2.1 The Trust Deficit and Social Capital



In the wake of the 2008 financial crisis and a raft of bankruptcies and scandals, the level of trust in business has dropped dramatically. A number of polls indicates that only one third of respondents trust business leaders to any degree, lower than most other professions and organisations. Events at Goldman Sachs, Siemens, GlaxoSmithKline, BAE Systems to name but a few have eroded public trust and confidence in business and their leaders.

The Edelmann Trust Barometer provides an annual insight into the public’s views on their institutions. Whilst the 2011 survey indicated modest increases in levels of trust across all sectors of the economy, levels of trust in business remained low. Banks and the broader finance sector were worthy of particular note, with trust levels down 46% in the US and 30% in the UK. Perhaps the most important, if largely unsurprising, highlight of the report was that ‘trust is now an essential line for business’. Interestingly, the report alludes to the changing expectations of business by the general community, with respondents talking about a notion of ‘shared value’. Specifically, the report concludes that business must align profit and purpose for social benefit.


Activity 2.1 – Trust Barometer

Go to http://edelmaneditions.com/2011/01/trust-barometer-2011/ and read through the Edelmann Trust Barometer 2011. Create a section in your diary entitled '2011 Edelmann Trust Barometer' and note the three most significant findings of the report. Explain why they are important to you and summarise their implications for business leaders. Spend no more than 15 minutes on this and write 150 words.


The Concept of 'Social Capital'

Fukuyama (1995) examines the importance of civil society defined through institutions including businesses, churches, universities, and schools and uses the concept of ‘social capital’ to describe how people work together for common purposes in organisations. Fukuyama argues that shared values lead to trust, which is crucial for society and the economy to function. He quotes from the distinguished economist Kenneth Arrow with approval:

‘Now trust has a very important pragmatic value, if nothing else. Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people's word. Unfortunately this is not a commodity which can be bought very easily. If you have to buy it, you already have some doubts about what you've bought. Trust and similar values, loyalty or truth telling, are examples of what the economists would call ‘externalities’. They are goods, they are commodities; they have real, practical economic value; they increase the efficiency of the system, enable you to produce more goods of whatever values you hold in high esteem. But they are not commodities for which trade on the open market is technically possible or even meaningful.’

(Arrow, 1974: 23)

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According to Fukuyama, widespread distrust puts a kind of tax on economic activity. Fukuyama argues that trust is crucial to civil society which underpins the economic system. He examines different types of society based on family and kinship, voluntary associations and the State and links the extent of social capital to economic prosperity.

It can be argued that business depends upon government for infrastructure and that business cannot exist in isolation from the community. Even markets are regulated. Hosmer (1994) builds his arguments concerning ethical business on a number of propositions which hypothesise that companies operating in a competitive global economy depend on a wide range of stakeholders for co-operative activities, and that it is possible to build trust, commitment and effort on the part of all stakeholders by including ethical principles in the strategic decision making of companies where the interests and rights of all stakeholders are recognised. Hosmer claims that equitable acts will, over time, lead to trust; trust leads to commitment and commitment supports success. In other words, for an organisation to be successful in the long run it must be ethical.

Given these links between the organisation and its environment, can, and should, organisations provide an ethical framework for the conduct of business? An ethical framework is not necessarily easy to define, and there is a wide spread of possible ethical stances; thus Woodall and Winstanley (2001) suggest some 20 starting points, ranging from self-interest and freedom to fundamental rights for all to the need to take stakeholder interests into account and giving consideration to the process of decision making. There is a strong argument that the sole purpose of a private sector organisation is to make profits for shareholders and that their self-interest is the only consideration. This view, which emphasises the ends rather than the means of private sector organisations, is being questioned as corporate social responsibility has become much more of an issue and as ethical investments gain credibility as investors seek investments that will ‘do good (or at least no harm) and do well’. It is worthy of note that the 1997 Annual General Meeting of Shell was disrupted by shareholders who believed that Shell's activities in Nigeria were questionable and should be subject to ethical scrutiny. Multinationals are now beginning to see that environmental problems are not just the concern of governments but they themselves have a responsibility, and as a response have adopted ethics statements as part of their mission.

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Activity 2.2 – Trust in Business

Select from the media an example in recent months of a business that has in some way undermined the trust of its stakeholders. Create a note in your diary entitled ‘Trust in Business’ together with the name of the business. Summarise what the business did to betray trust, why you think it might have happened, who it impacted and how they might address the issue and avoid repetition. Spend 20 minutes on this and write no more than 200 words.