Disruption

Trust to compete

Posted on in Disruption · Inspiration · Thought Leadership · Zeitgeist

This is the first of a series of pieces on the importance of trust and collaboration in making business competitive.

Our world has become caught up in the dog-eat-dog of competition. It forms so much of the background assumptions people use to build their business strategies, and permeates the culture in so many businesses. Just talk of collaboration to a lot of businesspeople and you might get the “all very well and good for the Silicon Valley start-ups” feeling back.

“Trust” is a word that commercial people will be more comfortable with. Starting there, then, I want to explore how deep-seated trust is in our competitive environment and then go on to explore how trust and collaboration are crucial for any business.

Trust, human nature and modern economics

Companies, whole markets and even economies have trust interwoven in their very fabric. It emanates from the very foundations of how we understand human behaviour and free markets.

Phrenology

In his 1759 book of moral philosophy, The Theory of Moral Sentiments, Adam Smith believed that much of human behaviour was under the influence of the “passions”—emotions such as fear and anger, and drives such as hunger and sex—but these passions were moderated by an internal “voice of reason,” which he called an “impartial spectator.”

The impartial spectator allows one to see one’s own feelings and the pulls of immediate gratification from the perspective of an external observer. In the area of self-control and self-governance, the impartial spectator takes the form of a long-term interest (i.e., I won’t have that chocolate biscuit today because I can see that I will regret it down the road). In the area of social interaction, the impartial spectator allows us to see things from another’s perspective rather than to be blinded by our own needs.

Smith’s moral philosophy is famously grounded in sympathy, the communication of fellow-feeling between members of the human species. By comparing one’s most powerful, potentially anti-social feelings to those of the impartial spectator whom we imagined to be observing us, Smith argues, the individual regulates the excesses of passion, and so brings his or her strong feelings into accord with those shared by the rest of society. The ‘impartial spectator’ therefore names a relationship between individuals and others, and (more importantly) between individuals and themselves, that makes possible the smooth commerce of sympathy.

Modern economics  thus, could be said to have had success as a field of scientific inquiry because it’s seen to been able to develop tractable models with strong predictive capacity; in other words, it simplifies the complex phenomena of human decision-making, interaction, and exchange into its barest form and makes predictions based on those.  

Only recently has the field of economics advanced enough to have the tools to reincorporate the factors that Smith and others had always felt were important in human interaction (Layard et al): our caring about each other and about fairness, our difficulties with aligning our long-term interests with short-term pulls, etc.

One of the most unexplored areas, which we are only now beginning to be able to measure, is the degree to which people are motivated by the “aerial coin of praise” and social status (being appreciated and being liked), something Smith thought was a crucial motivation for economic activity.

Foundations: self-interest meets trust

Smith believed that there were certain virtues, such as trust and a concern for fairness, that were vital for the functioning of a market economy. He wrote about trust and reciprocity as critical foundations of the early beginnings of the market, allowing reciprocal gift exchange to emerge, and leading to trade.

Foundations

One might think that the need for trust and trustworthiness diminishes as a market develops, but if anything the opposite is true.

For example, we trust managers to act in the interests of shareholders: We can build contracts to align manager incentives with those of shareholders, but we are never able to completely contract on all the things we care about and want to enforce. Implicitly, then, we hold a belief that managers have internalised the values we care about, and trust them to act on those, particularly when they might come in conflict with their own interests.

There are similarly other professions where individuals are entrusted to serve, like doctors, teachers, auditors, but cannot be monitored fully. We thus rely on these individuals’ professionalism and honour (or “enlightened self interest”) to carry out their occupations.

Across organisations, in the marketplace, factors like brand reputation and warranties help facilitate transactions without requiring complete trust. Within organisations, the issue of trust and trustworthiness—of employees to their bosses, of managers to each other and to shareholders—becomes even more important, and even more difficult to replace by market forces or better incentives and contracts.

Trust in business today

Thus, Smith’s advice to business leaders would likely be that they should weigh carefully the costs of breaking trust and of risking reputation. The costs of sacrificing ethical standards of conduct are much larger than any individual might imagine, precisely because they decrease trust and can strongly affect organisational and market functioning as a whole. Senior executives in the banking sector, for example, will know those costs well.

Therefore, both the quality of what is produced and the quality of the promises that are made by any organisation have an added imperative as a building block of the trust that is required. That trust is required both for the company and for the economy to thrive.

The second instalment of the series on trust and collaboration will pick up with insights on building a culture of trust for a business to compete.

David Best 3 Crop David Gustave, Chief Inspiration Officer

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