Trust crisis

The latest 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 its implications for boards and executives.

Global Findings – Stagnating trust levels, ‘fake news’ a concern

Globally, the Edelman Trust results reveal no recovery in the collapse in trust in institutions that characterised its 2017 report.

On almost every measure, Edelman’s annual trust survey results across 28 countries for government, media, NGOs and business was damning.

In 20 of the 28 countries surveyed, including Australia, markets now lie in ‘distruster’ territory. Media has become the least trusted institution for the first time in the 18-year history of the global Trust Survey. Almost 70% of global respondents in the general population are worried about fake news being used as a ‘weapon’. Global respondents also reported an increase in the level of trust in ‘experts’, compared to peers, with voices of authority regaining credibility.

There are strong messages for business in the global survey results. Business is expected to lead – globally, 7 in 10 respondents see ‘building trust’ as the biggest priority for CEOs, more important than high-quality products and services or profits and share prices.

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

Australian Insights – Low Levels of Trust, Business called to take the lead

Edelman’s data for Australia provides important context for boards and governance leaders of all organisations.

Australian institutions are now among the world’s least trusted, ranking only a few points higher than those in Russia, Edelman found.

The public does not trust business to do the right thing – at 45%, Australia’s trust in business is significantly below the global average (52%). More than half of Australian respondents believe that government is broken (global average 42%). Media and non-government organisations are distrusted, with trust in NGOs falling below 50% in Australia for the first time.

A lift in the perceived credibility of Australian board directors and CEOs in the survey was a rare bright spot. Trust in directors rose from 24% to 34% and trust in CEOs jumped from 26% to 39%. Both gains are off a low base and we continue to be below global averages.

“A divergence between trust in organisations and trust in individuals has been evident in the past three surveys,” says Edelman Australia CEO Steven Spurr. “The community is less trusting of organisations and increasingly more trusting of experts perceived to be authentic and credible.”

Spurr says the public wants business leaders to advocate and lead change on broader societal issues – not only represent the interests of organisations and shareholders.

“The community wants business to be a long-term actor that drives change on societal issues.”

Almost two thirds of survey respondents said CEOs should take the lead on change rather than wait for governments to impose it, reflecting the global trend.

“The days of CEOs and boards only focusing on their organisation’s agenda and profits are rapidly fading,” says Spurr. “The community wants companies to make a fair profit and improve society at the same time.”

Trust a complex issue for boards

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 now and in the future.

Also, trusted organisations 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. As such, trust is a pre-requisite for corporate innovation.

Trust is especially important in the digital economy. Technology is blurring lines between companies and individuals in a way 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 be more innovative and transition to the digital economy need to build trust. Distrusted organisations are likelier to be disrupted by technology because stakeholders may not let them move quickly enough and take risks. Extra regulation is another symptom of organisation distrust. Australia’s financial-services industry, for example, faces a wave of regulatory change, additional compliance and a handbrake on profitability, partly because of a perceived loss of community trust after industry scandals since the 2008-09 Global Financial Crisis.

The non-government organisation (NGO) sector potentially faces greater regulation through the current review of the Australian Charities and Not-For-Profits Commission (ACNC). NGOs were “distrusted” for the first time in five years, Edelman found.

Trust cannot fall much further in Australia,” says Spurr. “Trust in our organisations can only go so low before the people ask whether an industry is still functioning properly and if greater regulation is required from government. There’s significant regulatory risk ahead if business does not improve public trust.”

Governance community focused on trust

High-performing boards understand the value of organisation trust and the need to lift it. But it is 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.

Trust is built on consistent commitment and accountable actions over many years, yet financial markets mostly focus on short-term metrics, such as profitability.

Moreover, it can be hard for boards to engage in public debate and be seen to influence societal change. 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 multi-faceted approach:

  • Board diversity is critical because it shows the 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 and termination pay-outs, and at times a tenuous link with 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 displayed inappropriate behaviour, and accountability is becoming clearer.
  • Having greater say in national debate where appropriate is also influential. Leaders at some organisations entered 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”, distrust of media and charity frauds are all contributing factors.

Industry efforts on corporate responsibility – through organisation diversity, sustainability, CEO pay and other initiatives – are not addressing this low level of national trust to date.

Director Insights – 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. Let’s not sugar-coat it: Australian business is still not performing well on trust. There’s been some improvement in trust in our CEO and board directors, but I would not read too much into that. As leaders, we’re still ranked poorly on trust by the community and Australia is going backwards on trust, overall, according to Edleman.”

Scheinkestel, chair of Macquarie Atlas Roads and a non-executive director of Telstra Corporation, Stockland Corporation and AusNet Services, says technology is changing the notion of public trust.

“The empowerment of customers, employees and suppliers through technology is unprecedented. In the digital economy, trust is a two-way street: technology allows unprecedented access and involvement and organisations have to trust stakeholders by opening up to this level of engagement. That at in turn creates a greater degree of trust in the organisation. It’s an evolving relationship.”

Trust is central to organisation culture.

“Trust is not blind, it’s earned,” says Scheinkestel. “The Millenials generation (roughly aged 25 to 34) want to work for companies with a social purpose and whose leaders are authentic. Their trust is built by sustained interactions where people see that what is promised is delivered, what is said is also done. Trusted organisations attract and retain top talent and are better placed to change their skill sets as automation, artificial intelligence and other technologies drive rapid workforce change.”

Scheinkestel says boards may need to rethink how they disclose information, to improve trust.

“We are now living in a world of radical transparency - our actions and words are guaranteed to become public these days because technology and social media are speeding up the velocity and transparency of information. The public is a lot more skilled at spotting corporate ‘porkies’, jargon and inauthentic behaviour.”

More boards will have to change their conversation on trust, says Scheinkestel.

“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 upfront with stakeholders? 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 for their organisation through sustained interactions with stakeholders. “It’s about boards 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 on particular issues.”

Retail expert, Launa Inman, MAICD, a non-executive director of Super Retail Group and Precinct Properties NZ 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 when mistakes occur, 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 say CEO recruitment is changing, to reflect community expectations on trust.

“In my experience, CEOs these days are lot humbler than they were six or seven years ago. More organisations are moving away from the big personality or ‘hero’ CEOs who deliver quick profit growth, to those who can oversee long-term culture change, strengthen organisation values and deliver sustainable profits. They require leaders who have demonstrated a strong moral compass throughout their career.”

Executive pay is part of that process, says Inman. “Many new CEOs now earn less than their predecessor and boards are very conscious that any excess in pay is curtailed. The public wishes to see that boards are acting independently when setting CEO short- and long-term incentives and that they will make tough decisions if CEO performance is lacking.”

Inman says boards need to respond quicker when dealing with trust issues. “In the past, it was about dealing with the crisis in the first 24 hours. Now, it’s about the first 20 minutes due to social media. It’s almost impossible to contain major breaches of trust; the only real defence is to ensure the board is doing everything possible to stop the issue occurring in the first place; owns up quickly to problems; and takes clear, swift actions to resolve the issue.”

Can Australian business bridge the gap?

For all the problems, rebuilding trust is one of the great opportunities for industry, says Edelman’s Spurr.

“I truly believe business can become the most trusted sector in Australia. Our key organisations understand the importance of rebuilding trust and are taking genuine steps to improve it. It will take time, but the public’s willingness to put more trust in CEOs and directors suggests it will be people rather than organisations, that repair trust in this country.”

BOX: 2018 Edelman Trust Barometer Results - Australia

Trust in all institutions has declined for two consecutive years.

Trust in: Australia 2017 Australia 2018 Global 2018
Government 37% 35% 42%
Media 32% 31% 48%
Business 48% 45% 53%
NGOs 52% 48% 55%

To access the full results click here.

Maintaining the social licence to operate: 2018 KPMG - AICD Trust Survey

The AICD has been at the forefront of work to foster a discussion around trust in the boardroom and at the policy level in Australia. In conjunction with KPMG, the AICD will be releasing an important report to continue the conversation about how we as directors can help to restore the community’s trust.

The report is due for release next week.