Negotiation Mastery Blog

Trust but verify

Since the book is being published this week, I thought I would post a short excerpt from the book to give you a flavour of it.

Trust but verify

So you find yourself in a negotiation and the guy on the other side of the table has horns, cloven feet and a tail and there is a slight whiff of brimstone in the air. You say “So that’s agreed, then?” and he replies “Certainly, it’s a pleasure doing business with you” and bursts into an evil cackle. With your hand shielding your mouth, you lean over to your colleague and whisper, “There’s something about him that I don’t fully trust”.

When it comes to win-win, trust is a key question.

And some people are harder to trust than others. Michael Milken was famously dubbed the Junk Bond King and was the most successful financier on Wall Street in the 1980’s. In 1986, Fred Joseph, the Chief Executive of Drexel, Milken’s employer, gave the company’s bonus pool to Milken to divide out as he saw fit.

Milken distributed $150m to his colleagues, including $10m to Jim Dahl, his top salesperson. He told Dahl, “I really can’t pay you any more or you’d be making more than me.” Strangely, Milken’s maths must have somehow contained an error – he actually awarded himself a bonus of $550m. This was more than the entire profit of the company!

In 1989 he was indicted on 98 counts of racketeering and fraud. He was sentenced to 10 years in prison but released after less than two.

Milken is just one of a long list of high-profile fraudsters, standing alongside the likes of Ivan Boesky, Bernie Madoff, Kenneth Lay, Jeffrey Skilling and Bernie Ebbers in the roll-call of shame. But these are the ones who were caught. And these are the ones we know about. What about our guy, the man across the table? Smiling, shaking our hands, saying “Pleasure doing business with you” – will we one day see his mug-shot splashed across the newspapers?

Our strategy to date has been to avoid the quite ridiculous inefficiencies of the arm-wrestle and instead play the arm-game. And we do this in real-life by ensuring the other party also wants to play win-win and then by working together, on a problem-solving basis, to create greater value that is shared for all to benefit. And we have seen many strategies that will bring them around to win-win thinking and many ways to make sure the problem is solved.

But there is a big assumption involved here – namely, that we can trust our counterparty.

What if they have not actually come around to our way of win-win thinking, despite what they tell us? How can we tell? What if we think we can trust them for now but they could renege at the slightest opportunity? What if we are quite sure they are totally evil but we still need to do a deal?

In Chapter 7, we saw how to increase someone’s trustableness. Here we will look at the situation where trust is not enough. “Trust in me,” sang Kaa, the python in Walt Disney’s “The Jungle Book, as he slowly wrapped his coils around Mowgli. It is not enough to trust someone just because they say so, we cannot afford to be naive.

We need to be clever about it and the Strong Win-Win approach has a strategy which can be summed up in the phrase “Trust but verify” and is built on four pillars:

  • Seek to trust. Trust is a good thing, there is a return on it.
  • But know how to tell if you can trust someone
  • Know what to do to increase their trustworthiness
  • Know what to do if you really cannot trust them at all.

In Russian, trust but verify translates as  “Doveryai, no proveryai” and it became the by-word of Reagan and Gorbachev as they talked their way through the history-making nuclear disarmament negotiations between America and the Soviet Union. Two leaders, with no reason for trusting their counterparty but every incentive for doing so, used it as their touchstone as they negotiated the end to the Cold War.

Trust but verify. Absolutely trust. And absolutely verify. And we will see exactly how to do this in practice.

 

Can we ever fully trust?

We can never fully trust. The other person may be lying, they may have a personality disorder or they may be spawn of the devil. What is worse, it is not always obvious when we can and when we cannot, you cannot always smell brimstone.

In fact, even if we can trust the person in front of us, even if they are the coital fruits of the Dalai Lama and Mother Teresa themselves, there may be forces beyond their control that mean they cannot deliver as promised.

But babies and bath-water spring to mind here. Just because we cannot trust completely does not mean we should stop trusting altogether. There may be a chance a meteorite will hit my apartment today but that does not mean I should wear a crash helmet in my kitchen.

 

Trust is good

A 2002 study by Watson Wyatt found that high-trust organisations are likely to produce three times as much shareholder value than low-trust organisations.

We can give some examples. Huntsman Chemical sold a share in their company to Great Lakes Chemicals at an agreed price of $54m. In the six months that it took before Great Lakes finally completed the processing of the deal, the value of that share had risen to $250m. Great Lakes suggested re-negotiating the price to $150m, effectively splitting the windfall. Huntsman refused the extra $100m and stuck to their originally agreed $54m.

If you think Huntsman Chemicals were naive in doing this, they are a company valued at $8bn. Their methods have served them well.

Not big enough for you? Ok, how about Johnson and Johnson? Jim Burke, their CEO, says “I have found that by trusting people until they prove themselves unworthy of that trust, a lot more happens.”

Or Warren Buffett who bought McLane Distribution, a $23bn company, from Walmart. He said, “We did no ‘due diligence’. We knew everything would be exactly as Walmart said it would be, and it was.” As a result, the deal was struck in a one hour meeting and completed within a month.

 

The no-trust tax and how to avoid it

When you do not trust, there is a tax to pay.

Think about it, if you bought a house from your dad and he said, ‘Look, I’ve been living here for 20  years and I can tell you there is no structural problem with it’, you would believe him, and you would save yourself £1000 for an extensive structural survey. When you buy from a stranger, there is not the same degree of trust so you pay up. This is a tax that is payable when trust is not there.

Now, as with all taxes, sometimes it is worth paying. But overall, it is a brake on proceedings and the greater trust we can work with, the more efficiently things will go.

How slow would things be if you had to run chemical tests on every pint of milk you buy from the supermarket to make sure it was  safe? Every second of the day we place huge amounts of trust in the world around us and at any point that we do not trust, it slows us down enormously.

Johnson and Johnson and Huntsman Chemicals are hugely successful companies built on trust. Warren Buffett saved himself time and money by trusting. These industry leaders see the dividend that is collected from trust.

Life is quicker and cheaper when we trust.