Trust Is Ephemeral

Trust is the central subject of a new special report by the Arthur W. Page Society and the Business Roundtable Institute for Corporate Ethics. In sum, the comprehensive and carefully written study says that trust (or its absence) affects everything in our economy from employee performance to customer perceptions, to the willingness of people to loan money to one another.

“Trust is an important lubricant of a social system,” writes the Nobel Laureate economist Kenneth Arrow. “It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance upon other people’s word.” And the time, effort, and investment required to regain trust, once it’s lost, are substantial.

In view of recent untrustworthy behavior on the part of businesses, ranging from the Enron scandal of 2001 to the more recent Madoff and Stanford Financial schemes, people have more reasons than ever to be distrustful of businesses and the people who run them. The authors of the Page-Roundtable study, however, would have us believe that the erosion of trust is a widespread and broad-ranging phenomenon that extends well beyond the private sector.

Citing 2008 survey data, they note that “only 17 percent of Americans trust government to do the right thing most or all of the time,” and that 52 percent of Americans agreed with the statement that “quite a few government officials are crooked.” What’s wrong with those views? First, they’re the product of survey samples that ask narrowly framed questions regarding topics that are prominent in the news media. They’re subject to change without notice and they come without a price. That is to say, it costs the respondent nothing to express his or her opinion.

The fact is, most government officials are not crooked, and most governments (from federal to municipal) do the right thing most of the time. To assert that the public simply doesn’t trust anyone these days is an overstatement that ignores a recent, fairly important trend: trust has shifted from business to government. For a variety of reasons, people now believe that government at all levels ought to be paying closer attention to the banking profession, to the stock market, to the food supply, to the automobile industry, and more.

In the near term, that may prompt fewer risky loans and safer food, but it may also create a regulatory and cost structure that makes it more difficult for businesses to compete on an even footing in a global economy.

Ronald Reagan famously said in the 1980s, “Government isn’t the solution to the problem. Government is the problem.” The three decades that followed were characterized by unfettered, de-regulated, and unimpeded competitors in the marketplace. Absent regulation, many of them took the opportunity to re-package sub-prime mortgage loans, credit default swaps, and other little-understood instruments, take the profit and shift the risk to someone else. When the loans went sour, bankers turned to the federal treasury for help. Is it any wonder the public (and the taxpayer) is now distrustful of people who claim the marketplace is self-regulating?

The most significant event in recent years was the November 2008 election, in which the American voter said, “Enough.” That display of political behavior is clear evidence that those who wanted less government, less regulation, and fewer social programs have changed their minds. Even now, five months into the Obama presidency and ten months into a dismal economic spiral, confidence and trust in the new administration are in the low- to mid-sixties. Compare that with numbers in the mid-twenties for the previous administration.

Do people trust capitalism? They don’t trust unregulated markets, that’s for sure. They don’t trust investment bankers and bond merchants who refuse to speak to them in Plain English (despite the best efforts of Arthur Levitt to get them to do so). They don’t trust a global marketplace with uneven rules that mean lower wages, no health care, and unfunded pensions.

As healthcare legislation makes its way through committee, it’s clear that the public and their elected representatives no longer trust the private sector to look after many of their most basic needs. Why? Company after company, particularly in the American heartland, has shuttered its doors, locked the plant gates, and turned employees away. Yet, with remarkable regularity, executives in many of those same companies have departed with fat severance packages, rewarding irresponsible risk-taking and sub-standard business decision making.

Business people in just about every sector of the economy are saying, “trust me.” Now here’s a simple question for you: “Why?” Given your recent behavior, why should people trust you? People put their money in a demand deposit account because they trust the FDIC, not because they trust the bank. The fact is, the private sector is going to have to do a better job on a behavioral level in order to regain the trust that’s been lost in this decade.

Social psychologists tell us that the three components of an attitude (or intellectual viewpoint) are cognitive, affective, and behavioral. That is, how we look at something (or someone) depends a great deal on what we know, how we feel, and how we (and they) behave. In addition to arguing in favor of mutuality, balance of power, and trust safeguards, why not argue in favor of morally acceptable behavior?

Business ethicist Ken Goodpaster tells us that business ethics “is the application of what is good and right to that assortment of institutions, technologies, activities, and pursuits which we call business.” “Ethics,” he says, “refers most often to a domain of inquiry, or discipline in which matters of right and wrong, good and evil, virtue and vice are systematically examined.”
That’s not the same as morality, though. By contrast, morality refers not to a discipline but to patterns of thought and action that are actually operative in everyday life. Thus, what we have here is not so much a business ethics problem leading to a breach of trust. It’s actually a morality problem. The vast majority of folks in business today (including Bernie Madoff and Alan Stanford) know and understand the right thing to do. The problem isn’t what they know or how they feel – it’s their behavior.

And, until people in business begin internalizing issues and principles associated with business ethics (and morality) in both a personal and professional way, the public will continue to trust the regulators, auditors, inspectors, and legislators. If you want less regulation, less oversight, and fewer restrictions on business – if you want a resurgence of trust in business – begin making business ethics a part of your core values and everyday behavior. The pendulum will swing back away from government and toward those managers and firms who’ve shown they’re worthy of our trust.