10/29/2012 05:37 EDT | Updated 12/29/2012 05:12 EST

Why You Need Trust in the Boardroom

close up of businessman's hands ...

It was that time of year again: the board meeting. The CEO hated these meetings, didn't like the board, and resented their oversight. As he had done in so many other meetings, he sat at the table, arms folded across his chest, laptop in front of him. After a series of endless interruptions, the directors grew more and more frustrated, feeling that not only was the CEO antagonistic, but he was holding information back. Board relations with the CEO deteriorated to the point where there was little real communication and the quality of decisions was being compromised. Eventually, the CEO was terminated and the process of rebuilding had to begin.

Imagine the ineffective decisions that were being made (or not), the paralysis that would have set into this organization, the strained relationships and the chronic uncertainty that resulted from this scenario. The board, CEO and organization suffered a breakdown of trust that now required significant rebuilding. Wouldn't it have been easier had trust-building been a focus and a goal for the board and for the organization? If trust had been established as a core value, then the recruiting process would have had trust as a key criterion to assess candidates against.

Why does trust matter? Think about the transactional costs of a low-trust relationship. In low trust relationships, suspicion abounds and parties feel compelled to paper every decision and every discussion. In the drive to "CYA," they copy every person who may have a connection to the decision, no matter how tangential. Legal costs soar as lawyers are engaged and detailed contracts are drawn up to cover every possibility, simply because people don't trust colleagues or decision-makers not to act out of self interest. Meetings about the meetings occur, gossip takes over, and morale and productivity plummets. Information is hoarded, hindering innovation and creativity. When it happens at the board level, corporate governance and oversight are compromised.

Trust at the board level is necessary at three intersection points: board and CEO, board member to board member, and CEO to C-suite. Let's look at the CEO and C-suite. If the CEO is not trusted by the troops, they cannot lead. The board needs to know what the organization, and especially the C-suite, thinks of the CEO. One of the demonstrations of this is for the board to receive feedback from staff regarding CEO effectiveness. The board must then ensure a prompt and complete response. In a board review Richard undertook, the CEO was fired by the board because of a lack of trust by employees.

Trust between directors also needs to be high as directors need to support board decisions and act in the best interests of the company. In situations of low trust, governance suffers as directors miss key pieces of information, fail to speak up, and do not cover off critical issues. Decision-making results, which can include fraud, property destruction and even death.

Trust at the board level is also important as the public and investors rely on what the Conference Board calls "intermediaries, institutions and individuals," who are viewed as trustworthy and credible. Focus group participants stated that the organization's employees serve as an important bell-weather to assess the trustworthiness of the organization. An ineffective or dysfunctional board will be reflected in the views, decisions and behaviours of employees.

What can boards and executives do about this? Here is some advice:

1. Trust is a systemic operating principle and world view. It is a fundamental and core value; it guides action, behaviour and decision-making. It is not a 'thing', a project or an exercise. It must be constant in everything members of that corporation do.

2. Trust as an attitude and value must be demonstrated from the top down. This means that boards and the executive team must make decisions and conduct themselves in ways which are consistent with building and sustaining trust.

3. Trust-building requires an "I'll go first" attitude and behaviour. In other words, if you want to build a corporation with a reputation for high trust and integrity, then it starts with the board and trickles down. Not only the types of decisions made by the board matter, but the very directors who occupy the seats. Do leaders "walk the talk"? Transparency, consistency, authenticity and honesty are a few of the attributes of trustworthy decision-makers.

Therefore, boards need to hear, assess and impact trust, within boardrooms, in senior management ranks, and throughout the organization. It starts with commitments from the top and all directors who have a passion for, display and insist upon integrity.