By Dr Stephen van der Mye, Honorary Adjunct Professor, Faculty of Law, Bond University
What can an enterprise do when its stakeholders lose trust in its honesty and competence?
The World Economic Forum’s 2024 AGM was held in Davos, Switzerland last month. This year its theme was “Rebuilding Trust”. The AGM was important because all around the world people are becoming less trusting of governments, non-government organisations, business and the media. The Edelman Trust Barometer for 2024 shows that on a scale of 1 to 100 the Global Index sits at 56. Australia’s index sits at 52, and while this is an improvement from 48 in 2023, we still sit below the World Index score.
In many ways the concept of trust sits at the centre of a modern society. When we pay our rates and taxes we expect governments to use them wisely and not try to seek to gain a benefit for themselves. When we purchase a motor vehicle we expect it to be fit for purpose and that, if it is maintained in accordance with the service manual, it will remain so many years. When we invest our savings with a regulated financial institution we expect to receive the whole amount of our investment on maturity together with the advertised interest rate.
There are many examples where a loss of trust in an enterprise has caused significant harm not only to the enterprise itself but also its stakeholders and the community in which it operates. An extreme example is the Global Financial Crisis (GFC) between mid-2007 and early 2009, which saw the failure of several significant international financial institutions as a result of a loss of trust between them, forcing governments including Australia to introduced confidence and trust building measures such as a commitment to effectively guarantee deposits of customers.
Recent years have seen a crisis of trust in Australian companies such as AMP Limited, Crown Resorts Limited, the Star Entertainment Group Limited, Qantas Airways Limited, Medibank, PwC Australia and Optus accompanied by large declines in shareholder value and significant changes to membership of their boards and senior management.
Internationally, large companies have confronted a similar loss in trust. Facebook has been publicly questioned about its commitment to data privacy before the United States Congress. The Boeing Company was forced by a Presidential Order to ground its 737 Max jets in the United States after crashes had killed everyone on board two planes in five months, and 42 other countries forbid the jets to fly.
What is trust, and why is it so important?
In 2019, Sandra J. Sucher and Sharlene Gupta explained in their Harvard Business Review article:
Trust, as defined by organisational scholars, is our willingness to be vulnerable to the actions of others because we believe they have good intentions and will behave well towards us. In other words, we let others have power over us because we think they won’t hurt us and will in fact help us. However, trust is a double-edged sword. Our willingness to be vulnerable also means that our trust can be betrayed. And over and over, businesses have betrayed shareholders’ trust.
To put it more simply, according to Simon Longstaff AO: Trust is an ability to rely on someone to do what they have said they will do even when no one is watching them.
With regard to commerce and industry, in 1972, Nobel Laurate Kenneth Arrow argued that [v]irtually every commercial transaction has within itself an element of trust.
Trust is an important ingredient in how stakeholders, customer, employees, investors, suppliers and the community at large view any enterprise. It is one of the most important ingredients in how stakeholders view a an enterprise’s reputation and, once lost, trust is exceedingly hard to recover.
Who is ultimately responsible for the reputation of an enterprise i.e. who is responsible for how stakeholders view the trustworthiness of an enterprise? For Australian companies, the answer is found in section 198A (1) of the Corporations Act 2001 (Cth):
The business of a company is to be managed by or under the direction of the directors. While directors, especially those in large public companies, delegate their responsibilities to other officers and managers, they still bear final responsibility for the company’s performance, especially how its trustworthiness is perceived by stakeholders and hence its reputation.
What factors should directors consider in establishing an appropriate trust culture in their enterprise?
- Prioritise ethical conduct such that integrity is practiced in all aspects of an enterprise’s business, from product development through to customer and supplier interaction, as well as with the community in which they operate.
- Prioritise accountability so that when mistakes occur there is swift and responsible action to rectify errors. The users of social media will quickly identify what they see as a shifting of accountability onto a third party when it should not be so.
- Prioritise consistency and reliability in the delivery of products and services that are fit for purpose, and when that does not occur accept responsibility for their inadequacy. Reliability in the delivery of products and services builds trust between an enterprise and its stakeholders.
- Communication is the glue that holds the other three factors together, and it needs to be honest and transparent because the public will easily identify holes in proposed remedies for corporate failures.
Professor Graeme Samuel AO, in his Prudential Inquiry into the Commonwealth Bank of Australia commissioned by the Australian Prudential Regulation Authority, came up with a test he called “Can We Do It vs Should We Do It”. While an action or decision might be legal, directors should also ask: is it moral? And if they did complete the action or make the decision, would they be ashamed of their decision at some future date?
If we reflect upon the many examples of loss of trust in the Australian context, there is a common thread in the way the board and senior management handled the matter. Rather than moving quickly to own the issues and allay the concerns of customers, the initial reaction by management was often to try and protect the enterprise at any cost, which ended up doing greater damage than should have occurred.
An example of a better way to handle trust was recently shown by Medibank following the cyberattack where hackers obtained the personal details of a large number of its customers. In this case the company accepted accountability for the event and put in place processes whereby customers could understand their level of vulnerability and how they could obtain information on their case.
There are other examples from which we could learn, and other frameworks for addressing crises of trust and confidence in an enterprise.
If you are interested in exploring this and other related topics in more depth, Bond University offers a Master of Laws in Enterprise Governance, the first and only degree of its kind in Australia, as well as a one-semester microcredential, the Advanced Credential in Enterprise Governance. To find out more about either these educational opportunities please click on the links.