In our first post we proposed a universal business ethics principle: “A basic duty of every organization is to earn stakeholder trust.”
Our hypotheses are: 1) trust is based on the expectation of reliable behavior, 2) attributes of reliable behavior generally align with ethical behavior, and 3) therefore trust is a valid proxy for evaluating ethical behavior.
This principle does not, as some believe, confront businesses with a choice between trust or economic success. In fact, according to a PwC 2014 survey, more than 50% of CEOs believe that the absence of trust constitutes a real threat for growth. Creating trust by behaving ethically is a profitable strategy.
The Reputation Institute describes reputation as a function of trust and reports that “[r]eputation predicts all forms of [public] support.” Two firms have recently undertaken the challenge of quantifying the impact of reputation on share price. One concludes that for firms in the Standard & Poor’s 500 Index, reputation currently accounts for an average of 31% of share price. Reputation Dividend reports that corporate reputations “accounted for close to 26% of the total market capitalization of the S&P500” and concludes that “reputation therefore is a useful leading indicator of investment risk.”
Firms should not assume that strong financial performance alone generates a strong reputation. The World Economic Forum 2015 ranked financial returns last of ten factors critical to reputation (39%), while trust is one of the top four factors (65%).
The Edelman Trust Barometer reports that employees are the most trusted source of information on most trust-based attributes. Fortune’s Trust Index Employee Survey reports that top-ranked companies produce three times the cumulative market return as others in the Russell 3000 or Standard and Poor 500 companies.
For trusted companies:
- 80% of customers chose to buy product/services
- 68% recommended to friends/colleagues
- 54% paid more for products and services
- 48% shared positive opinions online
For distrusted companies:
- 63% refused to buy products/services
- 58% criticized to friends/colleagues
- 37% shared negative opinions online
The business case is clear: creating stakeholder trust improves the bottom line.
Why, then, do so many businesses fail to identify stakeholder trust as a goal? The World Economic Forum suggests an answer: “Trust as an asset appears inherently intangible and difficult to measure.”
We respectfully disagree. Measurement is critical to the operationalization of this principle, and measurement is possible.
In a future post we will discuss this topic.
Patricia E. Dowden is President of Center for Business Ethics and Corporate Governance and Managing Director of the Russian Compliance Alliance, an online compliance self-evaluation system. Ms. Dowden also has extensive U.S. commercial bank management experience. She holds a BS from University of North Carolina (Phi Beta Kappa) and an MBA from Georgia State University.
Philip M. Nichols is an Associate Professor of Legal Studies and Business Ethics and Director of the Social Impact and Responsibility Program, The Wharton School of the University of Pennsylvania. His research focuses on emerging economies and corruption. Dr. Nichols holds a JD, Duke University; LLM, Duke University; AB, Harvard University.
This post is adapted from an article that first appeared on collective-action.com.