Why the Best Leaders Trust Their Employees

“By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as a weakness.” That reflection comes to us from Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s business partner and best friend, who ruminated on the state of corporate life at Berkshire Hathaway’s annual meeting in spring 2014. Buffett and Munger’s firm is run in the exact opposite way many would expect a diverse amalgamation of companies to be run. By all accounts, it is run more like a massive entrepreneurial venture than a lumbering conglomerate. Both men are allergic to distrustful corporate cultures, but how do you use trust to manage the fifth-largest company in the United States, with $162 billion in revenue and 300,000 employees worldwide? How do you operate dozens of diverse businesses without a risk-managing general counsel overseeing them all? Without a finger-wagging centralized human resources department telling every operating unit what to do or not do? In other words, how do you dispense with the control mechanisms that enable Buffett and Munger’s mean man counterparts to feel utterly omnipotent? It could seem at best naïve and at worst negligent to run a large business like this. But in truth, the trust Munger mentioned can be a kind of superpower, one whose potential often remains unlocked or is misused. But Buffett and Munger get it: their management philosophy is based on finding trustworthy managers and giving them an enormous amount of control. Over the years, they’ve shown how this creates more value than if they consolidated the control in the company’s Omaha headquarters and monitored the business’s every move.

At a 2007 meeting, Munger said, “A lot of people think if you just had more process and more compliance—checks and double-checks and so forth—you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust.”

The belief that a leader can accomplish more by developing a culture of trust than by implementing multiple layers of control may seem unrealistic in today’s age of complex, fast-growing start-ups. But two researchers from the University of Zurich have shown that the more a firm focuses on controlling and monitoring their employees, the more new problems arise.

Control-heavy leadership not only doesn’t make people behave the way you want them to but also has the paradoxical effect of encouraging them to take advantage of the firm they’re supposed to care about. Researchers Margit Osterloh and Bruno Frey call this phenomenon governance for crooks. Whereas when organizations put a premium on trust, people tend to act in more ethical, civil, and productive ways.

In firms run by mean men, trust is doled out like small crumbs—and vacuumed away just as easily. Their need for control makes building genuine trust impossible. This absence of trust then creates its own self-fulfilling prophecy. When people do not feel trusted, they’re more likely to act in an untrustworthy manner. Intrinsic sources of motivation evaporate, and they become more focused on what they want to get from the organization, rather than what’s right for the team.

Today’s smartest companies put a higher level of trust in their workforce and seek to raise employee engagement at all levels—building in involvement, commitment, passion, enthusiasm, focused effort, and energy to employees’ work experiences.

Engagement has now been widely correlated with higher corporate performance. It embodies what the new generation of talented workers expects, and what most of us probably always wanted. In a 2012 analysis of 263 research studies across 192 companies, Gallup found that companies ranking in the top 25 percent for employee engagement, compared with the bottom 25 percent, had 22 percent higher profitability, 10 percent higher customer ratings, 28 percent less theft, and 48 percent fewer safety incidents.

Trust is an even bigger deal.

Billy Joel’s song “A Matter of Trust” starts off hard and loud. In the second line he sings, “The cold remains of what began with a passionate start.”

A passionate start. I’d be hard-pressed to find a better way to capture how mean men use their manipulative, faux-charismatic charm to create a passionate start with those who don’t know them well. But the passion never lasts; ultimately it becomes revulsion.

Incivility, in any form, ultimately chips away at the bottom line, even if in some cases it bumps up short-term profit and stock price. Authentic leadership—the kind that emphasizes trust and engagement—on the other hand, creates workplaces that have greater loyalty, reduced absenteeism, increased reliability, and higher job performance.

I’ll leave you with a stunning observation from a group of UK researchers: when leaders act with authentic leadership and infuse expectations for pro-social behaviors into their corporate cultures, their employees’ desire for achievement increases (a good thing, since it directly translates to higher motivation for employees), and their need for power—the bad kind—decreases. Something about authentic leadership and pro-social behaviors makes us want to work harder while at the same time reducing our need to control other people.

It all comes down to a matter of trust.