Trust—it’s one of those “big” words like love, risk, and happiness. It’s imbued with great meaning and consequence. But while most of us can agree on the importance of trust, very few of us are completely clear on what are the elements that create trust.
For investors, trust is an especially fascinating topic. It’s often a factor within the investment thesis since it relates to management teams. And yet, how should we consider “trust” in the context of management teams? How much trust is really enough to invest with someone? And is it ever prudent to fully trust a management team? Additionally, while trust is also an integral component of any high functioning investment team, as an organizational focal point, it appears to be massively underrated by most firms.
The building blocks
To date, the best overview of trust I’ve seen comes from researcher Brené Brown in this video. In it, Brown, paraphrasing Charles Feltman, defines trust as “choosing to make something important to you vulnerable to the actions of someone else.” She defines distrust as discovering “what I have shared with you that is important to me, is not safe with you.”
In other words, trust is about risking something of value to you by putting it in the hands of someone else. This could mean making your emotions vulnerable to your spouse or friend. Or, if you are an investor, it could mean risking your capital with a management team.
There are a couple of important observations that Brown makes about trust. One, is that trust is built up from very small moments. While it may seem counter-intuitive that something as big as trust would be made in increments, the research appears to be very clear on this point. Building trust is like walking up a very long flight of stairs. We end up trusting people for the small things they do over time.
Secondly, there are degrees of trust—trust is not simply a binary condition. Perhaps you trust your spouse will get your kids to school on time, but not to take out the trash. You can trust a management team to push for growth in the business, but not that they will do this profitably.
Brown offers a useful framework to highlight the elements of trust she has discovered in her research: BRAVING. BRAVING represents the conditions that must be present for a deep level of trust to exist. These include:
|Boundaries||I can trust you because you honour my boundaries (rules). You can trust me because I respect yours.|
|Reliability||I can trust you because you consistently do what you say. You trust me because I can consistently do the same.|
|Accountability||I can trust that when you make a mistake you will own it, apologize, acknowledge the hurt, and make amends.|
|The Vault||I trust that you will keep what I say in confidence. You trust me because, not only will I keep what you say in confidence, I will not breach the confidence of someone else just to get close to you.|
|Integrity||I trust that you will do the right thing by “choosing courage over comfort; what’s right over what’s fun, fast, or easy; and practicing your values, not just professing [them].”|
|Non-Judgment||I trust that I can come to you in a mess, needing help, and I will not be judged—and that you can do the same.|
|Generosity||There is only trust if I can make a generous assumption about your actions when you make a misstep, and that you will do likewise for me.|
Trust within investing: management teams
Management teams are a fascinating conundrum when it comes to trust. On one hand, there must be some level of trust in a management team for us to make an investment. On the other, we have a fiduciary duty to protect our clients’ capital—and the interests of management teams are not always aligned with our clients’ interests. So unlike your relationship with your spouse, where it is important that you hold generous assumptions about them, we must always be skeptical of managers.
My colleague John recently did work on a software company. This company sells software that is used by both industry professionals and small-medium enterprises (SME). When speaking with management, John was told that these industry professionals will often refer their SME clients to this software. Clearly, if this were true, it would be evidence of a significant value proposition. But did John take management’s word at face value? Of course not. John called up a bunch of professionals who were also users. They told him that, yes, they do usually refer clients to this platform.
Managers are human and have their own perceptions, incentives, and biases. Even if a manager seems like a trustworthy individual, you can’t ever fully trust what a manager is saying—you can only trust that they will tell you their story. That’s why scuttlebutt can be such a powerful element of our research process. Since we cannot simply take the word of management at face value, it is useful to seek the perspectives of other stakeholders. Ultimately, our research gave us enough confidence in management to invest with that company.
So what elements are we looking for when it comes to selecting a management team, which, if true, will enable a minimum level of trust? The main questions we ask are:
- Has management demonstrated the ability to consistently allocate capital effectively?
- Have they developed a sound and sensible business strategy?
- Do they have a proven ability to execute their strategy?
- Does the company have a culture that will build a strong business over time?
- Have the managers shown themselves to be trustworthy individuals?
If management meets these criteria, we might say we have enough trust to invest.
Note that within this list, there is an entire bullet point for the trustworthiness of the individuals. When we consider if someone is “trustworthy” we are weighing the elements Brown has unpacked. In particular, we examine the person’s integrity, reliability, and accountability. We wish to deal with individuals who are candid, whose deeds align with their words, and who will take responsibility for their actions and those of their team.
Trust within investing: the team
A discussion on trust within investing would be incomplete without mentioning the role trust plays within an effective investment team. In my opinion, trust is a significant and often underestimated success factor.
Trust is integral within an investment team because it enables working together in a productive fashion. When a high level of trust exists, people are more likely to share thoughts and ideas, seek feedback on their ideas from others, and talk openly about their experiences. Conversely, when there is a low level of trust, you encounter blaming, withholding of information, and people operating in silos. In investing, just as in life, this behaviour is counterproductive.
In our team, we devote a lot of time and energy toward cultivating a deep level of trust. The result is a high degree of candour within our group. For new members on the team, our interactions can be a little surprising at first—we are quite comfortable getting real. But the result is a greater sharing of ideas and knowledge, better and faster decision making, and more accountability across the team.