Week 7: Using informal mechanisms to build and maintain trust – Part A: Common values, norms & goals
Trust-building governance mechanisms for inter-organizational relations
In this series we’ve examined types of trust, the benefits of high-trust partnerships, the role of goodwill in trust building and how formal governance mechanisms can foster or impede trust building. Now we turn our attention to governance by trust, a direct form of informal governance. This week, we’ll tackle relational governance in three bites: norms, values & goals; joint planning & problem solving; and bilateral communications.
Informal governance mechanisms can be divided into two streams:
- Direct experience i.e., relational governance – where you are working directly with one or many people from another organization and feed that experience back into the collective understanding of your organization; and,
- Indirect experience i.e., reputation – where a third person, group or organization acts as a proxy and provides information about a potential partner (Week 8).
Sometimes called governance by “goodwill trust” or a form of benevolence, relational governance has been shown by many scholars to be more efficient and less expensive than formal control mechanisms (Bachmann & Zaheer, 2008; Claro et al., 2003; Das & Teng, 2001; Dyer & Singh, 1998; Gulati, 1995; Zaheer & Venkatraman, 1995).
Think of the savings that are possible if organizations reduce or eliminate contracting costs alone! Since this is the case, firms that can rely on informal governance mechanisms to create stronger forms of trust (Week 2) have a cost-based competitive advantage over competitors who have to rely on economic hostages, contracts and supervision (Barney & Hansen, 1994, p.183).
Relational governance mechanisms include: common norms and values, goal congruence, joint planning and problem solving, and bilateral communication. All of these foster cooperation and limit opportunism (Claro et al., 2003; Poppo & Zenger, 2002; Woolthuis et al., 2005; Zaheer et al., 1998).
Each of these informal governance mechanisms can create trust on a stand-alone basis. They are also intertwined to jointly create a powerful and positive spiral of growing trust.
Common Norms & Values
While you cannot necessarily expect broad commonality in norms and values at the outset of an inter-organizational relationship – because presumably you want your partner to bring something new to the party - there is great value in selecting a partner who has similar norms & values. Barring that, you can initially focus and build on points of commonality. This is critical because:
- Shared values are a “direct precursor of both relationship commitment and trust” (Morgan & Hunt,1994, p. 25).
- When norms create “thick trust”, the thick trust substitutes for complete contracts and is a superior governance mechanism due to the positive ‘side effects’ of constructively solving conflicts and loyalty (Woolthuis et al.,2005).
- Common values and norms improve exchange performance by reducing governance costs and making individual and collective behaviours more predictable thereby reducing the risk of opportunism.
- Relational norms have “strong effects on sales growth, financial performance, cooperation and [reducing] conflict…and provide an important backdrop for other focal performance drivers” (Palmatier et al.’s, 2007, p.183).
In case you think that trust and relational governance is all a little “airy fairy” and naïve, norms also work from a punitive perspective because players who do not cooperate or follow the rules of the relationship or culture face ostracism and reduction of current & future opportunities (James, 2002). That’s a hard financial incentive to play by the rules. While this approach assumes coercion and power rather than trust, it still supports the role of norms as a strong source of internally created and imposed governance.
Goal Congruence
A number of conceptual papers, and the common knowledge, surrounding goal congruence and trust is that trust builds after numerous inter-personal interactions over time. This gives people a chance to experience goodwill, to test one another’s credibility and to deepen their understanding of one another’s role constraints – which all contribute to increased trust (Ring & Van de Ven, 1994). In an iterative approach, people develop empathy and a common-interest (identity-based trust) as they work together over time (Hexmoor et al., 2006; Lewicki et al., 2006). Trust between individuals can transfer to the group and eventually to the organization.
Convergence of values and goals lead to identity trust which, in turn, strengthens the convergence of values, attitudes and goals– a positive, virtuous cycle (Gulati & Sytch, 2008).
However, goal congruence does not have to take time, i.e., be iterative and cumulative. This is one of Trust’s Big Myths!
In large-scale international engineering projects, contracts provide high level goals and direction and “necessitated general trust is extended to everyone even without prior knowledge” (Girmscheid & Brockmann’s, 2010, p.353). People use one another’s competencies, training and certifications (intsitutional trust) as a shortcut to extend trust. Imagine a large-scale disaster relief scenario. The various organizations don’t have the time to get to know each other slowly and build common values, norms and goals over time, they have to go on competencies and common objectives.
Whether iterative or instant, common goals …
- Set the direction of the alliance (Das & Teng, 2001).
- Limit distrust (Sako & Helper, 1998)
- Evoke sentiments most strongly related to trust (Geyskens et al.’,1998)
- Have a significant positive effect on coordination efforts within Inter-organizational relations (IORs) (Jap, 1999)
- Are an important variable in the success of alliances (Volery & Mensik, 1998)
- Meet the fundamental business ethics requirement that “both organization and individual needs will be achieved best by pursuing collective ends (Hosmer, 1996; Caldwell & Karri, 2005).
It’s not about singing kumba-ya… it’s a solid business strategy that ensures that goals and outcomes are clear. With a literally down-to-earth observation, a respondent in a case study of large-scale construction projects stated:
“There has to be a common interest, so that if a project partner screws up the project he also spoils it for himself” (Laan et al., 2011, p.104).
Do you have experience with swift trust between organizations? How about a scenario where goals were not aligned in a business partnership? How did you realign the situation? I’d love to hear about it.
I hope to see you at Part B when we explore Joint Planning and Problem Solving as informal relational governance mechanisms.
The 16 minute MA Leadership… with one edit
I’ve heard that you always make three speeches: the one you prepare, the one you deliver, and the one you give in your head on your way home when it’s all done.
This week, I had the honour of speaking on behalf of my MA Leadership Class of 2012 at the University of Guelph. I prepared a reflection on the program, on my amazing classmates and on leadership in general. The speech was very well received by its intended audience but I do wish I had made one important addition.
Graduation day with my biggest fans and supporters
Towards the 12-minute mark, I made a point to thank the “supporting cast” – the staff of the College of Management and Economics and I mention quite a bit how classmates supported one another; however, I neglected to mention my family and my classmates’ families. Spouses and extended family who did double duty for two years. Kids who were told “Mom has homework” or “Dad has an assignment due” more times than they care to remember.
Since I have a platform where I can make this edit, I want to thank my indefatigable editor, my husband Mike. He encouraged me when I was completely drowning in my topic and stressed by outlines and deadlines. As immersed as I was, he always provided a fresh perspective and warm encouragement. My children, Robbie and Elise, were also amazing cheerleaders - drawing happy faces in the margins of journal articles; giving a little hug, a word of encouragement or a little trinket; and steering clear when timelines were tight (with Dad’s help, of course). My Dad was a safe place to land; and; friends also, no doubt, heard more than they perhaps wanted to about courses, professors and APA formatting.
No leader achieves success alone and I wanted to thank the entire supporting cast, including those who have been my biggest fans.
What our collective minds could do together!
Have you ever been in the company of a group of people that you think, collectively, could solve – or at least make some serious headway- on some of the world’s most wicked problems?
From the field of positive psychology, appreciative inquiry focuses on building on what works in an organization.
I had such a priviledge on Wednesday when classmates from my MA Leadership program gathered at the University of Guelph to share the results of their Master’s research projects. While the 10-15 minute presentation window allowed for a variety of research papers, findings and insights to be presented, it did not nearly do justice to the depth of their research.
Since I have asked my friends and classmates to guest post on this blog to provide you with a much fuller picture of their findings, here are a few over-arching themes to whet your appetite.
Leadership Tips & Findings Hot off the Presses
Technology
- North American leaders need to be far more tech-savvy because a tsunami of new technology is coming. Our leaders are ill-prepared and our cumbersome and expensive governance mechanisms slow our ability to anticipate, innovate and respond to change. Research by @skardiel.
- Leaders under-communicate vision and do not use available technologies appropriately. In particular, difficult to navigate, busy web-sites are not effectively communicating key policies. Take steps to overcome language barriers and to make critical information easier to access on your web-site.
Emergence
- Projects rarely unfold in a linear fashion. Elements of data gathering, solutions and implementation take place at all stages of the process. Stay ‘edgy’ and be open to emergent change throughout the process.
Engagement
Employee engagement research shows only 20% of the working population is fully engaged.
- Appreciative inquiry can build on existing strengths and enhance positive workplace momentum. Do you build on success or focus on disfunction?
- Coaching interventions work and can build engagement. Are you investing in coaching your people for excellence? Research by TrueBlissCoach also on Twitter @TrueBlissCoach.
- Invest in career development to engage and retain your key players. Primary research by @lisaw33 showed that career development is positively correlated with affective commitment for fundraisers. In fact, career development opportunities are more important than traditional incentives for retaining and engaging key staff.
Increased commitment = higher engagement = lower turnover.
Don’t skimp on your people!
Trust
- Build macro-level trust between organizations (or departments) with formal and informal governance mechanisms. Inter-personal trust is insufficient to solve the macro trust problems our society now faces. (Guess whose presentation this one was? @DTORourke)
- Similarly, investing in people through coaching and career development (above) are considered Transaction Specific Investments. They build trust within an organization because they signal a long-term commitment in the individual (goodwill trust) and they build that person’s capacity (competence trust).
Thank you so much to my classmates for their excellent presentations. I still always learn so much from all of you. Looking forward to those guest posts!
Feedback...Criticism or Opportunity?
Every once in a while, I like to get back to the basics. The basics for me are always about people and how we relate to each other. This post addresses giving and receiving feedback. I know, it is an old topic but I’ll stop talking about it when more of us get better at it. In the meantime, here it is…again.
A Little Hiatus & Giving Credit Where Credit is Due
A little Hiatus
I am sick with a really bad cold on a really busy week. Since I don’t understand why sick people go to work when they should just focus on getting better, I will resume Twelve Weeks to Trust next week.
I’m also quite certain that no one’s world will crumble if they have to wait a week to find out how informal governance mechanisms (norms & values, shared goals, joint planning & problem solving and bilateral communications) can build trust between organizations. If it does, then thank you for your loyalty but I suspect you may have issues that this blog cannot solve.
Giving Credit Where Credit is Due
Since I did have this in my drafts folder, I thought this might be a good time to explain why I cite the sources of my research with the names and years in brackets which is unusual for a blog.
I cite authors and provide my bibliography because these scholars have published research in peer-reviewed journals – which is extremely difficult to do – and I like to acknowledge the years of research this requires and to give credit where credit is due.
Humbly, I stand on the shoulders of giants – editors of handbooks from Oxford and compendiums! I would never pretend those ideas are my own and I want you to know that the concepts I am presenting are grounded in solid academic research.
I’d like you to trust the information that you find on this blog and by extension, to trust me. So, I am committed to providing highly credible information (no Wikipedia references here) and to provide the references so that you may easily find the same information.
What I have teased out of their research is my doing. How I have mixed it with other research or current events is also my own alchemy. And the broad conclusions, including any errors, are my own.
Should you find any errors or wish to suggest literature that complements or contradicts my current position, then I warmly welcome your input and… I may cite you 
Now, if you’ll excuse me … I’m going to find more tissues and try to “Sharpen the Saw” (Covey, 1989).
Like this:
Transaction Specific Investments… click!… Sounds totally boring. But read on…
Transaction Specific Investments have been repeatedly proven to build trust in inter-organizational relationships.
Sometimes called Relationship Specific Investments (RSIs) or idiosyncratic investments, TSIs are unique investments that support the inter-organizational relationship and its performance.
They may be tangible or intangible but they are not easily transferable to other relationships and they lose their value if the relationship is terminated.
Examples of TSI include a joint marketing effort where the signage and promotional items are specific, a joint production facility or unique hardware, software and training.
From a purely calculative, somewhat negative perspective, TSIs are seen as a “deliberate strategy of locking oneself into a relationship, thus raising switching costs” if one partner choses to defect (Sako & Helper, 1998, p.393). They are referred to as “economic hostages” that control opportunism through economic incentives (Dyer & Singh, 1998).
Imagine you have a joint manufacturing facility – you won’t easily leave the partnership because the costs would be too high. Of course, this doesn’t mean the organizations trust one another – just that they have economic incentives to stay in the partnership. So TSIs alone are insufficient to build trust between organizations. What’s important, again, is how they are used.
TSIs build trust when they:
- Enhance coordination efforts between buyers and sellers to enable strategic outcomes (Jap, 1999.p.471)
- Offer a “credible commitment” They show that the vendor can be believed, cares for the relationship, and is willing to make sacrifices through such investments (Doney & Cannon, 1997; Ganesan, 1994; Geyskens et al., 1998; Sako & Helper, 1998; Zaheer & Venkatraman, 1995; ).
- Signal a long-term mutual commitment to the relationship which enhances trust, especially if both parties have other exchange alternatives (Ganesan, 1994; Sako & Helper, 1998; Zaheer & Venkatraman, 1995).
A long-term commitment and the expectation that your partner has taken your interests to heart are preconditions for serial equity to occur (Ganesan, 1994; McEvily et al.,2003, p.96). This means that reciprocity doesn’t have to occur immediately because the organization trusts that short term inequities will be corrected in the long-term (Ganesan, 1994; Sako & Helper, 1998; Poppo & Zenger, 2002).
Consistently, research finds that anticipated future longevity of a relationship is positively correlated to trust (Currall & Judge, 1995; Doney & Cannon, 1997; Ganesan, 1994; Sako & Helper,1998).
The length of your past relationship is not nearly as important as where you plan to go together in the future.
Remember how we determined that trust is generative in Week 2? A meta-analysis* by Geyskens et al. (1998) found that long-term orientation is a consequence of trust and that “the effect of trust on long-term orientation is even substantially larger than the direct effect of economic outcomes or any of the other antecedents” (p.242). So they influence and grow one another.
For best results: invest in your partners to signal long-term commitment and enhance outcomes. ( I believe this applies to professional development within organizations too!)
As we have seen in Part A and in Part B of Week 6, the use of formal governance mechanisms in IORs can either be seen as an imposition of power used to control the other party or it can be seen as a coordinating mechanism (Bachmann, 2006). When they focus on imposing power and control they erode trust (Kumar, 1996).
When formal governance mechanisms are used as a coordinating mechanism to provide role clarity, help to align interests, signal long-term commitment and provide a framework to support collaborative relationships, they build trust.
Have you seen examples of formal governance structures like hierarchy & monitoring, contracts and TSIs that build trust? Can you think of opportunities to use these formal mechanisms to enhance trust between departments or organizations?
*meta-analysis is a review of a large body of research to draw broader conclusions than you can obtain from a single study.
Like this:
There are two undeniable facts in inter-organizational relations:
1. All inter-organizational relationships are linked by a governance framework. Partners agree on structure (alliance, equity partnership, joint venture, etc.) and negotiate how it will be managed with contracts, hierarchy, reporting mechanisms and specific investments.
“The choice of the form of governance …is the inter-organizational strategy of the firm” (Zaheer & Venkantraman, 1995, p. 375).
If you have a partnership between two organizations, you have a strategy. If you have a strategy, you have a governance mechanism.
2. The role of that governance structure is to “mitigate the risk of opportunistic behavior in the alliance and to foster inter-partner trust” (Rivera-Santos & Rufin, 2010, p. 55).
So, your intent and your approach when you establish this governance structure is critical to building trust.
So much so that Ranjay Gulati of Northwestern University (1995) found that if high trust exists prior to the establishment of a governance structure, less formal governance is required because the perception of opportunism, or the fear of being taken advantage of, is low. This means the costs of governance are lower too.
Trust can influence choice of governance, governance can build trust, and in some cases, trust can be a form of governance – think of a handshake that replaces a contract.
Since inter-organizational governance is part formal structure i.e., hierarchies, contracts, etc. and part informal process i.e., norms, practices, etc. we’ll separate our look at formal governance this week into two parts and cover informal governance in Week 7… probably in a few parts as well. (Feedback on post length received!) So let’s look at hierarchy and monitoring today and tackle Contracts and Transaction Specific Investments (TSIs) later this week.
Formal Governance Mechanisms & Trust
First, let’s be very clear that your intent has to be to build trust.If you are focused on imposing power and control, any mechanisms that you put in place will erode trust (Kumar, 1996). Conversely, if they are intended and seen as formal mechanisms to support a collaborative relationship, then they will build trust.
Bart Noteboom put it best: “Adversarial strategies jeopardize value, and cooperative strategies build value.” (1996, p.985).
Hierarchy & Monitoring
In the economics and business literature in particular, externally enforced safeguards such as hierarchy and monitoring are considered important mechanisms to regulate and monitor activities to reduce the risk of opportunism. They provide access to fiat (authority, sanctions, ability to provide directives), better information disclosure, and incentive and punitive mechanisms to solve problems without the cost of resorting to the courts. In a more positive light, hierarchy and monitoring can also
- Create role clarity and enhanced information sharing (Kabadayi & Ryu, 2007); and,
- Boost inter-organizational trust surrounding resource investment where low trust exists but the need for investment is high (Fang et al., 2008, p.94). Basically, tight rules and monitoring create calculative trust (Week 2).
Intent is critical because if the intent is to control and centralize, impose and punish, then parties are acting more out of power and coercion than trust. This leads to conflict and distrust (Ring & Van de Ven, 1994) and less creativity and collaboration (Kumar, 1996). As you can imagine, these have a negative effect on the performance of the alliance (Kabadayi & Ryu, 2007). Ironically, Sako & Helper (1998) also showed that hierarchy does not have a significant effect on attenuating [buyer] opportunism which is its principal objective!
For best results: When mapping out the hierarchy and monitoring mechanisms in your inter-organizational alliance, stress the intent to provide clarity and go lightly on hierarchy, monitoring and control.
Contracts
The intent and approach to contracts and the contracting process can, again, either enhance or erode inter-organizational trust. They build trust when they:
- Act as a coordinating device for activities (Nooteboom, 1999; Williamson, 1993) and resources (Girmscheid & Brockmann, 2010; Mellewigt et al., 2007)
- Align interests (Bhattacharya et al., 1998)
- Provide role clarity and define expectations (Bachmann & Inkpen, 2011; Das & Teng, 2001; Dyer & Chu, 2003; Poppo & Zenger, 2002)
- Provide ‘institution-based’ or ‘thin trust’ where trust is low by controlling opportunity which can be an important starting point for some relationships. (Woolthuis et al., 2005, p.815)
- Provide a formal framework for beneficial adjustments to the partnership (Poppo & Zenger, 2002)
- Provide formal documentation and standardization to informal understandings so that the relationship can be recognized beyond the timespan of the people who initially negotiated it (Ring & Van de Ven, 1994). Like a will.
- Act as a sign of commitment (Woolthuis et al., 2005). Like a marriage contract.
Bart Nooteboom, Professor of Innovation Policy, observed that sufficient trust has to exist before a contract is drafted because it “constitutes a relation-specific investment, which one does not want to engage in until sufficient trust has developed to make it likely to be worthwhile” (2006, p.275). Essentially, why invest the time and resources to negotiate a contract with someone you don’t trust?
However, if you have no choice but to work with a partner – freedom, a required element for trust, is missing – then you’re talking about cooperation, maybe coercion, not trust. In this case, Rosalinde Klein Woolthuis’ 2005 longitudinal case study on trust and contract complexity found that “contracts may not work when they are needed most, i.e. in the case of asymmetric dependence” (p.825). They conclude that :
“intentions with which contracts are drawn up and used determine whether contracts and trust are complements or substitutes” (Woolthuis et al., 2005, p. 834).
So again, intent is critical. Notice a theme here?
Contracts that are seen as punitive and controlling, may decrease compliance and impede trust building (Kumar, 1996; Mayer et al., 1995; Morgan & Hunt, 1994). Longer and more complex contracts can create distrust because they “sow the seeds of suspicion” (Mellewigt et al.’s, 2007, p.837) and are actually correlated with greater opportunism (Sako & Helper,1998). Attempts to protect confidential information may also backfire because they “may raise suspicions in the counterpart regarding what else is being withheld” and impede information sharing (Currall & Inkpen, 2006, p.246). And, highly specific contracts can limit partners’ ability to make adjustments that could be beneficial (Gulati & Nickerson, 2008).
More importantly, very detailed contracts can erode goodwill trust and competence trust because they imply that a firm doesn’t fully trust its partner to decide what’s best for the alliance (Das& Teng,2001).
Most compellingly, complex contracts cannot anticipate all forms of cheating that may occur and they increase transaction costs due to the costs of drafting and recontracting.
For best results: Approach contracting as a process to get to know the other organization and its representatives, to outline a common vision, to provide role clarity, to define expectations. At the same time, leave enough space in the contract for innovation and autonomy.
More on Transaction Specific Investments in a few days. Until then, what have your experiences been with hierarchy and monitoring or contracts with a partner organization? What type of case studies have you seen that support or dispute these recommendations?
PS. Full references available in my trust bibliography.
