Trust Equity as Business Asset: An ‘Other-Interest’ Perspective

When we talk ‘Strategy’ in business, our conversations readily gravitate toward market-equity. Then, we try to trace the forces that assist or jeopardize the market-value. Quite logically, we are concerned about ‘competition’, ‘costs’ and ‘profits’ mostly harnessing the rational side of our brain primarily seeking the utilitarian or materialistic gains. Naturally, we muse over ‘outsmarting rivals’, ‘winning market share’, ‘maximizing profits’ and ‘minimizing costs’ or trade-off between costs and returns.

Yet rarely does it occur, strategy is all about securing ‘Trust-Equity’. We have heard about Brand-Equity. What is trust-equity? Is it an ‘asset’ that one can buy and sell in the market? Can money acquire that? Would market-equity complement trust-equity? The answer to these questions depends on what the organization is trying to accomplish with the resources what it carries? Trust-Equity of an organization is based on its trustworthiness which can be explained as an agglomeration of its integrity and competence, and the extent it is willing to share resources and governance among its stakeholders. Whether a business entity or an institution of economic and cultural significance, trust-equity is the foundation for its presence now and will be the pillars of its future.?

"An Organization's Trust-Equity grows, when it demonstrates trustworthiness to critical stakeholders through resource commitment, integrity, benevolence, competence and shared governance".

“An Organization is said to have high (or low) Trust-equity, when its stakeholders value its reputation or status more (or less) based on its trustworthiness”.?

From a shareholders perspective, market-equity is vital. No question on that. However, steering the entire organization toward the market-equity target is an invitation for trouble. While market-equity will mostly sail along the trust-equity, nevertheless, the loss of trust-equity will readily cause the market-equity to nose dive. Studies demonstrate that 'trust', rather 'lack of trust' can cost billions. It has been estimated that the?societal trust?– a product of trustworthiness of economic institutions and businesses - can impact at least 0.50% (half-a-percentage) point in yearly economic growth of many nations. Due to loss of trust-equity, market values of many firms have undergone permanent erosion to the tune of several hundred billions.?

Trust Gap in Business and Economic Organizations??????????????????????????????

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to own interest - Adam Smith (1776).

The notion of ‘self-interest’ has long been championed as an unassailable economic force that dictates the demand and supply conditions resulting in productive market transactions among individuals and organizations, and furthering wealth creation (Smith, 1776: 1981). However, the significance of the moral intentions and the possibility of moral hazards in economic transactions – where there is ‘opportunism’ or when there is no assurance of ‘trustworthiness’ of economic actors - has not been given enough attention in the extant economics and management literature (Ghoshal, 2005; Jensen & Meckling, 1976; Keynes, 1953; Sen, 1998; Williamson, 1975).

Those who emphasize the significance of ‘self-interest’ in economic transactions often fail to recognize the role of powerful social bonding mechanisms such as ‘trust’ in building efficient organizations and markets. The trust between transacting parties or their ‘trustworthiness’ - which is exalted as an 'enlightened self-interest - has been acknowledged as a necessary foundation for the efficient functioning of markets and organizations, yet the extant theory and practice in management seemed to have understated its weighty role. In the absence of trustworthiness in economic transactions, the free market can quickly turn into a ‘Hobbesian Jungle’, in which the ‘condition of man is a condition of war of everyone against everyone’ (Hobbes, 1651: 2012). We have a plethora of historical evidence for the vicious role played by self-interest-driven greed causing organizational collapse, market failure, famine, and political upheaval (The Economist: 25–31, October 2003). ?

The extant emphasis of ‘self-interest’ within business and economics has unhesitatingly drawn its inspiration from the model of the human being as – ‘Homo Economicus’ – a model of humans as a species of self-interest driven, efficiency-seeking, and utility maximizers. This economic model of human beings as only rational, calculative, material-driven, and selfish has routinely run into rough weather – because the organizations and markets built on these premises frequently experienced colossal failures; or precisely because the people subscribing to these premises have zealously pursued only the self-interest maximizing goals (Ghoshal & Moran, 1996; Shiller, 2008). After the 2008 financial crisis, the former Chairman of the U.S. Federal Reserve, Alan Greenspan famously confessed that “I made a mistake in presuming that the self-interest of organizations, specifically banks, and others, were such that they were best capable of protecting their own shareholders.”(Greenspan, 2008).

Moreover, the academically well-established economic aphorisms, “markets are efficient”, ?and “the only social objective of a business corporation is to increase its profits”, have further christened and sanctified the idea of “self-interest” and its associated adages like “greed is good” as the effective engines of enterprising, economic growth, and industries performance. The renowned economist Milton Friedman once argued that the free market is synonymous with democracy and freedom. As Friedman commented in support of the unfettered free market “Underlying most arguments against the free market is a lack of belief in freedom itself ……What the market does is reduce greatly the range of issues that must be decided through political means, and thereby minimize the extent to which government needs to participate directly in the game. ……...The great advantage of the market is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit” (Friedman, 2002).

The core presumption underpinning the paradigm – an unfettered free market - is that the decisions of the buyers and sellers in a market are rationally driven and the market can bring in amicable self-correction to prices, and demand and supply conditions toward realizing efficient outcomes. The notion of rationality and efficiency has almost become a religious conviction in economic and financial circles as many leading scholars had championed this idea across the streams of finance and economics. The distinguished economist Eugene Fama often recapped this view with a suggestion, “I take the market-efficiency hypothesis to be the simple statement that security (stock) prices fully reflect all available information. . In an efficient market, at any point in time, the actual price of a security will be a good estimate of its intrinsic value" (Fama, 1970; 2014). The ever-rising market volatility, frequently recurring financial crises, and the ensuing long recessions, nevertheless, have proved these assertions wrong. After the infamous 2008 market crash, however, Fama made a recanting observation, “after 2008, my brand of finance got a bad rap” (Tully, Fortune: December 2013).

Recent academic research, however, has undoubtedly established that markets inherently carry the propensities for irrational and opportunistic behaviors, and especially financial markets can easily be rendered inefficient by insider trading, herd behavior, fashion, fads, and irrational exuberance (Fender, 2020; Shiller, 2005; 2008). For instance, new studies have revealed how investors and arbitrageurs behave irrationally, and how crowding and aggressive trading after the earnings announcements push the stock prices to drift away from the fundamental value of an asset. It has been documented that investors frequently pursue momentum strategies whereby shares that have recently risen (or fallen) in price are bought (or sold) to generate excess returns. The leading proponent of the market-efficiency hypothesis, Eugene Fama himself has reversed his opinion with the suggestion “the momentum effect is the biggest challenge to market efficiency” (Fama, 2014, p. 1480).

Further, the extant notion of “shareholder wealth or profit maximization” as a primary objective of a company is also ardently debated because of its inherent contradiction with long-term strategies and sustenance of the company (Bower & Paine, 2017; Ghoshal, 2005). More Evidence is surfacing with a contention that focusing solely on "wealth or profit-maximizing” is in direct conflict with the corporate law and other key stakeholders; that it has guided managers in the wrong direction causing a huge accountability crisis (Bower & Paine, 2017; Ghoshal, 2005). Our readings on the functioning of markets and firm governance imply that the extant market efficiency and corporate governance models have not worked well for most firms. Neither the markets behave efficiently nor the corporate governance operates effectively to secure the investors' and other stakeholders’ interests. Some of the very solutions envisaged by the extant theoretical models in economics and finance have rather encouraged managers and markets to indulge in practices that are value-destructive (Economist, October: 2016; Ghoshal, 2005).

It is not an exaggeration to suggest that the pretense of ‘rationality’ in economic decisions concerning resource allocation, investments, or consumption – when in reality most actors' decisions are subject to the surfeit of cognitive biases and often restricted in choice by disposable income, information constraints, groupthink, fashion, fads, and herd behavior – caused many economic crises as evidenced during the episodes of the stock market crash and corporate failures (Bower & Paine, 2017; Eisner, 2013; Shiller, 2008). The stories of crazy crowding over 'junk bonds', 'hedge funds' or 'bubble stocks' and investors losing billions are numerous in the American economy and these are often the sequels of the zealous pursuit of self-interest maximizing, but at the neglect and subjugation of ‘other-regarding’ obligations within the transactions.

Systemically speaking, ?the agglomeration of individual entities' economic decisions based on self-interest – even with the presumption of full rationality – yet may not result in the best outcomes for all stakeholders or the society at large. As the tragedy of commons, take, for instance, the extent of fossil fuel consumption seeking low cost and efficiency gains in meeting the energy and transportation needs in many developed economies have resulted in unbearable trade imbalance and global warming effect jostling both economic crises and environmental wrecks. ?

A Model of Trustworthiness and Trust-Equity

An economic or business entity seeking to build trust equity will formulate its strategic plans toward winning the mind, enthralling the heart, and securing a lasting legacy. A trustworthy organization will stand by the motto?‘Truth, Excellence, and Honesty'; it will be driven primarily by 'others-interests', and will be guided by stakeholders-driven mission and strategies.?Trustworthiness is an entity's honor, organizational asset, systemic quality, and societal virtue. A conducive climate for trust buildup within an organization can be augmented in many ways: through increasing autonomy to operational units, enhancing professional and social controls, right-sizing of public/civic entities, enhancing inclusiveness and representation of diverse stakeholders in governance systems, promoting empowered self-managing teams, offering team-based monetary rewards, designing incentives in the form of structured ratios (rather than arbitrary market selection), and implementing transparent accounting practices. Monetary instruments and fiscal policies should be primarily designed to empower people rather than serve only profit interests. Modern technologies such as computers, mobile communication, GPS, and the internet can play an effective role in matching the demand and supply of critical information concerning the costs, benefits, and risks associated with business decisions. ?

Leaders can play a greater role in building the trustworthiness of the entities they represent. Many leaders - when faced with a social crisis or when challenged by a divided society - immediately take shelter in traditional boundaries, interest groups, or narrow sentiments. Such a partial recourse can further weaken the trustworthiness of the institutions they represent. Rather than echoing parochial slogans and favorite constituencies, leaders should transcend the divisions and unite all stakeholders by stoking collective aspirations and demonstrating competence, ethics, empathy, and optimism toward all stakeholders.

A transcendent leadership, by relegating "self-interest" and accentuating "other-interest", can improve the trust climate within their organization as well as proliferate the trust equity in the marketplace. People can easily overcome their entrenched beliefs and rooted behaviors when the leaders make every effort to eliminate the fear of the future by assuring an economic and financial haven for families, communities, and society at large. Building and ensuring safety-net systems in the form of contingent/alternative strategies, financial reserves, and protective policies for critical stakeholders including employees and customers will raise the reputation of both the corporation and its leaders. As Shiller (2012) and Sen (2000) have argued for a rethinking of managing finance and economics, business institutions need to be guided by the spirit of ethical care and stewardship of public assets.

From the service point of view, quality, and safety are the most critical starting points. Organizations that have built a reputation for high-quality products and services enjoy advantages in terms of high sales growth and market share, high customer satisfaction, and in turn, secure the trust equity for technology and industry leadership. Similarly, the safety records of corporations have a deeper reach across society for establishing a positive reputation for trustworthiness. Industrial accidents, product safety failures, and reports of consumer injuries, on the other hand, have bad consequences for an organization's future growth. Creating a benign work environment and delivering dependable and safe products will develop a harmonious rapport for an organization and in turn, will enhance its trust equity. Despite intense global competition to retain shareholders in the profit-challenged auto industry, - in contrast to its rivals like General Motors, Ford, Volkswagen, Honda, and Nissan - Toyota has sustained its market cap, or rather trust equity, through demonstration of product quality, participative management, and stakeholder-driven governance.

Shared governance is a critical process for establishing procedural justice - a principal trait of a trustworthy organization. Shared governance refers to the inclusion of significant stakeholder groups such as customers, employees, creditors, shareholders, and communities in company decision-making, and is a core feature of the most trusted corporations. Shared governance is the most practical solution to reduce information asymmetry and bias and can be very helpful in avoiding conflicts with the media, government, regulators, and stakeholders. Overall,?genuinely working toward stakeholder empowerment will enormously help build an organization’s trustworthiness.

Shared governance and power-sharing arrangements such as codetermination?and self-managing teams will enhance the autonomy, lateral collaboration, democratization of firm governance, and inclusion of stakeholders in company decision-making. Codetermination can serve as a safeguard against?opportunism and can effectively protect the interests of?both shareholders and employees by curtailing managerial whims, and thus can reduce agency costs. Codetermination also reduces the information asymmetry between the firm’s board of directors and production operations, especially?during times of crisis, because employees are aware of the problems and will be willing to endure the burden,?offer concessions, and share their operational insights.

As we are entering the knowledge-based economy primarily driven by intellectual capital which is replacing both physical work and materials as a key economic resource,?employees continually learning through open communication and collaboration is critical for building a firm's ability, transparency, and integrity. Consequently, it is significant that firms pursue a new management philosophy that deems all employees as active, competent, and intelligent participants. The codetermination and self-managing teams will offer empowerment, flexibility, agility, and innovation advantages by allowing the representation of employees' knowledge in management and organizational systems. Such inclusive and empowering organizational arrangements not only improve trust climate, but also enhance accountability and teamwork by further improving communication, information exchange, and organizational learning. Reducing the layers of organizational hierarchy encourages employees to seek more information from their colleagues and makes employees more appreciative of others' concerns and thus transforming them into "other-interest regarding' – a central tenet of a trustworthy organization.

In recent times, large firms such as Pepsi, Nucor, HP, and Alcoa have disaggregated their corporate operations into relatively smaller units toward decentralizing decision-making and creating more autonomy for operational managers. In addition to helping cost reduction, quality, and customer responsiveness, disaggregation of large-scale industrial operations will improve the organizational climate and reduce the risk of environmental hazards and thus can enhance the climate of trust among corporate stakeholders. For instance, Nucor's overall positive gains in terms of quality, innovation, employee empowerment, organizational learning, and productivity attest to the significance of scale reduction and disaggregation of organizational production systems.

Businesses that enjoy strong societal trust had usually worked beyond economic competition or profit motives; rather, they focused on winning trust equity. A corporation enjoying high trust equity will face less intervention from the government and regulatory bodies. Trustworthiness strengthens the internal character of the organization as well as its external market status. Trustworthiness will protect both the self-interest and public good, reduce both the transaction cost and bureaucratic cost, reduce tension between autonomy and control, maintain a positive trade-off between cooperation and competition, combine the forces of workers and capital, strengthen the bond between the supplier and buyer, and keep the stakeholders and society cordial.

Although the primary focus here is to address the tenet of trust equity within the context of business and economy, the role of trust equity in building economic and cultural relations across nations cannot be understated. Given the history of colonialism, trade wars, economic rivalry, the consequent ideological and military conflicts,?and the extant trust deficit between nations and peoples, building trust equity ought to be a central strategy for furthering global cooperation and peaceful economic growth. ?

In the arena of international relations, the trustworthiness of leaders can be an invaluable asset and has far-reaching consequences for the nations and people they represent. Trust equity of a political institution or national leadership is at stake when the boundary-spanning diplomats and political representatives play the 'self-interest' card excessively, rather than demonstrating their commitment and competence toward tackling the larger crises faced by the planet Earth and humanity in general. The recent trade war and the disputes (around the causes and controls over global warming and environmental wrecks) between the United States, Canada, China, India, the European Union, and other major Asian economies are evidence of the interplay of respective self-interest dimensions that parties portray giving rise to a series of other conflicts. However, if we ponder over it deeply, the hidden underlying distrust and a lack of determination to resolve these conflicts is the crux of the problem. Such a scenario was the backdrop of the economic crises that triggered previous world wars.

Often trust equity is lost, when parties get fixated on abstract theories of free-market capitalism, socialism, free trade, numbers of inflation, stock indices, trade imbalance, the ideals of religious theology or national pride, and most importantly, the premise of absolute power over the other. Other than serving as contingent contracts, most ideology-driven economic theories do not carry strong validity across complex global situations and do not stand the test of time. As one is reading this essay, a million people may be starving to death, becoming homeless due to industrial disasters and natural catastrophes, or suffering injuries and loss of lives due to political strife, wars, and terrorism. After all, abstract theories cannot yet rapidly solve the urgent crises of hunger, poverty, or environmental disasters. Organizations and leaders can build high trust equity when they conscientiously address – by transcending the race, religion, ethnicity, nationalism, ideologies, theories, and economic self-interests that divide humanity - the borderless challenges that afflict all sides.

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