On the Role of Trust in Corporate Culture

It’s been several years since I taught my daughter how to ride her bicycle without training wheels but the lessons from that experience resonated with me as I thought about trust in corporate culture.

Just like many kids her age, my daughter was excited by the prospect of riding her bike without training wheels. It took quite a bit of trust on both our parts to achieve the goal. First, she had to trust me to create a safe environment. We used pads and a helmet to protect her against an inevitable fall. We practiced in a cul-de-sac and away from through traffic. I held her seat until she reached balance and eventually picked up speed. I also needed to show confidence in her ability to improve, help her recover when she lost her balance, and cheer her on as she rode around the neighborhood with her friends.

 It turns out that trust is as important in a corporate setting as it is in helping kids learn and excel at a new skill. Trust is the foundation of an effective culture that results in happy customers and propels corporate performance. In his article, The Neuroscience of Trust, Paul Zak argues that culture based on trust leads to higher productivity, higher energy at work, better collaboration among employees, and lower employee turnover. It also results in better-quality, longer-lasting teams as employees who do not fit the trust-based culture self-select out of organizations. Conversely, employee stress related to uncertainty about the future and failure to connect with colleagues or afford a decent lifestyle act as trust inhibitors that lead to poor performance and high turnover. So, what are the examples of an effective corporate culture and what specific steps can management teams take to boost the level of trust in their organizations?

 One measure of high-performance is total shareholder returns over a reasonably long period of time, say, decades. With the caveat that favorable industry tailwinds and attractive market structure often influence corporate outcomes, let’s explore the following three examples where strong corporate culture accompanied exemplary corporate performance.

 Amazon.com. The company has pursued a culture of trust by not only tolerating but explicitly encouraging risk-taking when scaling up its operations and developing new products. In his inaugural 1997 shareholder letter, Jeff Bezos set the expectation that some of the firm’s pursuits would work out and others would not; either way, the firm would learn from the experience. As the company grew larger, Bezos encouraged employees to take larger risks: “Everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you are not going to be inventing at a size that is going to move the needle.” Implicit in Bezos’s stance was trust in the firm’s employees to take risks and treat failures as necessary learning opportunities.

 Constellation Software. Founded in 1996, the company acquires vertical market software businesses that automate specific industry needs. Think software that powers a car rental business or a public transit system. Founder and President Mark Leonard has instituted a high-trust culture that pushes decision-making, including M&A, down to individual business units.

 When asked why the company does not centralize such corporate functions as R&D, sales, and marketing to improve shareholder returns, Leonard cited trust in his business unit leaders as the key factor in the company’s strong performance over time. To illustrate the point, Leonard showed a multi-year inverse relationship between the returns the company generated on its invested capital and the size of its head office (see the chart below).

Constellation Software, Inc. Head Office Expenditures vs. Return on Invested Capital (2005 - 2014)

Source: Constellation Software, Inc.

 To uphold Constellation’s alignment between management, employees, and shareholders, Leonard forwent his 2015 salary to delegate responsibilities to his colleagues and to pay for first class tickets and nicer hotels out of his own pocket: “I’ve traditionally travelled on economy tickets and stayed at modest hotels because I wasn’t happy freeloading on [Constellation’s] shareholders and I wanted to set a good example for the thousands of employees who travel every month.”

 Berkshire Hathaway. It’s no secret that Berkshire has run a highly decentralized business model. Warren Buffett has been acquiring controlling stakes in businesses in a variety of industries and letting management teams run their operations without much interference from Omaha. With a 25-person staff at headquarters, the $625bn Berkshire has little to no centralized corporate functions (finance, HR, IT, sales/marketing, M&A, etc.) that are meant to produce “cost synergies” and “scale advantages” at other, conglomerate-like companies. Apart from providing brief financial reports and producing attractive returns on capital (no small feat for any business), Berkshire business managers are free to discuss business affairs with Buffet as frequently as they like.

 Paul Zak’s team argued that to increase trust, management teams should not only decentralize but also publicly recognize excellence, foster social connections, and institute maximum transparency. Collectively these steps should foster a sense of ownership. They should also create an environment in which everyone feels safe to speak up and is excited to innovate—the same way kids feel excited about learning and enjoying a new skill. Like riding a bike.