Why it’s time to start the trust fightback

WORKING TOGETHER

To rebuild trust, there needs to be a coordinated effort, involving all elements of business

Why it’s time to start the

trust fightback

“Once bitten by a snake,” the Dalai Lama says, “you feel suspicious when you see a piece of rope.” To put it in a less mystical way: trust is easily lost, and very hard to rebuild. Arguably, we are currently experiencing a global breakdown in trust.

A comprehensive annual survey, the 2017 Edelman Trust Barometer, displays this dearth of faith in business, politics and the media.1 The British public’s trust in the government is at just 26 per cent; for business the figure is 33 per cent, while the media only manages 24 per cent.

The historic low levels of respect for traditional media sources have given rise to a widespread belief that much of the news is fake, a belief that has been exploited and exacerbated by populist politicians in many countries. This is a striking example of what can happen when the public stops believing in the institutions around them.

UK chief executives are experiencing a reputational crisis, too, with just 28 per cent of Britons saying they trust business leaders

Business needs to rebuild public confidence by demonstrating it deserves it

James Jarvis

Corporate Governance Analyst at the Institute of Directors

– 12 per cent lower than during the same period last year, and lower compared than the 37 per cent across the rest of the world.

This decline in trust comes in part from high-profile instances of corporate chicanery, such as the Volkswagen emissions scandal, and in part the slow recovery from the 2008 recession, which has seen poor growth for many people’s wages. Issues, such as public distaste for high executive pay, tax avoidance, the banking crisis and corporate governance failures, including Sports Direct and BHS, all feed into a general mistrust in business.

This has a detrimental effect on the majority of businesses that operate in an ethical manner with mind to the society and community they inhabit. Just because an individual business may behave well, it doesn’t mean they can ignore the wider trend.

Lack of faith

Weak trust matters for business because it can demotivate workforces, anger customers and, in some cases, prompt government intervention. Taken together with the lack of faith in government, it also suggests dissatisfaction with the way the economy is working for sections of society – a central part of Jeremy Corbyn’s pitch to voters at the election.

Just as business is now truly global, the response to the trust challenge also needs to be viewed as an international project. The Institute of Directors (IoD) Director General, Stephen Martin, recently chaired a panel on rebuilding trust at the recent European Conference on Corporate Governance in Malta.2 Panelists and audience alike shared in the concern that recent patterns of mistrust throw up and there was a general consensus that excessive executive pay and public perception of the issue were among the primary causes.

As to the steps business could take to address this issue, there was relative alignment between the conclusions of the panel and those found in Edelman’s research.

Unsurprisingly, these focus on business conducting itself in an ethical manner, grounded in a sense of responsibility to a wide set of stakeholders. Businesses and policy makers alike need to wake up to this reality and realise the inherent danger of the society they serve losing faith in their ability to provide solutions and play fair. The so-called ‘rise of populism’ can in part be attributed to an electorate seeking answers in new places.

For business, this constituency represents not just potential customers but future employees, investors and suppliers. Data has shown that the next generation of employees place company values and societal contribution above personal remuneration. As highlighted in research by Global Tolerance, of respondents born between 1981 and 1996, 62 per cent wanted to work for an organisation that makes a positive impact, half prefer purposeful work to a high salary and 53 per cent would work harder if they were making a difference to others.

Investors are also becoming increasingly interested in a company’s impact on society and the environment. Earlier this year, industry giant Legal & General wrote to 84 global companies, warning that they would vote against chairs in businesses that failed to prepare for a move to a greener economy.3 This should all act as a warning for businesses that lag behind in these areas. We are also seeing creative approaches to bringing about more ethical business practice in the investment industry. The People’s Trust is one example of individuals taking up the cause themselves and coming at the issue from a market-side approach.

During the recent election campaign, the IoD published specific manifesto proposals on corporate governance, intending to contribute to the effort to repair some of the lost faith in business. The first suggestion was aimed at increasing shareholder power over executive pay. We suggested that binding votes on pay policies, currently held every three years and requiring a 50 per cent majority to pass, be amended so that where there is a large minority (30 per cent) voting against the policy, the company should be required to revise the policy before putting it to a second vote (this time requiring the original 50 per cent).

Enfranchising shareholders

We believe this would go some way to putting power on pay back with the ultimate owners of an organisation while still allowing companies themselves to be the architects of the package. Moreover, this could have a secondary benefit of making shareholders feel more enfranchised on the issue, hopefully leading to a reduction in the number of abstentions and non-votes. This is the start of a solution to a very real problem (public perception of executive pay) and one that 68 per cent of IoD members recently said was the primary threat to trust in business.

Public anger over executive pay is palpable essential that they are encouraged to keep their and can be tied to two key issues with the knowledge and skills topped up throughout current framework: firstly they do not perceive their career. To ensure that boards are meeting it as being tied to overall performance and, their requirements, companies need to be secondly, it is seen as being out of line with encouraged to conduct regular and thorough the remuneration of the rest of the workforce. board evaluation. Already in 2017 we have seen The IoD does not advocate placing pay caps examples of leaders at some of the country’s on executive pay, which we believe would largest companies not being fully aware of have a distorting effect on the market and the regulatory requirements and duties. would affect the ability of our companies to Ignorance should not be an excuse and we attract and retain the best talent. That said, are seeing shareholders reject this as a reason. we do believe that, through out proposal, With the advent of the ‘fourth industrial greater power can be given to shareholders revolution’ and the rise in the digital economy, to ensure that pay is scrutinised and tied to the need for people to be able to trust company performance. The fact that executive business, especially when it comes to personal pay has trebled since the dotcom bubble, data, is only going to increase. Pair this with far outstripping rises in the FTSE, shows that there are Weak trust matters the increased presence of the private sector in the delivery grounds for taking action. for business because of public services and the case In our second manifesto proposal, we focussed of the it can demotivate for ethical and trustworthy businesses becomes all the UK’s largest private companies. workforces, anger more pressing. Companies While the legal requirements on directors on unlisted boards customers and, that get ahead on the issue will reap the benefits. are the same as their public in some cases, To do so will need a counterparts, they do not fall under the same reporting requirements. This has led to prompt government intervention. Taken coordinated effort involving all elements of business: companies and investors, a ‘black box’ situation, where together with regulators and industry the governance arrangements of these companies are often the lack of faith bodies. There is a real opportunity for these unknown until a problem in government, elements to come together occurs. This matters as, while they may not have shareholders it also suggests and bring about the required changes. The FRC is in the listed sense, they do have dissatisfaction with reviewing both its Corporate a diverse and large number of stakeholders who rely on the company’s long-term the way the economy is working for Governance Code and its Stewardship Code. As part of this there will be sustainability. One only has to sections of society a consultative period, look at the example of BHS to which we would urge see the widespread impact that failure in large anyone with ‘skin in the game’ to contribute private companies can have. to. The IoD will certainly be doing so. We would urge those who fall under the Establishing a governance code auspices of either of the codes to embrace In response to this issue, the IoD has any changes in spirit as well as by letter. proposed that a corporate governance code Looking at the interventionist suggestions in for unlisted companies is established, the three main parties’ manifestos leading monitored and enforced by the Financial into the recent election, it’s clear that business Reporting Council, much like the code for is not the political flavour of the month. listed companies. While such a framework It is time for business leaders to show initiative would not be appropriate for all companies, and will. They need to prove, through action, many being far too small, we would suggest that profit, shareholder return and ethical an initial threshold of 2,000 employees. This business conduct are not mutually exclusive. threshold may be lowered over time as the The suggestions outlined in the IoD’s manifesto, code gains credibility and becomes something alongside the UK’s existing and world-renowned that private companies actively want to governance framework, will contribute to this comply with for reputational reasons. The goal. It should worry us all if business is seen, IoD produced a set of guidelines for unlisted to return to the Dalai Lama, as a risk to society, companies in 2010 and this could provide rather than an essential part of it, generating the framework for any code going forward.4 jobs and prosperity. After an election where

Our final proposal was to attach greater little positive was said about commerce, it’s importance to the issue of director training and vital that the trust fightback starts now. the board evaluation processes. The need for 1 http://www.edelman.com/trust2017/ 2 https://www. directors to keep up to date with the regulatory youtube.com/watch?v=l9QxRzBX4F8 3 https://www. environment, the new challenges and opportunities for business, and their duties to ft.com/content/05b5dc92-1884-11e7-9c35-0dd2cb31823a 4 https://www.iod.com/Portals/0/PDFs/Campaigns and Reports/Corporate Governance/Governance code for stakeholders is of utmost importance. It is unlisted companies.pdf?ver=2016-11-29-134715-607