When trust becomes a liability

Volumes have been written about trust in the world of business after the financial crisis.

“Cases of large losses at banks and other firms due to weaknesses in governance and culture are all too common. At the heart of these cases, there is an inevitable link between poor risk culture, on the one hand, and failures in controls and governance, on the other. Such weaknesses therefore have safety and soundness implications and represent a major risk factor with tangible consequences for banks’ profitability, reputation and competitiveness.” --Jaime Caruana, Former General Manager, Bank for International Settlements

Analysts, Business Gurus and even Regulatory Authorities all made propaganda about increasing the levels of trust and many organisations followed with great-looking code-of-conduct programs and a new focus on business ethics with a so-called “zero tolerance” for many related aspects of unwanted human behaviour.

Boards of Directors adopted and approved new policies, whistle-blowing programs and authorised expenses for the corporate tip-off infrastructure. Carefully constructed lists of corporate values and mission statements in bright colors quickly adorned the otherwise dull grey and off-white walls of the corporate ivory towers.

They even invented a new name for something they have lived with all of their lives, they called this thing “conduct risk”. This became big in the banking world, some are still debating where this should live as you cannot exclude Human Resources department from it. In this world; people risk is part of operational risk by definition. Operational Risk is “the risk of loss resulting from inadequate or failed internal processes, people and systems; or from external events”-- Basel Committee on Banking Supervision (September 2001)

There is no need for debate and new names for old things; those who practice operational risk management just need to start working on the hard things, like the human-factor.

Many Academics are still studying the good, the bad and the ugly of the Global Financial Crisis and even Parliamentary Commissions are in the game of sorting out the can of worms on the table. The successes of the focus on ethics and whistle-blowing often turned these cans into buckets, or should we perhaps say “drums full of snakes?”

“There is one thing that is common to every individual, relationship, team, family, organization, nation, economy, and civilization throughout the world — one thing which, if removed, will destroy the most powerful government, the most successful business, the most thriving economy, the most influential leadership, the greatest friendship, the strongest character, the deepest love. On the other hand, if developed and leveraged, that one thing has the potential to create unparalleled success and prosperity in every dimension of life. Yet, it is the least understood, most neglected, and most underestimated possibility of our time. That one thing is trust.” — Stephen M.R. Covey, The Speed of Trust: The One Thing that Changes Everything (2008).

Great advice, but it is ten years later and many Global newspaper and social media headlines tell us that consumer trust in business has eroded even further after the financial crisis.

The business world must embark on a new mission to restore trust, our policies, codes-of-conduct and brightly colored posters on the walls did not work! We have to get into the hearts and minds of the employees. Millennials make up large portions of the global workforce and projections are that by 2020, they will constitute up to 75% of the workforce in many organisations. These guys want: Purpose, personal development, a Coach @ Work, ongoing conversations that focus on their strengths; and they expect employment arrangements that match their values.

Organisations must move on from a “compliance mindset” and do more than just comply with rules and regulations. To drive the perceptions of purpose and values, they must also be seen to be doing the right things. For both organisations and economies to thrive, we need clear rules, a high level of integrity and much better decision-making; with clear consequences for unlawful, unethical and unwanted behaviour.

Most importantly, to really win back trust, organisations will have to clearly show and promote their dedication to a broader purpose. Perception is no longer enough, they need to prove they are not just driven by quick profits, but also by purpose and sound values.

The trust tipping-point

In this renewed and urgent quest to clean up the mess; we need to guard against the drive to improve the levels of trust going too far, there is a point at which trust turns into a liability and tips over into high risk. Too much trust leads to tales of lack of oversight, irregular management overrides and deceit.

One such tale of deceit comes from my time in the Middle-East where large numbers of workers are foreign workers, in some countries as high as 90%. It is common in these situations to see entire departments to be staffed with people from the same nationality as that of the head of that department. Many Human Resource departments fail to manage all elements of people risk and even sometimes encourage and support such bad practices in a multicultural work environment. The result is that as soon as the right level of authority is reached by a manager, the “countrymen and countrywomen” are invited in.

The patriarch of a good family business built up such a fantastic relationship with his general manager that he started to pass on many aspects of the business to this “brother-from-another- mother” This grew to the point where the general manager was officially granted full and sole signing power for all petty-cash payments. Over time the petty-cash float increased to enormous on-site cash holdings as it had to accommodate payments of tens-of-thousands in transactions authorised in terms of the mandate given.

Over time other controls were relaxed as the internal relationships matured, bookkeeping and stock control became completely haphazard. Accounting department just paid everything under that one signature and sometimes “recurring” payments were done even without a signature. It turned into an exclusive internal feast of theft, bribery and corruption. When a younger family member came home; and asked some questions, the missing millions were identified.

“Misconduct is not just the product of a few individuals or bad processes, but is the result of wider organizational breakdowns” --Misconduct Risk, Culture, and Supervision; Stephanie Chaly, et al. (November 2017)

In this great effort to improve trust and the conduct of employees, we must keep in mind that the human-factor is always in play, always unpredictable and human control-malfunction risk is always high!