Corporate Trust: a Precious Commodity

Trust improves reputation

In reading a recent article by Max Ferrandino, in a Boston University student newspaper, I was reminded that corporate trust is disappearing rapidly.   Moreover, many entities don’t realize how precious a commodity trust is.  Once stakeholders lose it, the road to redemption is very long.  It may take several years or decades to regain.

Max reminds his readers of the British Petroleum (BP) tragedy in the Gulf of Mexico, involving the Deepwater Horizon.  Furthermore, he questions the audacity of BP’s efforts to lower the carbon footprint of every day citizens and the lax approach of investors, including Boston University, in holding the oil and gas industry to account.

Examples of lost trust

The Deepwater Horizon incident is one of several corporate mishaps over the past several years, which should have investors asking, “how could the Board and management allow it to happen?”.

For example, there was the emissions scandal at Volkswagen, bribery charges at Goldman Sachs, accusations of fraud at the electric truck-maker Nicola, and the blowing up of the 46,000-year-old indigenous rock shelters at Juukan Gorge in Western Australia by Rio Tinto.

On a smaller scale, there was the leaked BHP document of 2019 where management lowered the bonus of employees because the annual perception survey of supervisors, as one of several criteria, had not improved.  Employees, rightly so, were a tad bit angry at the thought that they were being penalized, even for a portion of their bonus, due to the bad perception of their boss.

The larger-scale mishaps at BHP are discussed here.

Role of investors and other stakeholders

Shareholders are very active in voicing their views when things go wrong or when they believe an organization is not being managed in accordance with appropriate ethical standards.  Therefore, the purpose of corporations has significantly changed over the past decade, where value is measured by more than just the share price.

When Rio destroyed the aboriginal rock shelters in Western Australia, shareholders and investors demanded accountability on the part of the executive team.   And, while the company began an internal investigation, it was perceived to be dragging its feet, which only intensified investor anger. 

In early September 2020, the CEO of Rio, along with two other senior executives, resigned.  Their departure was the result of significant pressure by investors on the Board.

The new CEO of Rio, Jacob Stausholm, has said that “restoring trust with indigenous groups and other stakeholders was a key priority for the company”.

As highlighted above, restoring trust can take some time.  Volkswagen has been finding this out the hard way, with a recent Fortune article stating that it’s 2015 emissions scandal is still ongoing and serves as a “sobering lesson” of the “destructive power of poor leadership and a diseased corporate culture”.

Investors have sued for damages, with a German court ordering Volkswagen’s largest shareholder to pay approximately $54 million to claimants in 2018.  However, the total financial impact on Volkswagen is still to be realized and is likely to be in the billions of dollars.

Both the Rio and Volkswagen examples demonstrate that investors have the ability to hold Boards and management teams responsible, and they are not afraid to flex their muscle.

What destroys trust?

There are numerous reasons why stakeholders lose trust, but certainly the inability to foresee the risk and “read the room” are two activities that destroy an organization’s reputation.

One question that most reasonable people will ask is: what led up to the incident and what risk assessment was conducted before commencing the activity?  Also, while the activity may have been legal, what proportion of risk was assigned to potential reputational damage?

It’s crucial for corporations, especially those in a high-risk industry, to realize that stakeholders expect a vigorous risk assessment to be conducted before engaging in an activity that is likely to harm employees and the community.  Failing to do this, and then mounting a “vigorous defense” after an incident and damage have occurred, is a surefire way to destroy trust.

Another way to ruin a reputation is by failing to listen to your stakeholders.   It is certainly possible that a corporation will not be able to address all the concerns of their stakeholders.  Regardless, one has to listen carefully and determine if the concern can be addressed.  If it can’t, and the entity has exhausted all options, then the company must explain its position respectfully to the stakeholder.

Max Ferrandino’s request to Boston University seems like a legitimate concern of a stakeholder.  He has asked the school to explain why they have not withdrawn their investment in companies that sell fossil fuels, given that several organizations around the world have done so, like the Church of England.

The school should be in position to explain what its plan is to reduce or eliminate its investment in fossil fuel, assuming the majority of stakeholders agree.  And, stating that the portfolio will be evaluated every five years is not a plan.