Society increasingly demands that business firms act in ethical ways. Business firms, however, are offered few if any workable principles to guide their behavior. In order to actually be useful for a firm, a principle must lead a firm toward normatively desirable behavior, which is also measurable and testable.
Current principles fail to satisfy these requirements. A principle based on respecting the rights of others might – to the extent that the rights of others can be discerned in a manner clear enough to provide guidance – satisfy the objective of leading a firm to socially desirable behavior, but presents real difficulties in measurement. Similarly, the shibboleth of maximizing shareholder wealth might – to the extent that the appropriate shareholders can be identified and proxies for value be found – be measurable but it patently leads firms to engage in conduct not considered socially desirable.
In response to the need for real guidance, we propose a simple ethical principle: a basic duty of every business firm is to earn stakeholder trust.
Every business firm has stakeholders. A stakeholder is a party with a material interest in a business firm, or that may be materially affected by the actions of a firm. Those stakeholders will vary from firm to firm, and identifying stakeholders is instructive in understanding the societal context of a particular firm. In business firms that take a corporate form, shareholders will be one group of stakeholders, but not the only group.
Trust takes many forms, but in general consists of an expectation that a business will behave as expected/desired under conditions of risk. As a common example, we “trust” a business firm to keep personal data confidential, knowing that entrusting another with personal data does bear risk. If that firm acts in ways other than what we expect/desire, then the misuse of our personal data can inflict great damage. Trust is closely related to reputation – a good reputation is often the product of trustworthy behavior. People trust people or organizations that evidence good character as well as strong competency.
Trust as a Proxy for Normatively Desirable Behavior
The specific actions that will create trust among stakeholders of a specific firm in a specific culture or region will of course differ. The general actions and factors that create trust can, however, be identified. Research on both employee and customer trust suggests some common factors, including:
Reliability, dependability, consistency, promise keeping
Fairness, justice, accountability¬
Competence, capability: availability of required skills, resources, authority
Benevolence, shared values, empathy: a genuine interest in partner’s welfare and finding mutual benefit
Communication, transparency: timely, comprehensive, comprehensible information; listening as well as speaking
Responsiveness: timely, constructive reactions to issues
These behaviors align closely with the normative expectations of society. Society thinks that business firms should be honest, that business firms should be fair, that business firms should be respectful. In other words, firms earn trust by behaving in ways that society expects and desires. Trust, therefore, can be seen as a proxy for ethical behavior.
Trust Can Be Measured
Measuring ethical behavior presents real challenges for business firms. No real scale exists for measuring the honesty of a firm, or the extent to which it is fair or respectful. If a business firm is told only to be honest, fair and respectful it has no means of ascertaining its success at doing so. Most ethical principles, therefore fail to guide business firms toward behavior that is testable and measurable.
Trust, on the other hand, can be and is measured. Indeed, entire industries are dedicated to measuring trust and its close correlate: reputation. Surveys, questionnaires, focus groups, and online fora are only some of the ways in which this is done. Large firms often have offices dedicated to understanding stakeholders; these offices could adapt to the measurement of stakeholder trust. Consulting firms and survey firms, such as Gallup or Nielsen or Anderson Analytics, find and measure the attitudes of stakeholders. Small firms also have means to measure stakeholder trust; dozens of online survey firms, such as SurveyMonkey or Qualtronics or QuestionPro, offer free or low cost templates for surveying stakeholders.
Stakeholder Trust Benefits a Firm
Business firms should act in ethically accepted ways regardless of whether or not there is a financial reward for doing so. It is no secret that reputation affects the market value of publicly traded corporations. Reputation Dividend, a consulting firm that helps traded firms quantify the value of their reputation, releases annual reports on the overall value of reputation. In 2015, reputation created 36 percent of the value of firms included in the London Stock Exchange’s FTSE and 33 percent of the value of firms included in the Sao Paulo Exchange’s Bovespa Index. In the United States, during the same period, reputational problems had destroyed US$ 325 billion of value in the New York Stock Exchange’s S&P 500.
All business firms, whether publicly traded or otherwise, benefit from the creation of trust. A study by the World Economic Forum found five general benefits engendered through trust creation:
- Better business terms, processes and conditions
- Enhanced innovation and entrepreneurship, which contributes to competiveness
- More loyal, productive and engaged employee relationships
- Stronger external relationships up and down the value chain
- Greater resilience to withstand shocks and crises more effectively.
Trust contributes to the bottom line.
Trust Benefits Society
Trust not only contributes to the profitability of a business firm, it also enhances the economic viability of society in general. Countries in which people have higher levels of trust in other people and in institutions and in government tend to have greater economic prosperity than those with lower rates of trust. This sort of trust, called generalized trust, decreases costs, increases the number and types of relationships people will enter into, and contributes to cooperation, collaboration, and innovation. Indeed, Nobel Laureate Kenneth Arrow suggested that “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
We suggest all business firms have a duty to create stakeholder trust. This is neither an empty duty nor a thankless duty. Business firms and society in general will benefit from satisfaction of this duty.
Patricia E. Dowden is the President of the Center for Business Ethics and Corporate Governance. Philip M. Nichols is an Associate Professor of Legal Studies and Business Ethics at The Wharton School of the University of Pennsylvania.
[clickToTweet tweet=”Creating Stakeholder Trust as a Universal Principle for Business Behavior @SCCE” quote=”Creating Stakeholder Trust as a Universal Principle for Business Behavior” theme=”style3″]