Boosting productivity through trust
Trust affects the quality and type of investments businesses make
A lack of trust can make some investments appear too risky, which can lead to suboptimal investment allocations. For example, countries with low levels of trust tend to invest in projects with shorter time horizons.11 Investments with longer time horizons require more trust in workers to complete the project, in suppliers to get the necessary equipment, and in customers to continue to be there through the useful life of the investment. Of the three major types of business investment, structures, such as office buildings and warehouses, have the longest time horizon, followed by equipment, and then intellectual property products, such as software. In the absence of trust, businesses may make only incremental gains to capacity through investments with short time horizons, such as software, rather than expanding capacity more substantially through investments with longer time horizons, such as structures.
Investment in research and development suffers from a similar problem. Because the quality of research is nearly impossible to monitor while it is being conducted, low trust between employer and researcher leads to lower rates of such investment.12 A lack of trust can therefore skew investment toward projects that are more easily monitored and less ambitious, forcing companies to give up on investments that have the potential to push past the current frontier of innovation. In other words, a higher trust environment between employer and researcher leads to the kinds of R&D investments that could yield higher value-added innovations that ultimately drive productivity. If higher trusting environments have more ambitious R&D initiatives, they should have increased demand for well-educated and productive workers as a result.13 Greater demand for such workers can improve the average level of human capital in each firm and throughout the broader economy, thereby boosting productivity.
Trust enhances human capital investment, which raises productivity growth
Trust between employer and employee and among employees enhances human capital investment. Trust influences the behaviors of both employers and employees. For example, employers are more willing to invest in their workers if they can trust that those workers will not switch to another firm. Unfortunately, trust between employer and employee is fractured. Recent Deloitte research revealed that about 40% of employees in the United States do not highly trust their employer.14 This lack of trust discourages investment behaviors of both employers and employees. Alternatively, improving trust enables human capital to deliver greater value. Deloitte research suggests that employees who highly trust their employer are about half as likely to seek new job opportunities as those who don’t.15. At the same time, workers are more likely to invest in their own skill building if they trust that their employer will reward them for their efforts. This is especially true regarding nontransferable or firm-specific skills, which suggests that trust can raise the level of institutional knowledge that can lead to more productive work.16 Trust among employees on a peer to peer basis is also crucial for human capital building. Employees who trust each other are more collaborative and more likely to share ideas and information, which enables organizations to foster greater innovation and ultimately drive productivity.17
Trust affects how businesses organize themselves
Trust can also boost productivity through means unrelated to additional investments. One way this occurs is through decentralized decision-making.18 Decentralization empowers those closest to the problem to solve it, making the firm faster to adapt in a rapidly changing business environment.19 Such decentralized decision-making can’t occur without the trust of those working together. Decentralization is often associated with firms that are more productive and that specialize in innovation and information technology.20Consider a software company that reaped tangible benefits thanks to the new kinds of decentralized, more autonomous working arrangements that the pandemic made necessary. More autonomous, self-driven work arrangements unleashed in its workers new kinds of creativity, individuality, and productivity that helped drive a jump in the amount of code they wrote and that enabled them to deliver two major, high-quality product releases on time.21
Trusting vendors and subcontractors can lead to improved outcomes as well. Research studies across a number of industries demonstrate this connection. For example, one study shows “investors who have more trust in financial institutions delegate more decisions to them and thus obtain better diversified and more efficient [productive] portfolios.”22 Another study shows that greater trust between construction companies and subcontractors leads to greater collaboration, more flexibility, and better communication.23 All of these examples have the potential to raise productivity growth.
Trust is key to improving export sales
At the country level, greater trust is associated with more international trade. For example, a recent European study suggests that fostering greater trust at the organizational level could lead to more international sales.24 Greater integration in the global economy, for example, importing and exporting a larger share of goods, can itself boost productivity growth. For one, it can allow businesses to focus on their comparative advantage and invest in the parts of the business that yield the greatest results. Second, internationalization is associated with technology and knowledge transfers that can also boost productivity and therefore real per capita GDP.25 The success of Brazil’s aircraft manufacturing sector, a great feat given the highly technical nature of the industry, was in part due to knowledge transfers from foreign suppliers and contractors.26 And that would not have happened in the absence of trust.
The role of leaders influencing trust: A call to action
Trust has clear implications for the macroeconomy, but that trust is built from the actions taken by businesses and the leaders that guide them. Greater levels of trust can raise the quantity and quality of investments in physical and human capital. It can also boost productivity growth through more effective organizational adjustments. Trust is in a constant state of being built, destroyed, and rebuilt. As leaders reflect on how to increase organizational trust with stakeholders and society, the following considerations may be helpful:
- Make trust a strategic priority.
- Develop an understanding of trust within and outside the enterprise.
- Identify the stakeholders with whom you have or want to have trusted relationships.
- Measure and quantify levels of trust.
- Invest proactively in repairing, rebuilding, and enhancing trust.
- Reassess where you are as managing trust is not a one-time event.
Trust directly influences the actions and outcomes of business every day. By embedding trust in a company’s business, leaders generate value for their stakeholders and society more broadly now and in the future.