Trust in business is a critical component of any economy. It allows companies to flourish and grow and build strong relationships with their customers and other stakeholders. The Edelman Trust Barometer recently found that trustworthiness of business was near an all-time high in 2023. But can the trend continue given the current financial crisis? I believe it can. The remarks by Federal Reserve Chair Jerome Powell about getting inflation back to 2%, however, also apply to business: the road ahead is likely to be bumpy and it won’t be a straight trend line upward. Businesses need to remain vigilant and embrace a set of strategies to maintain their trustworthiness.
The Edelman Trust Barometer has tracked the global level of trust in business and three other societal institutions (government, media and NGOs) for over twenty years. The report, however, is not predictive. It looks back at the previous year. Yet by examining the history of trust in business and marrying that with insights from the 2008-09 financial crisis, there are lessons businesses can apply to maintain and build on the trust they’ve built.
Trust in societal institutions is based on two things in the Edelman survey: how ethical the public perceives them to be and how competent they are. Importantly, the report finds the ethical score of an institution (defined as how the public perceives their honesty, earnest work toward making society better, and whether they keep their promises) to be three times as important as competence in whether it is seen as a trusted institution by the public.
Over the past three years, the ethical score for business has jumped a total of 20 points, with a steady increase occurring each year. Business is now the only societal institution of the four that is seen as both ethical and competent. And significantly it is the only societal institution among the four that is trusted.
Twenty years ago, however, trust in business was at a low point after fraudulent practices came to light at Enron and WorldCom, among others. These high-profile corporate scandals eroded public trust in the ethical behavior of companies. To this day, Enron is the only corporation listed on the FBI’s list of its most famous and important cases.
After these scandals and the enactment of laws such as Sarbanes-Oxley to address expected corporate governance, transparency, and ethical behavior among businesses, we saw trust in business rebound. The improvement lasted about five years as companies worked to rebuild trust in how they conducted their operations and embraced corporate social responsibility initiatives.
Steady progress was made until the 2008-09 global financial crisis. It began with the collapse of the housing market in the United States where major financial institutions failed due to irresponsible lending practices and lack of effective oversight (i.e., subprime mortgages.) The crisis dealt a severe blow to trust in business worldwide as the fragility of the global financial system and the lack of effective regulation were exposed. While the crisis involved the financial sector, the impact was so large that it affected the public’s overall confidence and trust in businesses generally, and the trust score for business hit another low point in the Edelman survey.
In the aftermath of the global financial crisis, businesses again needed to restore credibility and trustworthiness. Over the next five to six years, trust in business slowly began to improve as companies refocused on sound governance, measured risk-taking, and corporate social responsibility initiatives.
During this time, the technology sector was on the rise. Innovative products and services ushered in a new era of greater transparency, access to information, and better communication between companies and their stakeholders.
Unfortunately, within a few short years incidents such as Facebook’s Cambridge Analytica debacle in 2015-16 and the endless stream of data breaches headlined the numerous privacy concerns the public had with how businesses were handling (or mishandling) their information and deploying technology inside their organizations. This muted the public’s perception of how trustworthy businesses were until the turn of the century.
2020 proved a banner year for disruption. It ushered in the era of Covid, increased tensions in the US over race relations, and brought a renewed focus on the environment and climate change. It also proved to be a real turning point for businesses to step up to the challenge. By digging in and focusing on the three ethical dimensions of trust, businesses were able to precipitously move the needle on how much they were trusted by the public.
Today, trust in business is at a high point, relative to the last 20 years, as evidenced by the three-year, 20-point rise in the ethical score for businesses. Despite the current banking crisis, I think businesses can employ the following strategies to maintain the gains or, alternatively, stem any significant slide on trustworthiness.
1. Risk is not static; remain vigilant. While the underlying causes of the 2008-09 financial crisis and the current banking crisis are different, there is at least one common thread applicable to all businesses – risk is dynamic and ever-changing.
The banking industry (and regulators) were wrong to think that the financial industry was somehow forever fixed with the sweeping regulations enacted in the aftermath of the 2008-09 bank failures. The systemic risks that caused that crisis (risky mortgage lending practices) may have been fixed, but new systemic risks have now emerged (rising interest rates and the effect it has on the value of a bank’s assets). These new risks were not contemplated by the regulations that were put in place after the previous financial crisis.
Managing risk requires constant vigilance. Simply following rules that have been put in place without thinking hard about what new risks are being created by current market conditions breeds a dangerous level of complacency. Effectively managing risks should be seen as a continuous journey of improvement, not a destination point.
2. Deal with risk offensively and strategically. Too often, risk identification and mitigation is seen merely as a defensive business play (i.e., cost avoidance.) The better approach is to consider it up front when setting strategy.
Businesses should proactively engage in exercises to predict what types of risks may arise both in the short and long term by continuously evaluating current changes in the operating environment and gathering data and information on what could change in the future. Armed with that intelligence, businesses can assess how these changes affect or may affect their current risk profile and then address the emerging risks before they become full-blown. This requires an appropriate investment in staff devoted to proactively assessing risk from a strategic point of view.
3. Work together for the greater good. While being mindful of antitrust laws, there are still many places where industry partners and businesses across various industries can work collaboratively for the betterment of society.
The most recent example is the efforts of JP Morgan to lead a coalition of banks to put a total of $30 Billion on deposit at First Republic to halt another bank run and calm fears about all regional banks being at risk. In this instance, Jamie Dimon drew on his knowledge and wisdom gained during his almost 40-year tenure in the financial sector and specifically his experience in dealing with the 2008-09 financial crisis to step in and work to stem the tide early this time around.
4. Work with government and NGOs to solve existential issues. The combined efforts of these three sectors can address large, existential issues that cannot be solved by any individual group.
As the 2023 Edelman Trust Barometer report points out, people want (and expect) the different segments of society to work together to solve the larger, complex issues of our day, such as the after-effects of Covid, race relations, the environment, and most recently, the banking crisis. Doing so increases the trustworthiness of all segments of society.
5. Anticipate the speed of business. Due to our interconnected, digital world, the flow of information is much faster these days, as is the ability to act on it. In fact, it’s one of the reasons cited for the swift fall of SVB. Word spread quickly on social media among the bank’s concentrated customer base (tech companies and the venture capital firms that supported them) and they were able to withdraw funds almost instantaneously on-line.
This phenomenon certainly didn’t exist 20 years ago when Enron and others collapsed, nor did it exist during the 2008-09 financial crisis. Failing to anticipate the “what ifs” and how swiftly the consequences could materialize before launching a plan is deadly in today’s business world, as evidenced by the collapse of SVB.
6. Embrace empathy and transparency. Despite all the technology advancements we’ve made, businesses are still composed of people. And the customers they serve are ultimately people. For individuals to trust one another and businesses in general, there needs to be a strong, authentic relationship upon which trust can be built.
Two keys to building that strong relationship are empathy and transparency. Businesses, by and large, displayed both characteristics during COVID and it paid dividends in the trust department. A new bar has been set and must be maintained by businesses with their employees, customers, and other stakeholders for their trustworthiness to continue to flourish.
Trust in business isn’t linear. As with many things in life, it’s often two steps forward and one step back. By focusing on the long-term trend-line, though, and looking past the individual bumps in the road, it’s evident that progress has been made over the years to improve the trustworthiness of businesses. We’re a long way from where we were when Enron collapsed, yet there’s still a long way to go. The focus should be on continuous improvement and quickly integrating and implementing lessons learned over the years to shorten the dips and accelerate the advancements.