Join UNC Kenan-Flagler Business School, our talented panelists and our moderator, Paul Wetenhall, President of Ventureprise at UNC Charlotte and UNC Kenan-Flagler alumnus (MBA 1975), as…
Trust, Innovation And Ronald Coase
September 10, 2013 at 6:37 AM
The best way to find out if you can trust somebody is to trust them.
- Ernest Hemingway
The science of innovation is not really new but has been developing for a long, long time... perhaps for centuries, but certainly longer than we generally think. Along the way, there have been untold numbers of revolutionaries, explorers and inventors who have contributed to our understanding of innovation ecosystems, sometimes reaching across hundreds of years to connect ideas. One of those ideas linked across the centuries is trust.
The passing of Ronald Coase is an opportunity to think about the close relationship between notions of trust and of transactions. Coase made significant contributions to our understanding of “transaction costs” and helped to frame up the challenge of understanding the true cost of social transactions in organizations. Much of his life was an examination of how to understand and quantify the non-financial dimension of human transactions, such as frequency, uncertainty, extra-rationality and opportunism. As a result of his work, and many others, we can better contextualize human transactions in innovation ecosystems, from both an objective and subjective point of view.
An interesting slant on this work is to bring in the factor of social trust. We can look at transaction cost issues framed inside of social trust and attempt to better understand the role trust plays in human systems. To do that, we might consider going all the way back to pre-Adam Smith, pre-Enlightenment 16th century England.
In this volatile century, there was a shortage of currency, no central bank, and very little in the way of financial instruments. Still, it was an oddly innovative period in economic history and a period of dynamic, rapid change. The population was growing, a consumer society was developing and there was a near-desperate need for capital to fuel trade and commerce. As a result, a culture and economy developed that fostered exchange (transactions) based largely on trust between individuals and communities, rather than on capital or security. Trust was valued in 16th century England because it was the driver of liquidity: without an individual being trustworthy and being able to trust others, commercial transactions would have come to a halt for lack of working capital. In essence, the need for liquidity created a normative culture of trust and reputation.
Now, fast-forward several hundred years. Modern society has plenty of available currency, central banks, and a vast array of financial instruments to provide liquidity. In our information age, trust is no longer necessary for access to capital. Instead, it has evolved into the key driver of efficiency in transactions and in particular of efficiency in the social transactions that are so critical to innovation.
As trust was to liquidity in 16th century England, so trust is to efficiency in 21st century innovation ecosystems. To get a sense of how trust plays this critical role in innovation today, consider these four cultural attributes not as “values” but as “transactions” and consider the role trust plays in each:
RISK: It is obvious that risk and failure are critical values in an innovation culture. But knowing this is not the same thing as creating this. Creating a culture that values risk and failure requires deep organizational trust. Viewed as a series of transactions, creative risk is nearly impossible without a high level of organizational trust. In the innovation culture, trust drives risk; the absence of trust drives timidity.
ITERATION: Another obvious element of innovation is frequent and rapid trial and error. In innovation cultures ideas come to life quickly and are just as quickly evaluated, modified, changed, and fiddled with. Innovators tend to pivot quickly and frequently. The pivot transaction – the ability to evaluate and quickly change a strategy or tactic – is fundamental to innovation. And it is also directly dependent on trust. Absent trust, pivots are slower, iteration is sluggish, and change is hesitant.
LEADERSHIP: Innovative cultures require powerful, authentic leaders. This seems so obvious as to be a cliché. But if innovation leadership is seen as a series of transactions between a leader and others in an organization, it becomes obvious that trust is what drives effective innovation leadership. Where there is a high level of trust, leadership interactions are efficient, and things just happen faster. Without trust, there is second-guessing, foot-dragging and fear.
NETWORKS AND LINKS: Innovative cultures are known by the ease of information exchange between individuals, departments and divisions. People talk to one another, share and exchange ideas and support disruptive thinking. When information exchange is viewed as a series of transactions, the role of trust in facilitating exchange becomes obvious. With trust, everyone in an organization is quick to share ideas; without trust, ideas are hoarded.
This list of organizational norms where we find transactions intersecting with normative trust could go on. We see these intersections often in the daily transactions of innovation leaders who have the roles of brokers, risk-takers and role models. Trust becomes their most important asset, and is what lends speed and efficiency to their daily work. To perhaps torture a phrase, trust brings idea liquidity to innovation ecosystems, allowing creativity, interactions and diversity to come to life. As Ronald Coase might put it, trust is the key driver of transactional efficiency. And of innovation.
- Henry Doss, a student, musician, venture capitalist and volunteer in higher education.
Henry is a contributer to Forbes about innovation, leadership and the humanities. He is a former banker turned venture capitalist, musician and over-committed volunteer. His firm, T2 Venture Creation, is dedicated to building great start up companies, and leading the buildout of the ecosystems that cause them. His role is Chief Strategy Officer. He is deeply interested in how we learn about ourselves and the world, and how that learning translates into innovative business and educational leadership. He has an abiding curiosity about English Literature, physics, computing and the Humanities in general. He also serves as Executive-in-Residence for the College of Liberal Arts and Sciences at UNC Charlotte, where he indulges his interest in pedagogy, graduate studies in Early Modern Literature, and opining. And he's a singer-songwriter wannabe.
This blog post was originally posted at Forbes.com on September 3, 2013. The original post can be found by clicking here.