Deepak Malhotra, an associate professor in the Negotiations, Organizations, and Markets Unit at Harvard Business School, took the time to speak with us about the research he and Michael Pirson, a research fellow at Harvard University’s John F. Kennedy School of Government, have done examining how companies manage stakeholders’ trust. Malhotra has also coauthored, with Max Bazerman, Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond (Bantam, 2007).
You argue that transparency is overrated. Why is this?
The point isn’t that transparency is bad. When it comes to government decisions or complex institutions like our financial system, transparency is critical. But if you’re trying to build trust with company stakeholders, you have to do more than be transparent: You have to consider what you’re revealing when you pull aside the curtain. For example, if you reveal that your CEO makes 400 times what the average employee makes, you’re not going to inspire trust among employees, even if it is important to reveal this information to investors. Transparency isn’t the miracle cure that people think it is.
Could you talk about a company that has handled stakeholder trust particularly well?
Companies like Apple, Southwest Airlines, and GE are often hailed as exemplars of good brand management and good customer service. But they’ve actually done a good job at something even harder: managing relationships with multiple stakeholders simultaneously. Often companies focus too narrowly on compensating one particular stakeholder group, perhaps a group that is salient because the company has visibly damaged relations with it in the past. But in solving one problem, say inspiring investor confidence by cutting your work force, you often worsen another: destroying employee trust and goodwill, for example.
You’ve also said “the right kind of competence matters.” Could you explain this further? How so?
Competence has often been thought of as a one-dimensional construct. But we [Michael Pirson and I, in our research] distinguish between managerial and technical competence. Managerial competence has to do with the ability to manage your work force and to make sound strategic decisions. Technical competence is about product and service development, innovation and making complex processes, such as supply chain, efficient. You obviously want both competences to be high, but keep in mind that different stakeholders look at different things. Investors and employees often look more at managerial competence. Customers and suppliers are more interested in how competent a company is from a technical standpoint. Both are important, but considering what you need to prove to whom will help you navigate stakeholder relations a lot better.
You say that value congruence -- the stakeholders’ desires to identify with an organization -- is important. Why?regulation
The big “aha” -- what’s really interesting -- is not why it’s important, but realizing how important it is. It’s not surprising that it’s good if others agree with your values. But we’ve shown that value congruence is important not just in deep relationships, for example with your spouse or with long-term employees. In the organizations we studied, trust for every stakeholder depends on the degree to which they perceive a congruence in values. As a company, you shouldn’t be focusing only on creating a reputation for transparency, competence or benevolence. You should be trying to bridge the gap between your stakeholders’ values -- even the ones at arm’s length -- and your organization’s values.
There’s been so much in the news lately about these catastrophic failures in business. Merrill Lynch just got sold; the Federal Reserve just bailed out AIG; Fannie Mae and Freddy Mac also needed bailouts. How can companies that have failed like this maintain stakeholders’ trust?
Well, the ones who have actually failed don’t need to worry about it, they’re gone! But thanks for leaving us with the bill. This is not a problem that one company can solve. The system is broken. There was a lack of oversight and regulation, poorly designed incentives, a lack of clarity in how risk was being calculated and managed, a lot of things. This is not as simple as some people being too greedy or too incompetent.
Here we are dealing with “Do we trust this system?” That’s a fundamentally different and more difficult question than “Do we trust this company?” We are going to need greater transparency, greater displays of competence, revised incentives and regulations. Let’s put it this way: Trust only matters when there is some risk involved, but trust in complex systems and institutions can only exist when risk is understood.