The 7 Low-Trust Organizational Taxes

  1. Redundancy

Redundancy is unnecessary duplication. Of course, redundant mission-critical systems and data management are necessary. But a redundancy tax is paid in excessive organizational hierarchy, layers of management, and overlapping structures all designed to ensure control. For the most part, it grows out of the paradigm that unless people are tightly supervised, they can’t be trusted. And it is very costly.

My father shared with me an experience he had once when he did a presentation for a gaming organization in Las Vegas. The management showed him the gambling floor of the casino. They pointed out that because of a low-trust environment, coupled with the high risk of theft, the gambling floor has four to five levels of management. Thus, they have people watching people watching people watching people. In a high-trust scenario, however, two levels of management would have sufficed.

In some circumstances, rework and redesign might also be considered costs of redundancy that’s triggered by low-trust behavior. In soft-ware development, as much as 30 to 50 percent of expenditures can be on rework. In manufacturing, rework, costs can often exceed the original cost of producing the product.

  1. Bureaucracy

Bureaucracy includes complex and cumbersome rules, regulations, policies, procedures, and processes. It’s reflected in excessive paperwork, red tape, controls, multiple approval layers, and government regulations. Rather than focusing on continuous improvement and getting better, bureaucracy merely adds complexity and inefficiency – and costs – to the status quo. And as management theorist Laurence Peter has said, “Bureaucracy defends the status quo, long past the time when the quo has lost its status.”

The costs of bureaucracy in all types of organizations – including government, health care, education, nonprofits, and business – are extraordinary. In 2004, one estimate put the cost of complying with federal rules and regulations alone in the U.S. at $1.1 trillion, which is more than 10 percent of the gross domestic product. In Germany, Chancellor Angela Merkel states that 4 to 6 percent of sales revenue for midsize businesses are spent on bureaucratic compliance. In 2003, the cost of health care bureaucracy in the U.S. was $399 billion – far more than it would cost to provide health care to all of the uninsured!

Low trust breeds bureaucracy, and bureaucracy breeds low trust. In low-trust organizations, bureaucracy is everywhere. 

  1. Politics

In an organization, “politics” is defined as the use of tactics and strategy to gain power. Office politics divide a culture against  itself by creating conflict with what author Lawrence MacGregor Serven calls the “enemy within” instead of the enemy without.

Office politics generate behaviors such as withholding information, infighting, trying to “read the tea leaves,” operating with hidden agendas, interdepartmental rivalries, backbiting, and meetings after meetings. These behaviors result in all kinds of wasted time, talent, energy, and money. In addition, they poison company cultures, derail strategies, and sabotage initiatives, relationships, and careers. The indirect costs related to office politics are estimated at $100 billion per year; some observers put them substantially higher.

Office politics thrive in low-trust environments. In fact, in many ways, ‘politics” is an antonym for trust. 

  1. Disengagement

Disengagement is what happens when people continue to work at a company, but have effectively quit (commonly referred to as “quit and stay”). They put in what effort they must to get their paycheck and not get fired, but they’re not giving their talent, creativity, energy, or passion. Their bodies are there, but not their hearts or their minds. There are many reasons for disengagement, but one of the biggest reasons is that people simply don’t feel trusted. 

The Gallup organization put a conservative price tag of $250 to $300 billion a year on the cost of disengagement in America alone. Their research estimates that only 28 percent of U.S. employees are engaged, and in many other countries, the figure is even lower. With regard to trust, Gallup’s research shows that 96 percent of engaged employees – but only 46 percent of actively disengaged employees – trust management. As the age-old question goes, Which came first, the chicken (distrust) or the egg (disengagement)? It’s a self-perpetuating cycle that gradually grinds the organization to a crippled pace, or even to a halt.

  1. Turnover

Employee turnover represents a huge cost for organizations, and in low-trust cultures, turnover is in excess of the industry or market standard. I’m not talking about the desirable turnover of nonperformers, but the undesirable turnover of performers. Low trust creates disengagement, which leads to turnover – particularly of the people you least want to lose. Performers like to be trusted and they like to work in high-trust environments. When they’re not trusted, it’s insulting to them, and a significant number will ultimately seek employment where they’re trusted. This turnover also flows from the first two taxes. People just don’t want to deal with all the bureaucracy and politics of a low-trust environment, so they leave. Or, as Gallup’s research suggests, their relationship with their boss is so poor (i.e., has such low trust) that they leave. 

Unwanted turnover is expensive. On average, it costs companies one and a half to two times the annual salary to replace an existing worker.

If your workplace culture isn’t open and honest, it won’t create employee satisfaction, and you’ll experience turnover and a lack of productivity that will cost you money, ideas and time. On the other hand, if the work environment is ethical, productive and positive, people will stay – and stay committed. They’ll drive your company forward.

Kent Murdock, President and CEO, O.C. Tanner Company

  1. Churn

Churn is the turnover of stakeholders other than employees. When trust inside an organization is low, it gets perpetuated in interaction in the marketplace, causing greater turnover among customers, suppliers, distributors, and investors. This is becoming increasingly an issue as new technologies such as blogs continue to develop, effectively empowering employees to communicate their experience to the world.

When employees aren’t trusted, they tend to pass the lack of trust on to their customers, and customers ultimately leave. My sister told me about a restaurant she went to recently where she asked the waiter what he recommended from the menu. The waiter’s response? “I recommend going to another restaurant.”

Now I don’t know the context of this waiter’s comment, but I do know that employees tend to treat customers the way they’re treated by management. That’s why Southwest Airlines President and COO Colleen Barrett says, “Because we approach customer service exactly the same way – whether it’s internal or external – I place the same degree of importance on the word ‘trust’ talking about employees or passengers.” 

Studies of customer defection indicate the financial impact of having to acquire a new customer versus keeping an existing one is significant; some say by as much as 500 percent.

  1. Fraud

Fraud is flat-out dishonesty, sabotage, obstruction, deception, and disruption – and the cost is enormous. In fact, most of the first six organizational taxes are actually a result of management’s response to this “fraud tax” – particularly the taxes of redundancy and bureaucracy. So in addition to all the individual taxes, there is a circular tax at play – the “fraud tax” giving rise to multiple low-trust taxes intended to deal with the fraud, but creating their own drain of time and money in the process. 

In a 2004 study done by the Association of Certified Fraud Examiners, it was estimated that the average American company lost 6 percent of its annual revenue to some sort of fraudulent activity. In Enron’s case, the fraud tax was ultimately 100 percent, which sank the company.

Fraud is almost exclusively an issue of character – a lack of Integrity coupled with self-centered Intent. If our only approach to this character challenge is to tighten the reins and put more controls in place, we will reduce the fraud tax only slightly, and in so doing, trigger the other six taxes, which are cumulatively far greater – maybe even five to ten times greater – than the original fraud tax.

Common sense suggests that we need to draw back and approach this problem differently. We need to utilize the 4 Cores of Credibility. We need to hire for character as well as competence. We need to focus our training and development to help people increase Integrity and improve Intent. We need to build and rely on an ethical culture to become the primary enforcer of cultural mores and values. As sociologist Emile Durkheim has said, “When mores [cultural values] are sufficient, laws are unnecessary; when mores are insufficient, laws are unenforceable.” The key is to strengthen the cultural mores or values; without them, there are not enough means to enforce compliance everywhere.

Rules cannot substitute for character.

Alan Greenspan, Former Chairman U.S. Federal Reserve

When you add up the cost of all these taxes that are being imposed on low-trust organizations, is there any doubt that there is a significant, direct, and indisputable connection between low trust, low speed, and high cost?
From “The Speed of Trust: The One Thing That Changes Everything” by Stephen M. R. Covey