Value of Trust

"every business type and category has trust issues.”
According to Rich Jernstedt, CEO, Golin/Harris International.

AMERICAN BUSINESS FACES A CRISIS OF TRUST "The erosion of trust indicated in the research is a call to action. And it must be heard loud and clear.” Nearly 70 percent of survey respondents said, “I don’t know whom to trust anymore,” and said they will “hold businesses to a higher standard in their behavior and communications.”

1. Anticipate and manage conflicts.
2. Improve decision-making from management, employees, investors and other external stakeholders.
3. Build consensus amongst diverse views.
4. Create stakeholder identification with the outcomes of the organization's activities.
5. Build trust in the organization.

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Value of Trust

Trust is the basis for all business engagement and stakeholder collaboration. Since no organization is an island and few organizations have absolute control over their business environment, their prosperity and very existence hinges on their ability to win the support of key stakeholders. It is therefore critical for organizations to engender confidence in the information they provide to stakeholders with explicitly designed business processes and mechanisms that help to reduce and mitigate uncertainties that inhibit stakeholder engagement. Regardless of whether an organization suffers from a crisis of trust or already enjoys high levels of trust, in an increasingly commoditized world stakeholder trust and confidence are defining the winners and losers.

Alan Greenspan was quoted by the Wall Street Journal as saying that breakdowns in corporate governance could undermine the trust necessary for efficient markets, which threatens to "significantly erode" the economy's impressive gains in productivity.

In a New York Times article, R. L. Butler, a retired clergyman in Denver was quoted as saying "The worst thing now, is you can't even trust the earnings reports. When you find the auditors in bed with the managers, there is nobody to believe."

"Never before in the history of our country has there been a lower level of trust in public institutions and corporations," According to Howard Schultz, Starbucks' CEO and founder, whose venture capital company, Maveron invested in eBay (Nasdaq: EBAY) and Drugstore.com -- now two of the biggest names in e-commerce. Given consumers' disenchantment, he thinks that brands that inspire trust are more valuable than ever.

 

Studies

General Business Benefits of Trust

Todd A., http://trustenablement.com/.

(Trust is integral to every transaction and the foundation for business success. It drives the volume, velocity and value of every business transaction.)

Todd A., http://trustenablement.com/value_of_trust.htm.

(Trust is the basis for all business engagement and stakeholder collaboration. Since no organization is an island and few organizations have absolute control over their business environment, their prosperity and very existence hinges on their ability to win the support of key stakeholders. It is therefore critical for organizations to engender confidence in the information they provide to stakeholders with explicitly designed business processes and mechanisms that help to reduce and mitigate uncertainties that inhibit stakeholder engagement. Regardless of whether an organization suffers from a crisis of trust or already enjoys high levels of trust, in an increasingly commoditized world stakeholder trust and confidence are defining the winners and losers.)

(There is a magic that certain companies have (eBay, Google, Harley Davidson, HP, Coca Cola earlier and maybe also GE and Microsoft) where companies transcend the normal bounds of management. Investors consistently value their shares at epic price/earnings ratios, employees evidence unusual loyalty and performance, customers use their products and gush about them, and the press finds ways to give them the benefit of the doubt (how would the market have responded to any other bank in Canada had it encountered the same IT failure that Royal Bank did earlier last year). Perhaps, "trust" is one of the underlying currencies that make this happen, where trust isn't an accident or an afterthought, but the carefully designed objective of a pattern of actions.)

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 1.

(“Trust is not an option in the success formula; it is an imperative.”

Ward, A., and Smith, J. (2003) “Trust and Mistrust”, John Wiley & Sons Ltd., pp. 23-25.

(“Business is about money.  We make the case that it is also about trust – about managing the risk of consciously behaving in ways that benefit others….  We do not directly claim that more trust equals more money (although that is clearly the case, as we will show later)…  moneymaking opportunities are severely constrained without trust…  trust ultimately underpins everything that business depends upon.  The limiting factor in business development is no longer the availability of resources but imagination about way to collaborate.” )

Bader, G. E., and Liljenstrand, A. (May 2003) “The Value of Building Trust in the Workplace”, WorkIndex.com,.

(A “study of 4,000 employees in eight countries concludes that building trust and emphasizing business ethics in the workplace pays off in tangible and intangible ways, helping the company's bottom line. Sponsored by United Technologies and conducted by Pamela Shockley-Zalabak, Ph.D., Kathleen Ellis, Ph.D., and Ruggero Cesaria, the study showed "trust is more than a social virtue and it serves as an economic imperative for business resilience in a global marketplace." Its findings show that organizations with high levels of trust continually benefit from:

* Adaptive organizational structures

* Strategic alliances

* Responsive virtual teams

* Effective crisis management

* Reduced transaction and litigation costs”)

 

Share Value

Ezekiel, Z. (2005) “Rebuilding Trust in Canadian Institutions”, The Conference Board of Canada.

(“Public distrust can have an impact on share prices. In testimony before Congress, U.S. Federal Reserve Board Chairman Alan Greenspan noted that damaged investor confidence in audited financial statements had led to lower valuations for equity securities.”)

Note:  eBay still traded at a 143 P/E, as of June 20, 2002, or 420% of the industry average, this is after the dot com crash.

 

The McKinsey Quarterly, “Article at a Glance:  Better boards in Thailand”, The McKinsey Quarterly http://www.mckinseyquarterly.com.

(“Companies [listed on the stock exchange in Thailand] with strong corporate governance practices have higher market valuations.”)

Thompson, M. (June 4, 2001) “Better Corporate Governance Pays Off for Large Companies in Emerging Markets”, http://www.socialfunds.com.

(“In examining the 100 largest companies in emerging markets, researchers found a strong correlation between corporate governance and financial performance ratios.”).

The Financial Express (May 5, 2003) “Corporate Governance and Performance – Expectations and Realities”, Corporate Governance Press Coverage, http://www.mckinsey.com.

(“Institutional investors are willing to pay a premium for well-governed companies.”).

Bauer, B., and Guenser, N. (April 2003) “Good Corporate Governance pays off!”, ABP Investments, http://www.deminor.org/.

(“Portfolios of companies with high corporate governance standards perform better than companies with worse standards.  Investors value well-governed companies significantly higher.”)

PeopleSoft Presentation materials (2001, 2003) “Striking a New Balance” and “Institutional Investor Preferences: 2003 Second Quarter Results”, Working Council for CFOs.

(“While investors penalize poor transparency … they reward good corporate governance efforts. [measured by “Opacity Discount” and “Corporate Governance e Premium”]).

 

Brand and Reputation Value

Red Herring, (July 1, 1999) “Starbucks CEO Howard Schultz brings a powerful brand to his new venture firm”, Red Herring.

(“Never before in the history of our country has there been a lower level of trust in public institutions and corporations," he [Howard Schultz, CEO, Starbuck's] says. Given consumers' disenchantment, he thinks that brands that inspire trust are more valuable than ever.”)

Moore, C., and de Bruin, A.(June 2004) “A Transaction Cost Approach to Understanding Ethical Behaviour”, World Congress of Social Economics, Albertville, France

(“In recent years, intangible asset growth has been the major driver of corporate market value, with some estimates suggesting that it accounts for more than 80 per cent of market value.”)

World Economic Forum (January 2004) 2004 Annual Meeting Survey, “Voice for the Leaders Survey”.

(“A majority of members believe 40% or more of their company’s market capitalization is represented by brand/reputation.”)

("Corporate reputation is a more important measure of success than stock market performance, profitability and return on investment, according to a survey of some the world’s leading CEOs and organization leaders. Only the quality of products and services edged out reputation as the leading measure of corporate success.")

 

Market Share

Anders, G. (November 2001) “Business Fights Back:  eBay Learns to Trust Again”, Fast Company.

(“Today, eBay commands more than 80% of the online consumer and small-business auction market.”)

 

Investment and Growth

Zak, P. J., and Knack, S. (1997, September 10, 1998 version). “Trust and Growth”, unpublished, Claremont Graduate University.

(“The amount invested decreases as trust diminishes in principal-agent relationships, adversely impacting income growth.  “Investment and growth improve with trust.”)

 

Revenue

Anders, G. (November 2001) “Business Fights Back:  eBay Learns to Trust Again”, Fast Company.

(“[At eBay] we do $2.25 billion worth of gross sales a quarter entirely on trust”, according to eBay's chief financial officer, Rajiv Dutta.)

(“Some 34 million people now participate in eBay, which consists of buyers and sellers from all over the world. Hardly any of them know one another.  Nonetheless, they ring up commerce at a staggering rate of nearly $10 billion a year, taking it on faith that someone really will send the money or ship the goods on time. In the overwhelming majority of cases, that trust is richly repaid.”)

Yankelovich (2004) “State of Consumer Trust: Rebuilding the bonds of trust”, Yankelovich.

(45% of consumers have lost trust in a business.  As a result 94% spend less; 76% tell family and friends; 58% stop shopping there for some time; and 49% increase business with competitor.)

 

Price

Yankelovich (2004) “State of Consumer Trust: Rebuilding the bonds of trust”, Yankelovich.

(“Most consumers shop at businesses that have earned their trust – even if they charge more.”)

Kalyanam, K., and McIntyre, S. (2001) “Returns on Reputation in Online Auction Markets”, unpublished.

(“From the perspective of the seller, the implications are that good behaviour is rewarded with higher prices (on average 19%) on eBay.”)

 

Price Volatility

Liesman, S. (July 18, 2002) “The strange Disconnect Between The Stock Market and Economy”, Wall Street Journal.

(“Most economists will tell you that the current disconnect between stocks and the economy is – at least in the post-war era – historic….  The Market at the moment is doing its own thing for its own reasons.  And not many – or even any – of those reasons concern the direction of the economy.  Accounting scandals and corporate corruption, the war on terrorism – all provide sound reasons for what many say is a rethink of the multiple that investors will pay for future earnings.  Part of what we’re watching is the painful recalibration of risk.”)

 

Profitability

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 7.

(“A 1999 Watson Wyatt Worldwide survey reported ‘companies with employees who had high trust and confidence in senior management had a three year total return to shareholders of 108 percent versus a 66 percent return for companies with low trust and confidence levels.’”)

(“The Atlanta Consulting Group … provides even more compelling evidence of the connection between trust and profitability.” “The study … found a high correlation between trust and profitability.  In divisions that outperformed others, 84% of survey respondents said they had high levels of trust, as compared to lower-performing divisions in which only 27% believed trust was high.  The findings provide evidence of a relationship between the level of trust in organizations and the success of major improvement initiatives like team, quality, customer services, and engineering.  More importantly, it supports a strong link between trust and overall company results.”)

Hart, C. W., and Johnson, M. D. (1999) “Growing the trust relationship”, Marketing Management.

(“Building customer trust grows ever more profitable.  As a result of their trust bond with HP, customers migrate toward limiting their choices to one company: HP. Such customers often "take themselves out of the market," not even considering competitive options. Why would they do this? Evaluating other offers takes time, which is costly and in short supply, and history has taught these customers that HP would come out on top in a vendor analysis anyway. Furthermore, this customer asset is uniquely capable of talking to others, powering a referral-generation machine. Here lies a wellspring of brand equity.”)

Simons, T. (2002) “The High Cost of Lost Trust”, ForeThought, Harvard Business Review.

(Tony Simons' study, "The high cost of lost trust" (Harvard Business Review, Sept. 2002) focused on pinpointing the real cost associated with low-trust environments.  It demonstrated that the U.S. and Canadian Holiday Inn hotels where managers followed through on promises and had behavioral integrity were more profitable.  “Where employees strongly believed their managers followed through on promises and demonstrated the values they preached were substantially more profitable than those whose managers scored average or lower.  So strong was the link, in fact, that a one-eighth point improvement on the five-point scale could be expected to increase the hotel’s profitability by 2.5% of revenues – in this study, that translates to a profit increase of more than $250,000 per year per hotel.  No other single aspect of manager behavior that was measured had as large an impact on profits.”)

 

Effectiveness

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 2.

(“Jeffery Pfeffer, professor of organizational behaviour at Stanford University, discovered the indispensability of trust.  In the book, Leader to Leader, he outlines the three basic principles leaders use to transform their organizations:  build trust, encourage change, and use appropriate measures of performance.  Warren Bennis, one of the most published authors on leadership, concurs that the underlying issue in aligning people with goals is establishing trust.”)

(A study by Royal Dutch Shell pointed to four characteristics common to companies with life spans of 200-700 years.  Trust is essential to producing the latter three (Hacker claims only the latter two) of the four: 

1.          They are financially conservative (risk management);

2.          They demonstrate sensitivity to the world around them [Note: Trust Enablement™ is predicated on the requirement that organizations be sensitive to the levels of trust required by their stakeholders];

3.          They create a sense of cohesion and identity; and

4.          They limit central control and exhibit tolerance for activities in the margins.

“To ensure effectiveness, then, leaders must instill a climate of trust in order to innovate and transform as the environment dictates.”)

 

Productivity

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 6.

(“In 1994, Federal Express and IDS both increased their productivity by up to 40 percent by creating empowered work teams trusted with many of the responsibilities traditionally held by managers.  Trust is the key pillar that supports empowerment and cooperation within organizations.”)

Hart, C. W., and Johnson, M. D. (1999) “Growing the trust relationship”, Marketing Management.

(“The value of trust was demonstrated in a study reported in HBR and conducted by Jeffrey Dyer of the University of Pennsylvania's Wharton School and Wujin Chu of the Seoul University School of Management….  The U.S. automaker that suppliers scored lowest in trust spent roughly 50% of face-to-face time negotiating price or assigning blame for problems, as opposed to the automaker scoring highest in trust, where only 25% of the time spent was on these relatively unproductive activities. Similarly, the volume of purchases handled by the highest trust automaker was double that of the manufacturer who was least trusted. Trust relationships pay off in tangible ways.”)

Chami, R., and Fullenkamp, C. (October 1999 - July 2001 version) “Trust and Efficiency”, Social Science Research Network Electronic Paper Collection.

(“When employees who work together trust each other, they exert more effort in their jobs and expend less effort monitoring each other.  This leads to increased productivity, lower costs, and greater satisfaction for workers as well as shareholders….  It is in every corporation’s interest to consider developing a culture of trust as a way of improving performance.”)

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 4.

(“La Porta, Lopez-de-Silanes, Shleifer, and Vishny describe a significant positive correlation between trust and performance.  Simply put, trust promotes performance.”)

Ezekiel, Z. (2005) “Rebuilding Trust in Canadian Institutions”, The Conference Board of Canada.

(“Decreased public trust often translates into increased scrutiny and regulation. Some U.S. commentators have expressed concern about the cost of complying with the Sarbanes-Oxley Act of 2002. However, the Act (along with similar initiatives here in Canada) was a response to a perceived need to rebuild public trust in capital markets following scandals such as Enron and WorldCom.”)

 

Change

Shaw, R. B. (1996) “Trust in the Balance”, pp. 3, Jossey-Bass Inc.

(“Trust increases the likelihood of successful change.”)

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 5.

(“Conclusions reached by Horst Kern support the notion that “when employees distrust the commitment of their organizations, they fear that innovation might result in job changes or, worse yet, downsizing.”)

Breen, B., and Dahle, C.  (December 1999) “Trust for Change”, Fast Company.

(A Ford Motor Company study of getting people to work together on change found that the average time to execute a change took 89 weeks.  They calculated that 39 of those weeks were a direct result of distrust, because of people sitting on information or refusing to share ideas.  “Trust equals speed.  Once people have stopped worrying about what the other guy’s agenda is, you can make changes much more quickly.”)

Ezekiel, Z. (2005) “Rebuilding Trust in Canadian Institutions”, The Conference Board of Canada.

(“Distrust can stall the launch of new initiatives, policies and products. Consumer distrust of biotechnology and biotechnology companies, for example, has forced delays in the launch of various products, including bioengineered sugar beets, potatoes and wheat.”)

 

Innovation and Entrepreneurship

Volken, T. (2002) “Elements of Trust: The Cultural Dimension of Internet Diffusion Revisited”, Electronic Journal of Sociology.

(“Trust fulfills various and important societal functions. Most importantly for our concerns here, it facilitates innovative actions…. Trust, one can summarize, is of fundamental importance for the diffusion of a new technological style in the knowledge society…. At the same time, trust substantially reduces transaction, control, monitoring and enforcement costs and therefore makes available more resources for productive use. Innovative networks with a high level of trust tend to reinforce not only the innovate capacity but also trust….  Trust as a cultural resource raises the overall innovative capacity of a social system, since it allows economic and also political agents to take advantage of their extended potential for action”)

Keser, C., Leland, J., Shchat, J., and Juang, H. (2002) “Trust, the Internet, and the Digital Divide”, IBM Research Report.

(“Our results suggest that trust does, in fact, influence Internet adoption.  Since low trust countries tend to be low or middle income countries, this will result in a digital divide between these countries and higher-trust, higher-income ones.”)

 

 

Efficiency

Shaw, R. B. (1996) “Trust in the Balance”, pp. 135, Jossey-Bass Inc.

(“High trust organizations rely on fewer controls of a more strategic and critical nature”)

Fukuyama, F. (1996) “Trust:  The social virtues and the creation of prosperity”, pp. 258-268, Free Press Paperbacks.

(The Lean production system, a system that is cheaper in terms of total capital costs and more productive per unit of capital than mass production “that constituted such a powerful boon to productivity that it was soon analyzed and copied by other countries, is founded on the principle of high-trust being shown in the lowliest assembly line worker.)

Fukuyama, F. (1996) “Trust:  The social virtues and the creation of prosperity”, pp. 342, Free Press Paperbacks.

(“Lean manufacturing is perhaps the clearest example of the efficiency gains that can come from the proliferation of network structures in the context of a high-trust society.”)

 

Cost Savings

Peppers, D., and Rogers, M. (October 2004) “Intel Measures Trust to Grow its Business”.

(“The research showed that Web site improvements drove trust values up, which in turn positively affected the number of downloads and saved Intel millions of dollars in customer-support costs.” When navigation aids and assistance tips were added “successful downloads increased by 6 percent, trust by 3.5 percent and satisfaction by 4.5 percent, according to Bryan Rhoads, Intel Web Strategist.”)

 

Sustainability

Anders, G. (November 2001) “Business Fights Back:  eBay Learns to Trust Again”, Fast Company.

(“So strong is eBay’s hold, say some observers, that the only force capable of stopping eBay is eBay itself.”)

Accenture (2004) “The business of trust”, white paper referencing the World Economic Forum.

(“Such a decline could never be good news, but it is particularly worrying today because new ways of doing business depend on high trust levels. The emergence of what Accenture has termed the ‘Connected Corporation’, with its permeable boundaries and complex web of links to other people and organizations, places great emphasis on the establishment and maintenance of relationships, and of a highly collaborative approach to business.

Without trust, customers and suppliers would be reluctant to do business with people they had never met (a major problem in this Internet-enabled age); employees would be nervous about working collaboratively with people from the other side of the world, some of whom could even be employed by their competitors; shareholders would be nervous about investing in businesses about which they did not have a deep personal knowledge; and leaders would not give employees the necessary freedom to behave in an entrepreneurial way.

Business today also needs the trust and confidence of society to operate successfully. Without this, governments are likely to regulate to limit companies’ freedom of action, which may in turn constrain the entrepreneurial spirit. In these tough times, it is especially important for business to have the support of government and indeed society at large.”)

 

Employee Attraction and Retention

Hacker, S. K., Willard, M. A., and Couturier, L. (2002) “The Trust Imperative”, American Society of Quality, pp. 6.

(A client of Hacker and fellow authors purposely designed a highly engaging and empowering work environment as a strong value proposition for attracting talent, which resulted in the lowest turnover in the Portland metropolitan area, even though they ranked in the middle of the area’s salary range.)

Armour, S. (February 5, 2002) “Employees’ new motto: Trust no one”, USA Today, published by Council of Public Relations Firms.

("Employees are scrutinizing their own firms. Management experts say workers will become less naive about their own company's finances and missions after the harrowing Enron headlines. More will ask questions and cast a critical eye on their own CEOs.

’Executives are looking out for the good of major shareholders, not employees,’ says Kusner, 33, in Denver. ‘It's hurt trust. People who lived through the Depression are frugal. This could have the same kind of lasting attitude change.’

The breakdown is having ramifications. Anxious employees are swamping financial counselors to learn about protecting themselves from worst-case scenarios. They're negotiating severance and outplacement help before they take a job, taking new steps to provide their own golden parachutes. And they're watching CEOs with a wary eye, putting top executives on the hot seat and demanding more communication from their companies.

The distrust is widespread. Only 10% of adults surveyed think corporations can be trusted a great deal to look out for the interests of their employees, according to a USA TODAY/ CNN/Gallup poll.

For companies, this is more than mere inconvenience. This goes to the bottom line. Employers who fail to restore workers' faith risk costly defections: Studies show lack of trust is a top reason employees quit.  That's troubling news to companies now dogged by accusations of impropriety, because the breakdown of trust is making it tough to keep and retain top talent just when it's needed most”)

("Corporate greed has never been seen on a scale that we're seeing now," says Mike Olson, CEO of Washington, D.C.-based American Society of Association Executives, which promotes voluntary associations. "Employees are going to ask more questions and become more involved in learning about their companies' finances.  Companies are going to have to deal with that or find themselves at the end of the line."

Workers are worried about their own fi