Illustration by Stuart Bradford
Companies invest CEOs with the singular authority to address high-stakes challenges and make tough decisions. However, to a large extent their power rests on the willingness of the business’s stakeholders to cede it to them. In other words, it depends a lot on stakeholders’ trust. Leaders who violate that trust soon find themselves ousted. Take Travis Kalanick, whose brash and at times inappropriate behavior repeatedly raised eyebrows at Uber. He was blamed for creating a toxic culture at the company and forced to resign by a shareholder revolt. And Kalanick is hardly an anomaly: A recent PwC analysis shows that in 2018 more CEOs were fired for ethical lapses than for poor financials or over battles with their board.
Dismissing executives for misconduct isn’t just the right thing to do; it’s a business imperative, because the trust stakeholders have in a leader significantly affects organizational performance. One 2000 study of 30 NCAA basketball teams, for instance, found that trust in a leader was even more important to success than trust in one’s teammates. Teams that trusted their coaches won 7% more of their games than teams that didn’t. In addition, the team with the highest trust in its coach had the highest number of wins.
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Another study, a meta-analysis by Kurt Dirks at Washington University in St. Louis and Donald L. Ferrin at State University of New York at Buffalo, revealed that trust in leadership positively affects employees’ job performance, overall job satisfaction, and commitment to their organizations. And in a 1999 study of Holiday Inns, where 6,500 employees ranked their trust in their manager on a score from 1 to 5 points, a one-eighth point improvement in trust scores could be expected to increase annual profits by 2.5% of revenues, or $250,000 per hotel.
How do leaders earn trust — or lose it? Much the way that organizations do. People evaluate a leader’s trustworthiness on the same four dimensions they evaluate a company’s — competence, motives, means, and impact. However, there’s one additional requirement for leaders: They must be seen to have obtained their positions through a rightful process. Otherwise, they won’t have legitimacy. Stakeholders who believe leaders haven’t come to power properly will be less likely to follow their direction and may even refuse to act on their requests.
Leaders who understand these five dimensions can deepen the trust others place in them and foster stronger relationships. Conversely, leaders who don’t pay attention to them can easily behave in ways that undermine trust, often without even realizing it.
Leaders can be stronger on some dimensions than others, but legitimacy and competence are more or less the trust equivalent of table stakes. It’s very hard to be trusted at all as a leader without those two. The next three dimensions make up the moral or ethical domain of trust, the areas where we judge leaders on the choices they make, whether it’s whose interests they serve (motives), how they go about achieving their goals (means), or whether they own all the effects they have on others’ lives (impact). The more of these three dimensions a leader has established trust in, the more power he or she has. Which of the three matters most is usually situational. The key for leaders is to understand which dimensions are needed in their particular circumstances.
Legitimacy. If you’re not a company founder, the generally accepted path to the top in a corporation is to be elected by the board of directors. While employees and customers may not agree with the board’s choice, they don’t contest the selection because they respect the process. Most company leaders do get their jobs in this manner. However, by itself it may not be enough.
Katharine Graham, the former publisher of the Washington Post, inherited a majority stake of the organization after the death of her husband, who had been appointed to run it by her father, the owner. To keep the Post in her family and carry on their vision for it, she decided to step in and was elected president of the company in 1963. Yet she struggled. She had limited experience in journalism and none in business. In addition, the industry and the corporate world didn’t accept women as top executives. So Graham began her tenure as the Post’s leader with shaky legitimacy. She had to win over workers who had been devoted to her charismatic husband, many of whom viewed her as an “ignorant intruder.” Early on, she was besieged by offers to buy the paper as well as persistent rumors that she wanted to sell. She also had to contend with a steep learning curve and her own deep feelings of inadequacy.
Competence. Constituents want leaders who are good at their jobs. If leaders don’t demonstrate skill, they won’t remain in their positions for long. Frequently, competence becomes a main route for leaders to gain legitimacy over time. This was exactly what happened with Graham, who led the Washington Post to national prominence during the contentious years of the Pentagon Papers and the Watergate investigation that ended in the resignation of President Nixon. The Post’s journalistic successes resulted in a nearly 20-fold increase in the company’s revenues, from $84 million when Graham took the helm in 1963, to $1.4 billion in 1991, when she stepped down. By then the company, which she had taken public in 1971, had a valuation of nearly $2 billion. She was also the first woman to head up a Fortune 500 company.
GM’s Mary Barra, in contrast, demonstrated competence on her rise up to the CEO’s office. She was able to break the glass ceiling because of a stellar 30-year-career at the automaker, serving as an executive assistant to former CEO Jack Smith, as vice president of global manufacturing engineering, as the head of an assembly plant, as executive director of competitive operations engineering, as head of human resources, and as the company’s product chief. She had a large impact in these roles. As vice president of manufacturing engineering, for instance, Barra overhauled GM’s production processes, cutting costs and the time it took to move products to market. As head of human resources in 2009, she simplified GM’s complex HR policies and procedures and steered the company through a painful bankruptcy reorganization. As the company’s product chief, she continued to streamline and prune GM’s processes across several different regions and improved teamwork. “She engenders loyalty through example and kindness,” a colleague told Business Insider.
Barra proved her competence before she went through a more formal hiring process, while Graham had to prove that she could lead after a more unconventional one. This shows that while a legitimate process is important in gaining trust, trust can ultimately be won without it.
Motives. Leaders have to serve the interests of multiple stakeholders. Stakeholders understand that this often involves trade-offs. But if they believe a leader neglects their interests, consistently prioritizes one group (such as investors) over the others, or is completely self-motivated, they will stop trusting that leader.
When starting Salesforce, in 1999, Marc Benioff made his motivations clear, outlining an agenda that looked beyond shareholders’ needs and included more than making profits. He vowed to donate 1% of the company’s revenue, 1% of its employees’ time, and 1% of its product value to nonprofit organizations every year. But his commitment didn’t end there. In 2015, when Indiana passed a bill that would allow companies to deny service to LGBT customers, Benioff took a hard stand. He threatened to withdraw his company’s investment in the state, promised relocation packages to Salesforce employees who wanted to move out of Indiana, and marshalled other tech CEOs to help fight the bill. Indiana quickly revised the law so that instead of allowing discrimination, it would ban businesses that denied service to customers because of their sexual orientation or identity.
In the same year, Benioff committed to regularly reviewing compensation practices to ensure that employees received equal pay regardless of gender or race. More recently, he implemented a new policy that bans customers that sell automatic and semiautomatic weapons from using Salesforce technology — an action that demonstrates how much Benioff believes in placing the interests of society above profits.
So far, these stances have not damaged the company. To the contrary, Salesforce is the largest customer relationship manager company in the world, with a 19.5% share of the market in 2018 (runner-up SAP had 8.3%), and has enjoyed an average revenue growth of 63% per year. In addition, since 2013, Benioff has consistently scored above 90% in CEO approval ratings on the employee feedback website Glassdoor, where the average CEO approval rating is 69%.
Not everyone will agree with what Benioff does as Salesforce’s leader, but there’s never any confusion about where he stands and why. By being transparent about his motives and showing concern for others, he has earned the trust of his employees, customers, shareholders, and board. He believes this is essential for any CEO. As he said in an interview on CNBC: “If trust is not your highest value — and you see it in our technology industry right now — your employees and executives are going to walk out.”
Means. Leaders are responsible for deciding what means they’ll use to accomplish their goals and for setting the rules that shape their companies’ actions. If those rules are seen as fair, their constituents will trust leaders and give them more power.
In 2009, Jennifer Hyman cofounded Rent the Runway to remedy an inequitable situation women faced: If a man needed to attend a special event, he could rent a tuxedo, but a woman had to shell out a small fortune for a dress she would probably wear just once. So the company allowed women to pay just for one use of the dress. To alleviate any concerns customers might have about renting clothing, the firm also took care of the dry-cleaning, provided free returns and free second sizes as backups, and offered low-cost ($5) insurance in case of damage to the garment. That reasonable value proposition struck a chord with women, and the company soon moved into subscription services for renting everyday work clothes. By 2018, Rent the Runway had more than 9 million customers, according to CNBC.
Hyman’s human resources philosophy also puts a sharp focus on fairness. In 2018, for example, she decided to do something about the unequal treatment of hourly employees. Her salaried employees — “who typically came from relatively privileged, educated backgrounds,” as she noted in a New York Times op-ed — were given the flexibility to work remotely and generous sick and family leave, including 12 weeks of paid maternity leave and two months of flextime upon their return to work.
However, Hyman’s hourly employees, who worked in the warehouses, retail stores, and customer service, “had to face life events like caring for a newborn, grieving after the death of a family member or taking care of a critically ill loved one without this same level of benefits,” she wrote. So she gave her hourly workers the same leave and sabbatical packages that her salaried employees had. Though her main goal was fairness, she also hoped this move would improve productivity, lower training costs, and increase retention not just among the hourly workers but among corporate employees who wanted to belong to an organization with good values. In fact, she said, “I received more positive feedback about these changes from my corporate team than about any other leadership decision I have ever made.”
The company enjoys 100% retention among working moms now, and Hyman’s approach appears to be paying off on other fronts as well. In March 2019 Rent the Runway’s valuation surpassed the $1 billion mark, giving the company “unicorn” status.
Impact. Like organizations, leaders are judged for the impact they create, regardless of whether the impact is intended.
Perhaps the most famous example of a leader who took ownership of unintended effects was Johnson & Johnson’s former CEO James Burke. In 1982, the company experienced a crisis when seven people died after taking cyanide-laced Tylenol capsules from bottles that had been tampered with. It would have been easy for Johnson & Johnson to sidestep responsibility, especially since the tampering did not occur inside J&J-owned facilities. Instead, Burke immediately took control. He pulled Tylenol from the shelves, stopped advertising it, tested 8 million pills by the end of the first week of the recall, offered customers coupons to make up for the bottles they might have to throw away, and had the company design a new tamper-evident triple seal, which was adopted by other pharmaceutical companies. He spent $100 million on the recall — an overreaction, some experts said.
Tylenol accounted for 17% of Johnson & Johnson’s net income, and marketers predicted the brand would never recover. But within a couple of months Johnson & Johnson’s stock regained its previous heights.
Burke’s commitment to taking responsibility earned him a spot among Fortune’s 10 greatest CEOs of all time and a place in the history books. In an era when recalls were rare, Burke pioneered a new way of understanding a company’s total impact and taking action when the impact was far from positive.
There is no one way for leaders to gain, regain, or keep the trust of their stakeholders, as these examples illustrate. But CEOs and others would be wise to take each of these dimensions seriously to ensure their companies are competitive and continue to bring in a profit. Because in order to do and keep their jobs, they must have the trust of the people who own their company, work for it, and buy or use its products.The Big Idea
About the authors: Sandra J. Sucher is a professor of management practice and the Joseph L. Rice, III, Faculty Fellow at Harvard Business School. Shalene Gupta is a research associate at Harvard Business School.
Author: Sandra J. Sucher