The Unspoken Contract That FoEs Honor
In an earlier career, one of us (Wolfe) owned a company that managed communities with mandatory membership homeowner associations. One day a disturbing fact hit us between the eyes: Our most technically proficient community managers were not always as successful in getting management contracts renewed as managers with less well-developed technical skills. We conducted a survey of association boards of directors in hopes of solving this mystery. The survey team came back with a startling insight: We had two contracts with every board—a legal contract and an emotional contract. The survey team told us, “You can be completely faithful to the legal contract but it’s not likely to be renewed if you haven’t satisfied the emotional contract. On the other hand, if you satisfy the emotional contract, the boards will cut you some slack on the legal contract.”
From customers and employees to suppliers, partners, shareholders, and the community, the full spectrum of a company’s stakeholders is bound up with a company via these two contracts:
- Legal contract—This contract is mostly explicit and is based on quantitative performance criteria established by jurisprudence as well as representations by a company and its agents in writing, oral communications, and actions.
- Emotional contract—This contract is mostly implicit or unspoken and is based on qualitative performance criteria established by stakeholders in the form of expectations that reflect their moral and ethical values and their experiential desires—what they want to experience, and what they want to avoid experiencing.
Former MIT Sloan School of Management professor Edgar H. Schein writing about the explicit or legal contract and the implicit or emotional contract (which he called the “psychological contract”) suggested that unless the terms of the psychological contract are intuitively understood by all, long-term relationships are not possible and friction is likely in the short term.10
Quite likely one of the most common causes of corporate mortality is breaches of the emotional contract. When the emotional contract is egregiously breached, customers stop buying, worker productivity ebbs, suppliers become less responsive, partners bail out, shareholders put in sell orders, and community support evaporates.
Companies spend vast sums fortifying and defending themselves against legal challenges by various stakeholders, while apparently not realizing that the roots of a claim might lie in a breach of the emotional contract. People don’t sue people or organizations for whom they feel affection—or as Kevin Roberts would say, “that they love.”
Toro, the giant lawn mower and snow blower maker, discovered that by delivering better on the emotional contract it could decrease personal injury litigation. Toro’s leadership once believed personal injury litigation was inevitable given the nature of its products. But in the mid-1990s, that belief was abandoned. Company representatives began making personal contact with injured customers. They apologetically extended the company’s sympathy and suggested that if an immediate settlement could not be arranged, arbitration might be better and less of a hassle than going to court. The company used nonthreatening paralegals, experienced settlement counselors, and mediators familiar with Toro’s preference for early case resolution. By mid-2005, Toro estimated that it had saved $100 million in litigation costs since it kicked off its nonaggressive and emotionally sensitive approach to avoiding litigation in 1994. It had not been in court for a single personal injury case—a truly amazing record for a company that builds dangerous equipment that falls into countless careless hands every weekend of the year.11
Amul Dairy Products, one of the best-known brands in India, is a widely loved company that understands the unspoken contract it has with customers. Dr. Varghese Kurien, Chairman of the National Cooperative Dairy Federation of India, observed at Amul’s 50th anniversary celebration, “If Amul has become a successful brand... then it is because we have honored our contract with consumers for close to 50 years. If we had failed to do so, then Amul would have been consigned to the dustbin of history, along with thousands of other brands.”
FoEs understand that their business operations are shaped by both spoken and unspoken contracts. Like partners in a successful marriage, they know that failure to honor the emotional contract with a customer means the end of customer loyalty.