HHL Working Paper
No. 111
July 2012
Trust as a Basis for Sustainable
Corporate Value Creation*
Andreas Suchanek
Prof. Dr. Andreas Suchanek is Head of the Dr. Werner Jackstädt Chair of Economic and Business Ethics
at HHL Leipzig Graduate School of Management. Email: [email protected]
*I would like to thank Dr. Jan Sammeck for his translation of a German version of this text and Alicia Bockel
for helpful hints. The text was originally published in A. Schneider / R. Schmidpeter (eds.): Corporate Social
Responsibility, Berlin – Heidelberg: Springer 2012, 55-66.
1 Introduction Untrustworthy companies rarely find partners who readily engage with them in cooperation. In cases where partners have no choice but to cooperate with such companies, these partners will reduce their cooperative efforts to a minimum in order to protect themselves from negative consequences of such cooperation. This reveals just how valuable trust is for corporations, since sustainable entrepreneurial value creation is simply impossible without it. As value creation is a key societal function of corporations, it is also clear that the preservation of trust is, in effect, the core of corporate responsibility. This concept is elaborated upon further in the next sections. However, firstly it is important that the conceptual framework of economic ethics is made clear. 2 Economic Ethics “Society is a cooperative venture for mutual advantage.” (Rawls 2005, p. 4) This definition is comprised of normative values such as solidarity, justice, and sustainability, as well as everyday forms of cooperation. Such common forms can include the purchase of bread from the baker, of a car from a car dealer, or of insurance from an insurance salesman. It can also include the daily duties of a judge, engineer, journalist, or business ethicist. Equally, this view of society incorporates the larger goals of tackling social problems like climate change, world hunger, poverty, or corruption as effectively as possible. Such social cooperation for mutual advantage must be organized and requires a continuous contribution from members of society in the form of productive work, which itself is typically coordinated via organizations and markets. The guiding principle here, which further serves as a conceptual basis of this essay, is a reformulated and advanced version of the Golden Rule. It reads: “Invest in the conditions of social cooperation for mutual advantage.” (Suchanek 2007) At the same time, this maxim serves as the basis for rules, structures, and processes and whether or not they foster or undermine investments according to the Golden Rule. In particular, this applies to corporations as socially established institutional arrangements which constitute corporate actors (Homann/Suchanek 2005, chapter 5). 1
3 Value creation as the raison d’être of corporations The social responsibility of corporations is to organize value creating practices which lead to social cooperation for a mutual advantage. An important requirement of this social responsibility—which will be of particular relevance throughout this text—is to organize these processes in ways that ensure that the legitimate interests of third parties are appropriately taken into consideration in the process.1 The prevention of harm or disadvantage is essential because corporations must act under the constraint of competition. This constraint is socially desirable insofar as competition forces corporations to orientate themselves toward the preferences of their partners – as these will otherwise migrate to competitors – and to use own resources efficiently. This includes the continuous search for new, innovative opportunities in the attempt to improve on both the fulfillment of co‐operation partners’ wishes and the efficient use of resources.2 However, competition creates conflict and pressure not only to avoid costs, but also to externalize them if the opportunity to do so arises. One of the fundamental challenges of business ethics (or in a more practical view: of business management) is to give consideration to the ambivalence of competition. The primary source of entrepreneurial (or corporate) value creation, however, is not competition but cooperation, which relies on numerous contributions from a diverse range of partners: customers, employees, suppliers, investors, agencies, and so forth. As these actors cannot be forced to cooperate, corporations have to win them over to cooperation. Companies do so by promising an adequately3 attractive quid‐pro‐quo for their contribution to value creation: commercials, advertisements, and job postings, but also annual reports, presentations, memberships, etc. are examples of such promises. However, promises alone are ineffective unless an essential condition is fulfilled; the respective partners must trust that these promises will be kept. It is important to recognize that only expectations of trust allow these promises to function.4 Nevertheless, expectations of trust do not rely exclusively on the trustworthiness of the corporation. Expectations, particularly in economic relationships, are safeguarded by the conditions and institutions that frame the situation, such as legal regulations, contractual arrangements or other incentive specifications. Thus, trust itself transforms into “system‐
trust” (cf. Luhmann 2009, p. 59 ff.). As receivers of trust, however, corporations do have a certain number of alternative courses of action (‘freedom’)—and these options are important in order to promote an entrepreneurial spirit. What is more, under the conditions of globalization and digitalization, options for action vary more than ever before. This increases the uncertainty (of behavior) 1
Otherwise one could legitimize organizations such as the Mafia, which engages in value creation processes as well, but does so at the expense of third parties. It principally demands that every member of society can consent to the existence of corporations as long as no fundamental rights and legitimate interests are violated. 2
See in this regard Homann 1990. 3
The notion ‘adequately’ indicates that it is always a question of relevant alternatives, in particular the conditions of competition, which determine how attractive the quid pro quo should be. 4
Part 5 will address the specifics of this issue.
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and hence, creates a greater demand for trust5. This explains why the topic of trust in corporations—parallel to CSR—has gained in prominence in recent years. 4 Determinants of Trustworthiness There are several factors that determine what qualifies as trustworthy behavior: 1) ability, 2) non‐opportunism, and 3) righteousness. These three aspects are important building blocks for trust; from an ethical point of view, especially the last two aspects are ‘core requirements’: 1) Ability: A trustor expects the trustee to be capable of performing the actions reliably. In this sense, it is also possible to ‘trust’ a machine, since machines usually create reliable results. Ability is a necessary component for successful cooperation, in particular in the value creation processes, yet ability alone is not enough to ensure trust. Ethically, a machine does not ‘cooperate’6—so ability is a necessary factor of trust, but not one of its core requirements. 2) Non‐Opportunism: For cooperative relationships, the most relevant aspect of trust is the willingness and ability to resist situational temptations for abusing that trust. Corporations should not seek advantages at the expense of their partners by, for example, deferring payments to suppliers, delivering products of inferior quality, or insufficiently monitoring supplier standards. Abstaining from such behaviors can be described as the corporation’s willingness and ability to adequately respect the interests of its partners through its actions. Non‐Opportunism is of fundamental importance for sustainable value creation. Partners only risk ‘investing’ effort into a cooperative relationship (i.e. a common value creation process), if they expect that doing so does not put them at a disadvantage or cause them harm7. 3) Righteousness: The third aspect of trustworthiness relates to the way corporations’ actions affect third parties and stakeholders; some examples include occasions where hazardous emissions from factories seep into the soil of local neighborhoods, or when restaurants serve their customers spoiled food. In these cases, the cooperation between corporations and partners is successful but only at the expense of a third party. This can mean that laws have been violated or that moral standards and norms have been ignored—
in particular when in the areas concerned, legal regulations are non‐existent or only rudimentarily developed and their enforcement is insufficient. Such circumstances need not necessarily impair the respective act of cooperation, e.g. with customers, in particular when the concerned cooperation partner does not know about the violation of (legitimate) interests of third parties, is not concerned about the fact, or this violation of interests is not made public. 5
See in this regard Giddens 2008. ‘Cooperation’ is meant here as an intentional act and in this sense machines cannot cooperateand hence cannot act non‐opportunistically or not righteous. In a weaker interpretation one might say that there is some kind of cooperation between human beings and machines; I owe this insight to Kathrin Möslein. 7
Some of the literature on trust views this type of ‘vulnerability’ as the most important feature of trust; see in this regard Bigley/Pearce, 1998, 406 f. 6
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This aspect of trustworthiness is distinguished by the term righteousness8 as it is concerned with the adherence to legal and moral rules and standards that serve to safeguard the legitimate interests of third parties. It is this last aspect of trust that is most relevant in the discussion about CSR. Corporations are granted certain freedoms—i.e. the ‘license to operate’—under the condition that they do not exercise this freedom at the expense of third parties, as is the case if social or ecological standards are violated or costs are externalized (cf. Suchanek 2007, pp. 70, 135). Therefore, the basic and indispensable responsibility of corporations can be expressed in the negative form—through the principle of ‘neminem laedere’—meaning not to harm others. This way of defining corporate responsibility: not violating legitimate trust expectations, allows boundaries of corporate responsibility to be drawn, which is necessary in order not to expose corporations to a constant threat of “excessive demands” (cf. Lin‐Hi 2009). As trust has been defined according to the triad of reliability, non‐opportunism, and righteousness, the next step is to identify the conditions that allow trust to be sustained and credibly conveyed. To this end, it is necessary to address logical asymmetry. 5 Logical Asymmetry Trust possesses the characteristic of a ‘universal proposition’, meaning that it is against the nature of trust to argue that someone is sometimes trustworthy and sometimes untrustworthy. This lack of a grey area is a source of ‘logical asymmetry’. Even if, for example, a corporation does occasionally keep its promises, it still denies the partner the very ability to judge whether or not the corporation can be trusted. In other words, trustworthiness can only serve as a basis for the formation of expectations (of trust) about the future behavior of corporations if it is assumed universally. This can be illustrated in the form of a logical syllogism (below), in which the first statement (1) shows the characteristics and attributes that are a basis of trust between corporations (trust‐
takers) and partners (trust‐givers): (1) Whenever a trust‐taker (TT) makes a promise (P) towards a trust‐giver (TG), he keeps that promise. (2) TT makes P to TG. (3) (TG can expect that the following holds:) TT keeps P. Without the first premise it is impossible to derive conclusions and form expectations about TT’s future actions regarding whether a promise will be kept.9 This universal proposition regarding trust leads to significant asymmetry between the confirmation and ‘falsification’ of trust10: A confirmation of trust is what one would expect—
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This concept is used here in a Hegelian sense: “Virtue is the ethical order reflected in the individual character so far as that character is determined by its natural endowment. When virtue displays itself solely as the individual's simple conformity with the duties of the station to which he belongs, it is rectitude.” (Hegel, 2008, § 150) 9
Note that in reality, certain assumptions about the situation must be made, for example the aforementioned trust system. That is, assumptions about contextual conditions, which make promise keeping more or less likely. 4
and thus, bears only marginal informational value.11 On the contrary, a ‘falsification’ is of high informational value as the expectation of (generalizable) trust no longer holds true. The consequence is that trust cannot be sustained in the form of generalized trust. This, in turn, leads to the question: Under what circumstance is the trust‐giver able to trust? And how does the trust‐giver know whether this circumstance exist, if he would like to cooperate with the respective trust‐taker? A universal proposition is exemplified in the following: A simple claim is that (1) all ravens are black. Hence, if one wants to (2) observe a raven, one will expect that he is (3) black. Thus, if one observes a black raven, one will hardly be surprised; a black raven is just what is expected. It would be quite remarkable and illuminating to observe a green raven. However, this would mean that the proposition that all ravens are black is no longer valid; it is no longer possible to assume this claim, which rests on a universal proposition (1). Transferred to trust this means: If a corporation promises to deliver a certain product with specific advertised qualities and then does so, it is not surprising; the trust expectation has been fulfilled.12 If on the other hand, such quality conditions are not met (without a reasonable explanation and without the corporation reacting to respective complaints about quality), the trust relationship between the corporation and its partners may suffer irreversible damage. Consequently, considerable asymmetry is present. For each case, not fulfilling expectations of trust will receive disproportionally higher relevance than the fulfillment of expectations of trust13. This reflects in Aesop’s fable ‘The boy who cried wolf’ or the quote accredited to Shakespeare: “Don't trust the person who has broken faith once”. As the behavioral psychologist P. Slovic explains: “Trust is fragile. It is typically created rather slowly, but it can be destroyed in an instant ‐ by a single mishap or mistake. Thus, once trust is lost, it may take a long time to rebuild it to its former state. In some instances, lost trust may never be regained. The fact that trust is easier to destroy than to create reflects certain fundamental mechanisms of human psychology that I shall call the ‘asymmetry principle’” (1993, p. 677; own accentuation). For corporations that value their own trustworthiness as the foundation for successful cooperation and sustainable value creation, it is thus of utmost importance to avoid ‘falsifications’. To enable further consideration, these ‘falsifications’ are rendered more precisely as relevant inconsistencies between the expectations of trust‐givers with regard to reliability, 10
These considerations are inspired by Popper’s philosophy of science (Popper 2008). This is why it is difficult to concretely signal trustworthiness. What is more, an explicit affirmation of trust is likely to be counterproductive; this also denotes the universal characteristic of trust, the ‘implicitness’ of which can be undermined via the explicit communication of its contingency. That is, broaching the possibility that one could not be trustworthy produces adverse results, as the trust‐giver may possibly ask himself why the trust‐taker feels the need to explicitly stress his own trustworthiness. 12
Nonetheless, if a CSR‐report were to emphasize the veracity of a corporation’s advertisements, it would look rather odd. This refers to the problem of communicating trust, which is discussed in brief later on. 13
At this point, one must mention that it is the unspectacular confirmations of trust expectations that build and preserve trust.
11
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non‐opportunism, and righteousness, on the one hand, and the actual behavior of trust‐
takers on the other. 6 Relevant Inconsistencies Not every promise can be kept, not every rule is followed in the exact manner in which it is prescribed. In fact, it is not even expected that promises are kept unconditionally and that rules are always followed exactly. The daily entrepreneurial routine allows for any number of minor and major inconsistencies14, but not all of them are important. Furthermore, as mentioned above, following rules and keeping promises is always contingent on situational circumstances. The question is therefore: What poses—with regard to trust and trustworthiness—a relevant inconsistency? An inconsistency can be described as relevant when it is perceived by the trust‐giver as a ‘falsification’ of trustworthiness, i.e. when the inconsistency leads to an endangerment, if not erosion, of the trust in a relationship. Note that there is no objective criterion for identifying when an inconsistency must be considered a relevant one. As indicated above, contextual conditions for both the trust‐giver and trust‐taker influence whether a breach of promise or legal and moral norms is considered relevant or not. However, there are any number of cases in which one may find—with some certainty—a largely consistent assessment of a situation; examples of which include the violation of human rights, corruption, financial misstatement, and disregard of safety standards. These endanger human beings and nature, and of course break specific promises vis‐à‐vis cooperation partners who, in turn, feel that their interests have been violated. 7 Self‐binding as the basis for trust In order to sustain trust, it is important to avoid relevant inconsistencies and to have credible and convincing answers ready in case such an inconsistency occurs.15 The basic means for avoiding relevant inconsistencies is to bind oneself to certain conditions. The term self‐binding or self‐commitment refers to structures, rules, and dispositions that make certain options for action impractical or sufficiently unattractive for the (individual or corporate) actor—in particular those options that can be interpreted as relevant inconsistencies, i.e. a breach of trust. Examples of such means of (individual) self‐binding are numerous. Contracts as well as compliance‐systems are types of self‐binding, but also membership in organizations that create trust by ensuring certain standards of behavior among their members. Corporations can find other opportunities for self‐binding by cutting off certain options for action by not engaging in particular market segments, processes, in certain regions, and so forth. In particular, manifold internal structures and processes allow for self‐binding to become a 14
In this regard, one may also speak of discrepancies, contradictions, disappointments, conflicts, and so forth. 15
Interestingly, having answers ready can itself become a source of mistrust when it comes hand in hand with the impression that these answers have been prepared in order to hide something.
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reality whether it’s from revision and controlling or appropriate measures of executive education. Nonetheless, it is generally insufficient to merely bind oneself; one should also be able to signal this self‐binding in a credible way. 8 The challenge of credible communication There are also some challenges present in showing trustworthiness: Signaling trustworthiness does not generally provide informational value—it is just what one expects. Even more: Highlighting one’s own trustworthiness is rather counterproductive and may lead to a “suspicion of motives” (Japp 2010, p. 281). That is, the trust‐giver may ask why the trust‐taker feels the need to communicate trustworthiness and they might come to the obvious conclusion that there is an ulterior motive involved—which might also signal opportunism. Then again, communicating the absence of ‘falsifications’ through such lines as, ‘our company has been corruption‐free for another month’, is obviously quite ineffective.16 In this respect, it is not astonishing that corporations communicate their responsibility and trustworthiness through positive actions like donations, pro‐bono activities, and corporate‐
volunteering programs. However, the success of this strategy is limited and in some cases could be counterproductive,17 especially when the communication is inconsistent with the observed behavior. This does not imply that communication is entirely redundant, quite the opposite in fact. If communication is symmetrically coordinated with a corporation’s actions, this improves how the corporation portrays itself18 and satisfies two elementary conditions: (1) It is useful for winning desired partners in cooperation for sustainable value creation, and (2) it avoids relevant inconsistencies. This does not only mean that the corporation desists from respective actions, but also that it adequately respects the manifold (trust) expectations with which it is confronted. In this way, corporate communication is influenced for the better. A second point is of crucial importance in this context: the existence of shared mental models, that is, a set of common values and beliefs between the trust‐taker and the trust‐
giver. Since modern society incorporates many different ways of life, while at the same time economic and political interdependencies create immovable connections and linkages, it is a tremendous challenge to develop such shared mental models, e.g. with respect to appropriate social or ecological standards. The average customer has little insight into the supply chain of a global corporation. However, customers in particular, like other stakeholders, have expectations of trust that increasingly do not limit themselves to 16
However, one should not underestimate the possibility to do so. For example, reporting according to respective GRI‐indicators may allow for valid inference about that actor’s righteousness – as long as one can trust the reports. 17
See in this regard Lin‐Hi 2009, Lin‐Hi/Suchanek 2011. 18
These self‐portrayals can take various forms: from web pages, annual reports, press releases to advertisements, investor road shows, and job postings or specific promises in negotiations, customer calls, target agreement talks, and so forth.
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concrete promises made by corporations as they also incorporate aspects of righteousness and the adherence to social and environmental standards. Consequently, different forms of stakeholder dialogue become relevant. Such dialogues must not be restricted to developing and strengthening common moral concepts, but even more so must provide a reciprocal understanding for (or familiarity with) conditions of action of the other party insofar as they can influence appropriate trust expectations.19 9 Implications for CSR A number of implications are derived from interpreting CSR within the described framework. The preservation and strengthening of one’s trustworthiness as a cooperation partner is the central criterion for every CSR‐strategy. At first, of the three aspects of trust—reliability, non‐opportunism, and righteousness—the former has little direct relevance for CSR; it is to some extent a background assumption that is generally taken for granted.20 Non‐opportunism (with regard to direct cooperation partners) is undoubtedly an integral part of corporate responsibility. There are plausible reasons to go so far as arguing that for everyday value creation, this is, in fact, the most important part of authentic corporate responsibility. However, for the way CSR is generally discussed and practiced, the third aspect of trust, righteousness is most elementary.21 Whereas this aspect is less concerned with the challenge of keeping specific promises made to trust‐givers (and hence desisting from possible chances of opportunistic action), but more with the respect for legal rules and general social and environmental standards designed to protect third parties from harm.22 For global corporations, this context constitutes a major task: To decide, under conditions of competition, which social and environmental standards must be fulfilled and how to deal with non‐fulfillment or the impossibility of fulfillment. After taking into consideration the aforementioned asymmetry, implications for possible CSR‐strategies can be derived. The goal is primarily to avoid harming third parties related to value creation processes, as these damages create relevant inconsistencies that undermine trust. As indicated in the previous section, the efforts to communicate trust through charitable measures which are dominant in literature and practice, i.e. concrete measures such as donations, pro‐bono activities, corporate volunteering, etc., are, when considered on their own, often sensible for marketing or human resource management reasons. They are, 19
Corporations may face the problem that stakeholders assume from the outset of the relationship that the corporation’s intentions are purely strategic, which may complicate dialogue. This, again, demonstrates the value of existing trust and trustworthiness. 20
This aspect is meaningful in the sense that the measurement of CSR should be carried out professionally. Where numerous CSR‐activities are present, this is indeed not a trivial task. 21
This reveals a peculiarity of CSR (as it is nominally concerned with the responsibility of the corporation), in that it is often not focusing on the center of corporate responsibility: the core business and associated decisions, processes, structures, etc. 22
Note that in reality these aspects cannot be clearly distinguished from one another.
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however, unsuitable for signaling trustworthiness in and of itself, as they do not address the related core challenge of avoiding relevant inconsistencies and are easily imitable by those corporations that are not trustworthy (but who wish to appear so). 10 Concluding remarks In the first section of this essay it was stated that untrustworthy companies rarely find eager partners of cooperation. Trust and trustworthiness are thus rightfully considered objects of value, that is, assets. It follows then, that it is worthwhile to invest in these assets. As demonstrated throughout this essay, such investments are demanding. Still, there are plausible reasons to state that such investments do pay off; after all, they are indeed the basis of sustainable corporate value creation. 9
11 References Bigley, Gregory A./Pearce, Jone L. (1998): Straining for Shared Meaning in Organization Science: Problems of Trust and Distrust, in: Academy of Management Review, Vol. 23. (1998), 405‐421. Giddens, A. (2008): The Consequences of Modernity, Cambridge. Hegel, G. F. W. (2008): Outlines of the Philosophy of Right, Oxford. Homann, K. (1990): Wettbewerb und Moral, in: Jahrbuch für Christliche Sozialwissenschaften 31, 34‐56. Homann, K./Suchanek, A. (2005): Ökonomik. Eine Einführung, Tübingen. Japp, K.P. (2010): Risiko und Gefahr. Zum Problem authentischer Kommunikation, in: C. Büscher, K. P. Japp (Hrsg.): Ökologische Aufklärung, 281‐308. Lin‐Hi, N. (2009): Eine Theorie der Unternehmensverantwortung: Die Verknüpfung von Gewinnerzielung und gesellschaftlichen Interessen. Berlin. Lin‐Hi, N./A. Suchanek (2011): Corporate Social Responsibility als Integrationsherausforderung: Zum systematischen Umgang mit Konflikten zwischen Gewinn und Moral. In: Zeitschrift für Betriebswirtschaft, Vol. 81. (2011), Special Issue 1, 63‐91. Luhmann, N. (2009): Vertrauen. 4. ed., Stuttgart. Popper, K.R. (2008): The Logic of Scientific Discovery. London. Rawls, J. (2005): A Theory of Justice, Cambridge, Mass. Slovic, P. (1993): Perceived Risk, Trust, and Democracy. In: Risk Analysis, Vol. 13. (1993), 675‐682. Suchanek, A. (2007): Ökonomische Ethik, Tübingen. 10
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