Trust: Make it or Break it

Boards and CEOs need to take the lead in policy change to rebuild burned bridges, reports Tony Featherstone.

The 2018 Edelman Trust Barometer attracted headlines about the worsening crisis of trust in Australian institutions. Less considered was the divergence between trust in organisations and individuals and the implications for boards and executives.

In 20 of the 28 countries surveyed, including Australia, markets now lie in “distruster” territory. There are strong messages for the business sector in the results. Business is expected to lead — globally, seven in 10 respondents see “building trust” as the top priority for CEOs.

According to 64 per cent of respondents, CEOs should take the lead on policy change rather than waiting for governments to act. Trust in employers remains high, but 60 per cent of respondents are concerned that CEOs are driven more by greed than making a positive difference in the world.

A lift in the perceived credibility of Australian board directors and CEOs in the survey was a notable change in the barometer. Trust in directors rose from 24 to 34 per cent and from 26 to 39 per cent for CEOs. Both gains are off a low base and we continue to be below global averages.

Trust vs reputation

Unlike corporate reputation, which is based on past actions, trust is a leading indicator. Stakeholders give trusted organisations scope to take risks, experiment and enter new markets. Trusted organisations also have greater licence to make mistakes because stakeholders believe the executive team and board consistently do the right thing and own up to problems, even when inconvenient.

Trust is especially important in the digital economy. Technology is blurring lines between companies and individuals in a way that is unprecedented in human history. We allow companies to access our most intimate data, such as how we sleep (through fitness trackers) or our location (via smartphones). Without trust, data exchange breaks down. Trust, therefore, is much more than an issue of corporate social responsibility or brand. Boards that want their organisation to transition to the digital economy need to build trust. Distrusted organisations are more likely to be disrupted by technology because stakeholders may not let them move quickly enough and take risks. Extra regulation is another symptom of organisational distrust.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is one example where high-profile breaches of trust have led to a public examination of practices across an entire industry. The industry faces a wave of regulatory change, additional compliance and a handbrake on profitability, partly because of a perceived loss of community trust following industry scandals after the GFC.

The non-government organisation (NGO) sector potentially faces greater regulation through the current review of the Australian Charities and Not-for-profits Commission. The Trust Barometer revealed NGOs were “distrusted” for the first time in five years.

High-performing boards understand the value of organisational trust and the need to lift it. But it’s easier in theory than in practice for boards to change the dial on community trust. Trust challenges the concept of governance. The community expects boards to have a broader remit to safeguard the organisation’s long-term interests, balance shareholder and stakeholder needs and forgo short-term profit for the sake of sustainability.

Moreover, some directors believe shareholders do not elect them to stand on personal soapboxes and comment on social issues that might hurt the organisation. Others see the benefit of commenting beyond their organisation, although they are the minority. Improving trust through governance requires a multifaceted approach:

Board diversity is critical because it shows organisations are conscious of reducing decision-making bias and having directors who are more representative of communities (with gender, for example).

Clearer alignment between CEO pay and performance is important. Distrust of organisations stems from perceptions of excessive CEO salaries, bonuses, and termination payouts, and at times a tenuous link between CEO reward and performance.

Executive recruitment is part of the process. Boards are anecdotally placing greater weight on prospective cultural fit. They want leaders who can deliver a good return on equity while enhancing the organisation’s long-term sustainability.

Holding CEOs to account for poor behaviour is another foundation of trust. Boards are showing less tolerance of CEOs who were in charge during scandals, or have displayed inappropriate behaviour, and accountability is becoming clearer.

Having a greater say in national debate, where appropriate, is also influential. Some leaders entered the debates on marriage equality and indigenous recognition, for example, and the lift in CEO and board credibility is thought to, in part, reflect this more visible and principles-based contribution to social policy.

Despite these positives, the low level of trust in Australian institutions cannot be ignored. Banking scandals, community concerns that government is “broken”, and distrust of media and charity frauds are all contributing factors.

Industry efforts around corporate responsibility — through organisational diversity, sustainability, CEO pay and other initiatives — are not addressing this low level of national trust.

Director perspectives

Responsive boards, changing demands

Leading company director Dr Nora Scheinkestel FAICD believes the loss of public trust in organisations will become a bigger governance issue this year. “Trust is clearly a top board priority.”

Scheinkestel, chair of Macquarie Atlas Roads and a non-executive director of Telstra Corporation, OceanaGold Corporation and AusNet Services, says boards may need to rethink how they disclose information.

“We are now living in a world of radical transparency — our actions and words are guaranteed to become public these days.

“Directors need to ask: what will happen when this information becomes public, as it inevitably will? What could we have done earlier or differently? Are we trying to sweep bad news under the carpet or are we being up-front? Can we tell the difference between good and bad revenue, and are we willing to sacrifice short-term results if it is in the organisation’s long-term interests?”

Scheinkestel says boards earn trust through sustained interactions with stakeholders. “It’s about consistently meeting stakeholder expectations over a long period. People want proof points: they need to hear what boards think about an issue, see their actions on it and marry the two. Where appropriate, boards need to be more public in explaining their views and actions.”

Retail expert Launa Inman MAICD, a non-executive director of Super Retail Group and Precinct Properties New Zealand, says community expectations on corporate behaviour are rising.

“The public wants to see real consequences when there are bad behaviours by executives or organisations. I’m not saying every executive needs to be penalised, but poor behaviour cannot be brushed away like it might have been in the past. That is when trust in an organisation immediately starts to decline.”

Inman says CEO recruitment is changing to reflect community expectations on trust. “In my experience, CEOs are a lot humbler than they were six or seven years ago. More organisations are moving away from the ‘hero’ CEOs who deliver quick-profit growth to those who can oversee long-term culture change, strengthen organisational values and deliver sustainable profits.”

Executive pay is part of that process, adds Inman. “Many new CEOs now earn less than their predecessors. The public wishes to see that boards will make tough decisions if CEO performance is lacking.”