The New Corporate Trust Formula

by Stephen Fischer

Some time ago, I came across an article from Mark Sheffert of the Manchester Companies in the Twin Cities Business that I read with greater interest: The High Cost of Low Trust.

Lab reports and CAT scans

Mr. Sheffert’s article begins a cute story that I’d like to repeat here because it illustrates in a humorous way the point of the article.

A woman brought her very limp parakeet to her veterinarian. She laid it on the exam table and after a brief exam, the vet shook his head sadly and said, “I’m, so sorry but your Parakeet has died.”The new corporate trust formula

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

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

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

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

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

As Mark Sheffert points out in his article, this little story illuminates, in a humorous way, the high cost of low trust. At the foundation of every personal interaction, family, organization, economy and even culture is one fundamental value: trust. Without trust governments become dictatorships. Without trust, economic transactions do not occur or become complex, more expensive and take longer to complete, and leaders lose their ability to lead. Without trust, families become dysfunctional. Without trust, businesses lose productivity, customers, market reputation, brand loyalty, employee talent, creativity, morale—and ultimately revenues and profits.

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

Mr. Sheffert further concludes, “I’m convinced that the lack of trust is the underlying cause of the current economic breakdown and its slow recovery from the recession. There is mistrust in the capital and credit markets, and in the financial institutions, government agencies, investment banks, and businesses that all work together to keep the economy healthy.”

The costs imposed by low trust

Just think for a moment about some of the worldwide, national and local events that have come to light in the past several years. The Madoff and Stanford Financial Ponzi schemes, Worldcom and Enron, the demise of one of the largest accounting firms (Arthur Anderson) the bankruptcy of Lehman Brothers, the SEC investigation of Goldman Sachs and other Wall Street firms, the revelations of the unethical if not illegal activities in the mortgage industry. Here in Minnesota, we have witnessed the Tom Petters and Trevor Cook Ponzi schemes and many smaller frauds (but no less significant to the victims) that have been or are currently being prosecuted.

Think also about the amount of cost we can easily identify to a lack or loss of trust—the time and cost of compliance with the Sarbanes-Oxley Act, the time and hassle of getting through an airport to board an airplane, the amount of paperwork and time required to open a bank or securities account or complete a mortgage or take out a personal or business loan. You can think of many more. I personally can remember the day when a securities account could be opened over the telephone without even a signature on an account form, a W-9 and the multitude of disclosures and disclaimers that are so commonplace today.

You can make your own judgment about whether this would be good, but imagine the efficiency of being able to open an account and transact business immediately without signatures AND customers having seven business days to get you the money!

The new corporate trust formula

Stephen M. R. Covey offers a theory in his recent book The Speed of Trust: The One Thing That Changes Everything, the theory that trust, either high or low, is the variable in the standard formula for organizational success. Rather than the traditional formula that says Strategy x Execution = Results, he rewrites it as (Strategy x Execution) x Trust = Results. In his book he references substantial data to document his point.

Space limits us to this very brief very discussion of the topic, but there is an abundance of information about this topic should you be interested in reading more.

I think most of us would agree that trust is vital for success in our industry. It is this trust that permitted the Madoffs, Cooks and Petters of the world to “get away” with their Ponzi schemes for what, to most of us, seems an unimaginable length of time. You might ask—have these events made it easier or more difficult for us in dealing with our clients?

Our purpose here is to merely introduce you to the concept that High Trust Results in High Results and Low Trust Results in Low Results and to provoke your thoughts about how this might impact your respective practices. Is there a connection with the currently raging debate about imposing a fiduciary standard on providers of financial services?

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