Honesty and Trust

I had a special visit in my office from Stephen M. R. Covey, the author of The Speed of Trust. I shared with him my basic philosophy regarding the importance of honesty, that the most serious threat to the economic well-being of any company or country is simple dishonesty. He explained that this belief is very similar to the foundation principle he has been teaching for the past decade regarding the importance of trust. He gave me a copy of his new book, Smart Trust, which provides additional evidence and applications regarding the importance of trust.

Trust is still the basic foundation by which our economic system operates. Even though we increasingly tend to rely on legal contracts and written agreements, the vast majority of our economic transactions are done informally based on a relationship of trust. In his bestselling book, The Speed of Trust, Covey explains how trust creates a competitive advantage because it increases speed and reduces the costs of transactions. When trust increases in a relationship (or on a team, in a company, or in a country), people are able to communicate faster, collaborate better, innovate more, and do business faster and more efficiently. Covey calls this the trust dividend.

In his more recent book, Smart Trust, Covey and his coauthor, Greg Link, illustrate how trust within different cultures has a direct impact on the economic prosperity of each country. They use a six-year average (2005-10) of the Corruption Perceptions Index reported by Transparency International as their measure of trust. This is an annual ranking of the perceived levels of corruption in almost two hundred countries. They contrast these data with a six-year average of the gross domestic product per capita for the same countries. The correlation, which appears to be about .80, shows that countries with a high trust index, such as Sweden, Denmark, and Australia, also have a high per capita gross domestic product. Conversely, countries with a low trust index, such as Iraq, India, Russia, and China, have low GDP per capita.

Academic research by economists Paul Zak and Stephen Knack have also confirmed the relationship between trust and prosperity. In a landmark 2001 study of forty-one countries, they found a direct correlation between the level of trust within a given country and the economic growth and investment in that country. They concluded that because trust reduces the cost of transactions, high trust countries produce more output than low trust countries (The Economic Journal, vol. 111).

Covey and Link do not advocate blind trust, however. They advocate smart trust that is characterized by a tendency to trust people combined with a careful analysis of their trustworthiness. A smart trust analysis involves assessing three variables, opportunity, risk, and credibility. What are the possible outcomes and what could go wrong? How much risk is involved and is the risk reasonable? Has this person demonstrated good faith in the past or are there reasons to be suspicious? Extending trust is an act of faith, but it pays to exercise due diligence in ascertaining the credibility of the people or organization involved. If the credibility is low and the risk of extending trust in a particular situation is high, the smart thing may be to simply not extend trust.

Credibility involves both character, meaning high integrity and a genuine intent, and competence, having capability and a track record of proven results. People do not want to conduct business with someone who, though very skilled, is a known liar and cheat. Neither would anyone want to do business with someone who is honest, but incompetent. Thus, smart trust involves a consideration of both character and competence of other people.

Covey and Link cite several examples of companies that have benefitted from the trust they have shown in customers, especially eBay, L. L. Bean, and Netflix. Although these companies have been the victims of fraud and dishonesty by some customers, they continue to believe that the vast majority of customers are trustworthy and can be trusted to fulfill their agreements. Customers who have a history of deceit are dropped as customers and told to go elsewhere.

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Most people underestimate how fragile trust is. Someone who has a track record of telling the truth dozens of times can destroy trust by one dishonest act. Trust is hard to gain and can be easily destroyed. But, trust can also be generated by the way people are treated. A hot dog vendor found that his profits soared when he trusted customers to leave their money in a bowl and make their own change. Likewise, I have learned to trust students to not cheat when I administer exams; I never remain in the room to proctor an exam and expect students to abide by our university’s honor code.

While trust will always involve an element of risk, it is clearly something worth striving for and encouraging. Trust and simple honesty are essential to the economic success of any country, company, or interpersonal relationship. $

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