Why trust matters so much in business

January 27, 2012, 10:02 PM UTC

Our Weekly Read column features Fortune staffers’ and contributors’ takes on recently published books about the business world and beyond. We’ve invited the entire Fortune family — from our writers and editors to our photo editors and designers — to weigh in on books of their choosing based on their individual tastes or curiosities. In this installment, reporter Caitlin Keating reviews Smart Trust, The Trustworthy Leader, and The Progress Principle, three new books that address the role that trust and related emotional issues play in business success.

FORTUNE — In business as in private life, all successful relationships run on trust. Yet we often get trust wrong, giving it either too readily or too stingily. From Bernie Madoff to the mortgage industry, con artists have always operated by persuading naïve investors to give their trust. On the other hand, relationships often fail because one or both parties are afraid to give trust.

That’s the premise of Stephen M.R. Covey’s Smart Trust: Creating Prosperity, Energy and Joy in a Low-Trust World. “[T]hose who live in blind trust eventually get burned; those who live with distrust eventually experience financial, social, and emotional losses,” writes Covey, the son of Stephen R. Covey of The 7 Habits of Highly Effective People fame.

Successful companies and people find a middle way that Covey and co-authors Greg Link and Rebecca R. Merrill call “smart trust.” For example, eBay’s (EBAY) 235 million registered users are mostly strangers to each other. Yet they engage in one million financial transactions a day. According to former eBay CEO Meg Whitman: “[M]ore than a decade later, I still believe … the fundamental reason eBay worked was that people everywhere are basically good.”

So how do successful companies manage risk in a low-trust world? Among many other examples, the authors point to Netflix (NFLX), which built a thriving movie rental business on trust. Netflix trusted all customers to mail back their DVDs, occasionally eliminating unreliable customers as a cost of doing business. If Netflix hadn’t extended this original trust, they wouldn’t have nearly as many subscribers. Less happily, Netflix’s business suffered last year when it abruptly changed its pricing structure, which many customers viewed as a violation of trust.

A related topic is how successful leaders inspire trust. Amy Lyman, cofounder of the Great Place to Work Institute, has been studying this question for about 30 years. In The Trustworthy Leader, Lyman argues that trustworthy leaders inspire cooperation from their employees, which in turn produces a strong sense of commitment and loyalty throughout the organization.

While Covey and co. highlight the important of trust in general, Lyman focuses on the workplace. She presents detailed examples from many industries, including healthcare, retail and real estate, using her institute’s Trust Index to measure the quality of relationships between employees and their leaders. (Fortune partners with the Great Place to Work Institute to produce our annual list of the Best Companies to Work For. The Trust Index is a pillar of our ranking methodology.)

Finally, Teresa Amabile and Steven Kramer wrote The Progress Principle: Using Small Wins to Ignite Joy, Engagement and Creativity at Work to try and understand how various aspects of an employee’s work and personal life affect performance and motivation at work. Amabile teaches at Harvard Business School. Kramer is an independent writer and researcher, as well as Amabile’s husband. In the course of their research the authors analyzed nearly 12,000 diary entries from hundreds of employees at many organizations.

Although Amabile and Kramer pile up an impressive mound of data, their conclusions are generally unsurprising. For example, they found that “participants … experienced much more positive emotion when they made progress than when they had setbacks.” They also found that happy employees tend to perform better. Strikingly, managers are often clueless about the importance of these “small wins”. In a survey conducted for the book, only 35 out of 669 managers ranked progress as the number-one motivator, after recognition, incentives, interpersonal support, and clear goals.

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