Designing Trustworthy Organizations

Companies often blame trust violations on ‘rogue employees,’ but these violations are predictable in organizations that allow dysfunctional, conflicting or incongruent activities to take root.

In the aftermath of the well-publicized corporate scandals of Enron, WorldCom and Tyco circa 2001 and 2002, there were major efforts in the United States to restore trust and enforce corporate compliance. Among other things, the U.S. Congress passed the Sarbanes-Oxley Act of 2002, featuring enhanced whistleblower protections, holding CEOs and CFOs personally responsible for financial statements, and establishing the creation of the Public Company Accounting Oversight Board, harsher sentencing rules and even new organizational guidelines to encourage boards to adopt changes to organization structures and processes to target more systemic approaches to prevent wrongdoing. Corporate spending on compliance increased an estimated $6 billion annually,1 and leading business schools created ethics centers and made ethics training mandatory. Yet despite these reform efforts, corporate trust violations have gone unabated and public trust in business has plummeted.2 A full recitation of the significant trust violations of recent years would go on for pages, covering Olympus Corporation’s accounting fraud, Barclays’ LIBOR rigging scandal, News Corporation’s phone-hacking scandal, and the BP Deepwater Horizon oil spill. In fact, some of the most insidious practices from the Enron era (notably, disguising financial weakness with off-balance-sheet debt) were front and center again during the global financial crisis of 2008. In the wake of that financial crisis, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which extended and tightened the financial regulatory system and strengthened consumer protections. But the apparent inability of governments and industry groups to curb the level of wrongdoing raises important questions: Why do trust failures continue to occur with such frequency, and how can they be reliably prevented? The matter is all the more perplexing considering that there is substantial research on organizational trust, including what trust is, how trust affects the functioning of organizations and how trust can be built, lost and repaired.3 Much of the work supports commonsense notions about how leaders can and should earn the trust of followers. One of us (Robert Hurley) developed the framework below to help leaders understand how to earn trust.<

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References

1. Synchrony often emerges in collaborative ecosystems that develop integrated technology platforms such as personal computers. For example, it is often observed in the managerial literature that computing companies leveraging similar platform technologies tend to release their products simultaneously. See T. Bresnahan and S. Greenstein, “Technological Competition and the Structure of the Computer Industry,” Journal of Industrial Economics 47, no. 1 (March 1999): 1-40; A. Gawer and R. Henderson, “Platform Owner Entry and Innovation in Complementary Markets: Evidence From Intel,” Journal of Economics & Management Strategy 16, no. 1 (Spring 2007): 1-34; M. Iansiti, “Technology Integration: Managing Technological Evolution in a Complex Environment,” Research Policy 24, no. 4 (July 1995): 521-542; A. Gawer and M. Cusumano, “Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation” (Boston: Harvard Business School Press, 2002); and D.B. Yoffie and M. Kwak, “With Friends Like These: The Art of Managing Complementors,” Harvard Business Review 84, no. 9 (September 2006): 89-98.

2. Research about platform ecosystems and R&D racing finds that complementary products that are available simultaneously enhance value creation for consumers and for the surplus captured by producers. For example, the success of one video game platform over its competitors is often credited to multiple games that are simultaneously released with each new generation of gaming console. See, for example, R. Adner and R. Kapoor, “Value Creation in Innovation Ecosystems: How the Structure of Technological Interdependence Affects Firm Performance in New Technology Generations,” Strategic Management Journal 31, no. 3 (March 2010): 306-333; K. Boudreau, “Let a Thousand Flowers Bloom? An Early Look at Large Numbers of Software App Developers and Patterns of Innovation,” Organization Science 23, no. 5 (September-October 2012): 1409-1427; P. Milgrom, Y. Quian and J. Roberts, “Complementarities, Momentum, and the Evolution of Modern Manufacturing,” American Economic Review 81, no. 2 (May 1991): 84-88; and D. Takahashi, “The Xbox 360 Uncloaked: The Real Story Behind Microsoft’s Next-Generation Video Game Console“ (n.p.: Lulu Press, 2006).

3. R. Katila and E. Chen, “Effects of Search Timing on Product Innovation: The Value of Not Being In Sync,”Administrative Science Quarterly 53, no. 4 (December 2008): 593-625.

4. In fact, the flashing of fireflies is the inspiration for the original mathematical model upon which my own simulation modeling is based. See R.E. Mirollo and S.H. Strogatz, “Synchronization of Pulse-Coupled Biological Oscillators,” SIAM Journal on Applied Mathematics 50, no.6 (December 1990): 1645-1662.

5. This and other qualitative research quoted here was originally part of my dissertation at Stanford University. See J.P. Davis, “Collaborative Innovation, Organizational Symbiosis, and the Embeddedness of Strategy” (Ph.D. diss., Stanford University, 2007).

6. Ibid.

7. These results are drawn from simulation modeling results. See J.P. Davis, “The Emergence and Coordination of Synchrony in Networked Industry Ecosystems,” Advances in Strategic Management, forthcoming.

8. Ibid.

i. In this paper, Kathleen Eisenhardt and I explore the strategic processes that shape innovation in technology collaborations. We describe a rotating leadership process in which pairs of partners alternate control of different phases of collaborative development that is associated with innovative outcomes. See J.P. Davis and K.M. Eisenhardt, “Rotating Leadership and Collaborative Innovation: Recombination Processes in Symbiotic Relationships,” Administrative Science Quarterly 56, no. 2 (June 2011): 159-201.

ii. Mirollo and Strogatz, “Synchronization of Pulse-Coupled Biological Oscillators.”

iii. Davis, “The Emergence and Coordination of Synchrony in Networked Industry Ecosystems.”

2 Comments On: Designing Trustworthy Organizations

  • Praveen Kambhampati | August 17, 2013

    I have known organizations which have used phrases like “Pran Jaaye per dhammidee na jaaye” ( Let life go but not a cent, (Dhammidee is an ancient Indian currency)) but the organization has submerged into oblivion and the stakeholder hands have changed.

    Similar organization an MNC, The senior VP had explicitly mailed its employees, do anything violate any policies but get business and retain customer. week back this announcement the corporate ethics team was following up with the Indian regional office to complete the mandatory ethics training by all employees because the performance appraisal is liked to the ethics training compliance. The organization had been acquired by a global major.

    On a different plane, Rogue employees are sometimes productive the organization cannot bind them with policies, rules and rulers. The Rogue employees have usually independent thinking and the organization should have a mechanism to get productivity from the creative side of such resources. This is definitely not say or advocate indiscipline or nurture violations but to identify and drive the energies of such independent resources constructively to the organizational needs.

    Organizations are unfortunately find it good as long as the rogue employee is aligned to a certain lobby or senior manager and the social instincts keep the bosses in good humor.

    Long term vision of organization would not usually give these jitters of policy violations and impacts on organizational trust and customer dependability.

    Companies like for example, Accenture which are usually cash cows are capable to overcome these violations much easily and they have a different mechanism to align or dis-align any such deviations. These are much tougher for organizations which are more technology seeded and need a strong and conservative approach to stand steady in turbulence.

  • Daniel T C Lee | September 14, 2013

    Excellent Article!
    Trust is about perceptions and expectations, not just the results delivered.
    There are two highly interrelated areas of trustworthy organizations:
    (i) The External area – Customer expectations
    (ii) The Internal areas – Management and Staff perceptions
    In my capacity as the Regional Service Business strategist for various large and small organizations, I have recognized that we cannot address everyone’s expectations and needs. There is a need to define customer segments and who are actually your customer, and who just isn’t. Companies fail when they are trying to address everyone’s needs without knowing if these are really their customer targets.
    Upon identifying the customer segment, there is a need to manage these customers’ expectations. I have seen how an organization is actually run by the customers rather than the management. The philosophy ‘The customer is always right’ is taken to the extreme leading to a crisis within the organization. Customers do have self interests which may conflict with the organizational longer term objectives.
    Again the selection of the right customers helps in reducing such conflicts, and appropriate communication helps to address this.
    The related internal factors is the lack of understanding of the organization’s resources required when committing to expectations. This is especially so when a senior member of the management has inadequately designed performance measurements that focuses only on specific initiatives rather than the entire organizational well-being. Staff turnover becomes high or costs overrun may result from delivering expectations and commitments made by that member of management to internal or external parties. Alternatively, the staff may also end up distrusting the management, and fail to deliver the expectations, thus leading to a spiraling of distrust throughout the organization. These eventually boils down to the competence of the management, the structure of the organization and the communication culture that has developed.

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