Martin Pelletier: The importance of weighing the trust factor in relation to winning performance
I recently came across a video by English-American author Simon Sinek that changed my perspective on a number of things, especially in the business and investing world. In it, Sinek describes his analysis of what the most important qualifications were required to make SEAL Team 6, the most elite of the United States Navy SEALs.
He outlined a chart with the Y-axis being performance and the X-axis being trust. Surprisingly, their preferred candidates did not come from the highest-performance and highest-trust corner of the chart.
Just by being a SEAL team member candidates’ performance was already high, and so the organization was willing to compromise on performance to seek out those with the highest level of trust — essentially prioritizing trustworthiness over the highest levels of performance. SEAL Team 6 members trusted each other, as he put it, with not just their life, but also their money and their wife.
Similarly, for organizations, adding people with a high level of performance but a low level of trust can be toxic. Having worked in investment banking for nearly a decade I saw some of the effects of this approach.
I remember one story told to me from a friend working at a U.S. investment bank in New York at the time. All of the new recruits were called into the office on a Friday at 7 p.m. and told to wait for a senior partner. The senior partner didn’t show up until midnight on purpose just as a test. Those who left early were let go. This kind of behaviour invokes fear more than trust.
Now it’s ok to make mistakes but it is essential to quickly right any wrongs and implement changes to restore trust. For example, take a look at the recent Toronto Dominion Bank money laundering fiasco in the U.S. resulting in a substantial US$3 billion settlement with the U.S. government.
The company was punished by investors with its share price greatly underperforming its peers. However, TD pivoted rather quickly, including some changes to its senior management team including its chief executive while slashing management bonuses. It then announced the sale of its 10 per cent stake in Charles Schwab Corp. and will be redeploying funds into a share buyback program and shoring up its balance sheet.
While the stock still has a bit of catch-up to play with its peers, we think it sends the right message about the seriousness of the situation and their intent to restore trust. We think other Canadian companies struggling because of a lack of investor confidence and the uncertainty about their forward outlook should take a page out of TD’s recent actions.
As a discretionary manager, trust in our fiduciary relationship is critical. This means always putting my client’s interests first and working with partners that make this a priority as well. I find it especially useful to put myself in clients’ shoes by imagining how I would want myself and my family treated. This includes the way their portfolios are being managed and taken care of, the time being allocated to the strategies being implemented, and ensuring every client is being valued and treated equally while recognizing some may demand more time and complexity.
Corporations need to do the same thing for their investors and there is no better place to start than building a firm around employees who are rewarded for their trustworthiness and not just their performance merits. This requires getting everyone to buy into the process and vision of what the corporation is trying to achieve. And it especially requires placing trust in employees that they will do the right thing even in the face of adversity.
Perhaps American businessman and former chief executive of The Campbell’s Co. Douglas Conant said it best: “Trust gives you the permission to give people direction, get everyone aligned, and give them the energy to go get the job done. Trust enables you to execute with excellence and produce extraordinary results. As you execute with excellence and deliver on your commitments, trust becomes easier to inspire, creating a flywheel of performance.”
Therefore, when making any investment decisions, whether directly in a company, within a fund or with a discretionary manager acting on your behalf, we would highly recommend undertaking measurements around determining the level of trust beyond what has been implied by historical returns. As the disclaimers usually say, ”Past performance doesn’t always equal future performance,” which is true but trust certainly can be a powerful force in maximizing a winning outcome.
