Ask More of Business

Asking More Commentary: Perspectives from Mendoza College of Business

Commentary Post - James S. O'Rourke

Trust is ephemeral

August 1, 2009

In view of recent untrustworthy behavior on the part of businesses, ranging from the Enron scandal of 2001 to the more recent Madoff and Stanford Financial schemes, people have more reasons than ever to be distrustful of businesses and the people who run them.  The authors of a new special report about trust by the Arthur W. Page Society and the Business Roundtable Institute for Corporate Ethics, however, would have us believe that the erosion of trust is a widespread and broad-ranging phenomenon that extends well beyond the private sector.

The comprehensive and carefully written study, “The Dynamics of Public Trust in Business: Emerging Opportunities for Leaders,” says in sum that trust (or its absence) affects everything in our economy from employee performance to customer perceptions, to the willingness of people to loan money to one another.

Citing 2008 survey data, the study authors note that “only 17 percent of Americans trust government to do the right thing most or all of the time,” and that 52 percent of Americans agreed with the statement that “quite a few government officials are crooked.”  What’s wrong with those views?  First, they’re the product of survey samples that ask narrowly framed questions regarding topics that are prominent in the news media.  They’re subject to change without notice and they come without a price.  That is to say, it costs the respondent nothing to express his or her opinion.

The fact is, most government officials are not crooked, and most governments (from federal to municipal) do the right thing most of the time.  To assert that the public simply doesn’t trust anyone these days is an overstatement that ignores a recent, fairly important trend: trust has shifted from business to government.  For a variety of reasons, people now believe that government at all levels ought to be paying closer attention to the banking profession, to the stock market, to the food supply, to the automobile industry and more.

In the near term, that may prompt fewer risky loans and safer food, but it may also create a regulatory and cost structure that makes it more difficult for businesses to compete on an even footing in a global economy.

Ronald Reagan famously said in the 1980s, “Government isn’t the solution to the problem.   Government is the problem.”  The three decades that followed were characterized by unfettered, de-regulated, and unimpeded competitors in the marketplace.  Absent regulation, many of them took the opportunity to re-package sub-prime mortgage loans, credit default swaps, and other little-understood instruments, take the profit and shift the risk to someone else.  When the loans went sour, bankers turned to the federal treasury for help.  Is it any wonder the public (and the taxpayer) is now distrustful of people who claim the marketplace is self-regulating?

The most significant event in recent years was the November 2008 election, in which the American voter said, “Enough.”  That display of political behavior is clear evidence that those who wanted less government, less regulation, and fewer social programs have changed their minds.  Even now, five months into the Obama presidency and 10 months into a dismal economic spiral, confidence and trust in the new administration are in the low- to mid-60s.  Compare that with numbers in the mid-20s for the previous administration.

“Trust is an important lubricant of a social system,” writes the Nobel Laureate economist Kenneth Arrow.  “It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance upon other people’s word.”  And the time, effort, and investment required to regain trust, once it’s lost, are substantial.