By Miguel Martinez-Zavala — Businesses worldwide are facing tough challenges. The European Union’s economic problems, and increasing uncertainty, are driven by unforeseen events. Such events include: the Ukraine’s crisis, the sociopolitical volatility of the Middle East and its subsequent global economic effects, and the feeble U.S. economic growth that seems to be the new norm. These realities are haunting the world markets, making it difficult for established businesses to grow, and for entrepreneurs to find the adequate financing they need. The managers, or to-be managers, are affected by these events that are out of their reach, forcing them to take decisions that sometimes are not within their best interests–such as firing employees that they might need in the future, or by hesitating on investing in strategic areas that would drive future growth. As a consequence, some traditional-based business structures, as well as forward-looking businesses, have transcended the old-school management principles and started applying newer management ideas–e.g. lean thinking–with the hope of overcoming the current economic constraints. However, these changes cost money that will be reflected on the companies’ financial statements, lessening their initial earnings forecast for the period, and eventually hitting the pockets of its customers. It is at this point that managers might start asking themselves, “Is there something a company can do to face the negative economic effects of unexpected external events while keeping its cost of business down?” The answer is yes: by building trust within its organization.
The effects of trust in business and, at a larger scale, on the overall economy is a topic that has gained popularity in the last few years as a consequence of a highly publicized number of scandals that had stained the financial industry, the corporate world, the governments, and even the NGO’s. It is impossible to effectively quantify the cost of the mistrust engendered by any given ethical wrongdoing perpetrated by a so-called “leader,” but its effects on the economy are vastly clear. The 2007-2008 financial crisis itself exacerbated after trust began to dissolve between banks and their counterparties–affecting a vast number of businesses all over the world. TIME Magazine warned at the end of last year that the National Security Agency’s espionage scandal could cost “the top U.S. tech companies billions of dollars over the next several years… if international clients take their business elsewhere.” And it is worth pointing out that this projection only takes into consideration the business transactions that would now take place in a different country, but not the ones that will not take place at all. As these examples attest, the basis for a healthy economy is a healthy business environment that has plenty of trust that serves as a lubricant for the system.
A business organization can start to build trust in order to organically–and inexpensively–boost its future prospects by expunging the five major causes of mistrust stated in The New Economics of Trust (Beard Books, 2014). These five causes are: the misalignment of measurements and rewards; the incompetence or the presumption of incompetence; the imperfect understanding of systems; the information that is biased, late, useless, or wrong; and the lack of integrity found in any of its members. By doing so, the cost of doing business will dramatically decrease by things such as the elimination of management layers or the diminution of agency problems that might have caused internal tensions before. The old and arthritic organization will then become a more vibrant and nimble one with a genuinely engaged workforce where communication is key. The economic savings that will result as a consequence will be available for investment in other areas within the firm, diminishing the utilization of outside financing. And, in an invisible way, the productivity reached will have a broader impact on the availability of resources for other firms in the outside markets, lowering their costs as well and therefore making the overall economy more efficient.
At a business-by-business speed, the organizations that expunge mistrust inwardly and its related waste will certainly have a positive impact on the overall prosperity. It is like a chain reaction that starts with building trust from within a business that will translate into profits, profits that will transmit into jobs, and jobs that will help to rebuild the people’s confidence in a steady economic environment, eventually easing government-established policies. A perfect recipe to lubricate the financial system and bring prosperity back to society, regardless of the uncertainty of the future events that are out of everyone’s control.
MBA 2012, University of St. Thomas
Coauthor of The New Economics of Trust (Beard Books, 2014) along with Prof. John O. Whitney
David Jolly, “Ukraine Crisis Takes Toll On Germany’s Economy, Powerhouse of the Eurozone,” The New York Times, August 12, 2014
Harriet Torry, “Germany’s Economic Growth At Risk From Ukraine, Middle East Crises,” The Wall Street Journal, August 12, 2014
Binyamin Appelbaum, “U.S. Economic Recovery Looks Distant as Growth Stalls,” The New York Times, June 11, 2014
Schools Brief. “Crash Course: The Origins of the Financial Crisis,” The Economist, September 7, 2013
Sam Gustin, “NSA Spying Scandal Could Cost U.S. Tech Giants Billions,” TIME Magazine, December 10, 2013
John Whitney and Miguel Martinez-Zavala, The New Economics of Trust (Washington, D.C.: Beard Books, 2014)