Trust the System not the Person

The whispers in the global business corridors when it comes to dealing with emerging markets are “Is he trustworthy?” As proof of why such whispers are necessary one need look no further than the recent revelations about Alstom, the French power company that paid the US Department of Justice a USD 772 million penalty for charges that it bribed government officials around the world.

How should governments and businesses deal with such trust issues? They can continue to allow the US DoJ to deal with it. Why a government would want a foreign justice department intervening in its affairs is not clear. Why a business would want the burden of double regulation is also unclear. The only other way forward is for local stakeholders to manage their issues locally.

There are many facets to this issue, some regarding policy, some regarding culture and some regarding business practice. This article will focus on one facet of the latter: how to trust that your business is being managed with integrity. To resolve this issue one needs to understand what trust means, how trust happens and the cultural influence on trust.

A widely held belief is that trusting someone means believing that they will “do the right thing.” But does such a definition make sense? Usually, doing the right thing has a different meaning to you than to the person being trusted. This creates problems as both people in the trust relationship end up feeling betrayed.

The second problem with the conventional understanding of trust is that it implies people will continue to behave as they always have. If Tarek worked for Ahmed without incident for 15 years, one would not fault Ahmed for trusting Tarek. If, however, Tarek then takes out a mortgage on his house and invests it all in the stock market, only to lose his investment and his house, how will Tarek act now?

So what is a useful definition of trust for a business looking to build a strong corporate governance culture? A good one is that trust is confidence in knowing the future behaviour of the person. Notice that there is no value judgment here. If Ahmed knows that Tarek will steal from him, then that is trust: it is trust that Tarek is ethically weak.

What blind-sides businesses in the region is the prevalent shame culture. Guilt based cultures, such as in the USA, hold actions as being wrong without reference to the person. Shame based cultures, such as Japan, hold that a mistake is an indication of something wrong with the person. As such, mistakes in shame based cultures have a great personal cost. This leads to the behaviour that is the exact opposite of optimal: it takes far too long to trust someone for fear of making a mistake and once trusted a person is never removed for fear of announcing a mistake (look up cognitive dissonance). Statistically speaking, this leads to a small number of people that are trusted but who are actually untrustworthy.

It seems grim. Misconceptions and cultural issues are challenging. The answer is to remove the human element and create a system that you can trust. It is important to differentiate this from just creating more bureaucracy, it is unfortunately far too easy to believe that throwing more people into the mix creates some sort of oversight. It does not. All it creates is new layers of bureaucracy that make it easier to betray a trust.

What systems are we talking about? We use the same people, just add the right processes, procedures and authorities to improve the corporate governance.

The number one issue is to ensure that there is a difference between normal operations whereby the CEO needs to have autonomy within approved guidelines from extraordinary decisions. Should the CEO be able to invest 15% of assets in a single deal without reverting to the board? Probably. Should he be able to invest 15% of assets with contingent liabilities equal to 100% of assets? Probably not.

Nothing stops corrupt behaviour like free information flow. Far too often secrecy is allowed directly, “this is confidential!” as well as indirectly, via selective invitations to management meetings.

A third issue to consider is enforcing a wide trust relationship. Why only trust the CEO? Get to know the rest of the executive team. Why is the chairman the only contact with the executives? Other board members should get involved.

It can be frightening to move to systems based trust. It is far less frightening than continual betrayals.

This article was originally published in The National.