Leaders are always searching for ways to be more effective. Although research suggests that trusting people more is a particularly potent way to increase team member performance, trusting more is not natural – leaders’ natural tendencies are to be particularly cautious because trusting means taking risks that they can easily avoid.
In Do Nothing! How to Stop Overmanaging and Become a Great Leader, I tried to convince leaders to trust their team members more. I don’t know how successful I’ve been, but I now have cool, new information that strengthens the argument. In fact, I can’t help thinking that if Warren Buffett and Charlie Munger can’t convince you to trust more, no one can.
Here’s the story, which I have drawn from a May 5, 2014 editorial by Andrew Ross Sorkin in The New York Times.
Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s best friend, recently spoke at the company’s annual meeting: “By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness.” He went on to suggest that, rather than hiring lawyers and people to regulate employee compliance, it’s more effective to put basic controls in place, do your homework so that you hire competent people whom you can trust, and them trust them to do their jobs. In fact, as Sorkin reports, even though Berkshire Hathaway is the fifth-largest company in the U.S. and employs 300,000 people around the world, they do not employ a general counsel to monitor their many different work units. They also don’t have an HR department.
Pretty stunning, isn’t it? No HR department? 300,000 employees?
This approach is based on the belief that people will perform more effectively if they don’t have to worry that someone is always watching them. This is not to say that everyone will always do what you want them to do. As Mr. Buffett put it, “300,000 people are not all going to behave properly all the time.” Also, as Mr. Munger put it in a lecture at Stanford in the late 1990s, “A very significant fraction of the people in the world will steal if (a) it’s very easy to do and (b) there’s practically no chance of being caught.” And just this year, he added, “You’re never going to have perfect behavior in a miasma of easy money.”
So there clearly are costs to trusting people – but Munger and Buffett are very good at cost/benefit analysis, and they have concluded that these risks are outweighed by the benefits that result when you trust your people.
Part of their calculus is a belief that monitoring is not particularly effective: “A lot of people think if you just had more process and more compliance — checks and double-checks and so forth — you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust.”
All sorts of research support their views. A wonderful paper by Ann Tenbrunsel and David Messick, for instance, showed that adding a weak monitoring system (“we will check up on your behavior less than 5% of the time”) in a context in which people could choose to cooperate or not cooperate led people not only to be more non-cooperative but also to expect that other people would be more non-cooperative. In addition, the use of a weak monitoring system pushed people to view their cooperate/not cooperate decisions as a primarily business-like decision (rather than thinking that it might have something to do with ethics). Thus, by creating monitoring systems, leaders and their organizations may be inadvertently influencing not only how people view their work, but also how they expect other people to behave and how they themselves behave.
Research in economics has reached similar conclusions. In a provocative paper, Margit Osterloh and Bruno S. Frey suggest that “more monitoring and sanctioning … create a governance structure for crooks,” i.e., they reinforce selfish, extrinsic motivation rather than more personally-driven, intrinsic motivation. They suggest that leaders hire people who have strong internal motives to cooperate and who enjoy their work, de-emphasize pay that depends on performance, and strengthen employee participation and self-governance.
It is clear that Berkshire Hathaway’s approach puts tremendous emphasis on selecting the right people. Getting it wrong can be pretty disastrous. But this doesn’t mean that every leader must adopt their approach completely. It is perfectly reasonable to monitor new employees’ performance when they take a new position. Once they have shown that they truly are competent and trustworthy, you can then increase your trust in them, and remove restrictive oversight.
With corporate scandals in the news all the time, it is easy to see why leaders would be reticent when it comes to trust. These corporate scandals are so vivid that they are tremendously easy to remember, and they can make us worry that untrustworthiness is everywhere. In fact, however, a great majority of the people we encounter are trustworthy a great majority of the time.
One final story. I recently needed medical treatment by a specialist. Our insurance allowed me to see anyone I wanted to see, so I tried to find the best person I could. To help me do that, I contacted one of my previous EMBA students, who just happened to be the head of an important department in one of our best local hospitals. I have interacted with him frequently over the years, and he is clearly a tremendously competent doc. When I told him that I needed a referral, he had a name instantly. Then he said, “We don’t get along, but he is really good.” What could be a better indicator that his referral is not only competent but trustworthy? He doesn’t like him but he recommends him anyway.
The moral of these stories is both obvious and important, and it’s worth repeating. Do your homework. Find people who are competent and trustworthy. Then trust them – and not just a little because people who are trusted more than they anticipated appreciate it so much that they uniformly step up to show you that they are at least as trustworthy and competent as you thought. This strategy has worked exceedingly well at Berkshire Hathaway. It can work for you as well.
Margit Osterloh & Bruno S Frey. 2003. Corporate Governance for Crooks?: The Case for Corporate Virtue. Institute for Empirical Research in Economics, University of Zurich, Working Paper Number 164.
Andrew Ross Sorkin. May 5, 2014. Berkshire’s Radical Strategy: Trust. The New York Times.
Ann E. Tenbrunsel & David M. Messick. 1999. Sanctioning systems, decision frames, and cooperation. Administrative Science Quarterly, 44, 684-707.
J. Mark Weber, Deepak Malhotra, & J. Keith Murnighan. (2005). Normal acts of irrational trust: motivated attributions and the trust development process. In Barry M. Staw and Roderick M. Kramer (Eds.), Research in Organizational Behavior, Volume 26. NY: Elsevier, 75-102.