CHAPTER 5

Trust and Leadership

Michael Pirson

Public outrage over fraudulent banks and crooked corporate officers, the looting of pension funds, the defrauding of stockholders, and the wholesale firings of hardworking employees have reached a new high.1, 2 Not only the antiglobalization movement of the far left but also opponents of crony capitalism on the right are questioning the legitimacy of capitalism, as can be seen in rise of nationalistic movements. The public has become increasingly uncomfortable with corporate power, corporate influence, and the ensuing abuse. Most people surveyed over time agree that corporations should have more than one purpose and additionally, that they owe something to their workers and the communities in which they operate.3, 4 International surveys on trust in corporations also demonstrate that trust in big business continues to decrease. According to GlobeScan,5 in 2006, trust in multinational and global companies reached its all time low. In the eyes of bestselling author William Greider,6 the avatars of capitalism are meeting deeply rooted anger and are blamed for the erosion of family life, the decreased sense of personal and professional security, corroded communities, impoverished spiritual lives, and a devastated natural environment. Overall, the criticism leveled at current capitalism is that it fails to be life-conducive. It is insufficiently set up to fulfill authentic human needs,7 or in humanistic terms, it fails to make “humans the measure of all things” (Protagoras).

As a result, current business organizations are facing a predicament that Jackson and Nelson compare to a “perfect storm.” They argue that “despite the ongoing pressures of relentless competition, and the need to deliver short-term financial performance, no major company can ignore and fail to respond to the following threats to long-term corporate success and viability:

• the crisis of trust
• the crisis of inequality and
• the crisis of sustainability.

In the following, I will focus on the crisis of trust. I will outline why a trust gap has developed, what trust is, and how managers can focus on the causes of low trust levels to effectively build trust. Doing well by doing good is the most sustainable way to close the trust gap and secure ongoing competitiveness.

The Development of a Trust Gap

Trust has been widely recognized as a key enabler of organizational success.8 Trust has been shown to facilitate efficient business transactions,9, 10, 11 increase customer satisfaction,12, 13, 14 and enhance employee motivation and commitment.15, 16 More generally, trust promotes cooperative behavior within organizations17, 18, 19 and between organizational stakeholder groups,20, 21, 22 as it fosters commitment,23 motivation,24 creativity, innovation, and knowledge transfer.25, 26, 27, 28 As such, by strengthening relationships between the firm and its various stakeholders (e.g., employees, customers, investors, etc.), trust can serve as a source of competitive advantage for the organization.29, 30

The Demand for Trust Is Increasing

The positive effects of trust are only gaining relevance. In a globalizing world the complexity for managers is increasing, more strangers than ever meet and teamwork and networks become more prevalent. Traditional mechanisms of coordination such as power and coercion lose their effectiveness and trust is becoming more important.

The current state of affairs, however, looks bleak in terms of stakeholder trust levels. A global public opinion survey carried out for the World Economic Forum 2006 in 20 countries, for which researchers interviewed more than 20,000 citizens, “paints an alarming picture of declining levels of trust.”31 Since 2006 and the global financial crisis stakeholder trust has decreased even further.32 Both in the United States and the European Union, people view big companies by far as the least trustworthy with an average of 65 percent mistrusting big companies, while the same percentage say they trust the police (see also other surveys).33, 34, 35

Many attribute the decline in trust to corporate misconduct and unethical behavior. On an interpersonal level, lack of integrity as well as an increasing opportunism, acquisitiveness, and greed36 are deplored.37 Trust on an organizational level is also falling because of an increased shortsightedness and an attitude that only seeks to make a “quick ­dollar.” Harvard Business School professor Lynn Sharp Paine views an increasing discrepancy between external demands and internal demands as the ­problem. In her book Value Shift4 she argues that stakeholders are increasingly aware of corporate conduct and demand more responsibility and social awareness. Bakan38 also argues that there is a fundamental problem in the capitalistic system that leads to ever-decreasing trust. A growing number of citizens mistrust the capitalist system since it seems unable to solve social problems, but multiplies them instead.

On the one hand, political, economic, societal, and technical developments lead to more need for trust; on the other hand, organizations, especially corporations, do not possess much trust, and in fact are continually losing stakeholders’ trust. Hence, a trust gap is emerging, which is likely to impair successful corporate development. Thus, the question is: How can organizations reestablish and maintain trust in order to close their trust gap and thereby secure long-term survival?

What Is Trust?

Trust is a complex phenomenon that can take various forms. There is general trust and situation-specific trust, emotion-based trust and rational trust. Luhmann39 argues that the onset of a trusting relationship is based on a situation characterized by uncertainty, the risk of personal loss, and freedom of choice. Seifert40 views a trust decision based on routine, emotion, or rationality. Mayer, Davis, and Schoorman and Ripperger claim that when actors trust, they are making themselves vulnerable to the trustee, risking that the trustee will behave opportunistically.41, 42 Many scholars argue that trust is based on attributions of benevolence, integrity, reliability, competence, openness, and identification. Trust here is thus viewed as a willingness to become vulnerable to a person, a group, or an organization based on expectations of trustworthiness along the dimensions of competence, reliability, integrity, transparency, and identification.43

Measuring Organizational Trust

Although trust cannot be managed with an input–output equation, trust-sensitive management can take decisions that do not harm and even improve the trustworthiness of the organization. To become aware of stakeholder trust, management needs to measure trust levels. To do so, the current literature suggests focusing on competence, benevolence, integrity, transparency, reliability, and identification. All of these dimensions I explain in more detail in the following.

Competence

Organizations are trusted because they deliver a certain service or good that fulfils a need or solves a problem. If the organization is not skilled or competent to do so, trust will be low, since good intentions are not enough. Competence is a generalized perception that assumes the effectiveness of the organization’s ability to survive in the marketplace. ­Competence-induced trust can include faith in the ability to deliver quality products or services, to compete dynamically, to survive in an ever-changing global economy, or to embrace disruptive technological developments, such as e-business.44, 45, 46

Reliability

Reliability refers to the expectation of consistent and dependable behavior. Reliability describes the notion of benevolent predictability.47 ­Predictability with regard to opportunistic behavior does not constitute reliability.48 Consistency and congruency between words and actions build trust across stakeholder groups;49 inconsistencies and incongruence diminish trust.

Integrity

Integrity highlights the moral aspects of trust. Traits that are commonly described as character, honesty, or authenticity constitute an important factor of trust.50, 51

Mishra and Spreitzer52 emphasize that openness is not enough; an organization that is open about its illegal behavior will not earn trust. To create trust, organizational behavior needs to be rooted in ethical behavior. Ad hoc integrity is seen to lead to mistrust; rather, a historical foundation, that is, a “track-record,” needs to be established to maintain or to create trust.53

Transparency

Many authors view accountability, openness, and transparency as a key construct of organizational trust. Especially after the corporate scandals in the wake of Enron,54, 55 openness or transparency describes the extent to which relevant information is not withheld.

Benevolence

Benevolence is seen as the confidence that one’s well-being or something one cares about will be protected or not harmed by the trusted party. This constitutes faith in the altruistic and moral disposition of the other. Organizational stakeholders perceive benevolence when concern, care, and interest are expressed by the respective organization. As a result, they have more trust in the organization.

Identification

Another proposed dimension of organizational trust is identification.56 Pavlou views familiarity and similarity as the basis for identification. Parkhe states that being similar leads to attraction and evokes positive attitudes. Identification in the context of trust especially relates to value congruence. Shockley and Ellis emphasize the importance of shared goals, values, norms, and beliefs.57, 58, 59, 60 With deep identification, organization trust and organizational effectiveness prosper.61

Managing Trust

Based on current research, I am proposing that managers should be on the look out for general managerial behavior that endangers the overall trust climate. In the following, I outline several of these within the trust dimensions outlined previously. Following these findings, managers can deliberate which trust hazards are driving current trust levels in their own organizations and determine how they can be elevated.

Competence

As Shaw argues, in most people’s understanding of trust competence does not matter; still, it is a central aspect and needs to be taken into consideration when building trust.62 The products and services offered by an organization are communicative elements that establish a relationship between clients and an organization. Poor product and ­service quality directly affects the trust levels of customers. However, poor quality levels will not only affect customers’ perception, but also the perception of the company as a whole, and investors, employees, and suppliers will trust the organization less as a consequence. Investors in their due diligence process focus strongly on service and product quality before they invest,63, 64 and employees are more likely to join an organization when quality levels of services and products offered match general expectations.65

Some organizations are technically very competent, but lack the capability to change when necessary. Adaptation to markets and flexibility in response to new circumstances is critical to gaining and maintaining the trust of investors as well as of employees. Trust in an organization is ­coupled with the perceived competence of management and its flexibility to respond to competitive demands.

Reliability

In the realm of reliability, trust is endangered by (1) inconsistent messages, (2) inconsistent standards, and (3) broken promises. Inconsistent messages are one of the most critical hazards to building and maintaining trust. These inconsistent messages can be either verbal or behavioral. In the example that follows, one critical barrier to trust was the perceived inconsistency in messages by top management.

Asking the middle managers in the organization how they perceived the current change processes, many expressed their skepticism toward top management.

INTERVIEWER: So, why are you skeptical?

MANAGER: You know, I have been here for 15 years and we have had many attempts at trying to change the situation. They never worked. The boss says one thing and then does another. I don’t believe that this time it will be different. We will come up with a plan to change and then continue as usual.

Top management declared that it supported the changes middle ­management had proposed, but top management’s actions undermined these changes.

MANAGER: Well you know, at first it seemed like he supported the new team structure, but all the decisions we agreed on in our team, he just doesn’t care about. He decides his way, like always.

According to respondents, teamwork was encouraged and more active participation by all employees demanded. However, when middle and lower management took decisions, senior management interfered and sometimes reversed outcomes. Consequently, trust was quickly dissolved and motivation and commitment lowered. Inconsistent messages can occur anywhere in an organization, from senior managers on down.

The second problem and source of mistrust is an inconsistency of standards across stakeholders and within stakeholder groups. As Slavio, an immigrant cab driver in Boston remarked:

I do not trust my employer, because he prefers white, American-­born cab drivers. He gives the good rides to the guys he knows, not to anybody else.

Similar reactions are expressed by employees of a nursing home, who mistrust their leadership because they employ different standards.

INTERVIEWER: What incident destroyed your trust?

EMPLOYEE: Scheduled vacations were not granted to the employees, not because there was a lack of personnel, but because leadership went on vacation.

Inconsistent standards for leadership and employees are a common cause of mistrust. Galford and Drapeau claim that employees keep score relentlessly and that any type of preferential treatment engenders cynicism in the rest of the organization.

Broken promises are a third major factor leading to losses in trust. According to Elangovan and Shapiro, the issue of broken promises concerns not only promises that are made explicitly, but extends to all violations of societal norms or social contracts. Task- or value-related violations of expectations can cause trust to disappear especially when these expectations are personal and pivotal to the relationship. If the expectations are not pivotal, then their violation is not significant to the relationship and will most likely be excused, ignored, or viewed as a disappointment.66 But in situations where violated expectations have serious consequences, such as not receiving a contract because technical gear was not delivered in time, trust is broken and future cooperation endangered.

Integrity

Hazards to trust are many in the field of integrity but can be categorized under the rubric of (1) hidden agendas, (2) opportunism, and (3) Machiavellism.

Some organizations are not trusted since a hidden agenda is assumed.

INTERVIEWER: Okay and what do you associate with trustworthiness?

RESPONDENT: … some institutions are more trustworthy than others. I would never trust scientology for example, or, sects or, companies that work with global systems, with details that are not communicated in the sales pitch; that now are written in the small details of the contract, fitness studios with long periods to give notice. These things are not trustworthy.

INTERVIEWER: Okay, ...scientology or sects because of what exactly ... you don’t trust…?

RESPONDENT: Hidden agenda. Manipulations. Not acting in the interest of the individual, financial gains, no win/win/ ­strategies.

Manipulations and hidden agendas are assumed for some organizations, but also concern relationships with teammates or leaders.

EMPLOYEE: … the important thing is that you can trust people in your team. Some people are not reliable and they just abuse you, they play a “false game” just trying to look good in front of superiors.

In many organizations trust is low because people do not trust the motivation of peers, subordinates, superiors, or partners. In many cases hidden agendas are assumed; employees question motives of their leaders, managers the motivation of investors, while members of society question the motivation of companies in general. Whatever the communicated goal of an organization, most stakeholders I interviewed assume that profit maximization is the real motivation behind a business.

INTERVIEWER: So, would you say you trust businesses in ­general?

RESPONDENT:… for businesses in general [my trust] would be quite low.

INTERVIEWER: Because?

RESPONDENT: Because, well they’re profit motivated, and a lot of them, actually with those businesses that you only have a one time relation with, those I believe [are] just, … basically, out to maximize profit from you.

Profit maximization, seen as the real motive for many businesses, lowers stakeholder trust. It is interesting to note that respondents who were intensively exposed to business practices are more mistrusting than less informed respondents.

A second hazard to trust is opportunism. Opportunism as Williamson defined it is “self-interest seeking with guile.” Respondents often describe their environment as one based on a philosophy of opportunism that leads to a heightened sense of betrayal. In a very drastic case of opportunism, one respondent reported that he was removed as CEO of his own company, because other employees expected better compensation with a new CEO. He recounted the story:

The guy entered the company through a capital increase. He took care of distribution [within the company] and negotiated with banks. I took vacations for the first time after 4 and ½ years and the business was debt free by then. Somehow, when I was gone, the supervisory board decided that the situation was very terrible, even though the protocol says everything was fine. […] However, when I came back from the vacation, the same guy was CEO and then I knew they played a “false game.” Shortly after the new CEO took office the payment for all who ­supported him was increased, but only after 6 months they filed for bankruptcy.

A staged takeover led to the CEO’s replacement and indeed compensation packages were drastically increased but resulted in filing for bankruptcy the following year. This maneuver had drastic long-term ­consequences for employees’ trust in the organization.

One employee said:

At first we felt it was strange that the founder of the company and the person who owns most of the shares, can be kicked out that easily by someone who only joined the firm six months ago. But my trust was only really decreased when we saw how the new leadership just spent money on all these unnecessary things such as logos or company cars etc. while we were cash strapped in the technology area, which was core of our business.

Self-interest seeking with guile by the new CEO led to a tremendous decrease in trust within the company. It also led to the creation of two rival firms by former employees, who left the company because they could not identify with the organization anymore.

This might be an extreme case of personal opportunism, but according to Hogan and Hogan67 opportunistic betrayals in everyday life, ranging from failing to return a phone call to deliberately sabotaging another person’s reputation, are relatively common. In a study by Jones and ­Burdette focusing on betrayal in the workplace, 25.4 percent of men and 9.4 percent of women identified work-related episodes in which their coworkers or bosses had betrayed them. According to Elangovan and ­Shapiro, betrayal episodes in the workplace are not only prevalent, but their effects are lasting. Opportunistic betrayal menaces trust, motivation, and commitment in the very long term. Stakeholders do not build trust when they believe they are a resource or pawn in a political game. While “playing politics” and “shrewd maneuvering” are often touted as great business skills, they do not lead to a heightened sense of integrity. Machiavellistic maneuvering, playing politics and treating stakeholders as a means rather than an end are behaviors that menace trust.

Transparency

Opacity and its ensuing rumors are hazards to achieving trust through transparency. Bakan claims that corporations are often rightly mistrusted since they are not open about their activities and try to conceal negative actions. In many organizations leadership does not communicate relevant information in a timely fashion. When relevant information is withheld stakeholders are left in a “guessing game.” Galford and Drapeau posit that insufficient communication leads to overinterpretation of available facts.

Employees know that something important is going on, but if they don’t know the full story (maybe the full story doesn’t exist yet), they’ll quite naturally overinterpret any share of information they get their hands on. Rumors circulate, and, in most cases, they’ll be negative rather than positive.68

Benevolence

Hazards to trust in the realm of benevolence are many. Concern and the lack thereof are often viewed as reasons for mistrust. Management autism often causes lack of concern, and misplaced benevolence also seriously undermines organizational trust.

As shown in the 1995 Brent Spar case, Shell had acquired a reputation as an environmental polluter. When they announced that sinking the drilling platform was economically and ecologically the best alternative (which later proved to be true), the German public mistrusted these statements and massive boycotts ensued. Shell learned the hard way that lack of concern fuels mistrust, and is now actively engaging in stakeholder dialog to demonstrate concern and build trust.

Lack of concern and “autism” often go hand in hand in organizations. In many business organizations, for example, top management is unidimensionally interested in catering to shareholders. Many businesses are often accused of only caring about shareholders. Critics argue that they cut themselves off from societal dialogs. Autism can be highly beneficial when firms only seek short-term results (see Deutsche Bank). However, the lack of connection achieved through societal discourses regarding decisions hurts reputations and undermines trust.

In many other cases misplaced benevolence destroys trust. Galford and Drapeau report:

Anyone who has spent time in business has encountered at least one person who is, simply and sadly, so out of his league that everyone is stupefied that he’s in the position at all. His colleagues wonder why his supervisors don’t do something. His direct reports learn to work around him, but it’s a daily struggle. Because the person in question isn’t harming anyone or anything on purpose, his supervisor is reluctant to punish him. But incompetence destroys value, and it destroys [...] trust.

Removing such people from their positions of responsibility can enable trust within organizations, and keeping such people out of misplaced concern will undermine it.

Identification

While current literature does not focus on value incongruence as a reason for mistrust very much, I find in my research that it is crucial. Many interviewees indirectly question the organizational setup that requires businesses to maximize profit and forces firms to think short term.

Many interviewees doubted the motivations and values of business organizations. A central issue that was consistently raised across the interviews was a lack of identification with business organizations because of profit maximization goals.

INTERVIEWER: So can you tell me why you don’t trust any bank?

CLIENT: That’s a difficult question. I think they only care about the money which is on the account and how they can use the last dollar of every customer. But, it’s not really about your money, cause you don’t get really a lot of interest on your savings account either. And, you actually pay more interest if you overcharge your account, … I don’t think this is the way it should be.

A former employee of a consulting firm states that he hedges a general mistrust toward the organization because it is profit motivated.

FORMER EMPLOYEE: …I trust [organization X] less, because what I don’t like about the organization is that they are basically profit motivated.

Many respondents placed trust in business organizations rather low, while trust in churches, non-governmental organizations (NGOs), or ­several state-run organizations, such as the police was quite high.

INTERVIEWER: Which societal organizations do you trust the most and which the least?

RESPONDENT: …trust in the church and NGOs is high, ­business I trust much less, for example the pharma industry is only interested in making profit. They are aligned in a way that they have to screw you over…

Another respondent argued in a similar fashion.

INTERVIEWER: So, would you say you trust businesses in ­general?

RESPONDENT: …for businesses in general [my trust] would be quite low.

INTERVIEWER: Because?

RESPONDENT: Because, well they’re profit motivated.

Many respondents rate trust in organizations with a social purpose much higher and could not identify with the profit maximization objective pursued by most businesses. Interestingly, especially respondents with considerable business experience and management insight reported a high level of disconnect with the values of business organizations. Judging from my sample it seems that profit maximization, the central objective of shareholder capitalism, severely undermines trust in business organizations. Hart69 concurs and posits that the short-term focus of businesses and lack of concern about environmental destruction are common reasons for mistrust. Some respondents argued that family businesses or NGOs do not succumb to the pressures of the financial markets and hence can be more socially responsible. Bakan blames pressures generated by financial markets for detrimental effects on society and argues that the setting up of the corporations as organizations with limited liability as a basic reason for justifying mistrust.

Mistrust—The Biggest Enemy of Trust

Another hazard of trust that receives very little attention in the management literature is mistrust. From my findings I posit that mistrust is the biggest enemy of trust and when focusing on building trust, signs of mistrust need to be understood. Ripperger and Luhmann argue that mistrust generates a downward spiral effect. Signs of mistrust create mistrust as a self-fulfilling prophecy. Malhotra and Murnighan70 report that signals of mistrust such as highly specified contracts, result in lower levels of cooperation. Sprenger states that organizations that monitor employee attendance report lower levels of productivity. Shaw recounts the story of Bill Packard who noticed that at his former employer, General Electric, tools were safely locked up so that nobody could steal them. This signal of mistrust somehow created a challenge for employees and it became a sport to overcome security controls and soon every worker had a toolset at home. When founding Hewlett & Packard, management decided to trust their employees and not lock anything away; in fact, they encouraged people to take tools home, so they could work on their ideas more. The high levels of innovation experienced at HP are often attributed to the high level of trust.

In most companies control practices undermine trust. Pervasive ­signals of mistrust, such as detailed contracts, camera monitoring, or incentive schemes based on external motivations undermine trust. The signals of mistrust are often very subtle but powerful and destructive. Trust is undermined by mistrust, a finding that sounds rather banal, but has immense repercussions for management.

Trust as a Self-Fulfilling Prophecy

On the other hand, trust is also a self-fulfilling mechanism, meaning that it grows the more it is employed.71 Trust is one of the resources that does not adhere to the economic logic: It increases—not decreases—when used.

In several interviews respondents powerfully demonstrated the impact of trust on trust. When asked about an incident in which his trust had increased, one employee recounted that his trust increased immensely when leadership expressed their confidence in him to manage a complex project.

INTERVIEWER: Can you tell me of an incident that increased your trust?

RESPONDENT: …I felt it was very positive when in a general meeting leadership said, “Yeah, we think you are the man for the job. We trust you to do that.” I just grew about 2 meters. My motivation increased dramatically.

In another incident an employee reported that his trust skyrocketed when he was given responsibility for a small business branch.

INTERVIEWER: …and can you tell me of an incident in which your trust increased?

RESPONDENT: Guess it was when I was working for my first employer, which was a big, traditional Japanese company; and they usually don’t give their younger people too much responsibility, or too much …leeway. But, once they actually gave me the responsibility to run a small, [a]very small portion of the business. … I felt quite good. I felt that they trusted me with that, even though it wasn’t really spectacular....

INTERVIEWER: So your trust went up?

RESPONDENT: My trust went up, yeah.

In both incidents employees felt trusted, which increased their trust in the organization tremendously. Luhmann and others thus postulate more trust in trust and Hoehler72 views trust as the most effective control. Many organizations, however, build their processes on the philosophy of theory X,73 which basically assumes the negative self-serving nature of human beings. In recent times, organizations based on theory Y, for example Ebay or AES, have continually proven that trust creates trust and results in higher levels of success.

Conclusion

Lack of trust caused by the enemies of trust has serious consequences. Simons (2002) studied the effects of mistrust in organizations in the hotel industry and found a stunning ripple effect. Hotels where employees strongly believed that the organization and their managers were trustworthy were substantially more profitable than those that were not. A one-eighth point improvement in a hotel’s score on a five-point scale could be expected to increase the hotel’s profitability by 2.5 percent of revenues, which translated to a profit increase of more than $250,000 per year per hotel.

If stakeholders don’t trust the organization and its leaders, they’ll disengage their cooperative efforts. Clients switch brands, investors reallocate their funds and suppliers will not deliver their best service. Employees will look for another job or succumb to inner resignation in their current job. Organizational confusion, decline in productivity, and decrease in ­competitiveness become the norm.

To successfully manage the current trust crisis, a new management paradigm is therefore needed. “Doing well by doing good” seems a promising alternative to “business as usual” and can help rebuild trust lost while restoring much-needed competitiveness. When extrapolating the results presented earlier, we can envision organizations that are much better fit to engender high levels of stakeholder trust. As the opportunistic profit motive is a true barrier to sustained high trust, we need to look at potential alternatives. Nonprofit organizations are enjoying much higher levels of trust, because they serve a cause larger than financial profit. Over the time, businesses did indeed feel the need for higher level vision/mission statements but those are rarely believed. But how about creating business organizations that actually serve a higher purpose and use financial means to that end? Such organizations do indeed exist: look at for example the Grameen Bank in Bangladesh, the Wainwright Bank in the United States, Mondragon in Spain, and other cooperatives around the world. The new movement to Social Entrepreneurship also leads the way in creating organizations that are structurally setup to solve social problems and create profit toward that end. A trust based economy needs to restructure its institutions to not reward systemic trust decrease, but even within the current system there are many ways to build and rebuild businesses to enjoy higher levels of stakeholder trust.

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