This blog recently talked about the importance of trust-based systems, as opposed to personal trust. This article continues investigating the role of trust in business with a focus on the importance of building a culture of trust.

The prime mistake made with respect to building a culture of trust in a business is believing that the aim is to have senior employees trust more junior employees. This is the complete opposite of what is needed, and the core reason that so many corporate cultures lack an element of trust.

Downward trust, that from a senior employee to a more junior one, is important for the effective running of a business but hardly needs to be institutionalised into the culture of the company. The reason is simple: the senior employee is in a position of power and therefore able to coerce or at the least strongly influence the more junior employee. Trust, although desirable, is not strictly necessary.

On the other hand upward trust is critical. The junior employee has little to no influence on a senior employee and can only trust that the senior employee will act not only with integrity but also with competence. Without such trust the junior employee will find it difficult to make any decisions or take any actions without first checking with all relevant senior employees. This would be an operational disaster.

Some examples will help to clarify the issue. In the “simple to explain but a great effect on the future of the company” category is strategy formulation and subsequent execution. Strategy formulation involves executive management as well as the board of directors and is ultimately approved by the board of directors. Strategy execution is the sole responsibility of the executive management.

The executive management needs to trust that if they follow the strategy that they will not subsequently be held accountable if the strategy turns out not to be the optimal one. After all, the strategy was discussed and approved by the board and for the board to hold management responsible for reading the future would destroy upward trust and lead management to develop a bias for extremely conservative strategies. Not good for the company.

On the other hand if the executive management does not deliver on execution of the strategy, the board has full authority to take remedial action, usually in terms of lower bonus payments and outright replacement of executives.

So what is at the core of the need for upward trust? It is about feeling safe. If human beings do not feel safe then they simply cannot function in terms of taking risks, and no risk means no return.

The example given is relatively clear to anyone outside the firm, but things are not always so clear. Imagine that you are a chief executive and your head of sales wants to sign a big new client. The problem is, the client wants to change some of the usual terms of the contracts that you use. Your head of legal states that it is not in the best interest of the company to weaken the contracts. Your head of sales states that it is not in the best interest of the company to lose the client and profit. What do you do?

If you trusted your board to evaluate your decision-making at the time of decision, then you might consider acquiring the client to grow the company. On the other hand, if you felt that your board would judge your decision based on the final outcome, which is dependent on factors outside of your control, then you might decide to do nothing. This is precisely why the audit and legal departments have undue influence on commercial decisions, although paradoxically nobody listens to them on corporate governance issues.

So how does one build a culture of trust? There are many elements, the first of which is to act with integrity. Closely following this is transparency. Communication needs to be open and frequent.

A common mistake is shooting the messenger. Far too often senior executives receiving negative news will react badly towards whoever delivered the news. This ensures that good news spreads quickly and bad news, which tends to be the important news, remains hidden. This creates a dangerous bias.

Another common mistake is to punish good failures. Good failures are like the first example given above – decisions that, at the time they were made and with the information available, were the best decisions that could be made. There is nothing wrong with these failures, indeed they are learning opportunities.

Applying these four pieces of advice will go a long way to building a culture of trust.

This article was originally published in The National.