[{"data":1,"prerenderedAt":53},["ShallowReactive",2],{"author-341":3,"author-team-341":6,"author-work-341":7},{"id":4,"name":5,"image":6},341,"Patricia Dowden",null,{"publications":8,"news":35},[9],{"id":10,"title":11,"slug":12,"image":13,"type":14,"date_published":16,"publisher":17,"summary":6,"body":18,"area":6,"programme":6,"languages":19,"countries":21,"tags":22},1960,"Maximizing stakeholder trust as a tool for controlling corruption","maximizing-stakeholder-trust-tool-controlling-corruption","a9670c9b-0ea1-43a6-90a2-49b92ec4db8f",[15],"Article","2018-01-01","Springer Netherlands","Corruption, particularly bribery of government officials, inflicts substantial damage on people, society, and the world, and warrants control. Collective efforts to control corruption tend to focus on rules and compliance with those rules. This paper suggests that collective action also consider the creation of strong ethical cultures in business firms. Implementation of such programs is impeded by the difficulty in prescribing a course of action and by the difficulty in measuring the strength of an ethical culture.\n\nThis paper suggests the measurement and maximization of stakeholder trust as a proxy for measures of ethical culture. The qualities that engender stakeholder trust correspond with ethical behaviors.\n\nStakeholder trust confers benefits on business firms, which will incentivize and justify its measurement. Implementation of a program focused on ethical culture would benefit from collective action both by normalizing behaviors and in the development of sophisticated measurement tools.",[20],"English",[],[23,27,31],{"tags_id":24},{"id":25,"name":26},973,"Corruption",{"tags_id":28},{"id":29,"name":30},909,"Collective Action",{"tags_id":32},{"id":33,"name":34},1274,"Ethics",[36,45],{"id":37,"title":38,"slug":39,"image":6,"type":40,"date":41,"body":42,"language":6,"tags":43,"translations":44},10146,"Stakeholder trust: a business case","stakeholder-trust-a-business-case-272","Blog","2015-08-10","_\"The advantage to mankind of being able to trust one another penetrates into every crevice and cranny of human life: the economical is perhaps the smallest part of it, yet even this is incalculable.\" John Stuart Mill (1848) \\[[ref](http://www.econlib.org/library/Mill/mlPCover.html)\\]_\n\nIn our [first post](http://russiancouncil.ru/en/blogs/patricia-dowden-philip-nichols/?id_4=1599) we proposed a universal business ethics principle:_“A basic duty of every organization is to earn stakeholder trust.”_ \n\nOur hypotheses are that 1) while cultures and levels of economic development may vary widely, trust is defined by universally shared attributes, sometimes summarized as “character” and “competence”; 2) ethical values are aligned with these attributes; and 3) therefore trust is a reliable proxy for evaluating ethical behavior.\n\nBusiness leaders intuitively understand that trust is important. Nearly 70% of respondents to the PwC 17th Annual Global CEO Survey (2014) agreed that the purpose of the business is to balance the interests of all stakeholders. \\[iii\\] This survey showed that more than 50% of CEOs surveyed regard trust as a major concern and that the absence of trust constitutes a real threat for growth, a sharp rise from 37% who cited concerns last year.\\[iv\\] \n\nTheir concern, however, has not lead to concerted efforts to generate trust. The World Economic Forum frames today’s trust agenda: “What is required is a common understanding that aligns expectations \\[between business and society\\], and clarifies business’s wider role and purpose beyond the creation of financial value. It is this understanding that will foster and rebuild trust.  Efforts to close the trust gap . . . face two key challenges: 1. The absence of a clear business case . . . \\[and\\] 2. . . . a fundamental disconnect between how the public and business understand ‘trust.’”\\[v\\]     \n\nIn this post we propose to address the first challenge identified by the World Economic Forum. An individual business may or may not care about the benefits that flow from trustworthy systems and a strong ethical climate (which we will address in another post) but it must care about its own bottom line. A strong business case does exist, at the firm level, for generating stakeholder trust. In particular:\n\n*   A buyer’s/investor’s economic decisions are not solely based on financial considerations; trust also plays a significant role.\\[vi\\]\n*   Businesses do not have to choose between financial value and stakeholder trust.  Companies that earn trust also have better financial results.  This means that rather than creating costs and interfering with business, as some believe, business ethics and trust are in fact a profitable strategy.\n*   Stakeholder voices, thanks to the internet and social media, are an increasingly influential source of information for the public.  An organization’s future success will depend more than ever on understanding and responding to these voices.\n\nOur primary focus is on business and its stakeholders, defined as small and large groups affected by the business – groups such as customers, employees, creditors, suppliers, investors, community, and even government. Research described below is primarily based on the experience of large Western business organizations. However, while this paper will concentrate on business, the stakeholder trust principle applies to any culture and any organization, including government, academia, NGOs.\n\nTrust and reputation\n--------------------\n\nReputation Institute’s 2015 Global RepTrak®100 describes reputation as a function of trust and reports that “\\[r\\]eputation predicts all forms of \\[public\\] support”, including “would buy the product, would say something positive, would recommend the products, would trust to do the right thing, would work for, would invest in.”\\[vii\\] \n\nA purchase price acquisition study suggests that about 1/3 of the average price is goodwill.\\[viii\\] Two firms have recently undertaken the challenge of quantifying the impact of reputation on share price; their independent analyses produced very similar results. One concludes that for firms in the Standard & Poor's 500 Index, reputation currently accounts for an average of 31% of share price.\\[ix\\] Another organization reports that “as of 1 January 2012 \\[corporate reputations\\] accounted for close to 26% of the total market capitalization of the S&P500” and concludes that “reputation therefore is a useful leading indicator of investment risk. In most cases, 91% of companies, reputation is having a positive impact and creating shareholder value. In the remaining 9% it is destroying value . . . a notional 5% improvement in the strength of an extant reputation would yield a market capitalization growth of 2.5% in a company in the S&P500 and 2.2% in one in the FTSE100.”\\[x\\]\n\nFirms should not assume that strong financial performance alone generates a strong reputation. The World Economic Forum 2015 research ranked financial returns last of ten factors critical to reputation (39%), while trust is one of the top four factors (65%).\\[xi\\] By 2013, trust was the primary driver of corporate reputation, replacing “operational excellence” (“admired top leadership, globally ranked as a top company, consistent financial returns”), which dropped from 76% in 2008 to 39% in 2013. These operational qualities are still important but are considered fundamental competencies rather than distinguishing characteristics.\\[xii\\]\n\nStakeholder prioritization of behavior over product is illustrated by the fact that an operational crisis, such as a product recall, will result in a share price drop of an average of 37% on day one, while a behavioural crises, such as bribery and corruption issues, produces much sharper declines: initial share price falls averaging 50%-plus, and many companies will still suffer declines more than a year after the event. “The study also found that behavioural crises also accounted for 40% of incidents where leaders resigned.”\\[xiii\\] \n\nA business’s reputation is particularly important as a bulwark against the risk of contagion due to a decline in trust in its industry.  The 2015 World Economic Forum study reports that “those with stronger trust appear to have weathered recent challenges \\[for example, the 2008 financial crisis\\] better than those who lacked it.”\\[xiv\\]  Evidence of the firewall benefits of trust are reported by the Edelman Trust Barometer: when a company is trusted, negative information reported 1-2 times will be believed by only 25%, while for a distrusted company, the information will be accepted by 57%.\\[xv\\]\n\nTwo stakeholder groups and value creation\n-----------------------------------------\n\nWe recognize that the research discussed above does not specifically explore stakeholder trust. We suggest, however, that the bulk of a firm’s reputation is based on its interactions with stakeholders. This is increasingly true given the technological platform that stakeholders now have to make public their interactions. Before the internet provided such platforms, a company’s communication with the public was mostly initiated by the company itself. In the “internet-and social-media-enabled goldfish bowl where companies now operate,”\\[xvi\\] stakeholder voices are increasingly available, through customer product ratings, comments on various websites, etc.\n\nEach organization has its own unique sets of stakeholders. Most, however, have at least two stakeholder groups in common: “customers” (recipients of organization’s activity) and employees. Research on trust within each of these stakeholder groups supports the business case for generating stakeholder trust. Trust by employees may create the greatest value, partly because it influences the level of trust held by other stakeholder groups\\[xvii\\]; but creating trust in customers is also valuable and will likely contribute to a firm’s bottom line. We will first discuss customers and then turn to employees.\n\n(NOTE: This analysis will focus on commercial business, where value is easily measured in financial terms.  We believe, however, that the principles apply to all organizations.)\n\nCustomer Purchase Behaviour\\[xviii\\] \n-------------------------------------\n\nCustomer purchase decisions will often include judgments based on a combination of instincts and trustworthy data, including experience with a company’s employees, its reputation, expert reports on product/service quality, marketing materials, and, increasingly, ratings provided by other customers.  In other words, stakeholders are both the judge of an organization’s trustworthiness and, potentially, providers of information that will influence the trust of other stakeholders.\n\n## For trusted companies:\n\n## For distrusted companies:\n\n_Customer loyalty_\n------------------\n\nBy nearly all measures, it is more profitable to keep customers happy than to attract new customers; and trust drives 22% to 44% of overall customer loyalty.\\[xix\\] Examples include:\\[xx\\]\n\n_Employee engagement_\n---------------------\n\nEmployee engagement is defined as the emotional commitment the employee has to the organization and its goals.\\[xxv\\]  The Edelman Trust Barometer reports that “\\[e\\]mployees are considered the most trusted source across most clusters of trust attributes . . . The public wants to hear directly from employees as ambassadors for the company who can attest to its integrity, the quality and relevance of products and services offered and the operational strength of the company, including its leadership.”\\[xxvi\\]\n\nResearch provides much evidence of the economic value of employee engagement.\n\nDespite all this evidence of benefits, there is much unrealized potential in most organizations. One study of American workers suggests that three-quarters of employees today would consider taking a new job and one-third are actively looking.\\[xxxiv\\] Gallup’s research finds that 18% of workers are not only not engaged but _actively disengaged_.\\[xxxv\\]  This lack of employee engagement also contributes to legal risk;\\[xxxvi\\] project implementation risk;\\[xxxvii\\] funding costs;\\[xxxviii\\] and security costs.\\[xxxix\\] \n\nAn understanding of broad levels of social trust can be extended to stakeholder trust. Current research described above suggests an impressive business case at the level of the individual firm: creating stakeholder trust improves the bottom line.\n\nWhy, then, do so many individual businesses fail to articulate the creation of stakeholder trust as a goal, and why does the World Economic Forum claim that the business case has not been made?  The World Economic Forum itself might provide an answer. It suggests that “Trust as an asset appears inherently intangible and difficult to measure.”\\[xl\\] \n\nWe respectfully disagree. Measurement is critical to the operationalization of this principle, and measurement is possible. In a post soon to come we will discuss some of the factors that might be used in creating trust metrics.\n\nReferences\n----------\n\n*   80% of customers chose to buy product/services\n*   68% recommended to friends/colleagues\n*   54% paid more for products and services\n*   48% shared positive opinions online\n*   40% defended company\n*   28% bought shares\n*   63% refused to buy products/services\n*   58% criticized to friends/colleagues\n*   37% shared negative opinions online\n*   18% sold shares\n*   A 5% increase in customer retention can increase a company’s profitability by 75%. \n*   80% of a company’s future revenue will come from just 20% of existing customers.\n*   Attracting new customers will cost a company 5 times more (some estimates are as high as 9 times more) than keeping an existing customer.  \n*   A customer that uses multiple products is less likely to change providers; this also creates efficiencies in product servicing.\n*   “An average business loses 10 percent of its customers each year, while cutting customer losses by 5 percent can boost profits by 25 to 125 percent.”\\[xxi\\]\n*   Loyal customers are an engine of profitability, according to a Bain study.  An evaluation of customers who were classified as “promoters” showed that, on average, an industry’s “promoter” group grew more than twice as fast as its competitors.\\[xxii\\]  For companies whose customers are other businesses (B2B), “promoters” have an average lifetime value typically three to eight times that of \"detractors,\" depending on segment and industry. Promoters stay longer with the company, buy more products, usually cost less to serve and are more likely to refer the supplier to colleagues and friends.  As a result, B2B loyalty leaders tend to grow four to eight percentage points above their market's annual growth.\\[xxiii\\]\n*   Organizations with loyal customers are twice as likely to exceed the forecasts of financial analysts.\\[xxiv\\]\n*   A Russell Investment Group study reports that the 1998-2008 stock performance of publicly traded companies on Fortune’s annual list of the “100 Best Companies to Work For” returned five times as much to investors as the market in general.\\[xxvii\\]\n*   A 50% increase in the Trust Index Employee Survey score correlates with a 12-fold increase in profits\n*   Trust Index Employee Survey top-ranked companies produce three times the cumulative market return as others in the Russell 3000 or Standard and Poor 500 companies\\[xxviii\\]\n*   Gallup’s Q12 Survey 2012 Reports\\[xxix\\] show that “companies scoring in the top half on employee engagement nearly doubled their odds of success compared with those in the bottom half.” \n*   PwC reports that the innovative companies are most clearly differentiated by a higher degree of trust in management.  (Entrepreneurship is also highly correlated with trust.\\[xxx\\])  Innovation is also increasingly tied to collaboration: their research finds that the most innovative companies collaborate over three times more often (34%) than the least innovative ones (10%).  According to the GE Innovation barometer, lack of trust in a partner company is one of the key barriers for not collaborating with other companies.\\[xxxi\\]\n*   Trust Index Employee Survey shows that top-ranked companies have up to 50% less staff turnover than competitors.\\[xxxii\\]\n*   Employees who rank life satisfaction on a 10-point scale indicate that 1 point increase in trust in management has the same impact as a 36% increase in income.\\[xxxiii\\]\n\nLinks\n-----\n\n*   \\[iii\\] [http://www.pwc.com/gx/en/ceo-survey/2014/key-findings/building-trust.jh…](http://www.pwc.com/gx/en/ceo-survey/2014/key-findings/building-trust.jhtml)\n*   \\[iv\\] [http://www.pwc.com/gx/en/ceo-survey/2014/key-findings/building-trust.jh…](http://www.pwc.com/gx/en/ceo-survey/2014/key-findings/building-trust.jhtml)\n*   \\[v\\] [http://www3.weforum.org/docs/WEF\\_EvolutionTrustBusinessDeliveryValues\\_r…](http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf)\n*   \\[vi\\] Francis Fukuyama describes the role of trust in economic decisions as the “missing twenty percent of human behavior about which neoclassical economics can give only a poor account.” (Fukuyama, Francis (1996-06-18). Trust: Human Nature and the Reconstitution of Social Order (p. 13). Free Press. Kindle Edition.). Several Nobel laureates have, however, addressed the importance of this question, including: Kenneth Arrow ([http://www.acton.org/pub/religion-liberty/volume-16-number-3/economy-tr…](http://www.acton.org/pub/religion-liberty/volume-16-number-3/economy-trust); [https://hec.unil.ch/docs/files/21/280/knack\\_keefer\\_1997.pdf](https://hec.unil.ch/docs/files/21/280/knack_keefer_1997.pdf)); Friedrich Hayek ([http://en.wikipedia.org/wiki/Extended\\_order](http://en.wikipedia.org/wiki/Extended_order)); Daniel Kahneman (Fairness as a Constraint on Profit Seeking: Entitlements in the Market”, by Daniel Kahneman, Jack L. Knetsch, Richard H. Thaler  The American Economic Review, 76(4), pp. 728 – 741, September 1986; [https://www.imf.org/external/pubs/ft/fandd/2009/09/pdf/people.pdf](https://www.imf.org/external/pubs/ft/fandd/2009/09/pdf/people.pdf)); Amartya Sen (Rational Fools: A Critique of the Behavioral Foundations of Economic Theory, Philosophy and Public Affairs, Vol. 6, No. 4 (Summer 1977), pp. 317 – 344 [http://www.nybooks.com/articles/archives/2009/mar/26/capitalism-beyond-…](http://www.nybooks.com/articles/archives/2009/mar/26/capitalism-beyond-the-crisis/)); John Nash ([http://www.ewp.rpi.edu/hartford/~stoddj/BE/IntroGameT.htm](http://www.ewp.rpi.edu/hartford/~stoddj/BE/IntroGameT.htm)).\n*   \\[vii\\] [http://www.rankingthebrands.com/PDF/RepTrak%20UK%202015,%20Reputation%2…](http://www.rankingthebrands.com/PDF/RepTrak%20UK%202015,%20Reputation%20Institute.pdf)\n*   \\[viii\\]Price Allocation Study by Houlihan Lokey  [http://www.hl.com/us/press/insightsandideas/4862.aspx](http://www.hl.com/us/press/insightsandideas/4862.aspx)\n*   \\[ix\\] [http://www.mediapost.com/publications/article/170349/company-reputation…](http://www.mediapost.com/publications/article/170349/company-reputation-translates-into-stock-value.html?edition=)\n*   \\[x\\] The Impact of Reputation on Market Value, Simon Cole  WORLD ECONOMICS• Vol. 13 • No. 3 •\n*   July–September 2012\n*   \\[xi\\] [http://www3.weforum.org/docs/WEF\\_EvolutionTrustBusinessDeliveryValues\\_r…](http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf)\n*   \\[xii\\] [http://www.scribd.com/doc/121501475/Executive-Summary-2013-Edelman-Trus…](http://www.scribd.com/doc/121501475/Executive-Summary-2013-Edelman-Trust-Barometer)\n*   \\[xiii\\] [http://www3.weforum.org/docs/WEF\\_EvolutionTrustBusinessDeliveryValues\\_r…](http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf)\n*   \\[xiv\\] [http://www3.weforum.org/docs/WEF\\_EvolutionTrustBusinessDeliveryValues\\_r…](http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf)\n*   \\[xv\\] [http://www.slideshare.net/EdelmanInsights/2011-edelman-trust-barometer?…](http://www.slideshare.net/EdelmanInsights/2011-edelman-trust-barometer?related=1)  p 35\n*   \\[xvi\\] [http://www.pwc.com/gx/en/ceo-survey/2014/key-findings/building-trust.jh…](http://www.pwc.com/gx/en/ceo-survey/2014/key-findings/building-trust.jhtml)\n*   \\[xvii\\] [http://www.edelman.com/2015-edelman-trust-barometer-2/trust-and-innovat…](http://www.edelman.com/2015-edelman-trust-barometer-2/trust-and-innovation-edelman-trust-barometer/global-results/)\n*   \\[xviii\\] [http://www.edelman.com/2015-edelman-trust-barometer-2/trust-and-innovat…](http://www.edelman.com/2015-edelman-trust-barometer-2/trust-and-innovation-edelman-trust-barometer/global-results/)\n*   \\[xix\\] “Connecting Customer Experience to Revenue: A Sellers’ Compass™”. New Business Strategies, NBS Consulting Group, Inc., 2013, [http://www.newbizs.com/wp-content/uploads/2013/02/NBSTSellersCompassWhi…](http://www.newbizs.com/wp-content/uploads/2013/02/NBSTSellersCompassWhitePaper2013.pdf).\n*   \\[xx\\] [http://www.forbes.com/sites/alexlawrence/2012/11/01/five-customer-reten…](http://www.forbes.com/sites/alexlawrence/2012/11/01/five-customer-retention-tips-for-entrepreneurs/)\n*   \\[xxi\\] [http://smallbusiness.chron.com/maximizing-customer-satisfaction-maximiz…](http://smallbusiness.chron.com/maximizing-customer-satisfaction-maximize-profitability-35724.html)\n*   \\[xxii\\] [http://www.netpromotersystem.com/about/how-is-nps-related-to-growth.aspx](http://www.netpromotersystem.com/about/how-is-nps-related-to-growth.aspx)\n*   \\[xxiii\\] [http://www.netpromotersystem.com/about/building-loyalty-at-b2b-companie…](http://www.netpromotersystem.com/about/building-loyalty-at-b2b-companies.aspx)\n*   \\[xxiv\\] “Connecting Customer Experience to Revenue: A Sellers’ Compass™”. New Business Strategies, NBS Consulting Group, Inc., 2013, [http://www.newbizs.com/wp-content/uploads/2013/02/NBSTSellersCompassWhi…](http://www.newbizs.com/wp-content/uploads/2013/02/NBSTSellersCompassWhitePaper2013.pdf).\n*   \\[xxv\\] [http://www.forbes.com/sites/kevinkruse/2012/06/22/employee-engagement-w…](http://www.forbes.com/sites/kevinkruse/2012/06/22/employee-engagement-what-and-why/)\n*   \\[xxvi\\] [http://www.edelman.com/insights/intellectual-property/2014-edelman-trus…](http://www.edelman.com/insights/intellectual-property/2014-edelman-trust-barometer/about-trust/global-results/) p.36\n*   \\[xxvii\\] [http://www.incentivecentral.org/business\\_motivation/whitepapers/the\\_eco…](http://www.incentivecentral.org/business_motivation/whitepapers/the_economic_case_for_ppmm.2038.html)\n*   \\[xxviii\\] [http://www3.weforum.org/docs/WEF\\_EvolutionTrustBusinessDeliveryValues\\_r…](http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf)\n*   \\[xxix\\] [http://www.gallup.com/businessjournal/166667/five-ways-improve-employee…](http://www.gallup.com/businessjournal/166667/five-ways-improve-employee-engagement.aspx)\n*   \\[xxx\\] Kodila-Tedika, Oasis, and Julius Agbor Agbor. “Does Trust Matter For Entrepreuneurship: Evidence From A Cross- Section Of Countries”. Munich Personal RePEc Archive, University of Kinshasa, Brookings Institution, Stellenbosch University, 29 October 2012, [http://mpra.ub.uni-muenchen](http://mpra.ub.uni-muenchen). de/46306/8/MPRA\\_paper\\_46306.pdf.\n*   \\[xxxi\\] “GE Global Innovation Barometer”. Global Research Findings & Insights. GE, January 2013, [http://www.ge.com/sites/](http://www.ge.com/sites/) default/files/Innovation\\_Overview.pdf.\n*   \\[xxxii\\] [http://www3.weforum.org/docs/WEF\\_EvolutionTrustBusinessDeliveryValues\\_r…](http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf)\n*   \\[xxxiii\\] Helliwell, Huang and Putnam 2009  [http://faculty.arts.ubc.ca/jhelliwell/papers/w14589.pdf](http://faculty.arts.ubc.ca/jhelliwell/papers/w14589.pdf)\n*   \\[xxxiv\\] Hall, Alan. “I’m Outta Here! Why 2 Million Americans Quit Every Month (And 5 Steps to Turn the Epidemic Around)”. Forbes Magazine, 11 March 2013, [http://www.forbes.com/sites/alanhall/2013/03/11/im-outta-here-why-2-mil…](http://www.forbes.com/sites/alanhall/2013/03/11/im-outta-here-why-2-million-americans-quit-every-month-and-5-steps-to-turn-the-epidemic-around).\n*   \\[xxxv\\] Edmund, Larry. “A State of the Workplace from Gallup: What The Greatest Managers Do Differently.” 2014 HCI Employee Engagement Conference, July 2014.\n*   \\[xxxvi\\] While business ethics compliance is often regarded by businesses as a troublesome imposition of costly processes, a major incentive to incur these costs is the risk of legal action, for example, for violation of the American Foreign Corrupt Practices Act or the UK Bribery Act.  Prosecution can be enormously expensive, both financially and reputationally.  It should be noted, though, that compliance is “necessary but not sufficient”.  A World Economic Forum study describes the “compliance equals gaining trust” strategy as a common fallacy ([http://www.weforum.org/reports/white-paper-decoding-complexity-trust-in…](http://www.weforum.org/reports/white-paper-decoding-complexity-trust-industry-perspectives)).\n*   \\[xxxvii\\] A KPMG study finds that 83% of all mergers and acquisitions don’t meet their goals, and on average 50% of top executives leave the acquired company within the first year after the deal; 45% of Fortune 500 CFOs blamed post-M&A failure on “unexpected people problems” (Agenda. KPMG, April-May 2011, [http://www.kpmg.no/arch/\\_](http://www.kpmg.no/arch/_) img/9808354.pdf).  Similar problems can damage a company’s ability to undertake major projects requiring cross-organizational cooperation.\n*   \\[xxxviii\\] A bank or investor will consider “character” as an important component of their funding and pricing decision.  An organization’s culture will heavily influence this evaluation.\n*   \\[xxxix\\] A low trust culture can often require expensive procedures to protect the company against perceived risk of loss from employees and customers.  A visitor to Kyrgyzstan describes buying a Snickers bar: guards stood by the shop door; the Snickers bar was protected behind a glass wall; a revolving tray under the glass wall ensured that candy and exact cash can be simultaneously exchanged – all creating costs that far exceeded the profit on a Snickers bar!  Costs incurred to protect against employee theft or to control employee time usage can also be quite high, in addition to discouraging employee engagement.\n*   \\[xl\\] [http://www3.weforum.org/docs/WEF\\_White\\_Paper\\_Decoding\\_Complexity\\_Trust\\_…](http://www3.weforum.org/docs/WEF_White_Paper_Decoding_Complexity_Trust_Industry_Perspectives.pdf)",[],[],{"id":46,"title":47,"slug":48,"image":6,"type":40,"date":49,"body":50,"language":6,"tags":51,"translations":52},10188,"Stakeholder trust: a proposal for a global business ethics principle","stakeholder-trust-a-proposal-for-a-global-business-ethics-principle-172","2015-01-08","_By Patricia E. Dowden and Philip M. Nichols._ _This article was [originally published](http://russiancouncil.ru/en/blogs/patricia-dowden-philip-nichols/?id_4=1599) by the [Russian International Affairs Council](http://russiancouncil.ru/en/) on 25 December, 2014. Republished here with permission._\n\nWhat standards should businesses observe in their own countries, or abroad? Businesses now have resources and influence that rival or surpass those of governments and certainly of ordinary people.(1) The choices businesses make can profoundly influence the lives of every person on the planet. Businesses, governments, and people now recognize that businesses must do much more than merely obey the law. Yet discerning and agreeing on globally appropriate rules for business behavior has been a formidable and contentious discussion among business leaders and academics.\n\nWhile acknowledging all of the contentiousness, we now offer a modest proposal for a unifying global business ethics principle:\n\n_A basic duty of every organization is to earn stakeholder trust._\n\nThis principle is meant to replace a more familiar but flawed imperative: that the basic duty of each business leader is to \"maximize shareholder value.\"(2) Such a duty has never been explicitly written into corporate law, yet is often practiced by CEOs as a way of avoiding dissatisfied shareholders and being replaced by a similarly dissatisfied Board of Directors. But a single-minded focus on profitability – especially very short-term profitability – has serious limitations and risks to the ongoing enterprise; we will explain why earning and maintaining stakeholder trust – including shareholders -- can not only serve businesses' bottom line over time, but also make the market economies where they operate much more sustainable.\n\nStating that businesses should earn and maintain stakeholder trust clearly implies that business should give moral consideration not only to owners, but also to small and large interest groups related to the business – groups such as customers, employees, creditors, suppliers, and even government. \"Stakeholders\" is, then, a much broader term than \"investors.\" The investors in a corporation include its shareholders, in a partnership its partners, in a privately held business its principals. These terms – particularly \"shareholders\" – are most often used when discussing who is affected by a business. Yet while investors are important, they are not the only groups with whom a business interacts. A business will typically have workers, customers, suppliers, and other people with whom it directly interacts. A business may owe money to a bank, or to bondholders, or other institutions. A business might interact with people and groups less directly. For example, a business might be the center of a community, or conduct research important to sick people, or develop technology to enable people. All of these groups, all of these people, are stakeholders in that business. All of these groups and all of these people are also part of the wider economy and social sphere in which these businesses operate.\n\nSo, it is the job of each business to earn stakeholders’ trust. But \"trust\" is an even more elusive concept than \"stakeholders.\" For each business, trust is often expressed in the value of its brand and its reputation. For a nation's economy, largely powered by its businesses, the value of widespread trust among its businesses and institutions is abundantly clear: robust market economies need a high degree of trust to prosper.(3) Trust contributes immeasurably to the functioning of an economy; a relative lack of trust degrades and disempowers a nation's economy. No better example can be offered than the global economic crisis of 2008, which we will discuss in a future post.\n\nThe logic of establishing trust as a unifying principle is, therefore, straightforward. Businesses operate in an economic context and in a larger social and natural environment. Individual businesses succeed when there is consistent and positive economic performance. Because trust is a critical factor in creating a robust economy, businesses should therefore act in ways that engender trust in all its activities, not only in its interactions with shareholders, but with all relevant stakeholders. To do otherwise would degrade the economic environment and would ultimately condemn businesses to failure. When business succeeds investors, stakeholders and society benefit.\n\n## Earning Trust\n\nStakeholder trust is created by organizational behaviors valued by stakeholders. Our hypothesis is that these behaviors are consistent with principles of business ethics, and therefore that trust levels can serve as accurate barometers for assessing a company’s business ethics.\n\nTrust can be defined as confidence in both character and competence. For example, the standard banking industry criteria for borrower trustworthiness (\"5 C’s of Credit\") begins with character. Pierson and Malhotra find that \"internal stakeholders, such as employees and investors, look most for evidence of managerial competence…. External stakeholders, such as customers and suppliers, typically care much more about technical competence\".(4) Trust reflects reactions to personal experience with the organization's representatives (fellow employees, marketing representatives) and to organizational culture, policies, reputation.(5)\n\nAnalyzing what behaviors are most likely to create trust is a challenge to every organization, and priorities will likely vary by industry, by national culture, by institutional strategy, etc. Research on both employee and customer trust, though, suggests that the basic elements are similar(6):\n\n*   Integrity, honesty\n*   Reliability, dependability, consistency\n*   Fairness, accountability­\n*   Competence, capability: required skills, resources, authority are available\n*   Benevolence, shared values, empathy: a genuine interest in partner’s welfare and finding mutual benefit\n*   Respectfulness\n*   Communication, transparency: timely, comprehensive, comprehensible information; listening as well as speaking\n*   Responsiveness: timely, constructive reactions to issues\n\nResearch also indicates that there is a strong correlation between employee trust and customer trust; and that employee trust and customer trust both influence shareholder value.\n\n## Stakeholder Trust and Shareholder Value\n\nMilton Friedman, a Nobel economist, famously wrote in 1970 that \"The social responsibility of business is to increase its profits\".(7) This evolved in the 1980s to the market economy mantra: \"The purpose of the corporation is to maximize shareholder value,\" where \"value\" was nearly always assumed to mean \"financial value.\" Money quickly became an end in itself: the common terms \"capital markets,\" \"market economy,\" \"shareholder value\" – now dominating discussions of business and economics – did not appear in 1970s economic texts. Today, maximizing shareholder value may be particularly inappropriate as a guide for businesses in emerging economies.(8)\n\nProfits serve as a proxy for value. It is widely assumed that profits reflect the collective judgment of the market, allocating resources to the \"best\" firms. But this assumption is undermined by a major shift in the behavior of investors: many shareholders no longer take long-term positions in most firms; rather, they acquire a financial interest on a temporary basis by buying securities. This has led to a very short-term focus on profitability, and has unintentionally encouraged firms to make highly-leveraged risks. One factor among many causing the 2008 subprime \"meltdown\" was short-term thinking by over-leveraged financial firms. Ignoring value to all stakeholders, some firms lost their economic value as well.\n\nOne of the world’s most successful shareholders, Warren Buffet, provides a different definition of \"shareholder value\": \"Lose money and I will forgive you. Lose even a shred of reputation and I will be ruthless.\" Buffet goes on: \"Wealth can always be recreated, but reputation takes a lifetime to build and often only a moment to destroy.\"\n\nWarren Buffet's experience has taught him that stakeholder trust enhances shareholder value. The cost of losing trust can be demonstrated anecdotally: earnings decline, loss of market share, loss of market cap, etc. There are also other examples of the economic benefit of trust:\n\n*   In emerging economies, research indicates that the single most important element in economic development is trust, specifically \"bridging trust,\" or the willingness to cooperate across groups.\n*   In developed economies, shareholder trust can be quantified by the difference between a company's asset value and its market value.\n    *   The S&P 500 Price to Book Value list shows that from 1999 to 2014, the \"trust premium\" ranges from half the companies' average value (in 2008, following the financial crisis) to about 84%.\n    *   In accounting terms, the difference between book value and market value is called \"goodwill.\" Many of the components of goodwill are related to trust. Recent research on purchase price of acquired companies suggests that goodwill may make up on average as much as a third of the value of these companies.(9)\n*   In recent years, the \"competition\" paradigm has shifted to a trust-dependent \"cooperation\" paradigm, called \"coopetition\"(10): it is common now for companies to optimize their economic performance and customer service through sharing resources with competitors, in order to increase market size rather than market share. Examples include airlines sharing routes with other airlines; universities expanding their curriculum by sharing classes with other universities; banks making their cash machines available to customers of other banks. Intel, Nintendo, American Express, NutraSweet are among numerous other companies using this strategy.\n\nThe West, we believe, has done a serious injustice to emerging economies – including Russia – to have exported a version of capitalism that measures success by money only. It is time to correct that error.\n\nIn future posts we would like to discuss the following topics and others of interest to our readers:\n\n*   role of trust in reducing corruption\n*   role of customer and employee trust in enhancing profitability;\n*   role of trust in emerging economy economic development;\n*   unique role of trust in the global financial system and how this failed in 2008;\n*   role of civility in creating trust\n\nWhile we will focus on business, we propose that earning stakeholder trust is not only the obligation of businesses but of all organizations. We look forward to your discussion of this proposition.\n\n\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\n\n_The authors are grateful to Professor Donald Mayer, whose generosity in sharing his extensive knowledge and experience in the field of business ethics has been a valuable contribution to this paper._\n\n*   Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle Between Government and the Marketplace (2008)\n*   Creating Shareholder Value by Alfred Rappaport: \"VBM \\[Value Based Management\\] is an approach to management whereby the company’s overall aspirations, analytical techniques, and management processes are aligned to help the company maximize its value by focusing management decision making on the key drivers of shareholder value.\" [http://www.imanet.org/PDFs/Public/Research/SMA/Measuring%20and%20Managing%20Shareholder.pdf](http://www.imanet.org/PDFs/Public/Research/SMA/Measuring%20and%20Managing%20Shareholder.pdf)\n*   Francis Fukuyama, Trust: The social virtues and the creation of prosperity (1995)\n*   Unconventional Insights for Managing Stakeholder Trust by Michael Pirson and Deepak Malhotra, p.11\n*   The Commitment-Trust Theory of Relationship Marketing by Robert M. Morgan and Shelby D. Hunt Journal of Marketing © 1994 American Marketing Association p 41\n*   The Commitment-Trust Theory of Relationship Marketing by Robert M. Morgan and Shelby D. Hunt Journal of Marketing © 1994 American Marketing Association p 41 Unconventional Insights for Managing Stakeholder Trust by Michael Pirson and Deepak Malhotra, p. 17 Altman and Taylor, 1973; Dwyer and LaGace 1986; Larzelere and Huston 1980; Rotter 1971 Heide and John (1992) Dwyer, Schurr, and Oh (1987) p 21 An Examination of the nature of Trust in Buyer-Seller Relationships, Patricia M. Doney and Joseph P. Cannon Journal of Marketing April 1997 p.1 How the Best Leaders Build Trust, Stephen M. R. Covey [http://www.leadershipnow.com/CoveyOnTrust.html](http://www.leadershipnow.com/CoveyOnTrust.html)\n*   [https://www.morethanaccountants.co.uk/the-social-responsibility-of-business-is-to-increase-its-profits-by-milton-friedman/](https://www.morethanaccountants.co.uk/the-social-responsibility-of-business-is-to-increase-its-profits-by-milton-friedman/)\n*   Mary Gentile describes other critical weaknesses in the \"shareholder primacy\" corporate governance concept, among them the fact that it is based on assumptions about underlying legal and cultural systems that don’t apply to emerging economies. See [http://www.aspeninstitute.org/sites/default/files/content/docs/bsp/EABIS.GENTILE.2004-1.DOC](http://www.aspeninstitute.org/sites/default/files/content/docs/bsp/EABIS.GENTILE.2004-1.DOC).\n*   2013 Purchase Price Allocation Study by Houlihan Lokey [http://www.hl.com/us/press/insightsandideas/4862.aspx](http://www.hl.com/us/press/insightsandideas/4862.aspx)\n*   Co-opetition by Adam M. Brandenburger and Barry J. Nalebuff (290 pages, Currency/Doubleday, 1996)",[],[],1784560138239]