The Four Ways to Increase Trust in Business

We trust individuals (or not). We also say we “trust” (or not) institutions—the SEC, Citibank, physicians (as a class), or business in general. Let’s talk about the latter. (Insert your favorite version of “trust in business is at an all-time low.”)

Take the scandal du jour—options backdating—as an example (it’s tough to choose, what with mutual funds, reinsurance, mark-to-market accounting, influence-peddling, capitalizing expenses, and looting for personal gain all vying for attention—but I digress).

Four broad approaches to dealing with low trust in business

a. enactment of laws or regulations, particularly re conflicts of interest;
b. enforcement of existing laws or regulation;
c. an increased transparency or visibility of transgressions;
d. an increase, in for lack of a better term, the ethical behavior of individuals.

All have their role, but it seems to me that—at least in the US—we have become too reliant on the first, and not enough on the latter three.

1. Enactment. Think Sarbanes-Oxley. There is no shortage of critics about its cost (Going Private blog is a good one); it also has its proponents (e.g. Annette Nazareth, SEC Commissioner, Business Week’s Ideas: Outside Shot, “Keeping SarbOx is Crucial”, November 13, 2006). Enacting our way into trust can be a massively expensive proposition—a serious cost of a low-trust business environment. But it’s also a mistake to phrase the debate solely in terms of efficiency.

The even bigger issue is whether reliance on the blunt instrument of the law saps the societal and cultural will required for other approaches to low trust. This is particularly true of conflicts of interest.

When Sarbanes-Oxley (or Glass-Steagall, decades ago) legislated barriers between kinds of business (accounting and consulting, merchant and investment banking), it said, “human beings cannot reasonably be expected to behave well towards each other in this circumstance—our baser instincts of selfishness will win out.”

This assumption puts a cynical ceiling on the expectations we hold out for individuals. Not that the cynicism hasn’t often been justified. Then again, low expectations are often self-fulfilling.

2. Enforcement. Think Eliot Spitzer. Not Spitzer the politician, or heavy-handed cop, but Spitzer the AG who single-handedly brought about some serious change. He didn’t invent any new laws, he just enforced. Enforcement has the great virtue of efficiency, but it also increases the integrity of the law, by taking it seriously.

The SEC has been active here on the issue of options backdating. Chairman Chris Cox says of options backdating, "this fact pattern results in a violation of the SEC’s disclosure rules, a violation of accounting rules and also a violation of the tax laws." If I’ve got it right, Sarbanes Oxley did not create the regulations that companies are running afoul of. Sarbanes Oxley made mandatory the disclosure which allowed violations to be discovered.

3. Transparency. Think whistle-blowers like Sherron Watkins; investigative journalism at its best; the increasing power of blogs. The options backdating scandal was first brought to light not by new legislation, or by the SEC, but by an academic whose studies showed that many companies’ options dates were statistically suspect in the extreme.

Like enforcement, transparency leverages existing agreed-upon norms. But it has the added power of galvanizing social groups around social norms, not just legal ones.

(In a fascinating bit of speculation, Joe Nocera’s NYTimes article (Talking Business, Sept. 23, 2006, "Curiosity Has its Merits and Its Profits") suggests that much of the haste of options abusers to crawl out from under the rocks and confess is due not to classical whistle blowers, but to corporate arbitrageurs who used the academics’ insights to catch the bad guys in a classic squeeze between being in violation of bond covenants, and paying the arbs to get out. This is one for free-marketers to love— a classic case of Gordon Gecko as Robin Hood.)

4. Individual behavior. At its simplest, business “ethics,” if it means anything other than “don’t get caught,” implies a beneficial relationship between businesses and people. Not just adversarial—beneficial.

Just educating people about the law succeeds only in teaching them to make informed guesses about what they can get away with. If that’s all we mean by “business ethics”—and judging by some educational programs, it is—then we’re just handing out sheep’s clothing to wolves.

“Values,” too, is a dodgy term. It is often either code-speak for religious right-wing belief systems, or a watered-down politically correct mantra (next time you see the word “values,” check to see if any specific value is mentioned—when the term exists only in the plural, it has no teeth)

The only valid way to change individual behavior is to reclaim business from its servitude to the idea of “competitive advantage” it has suffered under for the last three decades. We need to reframe business as being about commerce, not competition. The central organizing relationship in business has to change: from the relationship between competitors to the relationship between supplier and customer. Without a sense of that positive mutual relationship, there is no basis for expecting “good” behavior.

The problem isn’t in business ethics courses; it’s in the strategy and marketing courses. As long as we believe the goal of a company is to beat its competitors (and its suppliers and customers, a la Mike Porter), then we will have to rely on laws and enforcement to protect us from the implicit base motives we ascribe to people. Aiding the forces that increase transparency helps us to examine common goals—a good thing. And if we change the goal of business—if we begin to teach, and demand, that companies exist to serve customers in particular—then we have a shot at internalizing a higher order of corporate behavior in business people, the most desirable of the four roads to restoring trust .