• Senthil Kumar

Trust Equity: A Strategic Imperative

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?