Who Can You Trust These Days?

What a low-trust environment means for business

Published: Nov 21, 2011 06:14:48 AM IST
Updated: Nov 9, 2011 09:20:52 AM IST

News of the recent Delhi Bombing created fear in the Indian population, as terrorist acts have done around the globe. The government agencies have not convincingly shown what a solution against terrorism might look like, which unfortunately is seen as a daily happening here and in several other countries. The recent telecom scams and commonwealth corruption issues have further undermined the faith that people have in several levels of society. Increasing corruption, personal and professional greed, as well as terrorism are further shaking the security in our communities. Meanwhile, senses of accountability and responsibility are fast becoming alien concepts. This article explains in brief what trust means, why it may be decreasing, what the impact is on business and how to prepare for a low-trust environment.

Breaking trust at all levels
Public trust has been broken on many levels in recent years. One only need mention names like Raja aka 2G Scam and Kalmadi aka Commonwealth Games Scam to make the point resonate. Recently we witnessed outpouring of mass public outrage against Corruption in India, where people felt betrayed. Internationally big financial institutions betrayed the public, but because they were “too big to fail,” their recovery and executive bonuses were sponsored by the very public that they deceived; BP’s CEO wanted “his life back” when the company was responsible for the biggest ecology disaster in human history; governments repeatedly misled the world about weapons of mass destructions in Iraq; debt-surfing countries that were living beyond their means and perhaps playing by different rules might now default and thus causing the breakdown of an entire currency. 

These multilevel infringements on public confidence, contribute to the threat of a global low-trust environment. Today, less than 25% of Americans believe that their government will always do what is right for the nation[2]. The recent political theatre regarding the US debt ceiling has reduced faith in politicians even further. German and British trust in their governments was on par with Russia even before the Euro-crisis, and trust in multinationals and global companies is lower than ever in many countries[]. So is the case in India, where public trust in government is on the decrease because of multiple scams. 

Why trust?
Trust is a critical element of an efficiently functioning economic system. It reduces transaction costs and it facilitates exchange of information and knowledge sharing. In essence, trust is a vital component of effective government, economic performance, safety, peace and stability. Furthermore, trust increases happiness in peoples lives, indirectly or directly.

The countries that have traditionally enjoyed the highest levels of trust (e.g. Germany and Scandinavia), thrive because trust exists across all levels of society, that is, on individual, group and government levels. People trust each other and often even strangers. There is trust between groups of people, and most citizens trust the communal and governmental authorities. This may just be about to change, Norway being a tragic case in point.

What is the impact on business?
What can business expect from this increasing scepticism? While the world can still function amidst a low-trust environment[4], we are likely to see the following shifts in mindset:
Short-term focus  
Uncertainty and low trust will discourage long-term thinking and investments. Consumers and businesses cannot plan or dare not plan to spend money. In some cases, however, we may also see a counterintuitive reaction of reckless behaviour and spending due to a what-if-tomorrow-never-comes mentality or because companies see other businesses being bailed out when their risks lead them to fail.    

High-risk premium
When businesses work with people, institutions or governments that they do not entirely trust or that they fear may be “hit” by dependencies on faulting entities (such as Greece and Ireland), they need to get a risk premium to cover potential loses and write-offs. We already see huge risk-premium spans between European countries, and it is likely that these principles will increasingly trickle down to business practices, so that we build into our prices the risk of our business partners not meeting their obligations.

Regulations and legislation
Governments will be forced to increase regulations and monitoring, i.e. for the financial markets. People and organizations may increasingly ask for documentation, testimonials, (thicker) contracts or security/collateral prior to engaging in economic relationships. We may see private networks or “clans” having internal adjudication systems and various new forms of ratings, sanctions and “punishment” inside systems, industries or trade/e-trade.

Control and conservatism
Companies have natural strategic tensions between values. For example, in a low-trust scenario, the delicate balance between control and flexibility will break down in organizations, allowing control to prevail. That means hierarchies with monitoring, intelligence, tight management structures, increased risk assessment of the supply chain and control functions will become the norm. Perhaps cash settlements, large down payments and pre-payments will also increase.

What should business do?
These shifts present considerable challenges, as they will likely complicate business, make life more expensive and push the world toward closed-mindedness. It could even hinder the globalization processes and lead to increasing discrimination and protectionism.  

In a low-trust environment scenario[5], companies, and even countries, will need to focus increasingly on reputation management. Some companies may thrive on the basis of proven long-term relationships as repeated positive interactions typically create trust, or they may direct their business into markets that will grow fast due to increasing control, certification, risk brokering and monitoring. New firms providing monitoring, risk-brokering, “policing”, security and independent (reliable) ratings may flourish.  

However, organizations will need also to acknowledge new trust paradigms and how they are created. For example, it has been widely suggested that companies must do profit for a purpose, including adding value to society in different ways beyond simply paying taxes, as well as increasing transparency around how they secure their profit. Integrity will need to become more than just a value espoused on company websites.

Communities, good citizenship and social responsibility must be [re]-established[6], and we should all make efforts in this respect, as individuals, as parents, as politicians, as shareholders, and as managers. In essence, we must all live up to our responsibilities in an ever distrustful world. The time has come to discuss what these responsibilities and their underlying values should look like. If not, sub-prime innovators and ethical atheists will soar, as our legal systems, unintentionally, replace morality. Until then, the business world may be overburdened with low-trust high-risk consequences, crushing innovation and growth.
 

Karsten Jonsen is a Research Fellow at IMD, a leading global business school in Switzerland

[1] Trust is the belief that somebody will do “as expected” and act in your interest, even when you cannot monitor it. In the context of business trust relates to reliability in transactions and the expectation of honesty and integrity in commercial dealings.  

[2] CNN survey, Sept. 20th, 2010

[3] World Economic Forum, 2010, see also www.edelman.com/trust/2011

[4] Cook, Hardin & Levi (2005), Corporation without trust.

[5] See for example Shell’s global scenarios to 2025

[6] See Robert Putman’s increasingly relevant book, Bowling Alone, (2000).

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[This article has been reproduced with permission from IMD, a leading business school based in Switzerland. http://www.imd.org]

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