Trust Equity: A Strategic Imperative

February 12, 2018

 

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 seeking 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 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 perceived integrity and competence, and the extent it is willing to share resources and governance among its stake-holders.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 through resource commitment, integrity, benevolence, and competence to critical stake-holders through its products, services and shared-governance". 

 

“A firm is said to have high (or low) Trust-equity, when its stakeholders value its reputation or status more (or less) based on the extent of 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 social trust – a product of trustworthiness of economic institutions and businesses - can impact as much as 0.50% (half-a-percentage) of yearly economic growth in many nations. 

 

Due to loss of trust-equity, market values of many firms have undergone permanent erosion to the tune of several hundred billions. Take for instance, the value of BP Oil Corporation and its returns to equity before and after the infamous oil spill. Despite its steady sales revenue, profit and dividend performance, BP’s stock has yielded much lower returns compared to its competitors. Primarily because of the ensuing settlements, cost of damages, penalties and impending law suits and due to erosion of trust, a large number of shareholders have fled. 

 

It is understandable that accidents do happen and that they cannot be completely avoidable in certain high risk heavy industries. More than the oil rig explosion accident, the exposed cause of neglect and safety procedure violations cost the reputation of BP heavily and resulted in law suits and hefty penalties. What were the blind spots that resulted in strategic blunders at BP. 

 

According to the commission that did investigate the causes of the BP oil-rig explosion, “The loss of life at the Macondo site on April 20, 2010, and the subsequent pollution of the Gulf of Mexico through the summer of 2010 were the result of poor risk management, last-minute changes to plans, failure to observe and respond to critical indicators, inadequate well control response and insufficient emergency bridge response training by companies and individuals responsible for drilling at the Macondo well and for the operation of the Deepwater Horizon,”

The commission's study goes further than previous reports, citing several violations of federal regulations as factors. Among them were violations of laws that required BP and its contractors to operate in a safe manner, to take measures to contain oil and gas for the protection of health and the environment, to conduct reliable tests of well pressures and to notify federal regulators of changes in drilling plans (New york Times, September 14, 2011). (Please see the chart below comparing stock performance of oil companies in comparison with BP; BP’s stock deviating drastically downward from the rest of the industry.

 

 

How does a company build its trust-equity? 

 

Organizations seeking trust-equity will give the whole emphasis on winning the mind, enthralling the heart and securing a lasting legacy - the most valuable thing to do, although most difficult thing to accomplish, because money or material wealth alone cannot buy these results. 

 

While material wealth can be of great help in winning a legacy, however, it has been time and time again established that compromising ethical norms, violating social promises, damaging environmental health without bearing the cost of replenishment or repair, not giving-back to those who initially offered wherewithal or disrespecting the hard-work will not help sustain the market value in the long-term, let alone reputation or trust-equity. Business in general suffers from a social perception of ‘caveat emptor or buyer beware’ with the reinforced notion of 'self-interest seeking guile' as the basis for success in the free market.

 

A firm can achieve high trust-equity, if it can effectively demonstrate that its actions are non-opportunistic and trustworthy, and that it has competence to deliver what it has promised without failing, and that it will work toward benefiting the humanity in general. A trustworthy firm, rather will demonstrate the motto of "Veritas-Uirtus-Sinceritas" that is, truth, excellence and honesty.

 

In this light, Quality and safety are the most critical starting points. Firms that have built a reputation for high quality products enjoy advantages in terms of high sales growth and market share, high customer satisfaction and in turn gain reputation for technology and industry leadership. The story of steady erosion of market share and serious financial crisis experienced by U.S. automakers for past 3 decades is a good illustration of how reputation for quality (or lack of it) can impact the businesses positively or adversely from all sides. Troubles due to quality can range from product returns and recalls, damages and lawsuits demanding compensation and penalties, loss of market share, low employee morale, and loss of investor confidence. On the other hand, foreign auto makers, Toyota, Hyundai-Kia, and Nissan have gained substantial inroads into all US auto market segments and have established their global leadership in automobile product design and production technology.

 

Like Quality, safety records of corporations have deeper reach across the society in establishing a positive reputation and gaining societal recognition for "Great Corporate Citizenship". Industrial accidents, consumer/product safety failures, and reports of consumer injuries have serious consequences for the companies future market growth and financial performance. Creating a safe work environment and delivering dependable and safe products helps develop a harmonious rapport with stakeholders.

 

Shared governance with the inclusion of significant stakeholder groups such as customers, employees, creditors, shareholders and communities in company decision making for enhancing transparency and power-sharing is a critical feature of trustworthy companies. Although right to information acts, transparency regulations, and the free access to information available through internet have reduced the bureaucratic distance between people and the business institutions, however, the level of distrust between corporate bodies and the citizens has been steadily increasing. Now, the public trust over financial institutions and business systems is at an all time low. 

 

Enhancing trustworthiness through shared governance and transparency at every level within the corporate organizations is a primary challenge facing business leaders now. This is a real solution to reduce information asymmetry and the bias so as to avoid friction and conflicts with media, government, regulators and stakeholders. Shared governance and transparency can be augmented by increased inclusiveness and representativeness of diverse stakeholders in decision making bodies/boards.

 

In addition to demonstrating shared governance, genuinely working toward stake-holder engagement, empowerment and caring will tremendously help build a company's trust-worthiness and in turn trust-equity. Companies that have secured strong social trust had worked beyond economic, competition or profit motives and tried to secure ‘trustful’ relationship with their stakeholders. Trust-equity of a company strengthens the internal character of organization and its external market status. 

 

According to Civic 50, a community engagement initiative between Points of light and Bloomberg LP honoring the 50 most community-minded socially responsible companies in the United States each year, community involvement of corporations boosted their employees morale and engagement, aligned their purpose with profit, and enhanced their reputation and status among stakeholders. Civic 50 reports that there are four ways companies contribute to community engagement and stakeholder empowerment. 

 

First, Investment, How extensively and strategically the company applies its resources to community engagement, including employee time and skills, cash, in-kind giving and leadership. Civic 50 companies – including Caesars Entertainment, Comcast, Hasbro, Hewlett-Packard (HP), PwC, Toyota Financial Services and UnitedHealth Group – find that employees who participate in community engagement initiatives score higher on morale, engagement, pride and/or productivity than employees who don’t. HP, for example, has data showing that employees who participate in community engagement efforts have 13% higher morale than those who don’t participate. 

 

Second, Integration: How a company’s community engagement program supports business interests and integrates into business functions, or how it “does well by doing good.” More than 80% of Civic 50 companies connect their community engagement work to key business functions, including marketing/PR, sales, skill-development, recruiting or diversity and inclusion. 

 

Third, Institutionalization: How the company supports community engagement through its institutional policies, systems, and incentives. 78% of Civic 50 companies have a formal structure to seek input from U.S. community leaders, such as a survey, focus group or community meeting. 50% of Civic 50 companies include community engagement as a formal written component of employees’ performance reviews.

 

Impact: How a company performs in comparison to other firms in terms of the social and business impact of its community engagement program. Increasingly, companies are measuring what matters as a result of their corporate philanthropy and civic engagement, focusing their efforts on measuring outcome goals over activity or outputs. For example, 64% of Civic 50 companies track outcome measures for their community grants, and 36% track outcome measures for volunteering.

 

Following are examples of how companies have earned a good reputation and social trust through stakeholders engagement, empowerment and caring.

 

• Western Union’s employee performance objectives – which are the basis for professional evaluations and bonuses – include a “Social Ventures” objective, which reinforces each employee’s commitment to using business assets to deliver business and social results. Such objectives can range from developing a new product that benefits a societal cause, to sourcing from socially responsible vendors to incorporating community commitment information into an external-facing sales deck.

 

• As part of its Code-Green program – the company’s environmental sustainability strategy – Caesars Entertainment collects data on a monthly basis from each business unit on how employees are implementing and integrating Code-Green initiatives into their work. With aggressive goals set for energy, water, and waste, it is important that every employee makes an impact. With this data, managers are aware of the leaders and laggards and can drive action and empower employees by prioritizing actions. The culture’s friendly competitive spirit encourages managers to challenge each other to do better – and create an environment where every employee is able to make a difference.

 

It is increasingly becoming vital for companies to share responsibilities with governments in addressing citizens political voice, public health, road safety, and quality of life. Companies expanding their societal role are rewarded with brand recognition, market appreciation and sound financial returns.

As per Civic 50 report, nearly 80% of Civic 50 companies have taken a national leadership position on a social issue like ending hunger, texting and driving and strengthening STEM education. Many companies invest in issues related to their own operations and are, therefore, often in a unique position to contribute lasting solutions.

 

• Through the provision of healthcare solutions to the large and richly diverse U.S. population, Aetna has significant experience with the effects of inequality in health care. Aetna has taken a leadership role in addressing these inequalities. In 2002, for example, Aetna developed policy on genetic testing and nondiscrimination that became the model for the industry. In 2008, it worked with legislators to help pass a more meaningful mental-health parity law that allows for better coordination of coverage for physical and mental health care services. Aetna was an active voice throughout the health care reform debate of 2009 and 2010. Indeed, the efforts of Mark T. Bertolini, Chairman, Chief Executive Officer and President of Aetna, have earned him recognition as one of the 10 most influential leaders in the industry by ModernHealthcare.com.

 

More than 80% of Civic 50 companies connect their community engagement work to key business functions, including marketing/PR, sales, skill-development, recruiting or diversity and inclusion. General Mills’ Box Tops program empowers consumers to help their local schools purchase computers, books, playground equipment and other items of need. Parents and students earn cash for their schools by clipping box tops from their Cheerios, Betty Crocker or other General Mills products. Two-hundred forty General Mills brands have helped 90,000 schools earn more than $600 million since the program started in 1996.

 

• ConAgra Food’s Child Hunger Ends Here campaign increases consumer awareness of child hunger and provides an easy way for them to help. Nineteen ConAgra Foods brands, including Blue Bonnet and Hunt’s, featured the Child Hunger Ends Here pushpin on packaging. Shoppers could enter the provided code at ChildHungerEndsHere.com to trigger one meal donation to Feeding America.

 

Harvard Business School research found that companies with more community engagement practices significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.

• Academic research has shown that, for firms in industries that are highly sensitive to consumer perception, community engagement is associated with subsequent sales growth.

• Market research has found that 59% of Americans are more likely to buy a product associated with a corporate-nonprofit partnership.

• Market research also reveals that 56% of Americans will travel an extra ten minutes out of their way to purchase a product that supports a cause they care about and that 71% are willing to pay more.

References

1Kropp, Brian. “Maximizing the Effectiveness of Corporate Volunteer Programs” (webinar). CEB. July, 2014.

2Korschun, Daniel, C.B. Bhattacharya, and Scott D. Swain. “Corporate Social Responsibility, Customer Orientation, and the Job Performance of Frontline Employees,” Journal of Marketing, May, 2014.

3 Deloitte, Deloitte Volunteer IMPACT Survey, 2011.

4 Deloitte, Deloitte Volunteer IMPACT Survey, 2011.

5 Eccles, Robert G., Ioannis Ioannou and George Serafeim. “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance." Harvard Business School Working Paper, 2011.

7 Baruch, Lev, Christine Petrovitis and Suresh Radhakrishnan. "Is doing good good for you? How corporate charitable contributions enhance revenue growth" in Strategic Management Journal, Sept., 2009.

8 Cone, Inc. "More than three-quarters of Americans say a nonprofit-corporate partnership makes a cause stand out" in Trend Tracker, March, 2010.

9 Do Well Do Good. The Do Well Do Good Second Annual Public Opinion Survey Report on Cause Marketing, 2012.

10. M. Senthil Kumar., 1992. Toward a Social Corporate Policy, Industrial Engineering Journal of India 21 (9), 9-12

11. Muthusamy, Senthil Kumar & MA White. 2005. Learning & Knowledge Transfer in Strategic Alliances: A Social Exchange View, Organization Studies, Vol. 26 (3): 415-441.

 

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