In Business We Trust ...?

The Situation

We live in unprecedented times. The worst financial crisis in the past 75 years has raised vexing questions about the limits of markets, and particularly about the pathway to a prosperous future for the global economy. It has also brought to the forefront fundamental questions about public attitudes toward business. This presents a paradox: On one hand, the trust of the public in business enterprise seems to be at an all-time low[i], yet many see trust and public confidence as critical to rebuilding markets and re-strengthening the economy. Leaders need a better understanding of “public trust,” what factors influence it, and what that means for organizational action.

We understand a great deal about organizational trust, but research generally assumes that all parties view trust in organizations the same way. Stakeholder trust — or, an analysis of differential stakeholder approaches to trust — has been relatively unexplored, with a few notable exceptions.

Trust has at least two key components — trust that is based upon an assessment of integrity or goodwill and trust that is based on an assessment of competence. Recognizing and understanding which aspect of trust has priority in particular stakeholder relationships, and understanding how those stakeholders balance these two aspects of trust in their decisions, would be highly useful to business leaders.

At the individual level, trust in the institution of business and trust in a particular business are distinct concepts. Stakeholder roles (e.g., customer, employee, investor) differ qualitatively and engender different areas of emphasis when it comes to organizational trust; this has an important bearing on trust in business as an institution.

A Stakeholder View of Organizational Trust

How do different stakeholders conceptualize organizational trust, and what impact do these differences have? And in turn, what does a better understanding of stakeholder trust tell us about public trust in business?

The literature on interorganizational trust has placed a great deal of focus on supply chains as a context for exploring interorganizational trust.[ii] Following R. Edward Freeman’s 1984 identification of five key stakeholders, and in an effort to build our theoretical understanding of these stakeholders and their roles, we focus here on the four other key stakeholders — customers, employees, shareholders and community — and their views of trust. Let us discuss each of these stakeholders in turn.

Shareholders

Even though many investors care about the social performance of the equity-granting firm[iii], the firm-shareholder relationship is potentially the most impersonal of the firm-stakeholder relationships, and therefore tends to be the most sterile. Thus it is no surprise that shareholders are significantly influenced by instrumental logic[iv] and that managers operate under this frame of reference[v]. Therefore, we argue that the aspect of trust most important to shareholders is competence-based trust.

Proposition: Stockholders will view competence-based trust as more important than goodwill-based trust and they will be relatively “imbalanced” in their indicated priorities.

Customers

Studies done on the environment reveal that customers are willing to make only small increases in the price they pay and have even less tolerance for sacrificing product quality to get “greener” products[vi]. Expediency is a primary concern for customers. Consider the fast food industry; even though substantial evidence exists suggesting fast food is unhealthy, potentially fosters obesity, and may even contribute to global environmental problems, fast food businesses remain incredibly popular and highly profitable because customers value expediency and competence.

Proposition: Though customers will view competence-based trust as more important than goodwill-based trust, both will be important and relatively “balanced” in their indicated priorities.

Employees

There is substantial evidence that what employees desire most is meaningfulness in their work[vii]. We argue that employees generally have a heightened desire to possess goodwill-based trust in the organizations they work for, and that such considerations weigh heavier in the trust they have in their organization than competence-based considerations. The emphasis on goodwill, affect and morality in employees’ interpersonal relationships influences their desire for organizational identification. In the heightened interpersonal environment of the workplace, the aspect of organizational trust most important to employees is goodwill-based trust.

Proposition: Though employees will view goodwill-based trust as more important than competence-based trust, both will be important and relatively “balanced” in their indicated priorities.

Community

Like other stakeholders, individuals operating from the community perspective will care about an array of factors. They want businesses to do well, create jobs, provide tax revenues, minimize any environmental or social “externalities” associated with their operations and contribute to the overall well-being of the community. As we consider the issue of public trust, it brings front and center the idea that it is absence of perceived goodwill by business that is in the forefront of people’s minds as they think about the activities of business in their communities.

Proposition: Community-oriented stakeholders value goodwill-based trust more than competence-based trust and they will be relatively “imbalanced” in their indicated priorities.

Public Trust in Business

A critical aspect of trust in the context of business is trust in business as a whole. We now turn to the connection between a particular stakeholder’s trust in specific organizations and their trust in the institution of business, i.e., public trust.

Anecdotal evidence suggests there may be a significant gap between the levels of trust we have in a particular business and our trust in the institution of business, with the former being significantly higher than the latter. We know from experimental work that psychological distance is a powerful factor in our sense of attachment to others[viii]. An organization with which we have an ongoing relationship, and in which we may have developed relationships with particular people who represent that organization, is likely to garner far more trust from us than “business.”

Part of the explanation for this gap lies in familiarity and particularity that creates an emotional bond, but part of it may lie in additional factors that mediate the relationship — our deeper attitudes toward institutions, our place within social structures, and our sense of whether the existing system is corrupt and inefficient. In addition, some scholars have noted the power of scripts and background narratives for shaping individual attitudes and behaviors.

In this vein, Freeman has hinted at the power of a “background narrative” believed to pervade modernized society, which in turn, shapes individual attitudes about business[ix]. In this view, despite living in a society the values of which largely undergird and enable modern capitalism, most people see business as an inherently amoral or immoral enterprise.

Proposition: Stakeholder trust in particular businesses will, other things being equal, be higher than trust in the institution of business.

Consistent with the constructionist view[x], we suggest that individuals have a process of aggregating their respective experiences with particularized businesses into some larger, generalized view of trust in business. That is, individual commercial experiences matter, and will have substantial impact on one’s views of commerce generally.

As individuals aggregate their respective experiences of trust in particular businesses, not only might an overarching preference for a particular aspect of trust (e.g., competence or goodwill) emerge as a dominant influence on one’s trust in the institution of business, but the influence of exogenous narratives about business — for good or ill — will also influence the generalized perception, both directly and indirectly.

Although we have suggested that the effect for societal narratives about business will be overwhelmingly negative, we acknowledge that narratives can vary. For instance, background narratives could vary by geographic region or country, or they could vary depending on what kind of media one is exposed to, or based on the influence of NGOs or other third-party organizations.

Institutionalized narratives about business may be culturally specific and shaped by how business is viewed within a particular context (e.g., stories about the Great Depression in the United States may still influence Americans’ view of business). What might be some specific indicators of what one’s narrative about business is? At the very least, one’s contextualized narrative about business will be shaped by such factors as:

1. Media accounts (specifically, how the media portray business)
2. One’s confidence in the regulatory environment to curb either irresponsible opportunism or incompetence
3. The size of the institution the individual focuses on when they think of “business” (e.g., large or small)

Proposition: Public trust will be driven by individual aggregation of particularized trust in business and mediated by the contextual narrative about business, including media accounts, attitudes toward political institutions as an effective check on business, and perceptions about organizational size.

Discussion and Conclusions

These theoretical considerations highlight a number of practical implications. The most direct and obvious concern relates to the direct effects of low public trust. Businesses have reason to be concerned about low public trust; low public sentiment can result in increased regulation and more centralized or governmental control over markets. Other direct effects could be measured in terms of other extra costs (for both businesses and consumers) of doing business — for example, a need for additional guarantees, insurance, and the use of third parties, as well as lost sales.

Our focus also pushes us to think about more indirect effects of these results for businesses. Rather than thinking about trust in the aggregate, this study highlights the need to more carefully examine the role that trust plays in the operations of a given firm, and more specifically, the kind of relationships it seeks to create with stakeholders in the value chain. Firms should think about optimal levels of trust for their operations.

The relative absence of trust in business has implications for thinking through how successful and resource-intensive the efforts of management will be in resolving contracting issues with particular stakeholders. This also raises the importance of a focus on the role that stakeholders play in this process. The relative absence, or abundance, of stakeholder responsibility will go a long way in helping determine the firm-level implications of trust levels[xi]. In cases where stakeholders act with high levels of integrity and have a strong ethic of responsibility, firms may be able to readily adapt to declining levels of trust. In instances where stakeholder responsibility is low, the erosion of trust may provide circumstances that significantly impact the costs of contracting with stakeholders.

Our research builds on the work of others by highlighting the importance of a stakeholder perspective for thinking about public trust[xii]. Such global and generalized constructs have value, but without connections back to the more concrete roles of stakeholders, the kinds of trust that are important for firms, and the specific role that trust plays in their operations, these constructs have limited value and relevance for managers. Future work needs to explore these connections in further detail, both to explore their micro-level implications, but also to connect them back to these meso- and macro-level questions. It is precisely in seeing these interconnections, and the relationships that govern them, that researchers can shed valuable light on the subject of the public trust and its significance for management.

This post is excerpted from the book Public Trust in Business (Cambridge University Press), edited by Darden Professors Jared D. Harris, Brian Moriarty and Andrew C. Wicks.

Professor Wicks teaches in the Darden Executive Education program Servant Leadership: A Path to High-Performance, which helps leaders embody values in their behavior, deepen working relationships, and strengthen satisfaction internally and externally.

[i] Garcia, T. (2009), “Trust in Business at 10-yr. Low.” February 2, 2009, 3, PR week.

[ii] See, e.g.: Dyer, J.H. and Chu, W. (2000), “The Determinants of Trust in Supplier-Automaker Relationships in the U.S., Japan and Korea.” Journal of International Business Studies, 31(2), 259-285; Dyer, J.H. and Chu, W. (2003), “The Role of Trustworthiness in Reducing Transaction Costs and Improving Performance: Empirical Evidence From the United States, Japan and Korea.” Organization Science, 14(1), 57-68.; Heide, J.B. and John, G. (1990), “Alliances in Industrial Purchasing: The Determinants of Joint Action in Buyer-Supplier Relationships.” Journal of Marketing Research, 17(February 1990), 24-36.

[iii] Aguilera, R.V., Rupp, D.E., Williams, C.A., and Ganapathi, J. (2007), “Putting the ‘S’ Back in Corporate Social Responsibility: A Multilevel Theory of Social Change in Organizations.” Academy of Management Review, 32(3), 836-863; Glac, K. (2009), “Understanding Socially Responsible Investing: The Effect of Decision Frames and Trade-Off Options.” Journal of Business Ethics, 87, 41-55.

[iv] Berman, S.L., Wicks, A.C., Kotha, S., and Jones, T.M. 1999. “Does Stakeholder Orientation Matter? The Relationship Between Stakeholder Management Models and Firm Financial Performance.” Academy of Management Journal, 42(5), 488-506.

[v] Freeman, R.E. (1984), Strategic Management: A Stakeholder Approach. Boston, MA: Pitman.

[vi] Auger, P. and Devinney, T. (2007), “Do What Consumers Say Matter? The Misalignment of Preferences With Unconstrained Ethical Intentions.” Journal of Business Ethics, 76(4), 361-383; Siegel, D.S. (2009), “Green Management Matters Only if It Yields More Green: An Economic/Strategic Perspective.” Academy of Management Perspectives, 23(3), 5-16.

[vii] Nord, W., Brief, A., Atieh, J., and Doherty, E. (1990), “Studying Meanings of Work: The Case of Work Values.” In A. Brief, and W. Nord (eds.), Meanings of Occupational Work. Lexington, MA: Lexington Books; Pratt, M.G. and Ashforth, B.E. (2003), “Fostering Meaningfulness in Working and Work.” In K.S. Cameron, J.E. Dutton, and R.E. Quinn (eds.), Positive Organizational Scholarship: Foundations of a New Discipline. San Francisco, CA: Berrett-Koehler; Spreitzer, G. (1995), “Psychological Empowerment in the Workplace: Dimensions, Measurement, and Validation.” Academy of Management Journal, 38, 1442-1465.

[viii] See, e.g., Milgram, S. (1963), “Behavioral Study of Obedience.” Journal of Abnormal and Social Psychology, 67(4), 371-378.

[ix] Freeman, R.E. (1994), “The Politics of Stakeholder Theory: Some Future Directions.” Business Ethics Quarterly, 4(4), 409-421.

[x] See, e.g., Berger, P.L. and Luckmann, T. 1967. The Social Construction of Reality. New York: Doubleday.

[xi] Goodstein, J. and Wicks, A.C. (2007), “Corporate and Stakeholder Responsibility: Making Business Ethics a Two-Way Conversation.” Business Ethics Quarterly, 17(3), 375-398.

[xii] Pirson, M. and Malhotra, D. (2007), “What Matters to Whom? Managing Trust Across Multiple Stakeholder Groups.” Working paper, Hauser Center for Nonprofit Organizations, Harvard University; Pirson, M. and Malhotra, D. (2008), “Unconventional Insights for Managing Stakeholder Trust.” MIT Sloan Management Review, 49(4), 43-50.