Trustworthiness and Inclusive Organization

August 1, 2019

 

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

 

Above cited quote is a famous statement from the Scottish philosopher Adam Smith, which is most frequently quoted in support of the argument that "self-interest in a free market creates the necessary demand and supply condition” resulting in productive economic transactions and wealth creation in a society. Those who quote this statement in support of free market ideals often fail to recognize the significance of moral intentions in economic transactions and the moral hazards in ‘trusting’ fellow men when there is no assurance of ‘trustworthiness’, equally emphasized by Adam Smith – which primarily govern the dynamics of demand and supply, and wealth creation. Actually, this is the ‘enlightened self-interest’ that Adam Smith described in his seminal work. In the absence of morality and enlightenment, 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.” 

 

 

 

At the outset, let us remind ourselves that within a few decades of Adam Smith's publication, the unregulated market and the unchecked free trade caused one of the biggest famines of all times – the Great Irish Famine – in Adam Smith's own neighborhood, disproving his theory of the invisible hand and its efficiency. Due to the Great Irish Famine of the 1840s, more than a million Irish farmers died of hunger, lacking even potatoes and corn to eat (Mitchel, 1861). All of us are familiar with the market failures of gigantic proportions which resulted in a slew of government regulations and public welfare programs. To name a few, 1929 American stock market crash triggering great depression, 1987 Black Monday worldwide market crash, and 2008 Global financial crisis. 

 

Afore the invisible hand the 'self-interest' beginning to create wealth, there are other powerful systemic and social forces which hamper the efficient functioning of demand and supply mechanisms. While self-interest may naturally entail gentle and mutually cordial transactions and relationships in a little village or town where the men can trust each other, as the size of the market and population increases, there are many invisible social forces which can engender moral hazards by diminishing the trustworthiness of parties in a system. As trustworthiness declines, the self-interest dynamics can derail into poverty, apathy, ennui, and gluttony, thereby generating social disturbances and class warfare. 

 

As Adam Smith concluded in one of the essays in his other work 'The Theory of Moral Sentiments', "This disposition to admire, and almost to worship, the rich and the powerful, though necessary both to establish and to maintain the distinction of ranks and the order of society, but to despise or at least to neglect persons of poor and mean condition, is at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages" (Adam Smith, 1759). 

 

The neglect of critical stakeholders in a social system in the guise of the 'efficiency of self-interest' and the rise of greed and lopsided accumulation of power and wealth in the guise of 'market efficiency' naturally result in steep inequality, economic turbulence, and political upheavals weakening the national interest. It is quite obvious and inevitable that moralist views have logically given credence to the collectivist and utilitarian argument that power and wealth, if unchecked, would result in the deprivation of even basic rights and public goods, challenging the very existence of most people in society. The collectivist or public good argument can sway to the right with some religious ideals and nationalism in combination as the core political ideology, or can swing to the left with nationalism joining hands with the ideals favoring the rights of the majority population. Either way, the political bandwagons can be pushed to the extreme, even within the bounds of democracy, disturbing harmony and destabilizing the socio-economic and political order in any society (Putnam, 1993). 

 

Distrust and moral hazards are further exacerbated by various social and systemic frictions. There are two major factors behind frictions frequently generated within any large social organization: one factor is ’information asymmetry'. The other major source of friction is the ‘bias’ created by the diversity of interests, social groups, and fashion, fads, and short-term interests. Information asymmetry and bias can move the advantages in favor of select individuals or groups, derail the demand and supply equilibrium to a new state, or tilt the balance of forces or bargaining powers among various stakeholders to a new state. Globalization is yet another new phenomenon that is further complicating the problems of information asymmetry and bias. 

 

The objective here is not to take an ideological or political stand for the discourse, but rather to suggest how to reduce information asymmetry and bias in the market system, which skew the advantages, transactions, contracts, wages and returns in favor of some. All of us are aware of the popular extant recommendations offered for leveling the playing field: anti-trust monopoly restrictions, minimum wages, labor laws and standards, taxes, social security and public welfare schemes to offset the problems created by inequality, national debt, and aggrandizement. 

 

Despite democratic revolutions, radical transformation and populist governments making all sorts of corrective measures to increase market efficiency and curb the excesses in the last 250 years after Adam Smith, information asymmetry and social biases are still the underlying causes that increase conflicts among various sections of society. "From the American revolution to Lincoln's civil war, Theodore Roosevelt's Anti-trust campaigns, and FDR's Industry recovery act & New deal, to the recent Dodd-Frank Wall Street Reform Act, all would qualify as some form of such corrections." Notwithstanding the corrections rendered by democracy-driven choices and alternative political solutions, information asymmetry and bias are still major systemic challenges affecting the efficiency of market, government, and business mechanisms. 

 

Governments are equally inefficient hampered by corruption, bureaucratic delays, lack of responsiveness, and lack of consensus and so on. Since governments, especially democracies, often swing from left to right, or from right to left, without consistent policies and strategies, the corrective measures would have a weaker impact, since they are being pursued haphazardly. Besides, the rising population, globalization, resource crises, and border-less corporations are further exacerbating problems and weakening national economies. These are some reasons why International economic organizations like the IMF and European Union are facing deep fissures within and among their member states. 

 

Although freedom of information laws and free access to information made available through the internet have reduced the bureaucratic distance between people and governing institutions, the level of distrust between governing bodies and the citizens has been steadily increasing. The trustworthiness of governing bodies is being marred by incompetence, lack of integrity, and the decline in public goods which we routinely see in the media. Now, public trust of a wide range of democratic institutions is at an all-time low (Harrington, 2017). The Edelman Trust Barometer, an annual survey of tens of thousands of people across dozens of countries about the level of trust in business, media, government, and NGOs, found a decline in trust across all four of these institutions. In two-thirds of the 28 countries which were surveyed, the general population did not trust the four institutions to “do what is right” — the average level of trust in all four institutions combined was found to be below 50% (Harrington, 2017). Enhancing trustworthiness at every level within organizations and society, and creating more public goods, will be the primary challenge for leaders. These are the only real solutions for reducing information asymmetry and bias, and building peaceful societies. 

 

Using the same logic, this discourse on self-interest versus the public good can be extended to other realms of economics and society. Just as the dialectical juxtaposition between self-interest and public good is moderated by trustworthiness, the tensions between cooperation and competition, producer and consumer, capital and labor, and freedom and control can be arbitrated by the pertinent management and cultural controls which can render trustworthiness. Thus trustworthiness can act as a fulcrum and resolve the dialectical tensions between the conflicting forces in a social system. (Please Refer Figure 1) 

 

When freedom is enshrined, people abuse fellow beings. When control is exercised, people hate authority. When self-interest is advocated, public good is compromised. When the public good is promoted, people call it free-riding and waste. When labor rights are protected, owners say their property and profit rights are violated. When capital is given free reign, workers complain of exploitation. When a party pursues cooperation, rivals take advantage of it. When parties decide to compete, either they try to destroy each other, or collude to destroy other significant stakeholders. When one tries to dominate the other, the other is waiting to annihilate. 

 

Careers can be made, lives can be lost, money can be minted, and nations can be destroyed based on these dialectic tussles. When the tussle intensifies, the transaction cost naturally increases, further strengthening the desire to control the other, and giving rise to power conflicts. The perpetual struggle to dominate or win over the other then viciously spirals into the state of a Hobbesian Jungle indeed.

 

Differences between individuals exist, choices differ, institutions diverge, conflicts arise, nations collide – owing to a variety of factors – yet there are still some universal constraints imposed by nature forcing the humanity to converge on some framework. 

 

Trustworthiness among individuals, organizations, and societies can mitigate many of the different conflicts that inhibit economic growth, cooperation, harmony, peace, and stability (Algan and Cahuc, 2013; Putnam, 1993). The recent trade war between the United States, Canada, China and the European Union is quite appropriate evidence of the interplay of multiple dimensions that parties portray to protect their respective self-interest, either at the individual level, group level, or organizational level, giving rise to a series of other conflicts. However, if we ponder over it deeply, the hidden underlying distrust and the inability 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 is destroyed and trustworthiness is impaired when parties get fixated on abstract theories of free-market capitalism, socialism, free trade, inflation, interest rates, stock indices, trade imbalances, religious theologies, national pride, and most importantly, the premise of absolute control over each other. Other than serving as pragmatic covenants, most theories have no validity and do not stand the test of time. After all, abstract theories cannot yet solve the crises of hunger, poverty, environmental disasters, resource scarcity, sustainability, and most importantly, peace. As one is reading this essay, a million people may be starving, becoming homeless due to natural catastrophes, or suffering loss of lives because of political strife and wars. 

 

From a relational social exchange perspective, the strategy is all about securing and sustaining ‘Trust-equity’. The trust-equity of a party or an organization is based on its trustworthiness, which can be explained as an agglomeration of its integrity, competence, and the extent to which it is willing to commit resources and share governance among its stakeholders (Homans, 1961). Whether a business entity or an institution of economic and cultural significance, trust-equity is the foundation for its existence, and will be one of the pillars of its future. "Trust-equity of an organization 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 financial perspective, the market-equity of an entity is unquestionably vital. However, steering an entire organization towards a market-equity target is an invitation for trouble. While market-equity will mostly correspond to trust-equity, the loss of trust-equity will inevitably cause the market-equity to nosedive. Studies demonstrate that 'distrust’ or 'lack of trustworthiness' can cost billions. It has been estimated that societal trust – a product of the trustworthiness of economic, political, and business institutions – can impact at least 0.50% (half-a-percentage) point in the annual economic growth of many nations (Dasgupta, 2000). 

 

Due to the loss of trust-equity, market values of many firms have undergone permanent erosion to the tune of several hundred billions of dollars. For instance, consider the market value of BP Oil Corporation before and after the infamous oil spill near coastal Alabama. Despite its steady sales revenue, profit, and dividend performance, BP’s stock has yielded much lower returns in comparison to its competitors. Because of the ensuing settlements, cost of damages, impending lawsuits, and most importantly, the erosion of trust, a large number of its shareholders have fled. 

 

It has been repeatedly 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 the wherewithal or disrespecting the hard-work, will not help sustain market value in the long-term, let alone reputation or trust-equity. An organization can achieve high trust-equity if it can effectively demonstrate that its actions are non-opportunistic and trustworthy, and that it has the competence to deliver what it has promised without failing, and that it will work toward benefiting humanity in general. Organizations seeking trust-equity will place the emphasis on winning the mind, enthralling the heart, and securing a lasting legacy. A trustworthy organization will abide by the motto "Veritas-Uirtus-Sinceritas," that is, “Truth, Excellence, and Honesty.” 

 

Trustworthiness is an entity’s honor, an organizational asset, a systemic quality, and a societal virtue. Trustworthiness can be augmented in many ways: through increasing autonomy to operational units, increased professional and local controls, right-sizing of public/civic entities, enhancing inclusiveness and representation of diverse stakeholders in governance systems, enhanced employee and stakeholder participation in corporate boards, offering incentives and rewards in the form of structured ratios (rather than arbitrary market selection), implementing stringent controls and transparent accounting standards. Monetary instruments and fiscal policies should be primarily designed to empower the people rather than serving 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 human decisions. 

 

Leaders can play a tremendous role in building the trustworthiness of an organizational or social entity. When faced with a crisis or challenged by a divided society, we often see that leaders take shelter in traditional boundaries and narrow sentiments that further weaken the trustworthiness of the institutions they represent. Leadership across multiple layers of a society can boost the level of trustworthiness in a system through demonstrating competence, empathy, benevolence, and optimism, and transcending institutional, ideological, and national barriers, rather than echoing parochial slogans targeting traditional constituencies. People can overcome their entrenched beliefs, rooted behaviors, and traditions, if the leaders can eliminate fear of the future by assuring an economic and financial safe haven for families, communities, and the society at large. 

 

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 gain a reputation for technology and industry leadership. Similarly, safety records of corporations have deeper reach across the 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 and financial performance. Creating a benign work environment and delivering dependable and safe products will develop a harmonious rapport and in turn enhance organizational trustworthiness. 

 

Shared governance is a critical process for establishing a reputation for 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 businesses. Shared governance is a real solution to reduce information asymmetry and bias, so as to avoid friction and conflicts with the media, government, regulators, and stakeholders. Besides, genuinely working toward stakeholder empowerment will enormously help build an organization’s trustworthiness.

 

Businesses which enjoy strong societal trust have usually worked beyond economic competition or profit motives, and rather focused on winning trust-equity. Trustworthiness strengthens the internal character of the organization as well as its external market status. Trustworthiness will protect both self-interest and the public good, reduce both the transaction cost and bureaucratic cost, reduce tension between freedom and control, maintain a positive trade-off between cooperation and competition, combine the forces of labor and capital, strengthen the bond between the supplier and buyer, and keep the citizens and society healthier and happier.

 

 

References

Algan, Y., and Cahuc, P. 2013. Trust and growth. Annual Reviews of Economics, Vol 5, 521–549.

Dasgupta, Partha. (2000). Economic Progress and the Idea of Social Capital, in Partha Dasgupta, and Ismail Serageldin, eds., “Social Capital: A Multifaceted Perspective”, Washington DC: World Bank.

Harrington, Matthew. (2017). Survey: People’s Trust Has Declined in Business, Media, Government, and NGOs. Harvard Business Review, Vol.

Homans, G.C. (1961). Social behavior. New York: Harcourt, Brace and World.

Mitchel, John. (2005).[1861]. The Last Conquest of Ireland (Perhaps), University College Dublin Press (reprint).

Putnam, R.D. (1993). Making Democracy Work: Civic Traditions in Modern Italy. Princeton University Press, Princeton (New Jersey).

Smith, Adam. (1759). The Theory of Moral Sentiments. Gutenberg Publishers (March 26, 2011: A reprint of the 1790 London Edition).

Smith, Adam. (1776). An Inquiry into the Nature and Causes of Wealth of Nations. Liberty Fund; Volume 1 ed. edition (March 1, 1982).

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Trustworthiness and Inclusive Organization

August 1, 2019