Corporate scandals are often blamed on a couple of ‘bad apples’ in the ranks of management, but they are usually indicative of a larger fault in the system. Research shows how to avoid them by designing organisations with trust embedded in the foundations.
The revelations coming out of the banking and financial services Royal Commission have clearly damaged the public’s faith in financial institutions and trust in business ethics.
Yet, these tales of corporate misconduct have a familiar ring. The banking scandals are just the latest in a long list of trust violations in recent years – from the financial crisis to Cricket Australia and cases such as Volkswagen, the same themes often come up time and time again. Even tough action by regulators fails to prevent reoccurring misconduct.
So why do failures of trust continue to occur? And how can businesses build and sustain trust? Professor Nicole Gillespie, a management expert at The University of Queensland Business School, says that trust violations are almost always due to a failure in the organisation, and the problem is often common knowledge within the company before the scandal occurs.
“While trust violations are often blamed on rogue employees, our research shows that usually the real problem lies with faults in the system,” says Professor Gillespie, who spent 12 years studying trust in organisations as part of an international research team.
“Trust violations are predictable in organisations that allow dysfunction, conflicting or incongruent elements to take root. Often it is due to a company strategy or culture that puts the interests of one stakeholder group ahead of another.
“Of course it is not uncommon for organisations to prioritise some stakeholders, but in the case of trust violation it goes far beyond this – it is serving the favoured group at the expense of, and even causing harm to, the others. In the age of social media and 24-hour news, a breach of trust in one group can rapidly undermine the organisation’s trustworthiness with the others,” says Nicole.
Having checks and compliance procedures are not enough by themselves to prevent a violation – the researchers found that many companies involved in scandals had safeguards in place. Such formal procedures can easily be undermined by an informal culture that contradicts them.
The rules say one thing, but in practice, employees may find they are expected to ignore them to be able do their job or meet targets.
Goldman Sachs is one example - in the wake of the 2008 financial crisis, a US Senate committee found that its values of client focus and integrity were overshadowed by a less formal culture that prioritised getting deals done with less than full disclosure.
Where systemic faults are not addressed, it can lead to repeated violations. BP’s Texas refinery explosion in 2005 was followed by the Gulf of Mexico oil spill five years later, while at News Corp, an employee was jailed for phone hacking in 2007, yet it failed to prevent the phone-hacking scandal of 2011.
External regulation is not the complete answer either, says Professor Gillespie.
“Regulators lack the resources to police the system and their presence can lull stakeholders into a false sense of security, leading to complacency.
The researchers found that to build and sustain trust, organisations need the right infrastructure in place – strategy, leadership, culture and systems – which in turn leads to the right processes to deliver their products and services. They identified six key areas:
Organisations need a clear mission which takes account of all stakeholder interests. A focus on short-term profit or aggressive global expansion can upset the balance. Ask yourself, does your strategy benefit the ‘triple bottom line’ of people, planet and profit? Are strategic trade-offs seen to be made in a fair and transparent way?
Leaders should embody company values and expect their team to do the same. Does management communicate openly and demonstrate concern for employees? And do they deliver on their commitments?
Strong shared beliefs and norms should uphold company values and deter people from deviating. A culture of risk-taking or self-interest, an aggressive sales-driven approach and organisational silos are all warning signs. Are values so ingrained that people would support the company’s mission before their own interest or their group?
The structure must provide clear roles and responsibilities and align interests across groups. Is there adequate monitoring and governance to ensure values are upheld? Does the structure encourage open communication with stakeholders?
From planning and budgeting to reporting, HR and compliance, systems should reinforce behaviours that encourage trust. Professor Gillespie stresses that it is important to have a way for people to report a breach of ethics, given that insiders are often aware of an issue before a scandal occurs. “The problem is either not reported or, even more commonly, not listened to and acted upon when raised – it is a case of ‘shoot the messenger’,” she says.
6. Products and services
From development to production and delivery, processes should ensure that you meet stakeholder needs, uphold company values and adhere to legislation. Is the system fair to both customers and suppliers? Are sustainability and safety a priority? How do you monitor the supply chain?
The research suggests that the key differentiator between companies that violate trust and those that sustain it is integrity and consistency within and across the organisation.
Professor Gillespie says failures occur when elements become misaligned.
“Organisations which can build trustworthiness signals into their infrastructure and processes over time earn trustworthy reputations. Having the right organisational design enables them to meet stakeholders’ expectations reliably and minimises the chance that a trust failure will occur.”