within 18 months of the plan’s creation, almost every employee knew the strategic plan and why he or she mattered. Once employees realized the leadership team was committed, more self-organizing teams arose, employee retention increased, key customer wins increased, costs decreased, and profits increased. Employees saw that the direction was really working both in terms of the leadership’s continued communication and commitment and most definitely in the results.

A powerful example of trust is MPC’s self-organized teams (SOT), a component of the strategic plan. These SOTs developed and expanded more broadly than expected. Part of the reason for this may lie in the investment of time and money in Lean training. The focus on Lean, not Six-Sigma, put power in the hands of the people doing the actual work and accelerated the innovative culture. As Lean thinking started to permeate MPC, innovative thinking was a no-brainer—part of the continuum of looking at things differently and focusing on effectiveness instead of just efficiency.

Some of these SOTs have worked with MPC’s customers on new products and services that significantly increased customer success. In fact, MPC has brought entirely new products, capabilities and opportunities to the marketplace. One of my favorite examples originated with a major account manager in one location who knew MPC could be doing much more for their customers. He asked 20 non-management employees, from production, print, design, customer service and sales to come together to create something that would increase value to the customer and either decrease or at least keep MPC’s cost the same. Everyone came. They didn’t check with their management, but they did check with peers to align schedules. The result of this first, now ongoing, team meeting was a highly successful product. The team used various designs, finishes, and 3d animation to develop the idea and then allocated resources for prototyping and testing with customers. Management only became involved once the results of prototyping were successful and a new piece of equipment was required. The team created the business case, management signed off and this ‘process’ is now a template in MPC.

The success of these self-organized teams spread to other areas within MPC—such as production, procurement, operations, quality, customer service, finance, IT, HR, etc. For instance, the strategic plan identified the need for better project management. Mike asked a few employees to figure it out and come back with a solution. These people, from different plants, were not ‘freed up’ to do this—although it was part of their ‘day job’. They were not relieved of any work. It didn’t matter; the team’s passion for solving the project management challenge was strong. They created a discovery process and used a ‘divide and conquer’ method instead of appointing a leader. They looked at what had worked in other areas of MPC, focusing on Bright Spots (Positive Deviance). They created and presented a detailed solution to the leadership team, including specific people to staff new, reallocated positions and technical tools. The result? It’s been a huge success, providing people with internal growth opportunities and significant value to customers. Clearly, SOTs require and reinforce trust, both within and among the teams and with management, who worked hard to remove obstacles and get out of their employee’s way.

The MPC culture extends to the communities in which it lives. Mike views himself as a steward of the company and its communities not just because he’s part of the family, but also because he grew up in the community. MPC’s success directly affects the quality of schools, healthcare and sports teams. Employees see each other outside MPC’s walls in the grocery stores, on the football and soccer fields, at school concerts, and at the gas station. This raises the level of accountability, according to Mike and his leadership team. MPC employees are active on school boards, in food pantries, soup kitchens and local shelters. One plant’s motto is “Never Walk by a Free Sample.” Employees collect sample-sized health and beauty supplies from hotels, salons and doctors’ offices to donate to local shelters. Employees, and MPC at the corporate level, support various fund raising groups related to diseases affecting MPC families, and packages are always being sent to our troops.

One of my favorite examples of a community-based SOT is from the Muscatine, Iowa plant. Muscatine has an annual Great River Days cardboard boat race. Last year, a team from the local plant took time during lunch and after work to design and test prototypes, settling on a 30’ long and 11’ tall Pirate Ship and a canoe-like boat. They even used their Lean training to design and build the boats! The team commented that this took them way out of their comfort zone. And, on it’s maiden (and only) voyage, it carried 4 employees for 10 minutes without leaking!

The benefits of trust are evident within MPC—both tangibly and intangibly. The tangible results are continual, consistent increases since 2005 in market share, revenues, profits and ROI, even during the recession. Sales and profits continue to increase significantly as a result of capitalizing on earlier investments, facility alignments and two acquisitions. Even MPC’s Retail and CPG market sales increased in the down market. All years, including the ‘recession years’, ended with a strong cash position and exceptional current receivables. While the bigger integrated firms had dismissed MPC in the past, they became a formidable competitor. Instead of just taking market share, they created new share with new solutions in new markets, what some call “Blue Ocean.” Many customers view MPC as a vital part of the merchandising process. Key retailers require CPGs to use MPC’s products and services in their stores and CPGs can measure how MPC’s products help both their top and bottom lines.

The intangibles are more powerful. When you walk through MPC’s plants, you can feel the energy; employees on the floor smile and say “hi,” people are laughing and working together and feel free to ask for help. Employees do not fear new ideas or failure. Innovation pipelines are visible. MPC continues to invest in training, education and equipment so their employees can try new ways to work, easier ways to make “stuff’ and new ways to put things together.The attrition rate is low and MPC attracts talent around the country to work at this “cool” company in the Fox Valley of Wisconsin. The board has more confidence in the leadership team, which results in a willingness to invest and take risk. The legacy and story of MPC, a private family-held business, is strong with the emphasis on doing things better and making things better—things that affect customers as well as the communities where their employees live.

When you ask Mike what his goal is, he says, “I want to make sure our people get to live their dreams at home.” It’s that simple, and it works.

Deb Mills-Scofield

Deb Mills-Scofield helps companies create and implement highly actionable, adaptable, measurable, and profitable living innovative strategic plans. She is also a Partner at Glengary LLC, anearly-stage Venture Capital firm in Cleveland. Deb is a co-creator of Alex Osterwalder’s book, Business Model Generation as well as contributor to several other books and is currently working on her own. She blogs at Harvard Business Review, her own site, and is recognized as one of the top 40 bloggers on innovation. Deb graduated from Brown University in three years, helpingcreate the Cognitive Science concentration and went to AT&T Bell Labs where she received one of AT&T/Lucent’s top revenue generating patents. She is active at Brown University, mentoring and advising in several formal and ad hoc programs and guest lecturing. Deb is a Visiting Scholar in Brown’s joint E-MBA program with IE in Spain and on the Advisory Counsel for Brown’s School of Engineering. As part of her “all business is social” philosophy, she asks her clients to match and donate 10% of her fee to improve lives in their community.

Section III:

Trustworthy Leadership

Leading Out in Extending Trust

By Stephen M.R. Covey and Greg Link

Trust men and they will be true to you; treat them greatly, and they will show themselves great.

— Ralph Waldo Emerson

In our work, we often ask leaders and executives around the world to reflect on their lives or careers and to identify a time when someone took a chance on them, extended trust to them, or maybe believed in them even more than they believed in themselves. Whenever we do this, without exception, the feeling in the room changes. People become deeply touched and inspired as they recall their experiences and acknowledge with gratitude the impact those experiences have had on their lives. And they become even more inspired when we invite them to share and they take in each other’s experiences.

We encourage you to take a minute now and do the same thing. Think of someone who extended trust to you. Who was it? What was the situation? What difference has it made in your life?

Leaders in all walks of life lead out in extending trust to others. In doing so, they build the capacity and confidence of those who are trusted. They unleash human potential and multiply performance. They inspire reciprocal trust in both directions—back to those who extended it and forward to others who could benefit from it.

Leaders Go First

In order to increase influence and grow trust in a team, an organization, a community, a family, or a relationship, someone has to take the first step. That’s what leaders do. They go first. They lead out in extending trust. In fact, the first job of a leader is to inspire trust, and the second is to extend it. This is true in a formal leadership role, such as CEO, manager, team leader, or parent, or in an informal role of influence, such as work associate, marriage partner, or friend.

In the exercise we described earlier, after asking leaders to reflect on their experience when someone extended trust to them, we then ask, “When have you led out in extending trust to someone else?” This often brings people up short as they realize that they have missed opportunities—sometimes many opportunities—to extend trust and initiate an upward cycle of trust. You might want to think about your own experience. Have there been times you extended trust to others and really made a difference in their lives? Have there been times you didn’t but now perhaps wish you had?

Bottom line, if you’re not extending trust, you’re not leading. You might be managing or administering, but you’re not leading. “You manage things; you lead people.” And real leadership requires trust. As renowned leadership authority Warren Bennis put it, “Leadership without mutual trust is a contradiction in terms.”

When managers don’t extend trust, people often tend to perpetuate vicious, collusive downward cycles of distrust and suspicion. As a result, they become trapped in a world where people don’t trust each other— where management doesn’t trust employees and employees don’t trust management; where suppliers don’t trust partners and partners don’t trust suppliers; where companies don’t trust customers and customers don’t trust companies; where marriage partners don’t trust each other; and where parents don’t trust their children and children don’t trust their parents.

But when managers take the lead in extending trust—in a relationship, on a team, in an organization, or in a community—negative, collusive cycles of distrust and suspicion can be broken, and a game-changing shift in possibilities can occur.

Of course there is risk in extending trust. That’s why it takes courage. But there is also risk in not extending trust. In fact, there is often greater risk in not trusting. As a society, we have become very good at measuring the risks and costs of extending too much trust, but we’re not good at all at measuring the risks and costs of not trusting enough.

So how do we navigate through the decision-making process and determine whether or not to extend trust, and—if so—how much and under what conditions?

There are two factors you will find most helpful in deciding to extend trust wisely: 1) your propensity to trust and 2) your analysis of the situation, the risk, and the credibility of the people involved. It’s the combination of the two that creates good judgment. Creating the highest synergy between these two factors is more of an art than a science. It takes assuming positive intent in others—unless there’s good reason to do otherwise. It takes determining when verification will enable trust—or when it will get in the way. It takes discernment and sometimes the willingness to take a leap of trust, possibly even when “logic” may direct otherwise.

Clearly, deciding to extend trust does not result in a simplistic, “one-size-fits-all” solution for every person or every situation. What’s smart for one person may not be smart for another. What’s smart in one situation may not be smart in another. Still, successful leaders and organizations have a definitive propensity to trust and lead out in extending trust to others.

For example, Zane’s Cycles is one of the largest bike shops in the United States. Zane’s allows customers to go out the door for test drives on their bikes without asking for any identification or collateral. When customers offer to leave their driver’s licenses, they are politely refused. The message Zane’s communicates to its customers is: “Just have a great ride. We trust you.” As its founder, Chris Zane, put it, “Why start out that relationship by questioning their integrity? We choose to believe our customers.” The company’s high-trust message also communicates clearly to its employees that Zane’s is in the business of building customer relationships, not merely selling products. The result is $13 million in annual sales, with a 23 percent average annual growth rate since opening in 1981, and a loss to theft of only five of the 5,000 bikes sold each year.

When leaders lead out in wisely extending trust, their actions have a ripple effect that cascades throughout the team, organization, community, or family and begins to transform behavior in the entire culture. Sometimes the acts of leaders extending trust become legendary. For example, when CEO Gordon Bethune burned the Continental Airlines policy and procedure manuals in the parking lot and told his employees they would be trusted to use their own judgment, that act became the symbol of Continental’s new culture of trust.

One reason some managers don’t extend trust is fear of losing control. They think they will have greater control in a culture that depends on rules, policies, and regulations to cover every contingency. In actuality, the relationship between trust and control is inverse: the greater the level of trust, the greater the level of control. The French sociologist Émile Durkheim put it this way: “When mores [cultural values] are sufficient, laws are unnecessary; when mores are insufficient, laws are unenforceable.” In a low-trust culture, it’s literally impossible to put enough rules and regulations in place to control people’s every action. In a low-trust relationship, the legal agreement can’t be long enough to cover every possibility. We submit that the best way to increase control is to create a high-trust culture. And for a high-trust culture to exist, managers must lead out by extending trust to others.

Leading out and extending trust creates a culture of immense momentum, possibility, and power. The increased freedom of expression, the autonomy, the enhanced trust, and the greater speed at which things can be accomplished make an enormous, tangible, measurable difference in performance. This is one reason extending trust is smart. It’s not built on the assumption that what we need is more rules, more regulations, and more referees; it’s built on the evidence that extending trust and creating a high-trust culture (in which top performance is expected) bring significantly greater dividends for stakeholders on every level.

For us, a poster child for leading out in extending trust is Warren Buffett of Berkshire Hathaway. The most remarkable thing about Buffett’s approach is that his headquarters staff managing Berkshire’s 77 separate operating companies and more than 257,000 employees is a mere 21 people—unheard of by any measure. Stanford Business School’s David F. Larcker and Brian Tayan call it “the lowest ratio of corporate overhead to investor capital among all major corporations” in the world.

When we asked Grady Rosier, the CEO who runs McLane, a $33 billion Berkshire Hathaway business, how Buffett is able to create trust so quickly, he replied, “You have to understand the core business philosophy at Berkshire Hathaway—the trust. Warren’s ability to acquire quality companies is built around the trust. Warren leaves them in charge of their businesses, and they’re happy about that, and nobody wants to let Warren down. And that’s the way it just cascades down the organization as to ‘this is what the expectation is and this is what we’re going to do.’ ”

How does Buffett handle a span of control that includes more than 77 direct reports? He operates on the premise of what he and his business partner Charlie Munger call “deserved trust”—they assume that their people deserve trust unless they prove otherwise. It’s not blind trust. It’s Smart Trust. It includes a discerning selection of people, clear expectations, and high standards of accountability. People respond to it, they thrive on it; they’re inspired by it. Munger captures this beautifully:

Everybody likes being appreciated and treated fairly, and dominant personalities who are capable of running a business like being trusted. That’s how we operate Berkshire—a seamless web of deserved trust. We get rid of the craziness, of people checking to make sure it’s done right. When you get a seamless web of deserved trust, you get enormous efficiencies. Berkshire Hathaway is always trying to create a seamless web of deserved trust. Every once in a while, it doesn’t work, not because someone’s evil but because somebody drifts to inappropriate behavior and then rationalizes it … How can Berkshire Hathaway work with only [21] people at headquarters? Nobody can operate this way. But we do … It’s what we all want. Who in the hell would not want to be in a family without a seamless web of deserved trust? We try for the same thing in business. It’s not rocket science; it’s elementary. Why more people don’t do it, I don’t know. Perhaps because it’s elementary.

One person’s or one company’s act of extending trust often inspires those on the receiving end to reach out and extend trust to others. Often those experiences become part of a “genealogy of trust.” Somewhere along the line, a parent, teacher, manager, or leader extended trust to that first individual and inspired him or her with a desire to make a similar difference in the life of someone else. Over time, each act of extending trust becomes part of a legacy of trust that increases prosperity, energy, and joy in families, relationships, organizations, communities, and even countries … for generations.

The question to ask ourselves is this: “What kind of legacy am I passing down to future generations—to my family, my personal associates, my community, my organization, my nation? Is it a legacy of trust that will create increasing prosperity, energy, and joy?” This is what creating a “renaissance of trust” is all about. It’s about the snowballing effect of extending trust one act, one person, one team, and one organization at a time.

Where might you begin to enhance your legacy of trust? Is there a business colleague for whom, or a situation in which extending trust might change a vicious downward cycle into a virtuous upward cycle? Is there an opportunity for you to lead out in extending trust in your team or organization?

Wherever you start, your decision to lead out by extending trust to others will be a game-changer. You may not see results immediately. And you will certainly never see the full impact as those you trust, in turn, reach out and extend trust to others . . . who then extend trust to others…and so on, over time. But you will have the deep satisfaction of knowing that you are investing in something magnificently bigger than yourself—something that can truly affect every relationship in every team, every organization, every family, and every community throughout the world.

Stephen M. R. Covey and Greg Link

Stephen M. R. Covey and Greg Link are cofounders of FranklinCovey’s Global Speed of Trust Practice, which teaches trust in more than 100 countries worldwide. Stephen is the New York Times and #1 Wall Street Journal bestselling author of The Speed of Trust: The One Thing That Changes Everything. Stephen and Greg are coauthors of the bestseller Smart Trust: Creating, Prosperity, Energy, and Joy in a Low-Trust World. They are sought-after speakers and advisors on trust, ethics, leadership, and high performance and have worked with business, government, and educational entities throughout the world.

Reinforcing Candor Builds Trust and Transparency

By Bob Whipple

The decimation of trust in organizations of all types during the past decade has been alarming, yet some groups have been able to buck the trend and are actually increasing trust. The research by Trust Across America is the most comprehensive data on organizations and consultants who are leading a rebirth of trust. My own experience provides many examples of the power of trust. This is one.

I was a Division Manager for Eastman Kodak when an unusual request came in from the Olympics. Responding to this impossible challenge involved having total trust in the system and team to allow them to break every rule in the book and put out a new product in less than three days.

On a Tuesday morning in 1992, one of the product planners received a call from a gentleman in Albertville, France. The Winter Olympics was starting to wind down, and this customer from Sports Illustrated had a challenge for us. He noticed there were colored Olympic rings embedded in the ice of the figure skating venue. His idea was to climb up into the rafters and take images looking directly down on the skaters in the Woman’s Singles Finals on Saturday night, using the rings in the background. He needed some special equipment in a format we did not sell. The accelerated cycle time to get a new product to market like the one he was suggesting was 9-12 months. We had to ship the product on Friday morning to be sure it would get there on time. That meant we had to get everything done in 2½ days rather than a year.

The team assigned the task of readying and delivering this product had a blast, breaking all kinds of rules in order to make the impossible deadline. In the end, the customer had what he needed, and the next issue of Sports Illustrated included an image of Kristi Yamaguchi winning the Gold Medal while she was literally flying over the Olympic rings embedded in the ice.

The Business Unit was so thrilled that they presented the Department with a framed copy of the image signed by Kristi Yamaguchi herself. When the business unit came to the factory to deliver the picture, it was an electric moment for the workers. It is truly amazing what a trusted team of workers can accomplish.

While there are many examples of great progress like the one above, the overall trend is still far from the trust levels we experienced in past decades. We must do better.

Once lost, trust is very difficult to rebuild. There is an urgent need to reeducate all leaders on how to build trust consistently to prevent further loss of it. More than any other factor, the quality of leadership governs the levels of trust seen within any organization.

A simple three-part model of how leader behaviors can help build higher trust includes three categories of behaviors.

1. Table Stakes

These are the basic building blocks of ethics and integrity that must be present for any level of trust to kindle. The term Table Stakes comes from the phenomenon in poker where individuals must ante up even to play in the game. Traits like honesty, openness, communication, consistency, and ethics simply must be present, or the leader may as well take off his suit and hit the showers. Trust is not going to kindle or survive if the Table Stakes are not there.

2. Enabling Actions

These are the components that further help build trust once the Table Stakes are present. There are thousands of items we could name in this category. Here are some examples: following up, advocacy, fairness, admitting mistakes, and many others. The more these elements are present, the greater the ability for the leader to withstand trust withdrawals.

Enabling actions need to form a pattern of behavior that people see as consistent and prudent in building trust. It is the actions of the leader that determine the level of trust achieved in any organization; words are important but inadequate.

These first two lists of behaviors are necessary but not sufficient conditions for real trust to kindle and endure. There is a central core that must also be in play for the Table Stakes and the Enabling Actions to have their intended impact. Without this core, these elements will aid in building some trust, but their potency is severely limited.

3. The Heart of Trust—Reinforcing Candor

In this analysis, reinforcing candor takes center stage, because the concept goes far beyond integrity. It is the magic that most leaders find difficult or impossible to accomplish, but if done well, make a huge difference in creating trust.

Reinforcing Candor is the ability to make people glad they brought up an observation of a leader’s inconsistency. In most organizations, people are punished in some way for bringing forward a leadership problem. Where the highest levels of trust and transparency are present, the leader has the ability to set aside his ego and reinforce those who challenge an action. Doing so greatly increases trust and allows for future trust-building exchanges. Without this critical element, the Table Stakes and Enabling Actions are not sufficient. People do not feel empowered to challenge the leader and hide their true feelings, making the maintenance of trust impossible.

One hallmark of an environment where candor is reinforced is the lack of fear. Trust and fear are incompatible. If people know they will be reinforced for initiating the difficult conversations, they will not be afraid to do so. Whenever people are reinforced for their candor, trust deepens and fear is suppressed.

The critical need to reinforce candor can be explained by a phenomenon called “the ratchet effect.” Like a ratchet, trust is built up by a series of actions or “clicks” that take place over time. But, if the pawl holding the ratchet from rotating backward becomes dislodged, the entire spool of trust equity can spin back to zero very quickly.

Visualizing the Ratchet Effect in Action

Many authors writing on the subject of trust, such as Stephen M.R. Covey, describe the level of trust as similar to a bank account. Between any two people there is a current “balance” of trust that is the result of all transactions that have happened to date. Every time there is any kind of interface (whether online, in a meeting, or even with body language) there is some kind of transaction occurring. Either there is a deposit (increasing trust) or a withdrawal (reducing trust). The magnitude of the transaction is determined by its nature and importance.

The level of trust between people is precisely the same as the balance in a bank account. It is an instantaneous statement of the total worth of the relationship based on all transactions up until the present. The balance can only be increased by making consistent deposits, and being very careful to limit the withdrawals.

It is easy for a leader to make small deposits in the trust account with employees. Treating people with respect and being fair are two examples. Great leaders go about their day trying to make these small deposits as often as possible, realizing they are adding to the balance every time. While making small deposits is relatively easy, making a large deposit is more difficult.

For leaders, words alone rarely make a large deposit in trust. It has to be an action, and it often requires some unusual circumstance, like giving up some personal time off during a crisis, or relinquishing a long-standing perk if others cannot have it too.

Unfortunately, on the withdrawal side, the pattern is different. With one slip of the tongue, an ill-advised email, or even the wrong facial expression in a meeting, a leader can make a huge withdrawal. Because of the ratchet effect, a small withdrawal can become big, because the pawl is no longer engaged in the ratchet. Trust can quickly spiral to zero or even to a negative balance.

This is an example of the ratchet effect in a typical conversation: “I have always trusted George. I have worked for him for fifteen years, and he has always been straight with me. I have always felt he was on my side when the chips were down, but after he said that in the meeting yesterday, I will never trust him again.”

Not only has all trust been lost in a single action, but also it will take a very long time before any new deposits can be made. The trust account dropped from a healthy positive balance to a negative one in a single sentence. In many cases, the normal small trust deposits do not even register in the account balance after a mega withdrawal.

It would be incredibly powerful if we could prevent the ratchet from losing all of its previous progress. What if there was a way to reinsert the pawl back into the ratchet during a serious withdrawal so that the mechanism only slipped back one or two teeth? Reinforcing candor inserts the pawl and provides organizational magic that has unparalleled power to build trust.

All leaders make trust withdrawals because no one is perfect. In most organizations, people do not feel safe to let the leader know they have just been sapped. There is no ability to reinsert the pawl, and trust plummets. It may even go to zero or a negative level of trust before it can be corrected over a long period of time with incredible effort.

Contrast this with another scenario where the individual knows it is safe to let the leader know she has made a blunder. The individual might say something like, “I don’t think you realize how people interpreted your remarks. Your decision reduced trust, and I am concerned that long term damage may result.” If this employee is sincerely thanked rather than punished for their candor, then trust will grow.

Every leader is trying to do exactly the right thing all day, every day. If an employee is so bold as to question why the leader did something, the reaction in most is for the leader to become defensive and push back on the messenger; it is human nature. Taking a defensive stance becomes a withdrawal, which does not work to reinsert the pawl into the ratchet.

Reinforcing candor is not easy. Not only does it require a leader to suppress ego, it also means performing an unnatural act in terms of being human. The solution to get mileage out of reinforcing candor is for the leader to recognize the trigger point and to modify his behavior to create the desired reaction.

Tip: When an employee brings forth bad news or a contrary opinion, focus on doing only one thing. When the conversation is about to end, make sure this person walks away saying, “I’m glad I brought that up.”

This tip is difficult for most leaders to execute, because they have justified their action to themselves, so it is only natural to defend it to others. It takes great restraint to listen and not have a negative reaction. The good news is that the more a leader practices, the easier this technique gets. No one will ever have a 100% batting average, but if a leader can go from 10% to 70% by focusing on his behavior, he can change an entire culture of an organization in a matter of months rather than years.

Once the leader has learned to reinforce candor consistently, something magic happens. When he practices any of the “Table Stakes” or “Enabling Actions,” everyone benefits. That is why reinforcing candor is at the heart of building trust. Individuals who learn to do this well will be among the elite leaders of our time.

Bob Whipple

Bob Whipple is CEO of Leadergrow Inc a company dedicated to improving leadership in organizations. He is also a professional speaker and a member of National Speakers Association. When speaking, Bob uses the brand name of “The Trust Ambassador.” He has been named by Leadership Excellence Magazine one of the top 15 consultant thought leaders in the country on leadership development. He has three published books on the topic of trust and over 300 published articles on various leadership topics. Reach Bob at bwhipple@leadergrow.com

Section V:

Restoring Trust

Trust, Emotion and Corporate Reputation

By Linda Locke

In 2008, a musician flying from Nova Scotia to Nebraska checked his prized instrument because it was difficult to carry on board. When he arrived in Omaha, he discovered that his guitar was damaged and he immediately contacted the airline. After nine months of discussion with the airline, he was told he was ineligible for compensation because he hadn’t filed the proper claim within 24 hours.

In a move that has become legendary, the musician, Dave Carroll, recorded a song and video called “United Breaks Guitars” and posted it on You Tube, and finally got the attention of United Airlines- within 24 hours.

When Carroll boarded the plane and checked his guitar with United, like hundreds of thousands of travelers that day, he trusted that he and his luggage would arrive safely. He put himself in the hands of pilots, flight control agents and baggage handlers, trusting that all would act competently.

A reputation is a promise

A company’s reputation is built on trust. It’s the promise an organization makes to its stakeholders about its products, processes and people. The promise is then secured by the handshake of a transaction. When people trust an organization, they are more likely to exhibit supportive behavior: buying the products and services it is selling, recommending it to friends, and taking the actions it would like. When a company lives up to its reputation, customers develop warm or trusting feelings about it.

Trust is an emotion we feel. When we trust another person we feel safe and secure. We are more likely to give them the benefit of the doubt in times of stress, because ultimately we trust that there will be a positive outcome.

After multiple attempts at resolving the airline’s responsibility related to his broken guitar, Dave Carroll’s emotions had moved from trust to outrage.

A lack of trust in organizations is evident in the cynicism and skepticism that permeates modern society, tracked in annual surveys such as the Edelman Trust Barometer. The 2012 survey showed that low trust in business results in increased calls for regulation because of perceptions about companies’ irresponsible behavior. While the survey points out that business leaders are more trusted than government officials, nearly half of the respondents said the government does not regulate business enough.

The decline in trust has a cost

Damage to a company’s reputation for trustworthiness comes with a price tag.

•  Bank of America was surprised at the public reaction to its announcement of a monthly fee to use a debit card, and scrapped the plan despite its revenue potential.^[1]

•  BP saw significant increase in its cost of doing business as a result of reaction to its management of the Deepwater Horizon spill in the Gulf of Mexico.^[2]

•  The Komen Foundation faced a significant decrease in contributions when its process to decide to withdraw funding from Planned Parenthood became public.^[3]

All three crises have two elements in common—a significant reputational crisis event followed by a negative impact to revenue.

A reputational crisis is one in which trust in the organization is undermined. Reputation may be an organization’s most valuable asset, but its inherent intangibility may make it the most difficult asset to manage. This explains why CEOs and Boards of Directors consider it a perplexing challenge that keeps them up at night.^[4]

Key to that challenge is understanding the emotions that drive stakeholders’ expectations. Leaders often mismanage trust and reputation because they fail to think and communicate in emotional terms.

Trust as an emotional construct

When faced with consumer outrage—when trust and reputation are at risk—the first instinct of many organizations is to respond with facts. But mistrust is not often assuaged by facts.

Trust is an emotional construct and a building block for civil society and commerce. Trust is the core of every transaction and interaction. Why? We depend on others. We need them to provide what we long for—love, safety and security. Likewise, we depend upon businesses that provide essential products and services. We rely on them and are disappointed when they fail to meet our expectations.

Today, consumer expectations often extend beyond price and quality to how the companies make us feel. Are we satisfied with our interactions with clerks, customer service representatives? Do they make us feel important or ignored?

We expect companies to act ethically, fairly and reliably. When we hear an executive speak or we read about corporate activities, we make judgments about them. We decide whether they meet our expectations. These expectations shape our beliefs and our actions.

The more that companies meet our expectations, the stronger our emotional bond. When our expectations are not met, we begin to withdraw our trust, either slowly or rapidly, depending on the severity of the issue.

Unfortunately, businesses often approach their activities from a purely logical perspective. Rationality rules the boardroom while emotionality rules the living room.

Let’s say a company is accused of acting unethically. The business may meet every requirement for compliance with laws and regulations. In a crisis, the instinct of executives often is to respond with the facts that demonstrate the logic of their choices and actions—in this case, with a full list of compliance actions.

If they were speaking to a boardroom of fellow executives, or a panel of attorneys, that response might suffice. But if their broader audience is a nation of skeptical families and consumer advocates, a cold list of facts may only worsen the company’s reputational crisis. The company may get a reputation for unethical behavior.

Instead, facts should be just the starting point.

Facts: only the first step toward trust

The facts are the starting place to build trust. An organization must meet all of the requirements to comply with the law. If the legal requirements are not met, then stakeholders have good reason to consider a company weak in the dimension of ethics.

To earn trust, a company must go beyond the requirements, beyond the simple facts of the situation, and demonstrate that it understands the concerns of its stakeholders. Compliance with the law can be interpreted as doing the minimum; today, stakeholders have expectations regarding ethics, fairness, workplace and the environment that go beyond the attributes of a specific product. The manner in which companies engage, respond and communicate can impact how they are perceived.

In times of crisis or stress, when the environment can be characterized as “high concern/low trust,” people hear messages differently. Given the asymmetry of information between large organizations and their stakeholders, companies should communicate assertively that they care about their stakeholders and are dedicated to resolving the situation. But if those communications are not backed up with action, the move will backfire.

Commitment, honesty and empathy

Risk communication science suggests that to build trust, the facts of the situation are a small part of what organizations need to communicate. Trust and credibility depend upon a company demonstrating that it has the knowledge and expertise to address a problem; that it acts with honesty and openness; and that it expresses concern and care.

A company that expresses empathy, care and concern for its stakeholders demonstrates that it understands their perspectives and is more likely to maintain their goodwill in a crisis.

In a crisis situation, here is the recommended breakdown of communications content:

•  Half of a company’s external communications should express care and concern;

•  One quarter should express the company’s commitment to addressing the situation;

•  And only one quarter should focus on the facts.

Consumers today express their feelings through traditional market research and customer care surveys, but also through social media.

A company that welcomes unfettered stakeholder feedback will employ a listening platform to understand what is being said about it and its competitors—and to ascertain whether its perspective on a situation aligns with the perceptions of its stakeholders.

The more sophisticated social listening tools capture the level of emotion in the public dialogue about an issue or organization—such as the emotion expressed in comments on Twitter, blogs, Facebook and web forums.

Using tools from social psychology, a listening platform should predict the emotion that will be felt by people reading about an issue or company. By understanding trust and other emotions that drive perceptions and lead to behavior change, an organization can demonstrate empathy, caring and concern that resonates with its stakeholders.

Case study: Fear undermines trust

For example, during the 2007-2008 financial meltdown in the US, a major financial services firm conducted an analysis of the emotions about the crisis in the public dialogue. By applying a social-psychological framework to the language people were using to describe and discuss the situation, the firm found that the three strongest likely emotions were: irreversibility, unfamiliarity and a sense among consumers that their involvement wasinvoluntary.

Irreversibility. A risk perceived to be irreversible elicits greater negative emotions than one that is thought to be reversible. In this case, consumers expressed deep fears that the changes they were seeing were permanent. This fear of permanent economic difficulty was reflected in changes in consumer sentiment about spending.

Unfamiliarity. This concept involves the emotional concern over the unknown risks from an issue. Risks perceived to be unfamiliar are less readily accepted and appear greater than risks perceived to be familiar.

Involuntary. The involuntary nature of the crisis stemmed from consumers’ feeling that they were unable to have any influence over the situation; that it was not a result of personal choice.

In this case, organizations that wished to demonstrate empathy, caring and concern with their stakeholders would communicate the steps that could be taken by each relevant party (government, banks, consumers) in language that most people found easy to understand. They would explain in plain language how the situation occurred, using examples from familiar situations. And, they would describe the role of the responsible parties and what they were doing to address the situation.

Case study: Blame undermines trust

More recently, a proposition was on the ballot in California to require labeling of genetically modified food. A recent analysis of the dialogue around the campaigns for and against Proposition 37 identified three primary emotions: human involvement, dread and catastrophe.

Human involvement. This is an emotional concern that derives from the feeling that the situation is being caused by human failure or action. Risks perceived to be generated by human action elicit greater negative emotion than risks perceived to be caused by nature. If someone caused the problem, that person is expected to fix it.

When consumer commentary focuses on “human-caused risk,” consumers are assigning blame. They are calling organizations to account. A company that fails to understand these expectations risks looking tone deaf, which undermines its emotional bond with stakeholders, gives rise to distrust and damages its reputation

Dread and catastrophe. These are extreme emotions. When dread and catastrophe are driving the emotional tenor of the public discussion, people are likely to be experiencing fear, terror and anxiety. They perceive the potential for fatalities, injuries or illness.

In such a situation, a company must respond with both empathy and action to preserve trust, protect its reputation and contain the issue. If people fear catastrophe, but a company responds with only the bare facts of, say, its compliance program—that company would rapidly lose the trust of many of its stakeholders. Such a misstep could give rise to calls for additional regulation.

Trust payoff … or penalty

A strong reputation that inspires trust provides a measurable payoff.

A company that is highly regarded by its stakeholders is more likely to enjoy strong brand loyalty and long-term, high-value customers. It can expect to see lower employee turnover and easier recruitment of high-caliber employees. Such a company is more likely to benefit from higher investor confidence, a more positive regulatory environment and even lower costs of capital, as its reputation paves the way for greater trust from financial partners. That’s the payoff of trust and a good reputation.

Mistrust, resulting in a weak or negative reputation, exacts a measurable cost—a reputation penalty—in the form of increased customer churn and elevated customer acquisition costs. Such a company will face higher employee training costs and related service inefficiencies. It will pay the price of regulatory constraints, increased cost of capital, lower investor confidence and an increased vulnerability to competitors.

Leaders are responsible for protecting both revenue and reputation. To fulfill this dual responsibility, they must orient their organizations toward understanding the expectations of their stakeholders as a core element of strategy.

Every leader knows perceptions are reality; the wise leader uses the drivers of trust to survive and thrive in the current economy.

Linda Locke

Linda Locke is the principal of Reputare Consulting, a consultancy that focuses on reputation, risk, crisis management and strategic communications. Locke previously served as the group head and senior vice president for Reputation and Issues Management for MasterCard Worldwide. linda.locke@reputareconsulting.com

^[1]  Bank of America drops debit card fees, by Sandra Block, USAToday, Nov. 11, 2011

^[2]  Reputation, Stock Price and You by Dr. Nir Kossovsky, Apress, 2012

^[3]  Komen Foundation Struggles to Regain Wide Support, by David Wallis, New York Times, Nov. 8, 2012

^[4]  Third Annual Board of Directors Survey 2012—Concerns About Risks Confronting Boards—EisnerAmper, May 7, 2012; survey of 193 U.S. company directors regarding chief concerns beyond financial risks.