The 7
Low Trust Organizational Taxes

1.     Redundancy

Redundancy is unnecessary duplication. But a redundancy tax is paid in excessive organizational hierarchy, layers of management, and overlapping structures all designed to ensure control. And it is very costly.   

2.     Bureaucracy

Bureaucracy includes complex and cumbersome rules, regulations, policies, procedures, and processes. It’s reflected in excessive paperwork, red tape, controls, multiple approval layers, and regulations.  Rather than focusing on continuous improvement and getting better, bureaucracy merely adds complexity and inefficiency—and costs—to the status quo.

Low trust breeds bureaucracy, and bureaucracy breeds low trust.  In low trust organizations, bureaucracy is everywhere.

3.     Politics

In an organization, “politics” is defined as the use of tactics and strategy to gain power. Office politics divide a culture against itself by creating conflict with what author Lawrence MacGregor Serven calls the “enemy within” instead of the enemy without. 

Office politics generate behaviors such as withholding information, infighting, operating with hidden agendas, interdepartmental rivalries, backbiting, and meetings after meetings. These behaviors result in all kinds of wasted time, talent, energy, and money. The quantifiable cost alone of office politics is conservatively estimated at $100 billion per year; most observers put it substantially higher.

4.     Disengagement

Disengagement is what happens when people continue to work at a company, but have effectively quit (commonly referred to as “quit and stay”). They put in what effort they must to get their paycheck and not get fired, but they’re not giving their talent, creativity, energy, or passion.

The Gallup organization put a conservative price tag of $250 to $300 billion a year on the cost of disengagement in America alone. Their research estimates that only 28% of U.S. employees are engaged, and in many other countries, the figure is even lower.  With regard to trust, Gallup’s research shows that 96% of engaged employees—but only 46% of actively disengaged employees—trust management. It’s a self-perpetuating cycle that gradually grinds the organization to a crippled pace, or even to a halt.

5.     Turnover

Employee turnover represents a huge cost for organizations, and in low trust cultures, turnover is in excess of the industry or market standard.  Low trust creates disengagement, which leads to turnover—particularly of the people you least want to lose.

Unwanted turnover is expensive.  On average, it costs companies one and a half to two times the annual salary to replace an exiting worker.

6.     Churn

Churn is the turnover of stakeholders other than employees. When trust inside an organization is low, it gets perpetuated in interaction in the marketplace, causing greater turnover among customers, suppliers, distributors, and investors.

When employees aren’t trusted, they tend to pass that lack of trust on to their customers, and customers ultimately leave. Southwest Airlines President Colleen Barrett says “Because we approach customer service exactly the same way—whether it’s internal or external—I place the same degree of importance on the word trust talking about employees or passengers.”

Studies of customer defection indicate the financial impact of having to acquire a new customer versus keeping an existing one is significant; some say by as much as 500%!

7.     Fraud

Fraud is flat out dishonesty, sabotage, obstruction, deception, and disruption—and the cost is enormous.  In fact, most of the first six organizational taxes are actually a result of management’s response to this “fraud tax”—particularly the taxes of redundancy and bureaucracy.

In a 2004 study done by the Association of Certified Fraud Examiners, it was estimated that the average American company lost 6 percent of its annual revenue to some sort of fraudulent activity. If our only approach to this character challenge is to tighten the reins and put more controls in place, we will reduce the fraud tax only slightly, and in so doing, trigger the other six taxes, which are cumulatively far greater—maybe even five to ten times greater—than the original fraud tax. 

When you add up the cost of all these taxes that are being imposed on low trust organizations, is there any doubt that there is a significant, direct, and indisputable connection between low trust, low speed, and high cost?

The 7
High Trust Organizational Dividends

Now consider the dividends of high trust.  Obviously, the opposites of the 7 Low Trust Organizational Taxes are dividends. But there are additional high trust dividends—dividends that clearly show how trust always impacts speed and cost…and also a third measure: value.

1.     Increased value 

High trust increases value in two dimensions. 

The first dimension is shareholder value—and the data is compelling.  In a Watson Wyatt 2002 study, high trust organizations outperformed low trust organizations in total return to shareholders (stock price plus dividends) by 286%

Additionally, according to a 2005 study by Russell Investment Group, Fortune Magazine’s “100 Best Companies to Work for in America” (in which trust comprises 60 percent of the criteria), earned over four times the returns of the broader market over the prior seven years. As Fortune Magazine declared, “Employees treasure the freedom to do their job as they think best, and great employers trust them.” 

The second dimension is customer value.  As a result of the last five dividends described below, high trust organizations are consistently able to create and deliver more value to their customers.

2.     Accelerated growth

High trust companies outperform low trust companies, not only in shareholder value, but also in sales and profits.  Research clearly shows that customers buy more, buy more frequently, refer more, and stay longer with companies and people they trust.   Plus, these companies actually outperform with less cost. The net result is not just accelerated growth, but accelerated profitable growth. As Vanguard Investments CEO John Brennan said, “Trust is our number one asset…As customers learn to trust us, they generate a surprising amount of growth.”

3.      Enhanced innovation

High trust companies are innovative in the products and services they offer customers, and they have strong cultures of innovation, which only thrive in an environment of high trust. Innovation and creativity demand a number of important conditions to flourish, including information sharing, an absence of caring about who gets the credit, a willingness to take risks, the safety to make mistakes, and the ability to collaborate.  And all of these conditions are the fruits of high trust.

4.     Improved collaboration 

High trust company environments foster the collaboration and teamwork required for success in the new global economy.  Different than the traditional approaches of coordination and cooperation, real collaboration creates the key opportunity model of today’s world. And this collaboration isn’t just internal to an organization—it’s also with external customers and suppliers. Forbes highlighted this “collaboration as opportunity” trend in 2006, pointing out what they call the “bedrock” of collaboration: trust.  Without trust, collaboration is merely cooperation, which fails to achieve the benefits and possibilities available to true collaborators in the knowledge worker age.

5.     Stronger partnering 

The Warwick Business School study confirmed that partnering relationships (such as outsourcing deals) that are based on trust experienced a high trust dividend of up to 40% of the value of the contract.  Those that rely on the contract language, and not on a relationship of trust, fare far worse. The report reads: “We found that contracts with well-managed relationships based on trust—rather than stringent SLAs [Service Level Agreements] and penalties—are more likely to like to a ‘trust dividend’ for both parties.  Real trust is not naïve.  It…is earned from performance.” 

6.     Better execution 

High trust companies are better able than low trust companies to execute their organization’s strategy.  The importance of execution was made clear to me on my first day at Harvard Business School.  At the end of a four hour case study, my professor said something I will never forget:  “If you only remember one thing in your two years at Harvard Business School, let it be this:  It is better to have grade B strategy and grade A execution, than the other way around.” 

Voted the # 1 enduring idea by Strategy + Business magazine readers, execution is appropriately a huge focus in organizations today, and execution is significantly enhanced by trust or weakened by low trust.  High trust is the great performance multiplier.

7.     Heightened loyalty 

High trust companies elicit far greater loyalty from their primary stakeholders—co-workers, customers, suppliers, distributors, and investors—than low trust companies.  The evidence for every one of these relationships is clear: 

·         Employees stay longer with high trust companies

·         Customers remain customers of high trust companies

·         Suppliers and distributors stay partnered longer with high trust companies

·         Investors hold their investment longer with high trust companies. 

Dr. Larry Ponemon, Chairman and founder of Ponemon Institute, a leader in measuring trust in privacy and security put it clearly: “Trust is becoming the vital component in customer loyalty and brand strength.”

When you add up all the dividends of high trust—and you put those on top of the fact that high trust decreases or eliminates all the taxes we’ve just discussed—is there any doubt that there is a significant, direct, measurable, and indisputable connection between high trust, high speed, low cost, and increased value?

"What a Low-Trust, Low-Performance Culture Looks Like"
and "What a High-Trust, High Performance Culture Looks Like"

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