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Transcript: How trust and keeping your word will improve your bottom line

A businessman gives pledge to keep his promise.

KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University,  with Talking Management for The Globe and Mail. Today I am delighted to speak to Rebecca Henderson from the Harvard Business School.

Good afternoon, Rebecca.

REBECCA HENDERSON – Good afternoon, Karl.

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KARL MOORE – Some of the research you have been doing is about high performance but also high purpose organizations. What are some of your key learning's you have taken away from that research?

REBECCA HENDERSON – I first got interested in high purpose organizations through studying high performance firms. One of the most interesting results from recent studies of firm level productivity is that firms that are seemingly identical – have the same capital and are playing in the same markets – have huge differences in productivity at the plant level.

I became very interested in why that was and I was convinced that one of the reasons, and there are many, but one of the reasons was because they were able to maintain what the economists call Relational Contracts with their work force. Now, a Relational Contract is what everyone else calls trust. So instead of telling someone who works for me, "I want you to go to China and start a new business and here are exactly the metrics I am going to manage you by," instead I say, "I want you to go to China, start up a new business, and do the right thing and if you do the right thing I will take care of you."

When I say that to you we set up a complex implicit relationship between us, which again the sociologists and the organizational behaviorists have been studying for years but which is new to the economist – this idea that organizations are shot through with these implicit understandings that have very important economic implications. So if you take that as a premise (and I think that most practicing managers would say, "yeah, yeah that makes sense"). The interesting question is why are they so hard to build?

If I tell you that the secret to high performance is building trust with your work force so that they go the extra mile and that you then take care of them, why is it that the world is not full of high performing firms? This is a particularly puzzling question to an economist because if there is a better equilibrium I should just be able to announce the better equilibrium and go there.

So studying this topic has led us down some very interesting routes where we are looking at things like path dependent equilibrium. When you talk to managers you don't use the term "path dependent equilibrium," what you say is, "so how do you build trust within the organization?" What they talk about are two things – they talk about being ruthlessly committed to doing what you said you would do. When you hit the guardrails, when things get nervous making and you are tempted to go back on your word or not do the right thing, you come through in spades – you show that you are really committed to keeping your end of the bargain and that requires really superior strategic skills.

That is very interesting and we can kind of model that and the economists are like, "Ok that makes sense, I understand ambiguity and following through in times of ambiguity." But then the other issue that comes up when you look at firms like this and think hard about the problem is might it be helpful to have some kind of shared values, some kind of shared purpose, or some kind of reputation for keeping your word?

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I signed totally instrumental, as if I should be a good person because it will help me make more money, I think in reality what is going on is that in high performing firms there is an interaction between the two. You believe strongly in the firm, you believe strongly in the purpose of the firm that you want everyone to give their very best, not to be overly worried or obsessed with short-term results, so you are willing to invest in people for the longer term.

That allows you to build these relational contracts initially at a low level. As the firm reaps more success and as you start to have an impact it becomes easier to reinforce those contracts. This is a dynamic you see in firms that we have heard of like Toyota or Southwest Airlines but I think you see it too in firms that no one has heard of like United Stations [Radio Networks] or Merida Carpets, and these are firms run by totally buttoned down, excellent managers who have a deep sense for what they are trying to accomplish in the world.

I think, and many people have looked into this issue, but I think that what my co-authors and I are finding our ways towards is some sense of the analytics behind this, of the mechanisms behind it. What worries me about a lot of the purpose-driven literature is seems to assert that if I just exercise authentic leadership then everything will happen. Of course being authentic and individual behaviour is critically important but I think that has to be mapped to the strategic understanding of the company, the kinds of investments that need to be made over time, why these behaviours are a good idea in the long term, so that in these high performing firms you see this wonderful synergy between the hard and the soft.

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