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Trust is the secret sauce in companies that Warren Buffett and others value highly

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For his 100th birthday last week, George P. Shultz, distinguished businessman, cabinet member and scholar, wrote an op-ed in the Washington Post reflecting on the single most important quality in American institutions and life: Trust. If trust is in the room, whatever room, he wrote, then good things happen. Shultz went on to illustrate with examples in 10 different settings including family, military, management, religion, government, leadership, diplomacy, writing, negotiations and politics.

Shultz’s thesis seems profoundly right, and all of his examples warrant being expanded on, starting with trust in the corporate realm — encompassing management and leadership as well as other aspects such as stewardship.

For decades, American corporate culture has moved in the direction of command and control. Boards faced rising pressure for accountability, leading them to command corporate officers to install elaborate internal controls, information systems and compliance programs. While well-intentioned, such efforts dampen the trust employees up and down the ranks need to have.

Over the same period, corporate governance moved toward prescribed mandates for all companies. Today all boards are expected to follow delineated protocols ordained “best practices,” whether or not they are best for a particular company. Such uniformity diminishes the trust that can form when directors and shareholders exchange views and make their own decisions based on the needs of the company.

Countering this trend of control is a trust-based culture. A trust-based corporate culture relies on the assumption that businesses should be decentralized into the smallest possible units whose performance can usefully be measured to identify problems and opportunities. Hallmarks of a trust-based corporate culture include autonomy and decentralization.


Trust is a powerful motivator.

Trust is a powerful motivator. Autonomy empowers employees to focus on tasks rather than on reporting compliance. Payoffs include more effective leadership, lower cost of administration and other corporate efficiencies.

The paragon of trust in corporate America is Warren Buffett’s Berkshire Hathaway
BRK.A,
-1.10%

 .
BRK.B,
+0.38%

 The company takes a famously hands-off approach to management, delegating all responsibility to the heads of its subsidiaries. The trust-based approach works because the most important quality Berkshire looks for in new managers and companies is trust — they pass up opportunities if they have a shred of doubt about trustworthiness.

Accountability follows. Based on interviews of scores of Berkshire executives over the years, the consensus view was summed up in a pithy comment by Jim Weber, head of Berkshire unit Brooks Running Company: “I have never been given so much autonomy in my long business career, and have never felt so accountable and responsible.”

The tone of trust is set at the top and percolates throughout the organization in daily decisions, challenges, and crises. Consider Pfizer
PFE,
-0.70%

 . Its speedy development of a vaccine for the coronavirus owes much to the company’s culture. It is a learning organization where scientists enjoy considerable autonomy and where small groups are allowed to experiment and then share knowledge across the company.

Such hallmarks continue to characterize a wide range of businesses today, especially insurance companies as well as diversified industrials. Insurance is a trust-based business, after all, where the product is the promise to pay money and its value is almost entirely in being trusted to pay. Among insurance companies touting trust-based cultures — and performance and shareholder followings to match — are Allegheny
Y,
-0.84%

 , W.R. Berkeley
WRB,
-0.08%

 , Erie Indemnity
ERIE,
+0.76%

  and Markel
MKL,
+0.45%

 .

In the broader market, exemplars of trust-based cultures include Danaher
DHR,
+1.01%

 ,
DOV,
+0.49%

  Illinois Tool Works
ITW,
+0.61%

 , Roper Technologies
ROP,
+0.58%

 , and TransDigm Group
TDG,
-0.27%
.
All use slightly different approaches to managing scale and justifying it, but all are united by core practices such as autonomy and decentralization.

Companies boasting trust-based cultures also tend to attract a distinguished group of shareholders, those with the highest concentration levels and longest holding periods. All the companies named above are in the top quartile in attracting such quality shareholders. Rather than conforming to standardized governance controls, these companies and shareholders prefer tailored arrangements to suit, on matters ranging from shareholder voting rights to boardroom practices.

Corporate America would do well to embrace trust. This would not only improve corporate performance, but offer positive spillover effects to other American institutions where trust has been under assault. As George Shultz reminds us, “Trust is the coin of the realm.”

Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University. His books include Quality ShareholdersDear Shareholder; and The Essays of Warren Buffett.  Cunningham owns stock in Berkshire Hathaway and is a shareholder, director and vice-chairman of the board of Constellation Software. 

Also read: Stockpicking legend Warren Buffett and index champion John Bogle both knew the other was right about investing

Plus: Life inside a stock market bubble is great until someone takes out a pin



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Galaxy Digital’s Mike Novogratz explains the outlook for crypto as Coinbase goes public.





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My fiancée’s mother asked us to raise her 2 kids, as we live in a good school district and she has a gambling addiction — then she claimed their stimulus checks

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Dear Quentin,

Last year, in February, my fiancée’s stepfather passed away. After his passing, my fiancée’s mother asked both her and me to raise her younger sons, as we had recently purchased a new home, have degrees and will be able to provide a great area for their education, such as help with homework and the ability to communicate with their schools or doctors. My fiancée’s mother cannot read, write or speak English, and she has an addiction to gambling at casinos.

COVID-19 hit soon afterward. We both were let go from our jobs, and are making it by with unemployment and savings.

With that said, in March of this year, we filed taxes and my fiancée claimed both of her brothers since they had lived with us for almost nine months of last year. We received both of their stimulus payments a few days later. About three weeks later, we found out that my fiancée’s mother had also received the stimulus payments, even though she is adamant that she did not claim her children this year.

Upon seeing the money, I advised her to leave the money as the Internal Revenue Service may eventually ask for it back. Her new boyfriend then quickly told her to withdraw it anyway. They’ll deal with it later if the IRS asks for it, he said.

My question is: Will this situation hurt my fiancée and me in any way? I fear that the IRS may find out sooner or later about the error and seek the money from us, as her mother may have already gambled away that stimulus money, and make us pay for it even though we are using it as it was intended: for bills and necessities.

Fiancé

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Fiancé,

You are correct. The IRS will eventually ask for that money back, and it will likely do so by deducting the money from a future tax refund. You are also correct that your de facto mother-in-law should not spend the money. I take my hat off to you for raising these two children, and giving them a stable home and the head start in life that they deserve.

Many people in such a situation would write complaining about how they did X, Y and Z, and their in-laws were ungrateful. But you have taken the high road, knowing that these shenanigans are between you two and your fiancée’s mother, and do not involve your girlfriend’s two younger siblings. I am glad that you have not involved them in this somewhat messy situation.

You, of course, have done the right thing. The Moneyist column has dealt with dependents who claimed the stimulus, and parents who are not guardians of their children collecting it. The $1,400 economic stimulus payment, as you are aware, is not a loan. This third stimulus check is an advance tax credit on your 2021 taxes, and calculated based on your 2020 taxes.

If the IRS does not know who is telling the truth here, it will audit both parties. The truth will come to light eventually, and your fiancée’s mother and her boyfriend should be made aware that you are not in a position to help bail them out of this situation. They have knowingly walked into it, and there should be a clear boundary between helping her children and being a facilitator to this malfeasance.

The IRS has extensive guidance on what to do when someone fraudulently claims your dependent. “If you determine the other person was not eligible to claim your dependent, you’ll need to take steps to protect your right to claim the dependent and ensure an accurate filing,” it says. You have everything you need to know in order to take proactive steps here.

I leave that for you to decide.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

Hello there, MarketWatchers. Check out the Moneyist private Facebook
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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.



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I’m on track to retire at 58. My fiancée is in debt and drives my old car, and I support her family. How do I ensure my son inherits my wealth after I die?

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Dear Quentin,

I have dated my fiancée for just over three years. Within those three years, I have been severed from a job and spent two years unemployed looking for a new job. I have a new job, making roughly 75% of what I previously made, but it is a more than livable salary. My fiancée makes a modest salary in comparison to my own.

Financially, I had spent a lot of years going without in order to pay for my son’s college education and to stockpile savings in order to retire early. According to my financial planner, I am well ahead of my goal to retire at 58 (I’m 51 currently) with an IRA of around $2 million, plus savings and other liquid assets.

Currently, my fiancée is trying to get herself out of debt. She drives my old car and shares no utility bills or mortgage payments, but she does buy groceries, as the household is made up of her, her children and me. By supporting her family, I have very little I can do for my own son.

It has always been tradition in my family to leave an inheritance. I had planned on leaving my only son a rather large inheritance so that he may better himself and his family. My fiancée has children, and my concern is that if I am married (I live in Texas), the savings I have would go to her and subsequently her children, bypassing my son.

Since I am 10 years older than my fiancée, I suspect she may outlive me. How do I protect my assets so that they can be split as part of my wishes?

Nervous Fiancé and Father

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Want to read more? Follow Quentin Fottrell on Twitterand read more of his columns here.

Dear F & F,

Texas is a community-property state, so what you bring into the marriage, you also take out of the marriage. Assets accrued during the marriage, with the exception of inheritance, are deemed marital or community property.

You have several options, including setting up a living trust to allow you to transfer your wealth to your son during your lifetime, and thereby avoiding going through probate, which can be an unpredictable, cumbersome and public process.

You have two choices of trust: revocable or irrevocable. The first can be changed. You could retitle financial accounts in your son’s name. The latter cannot be changed, and also serves to save on estate taxes. It’s typically used to leave assets to children and grandchildren.

Other routes: a prenuptial agreement, a will (obviously) and naming your son as your beneficiary on your life-insurance policy. With the help of an estate planner, you can devise ways to ensure your son is taken care of after you’re gone, and your future wife is not left out.

In the meantime, ensure you keep separate property separate. If you deposit an inheritance in a joint bank account, for instance, it becomes marital property. If your fiancée contributes to the renovation of a home in your name, it again becomes community property.

Speak to your fiancée about your concerns and goals. It’s important to be transparent and ensure that you and she are on the same page, and share the same financial expectations. You may also want to wait until your wife pays her debts before marrying.

Hello there, MarketWatchers. Check out the Moneyist private Facebook
US:FB
 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.





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