ON DIRECTORSHIP is by PETER TUNJIC.

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 a leading voice in the re-discovery of what corporations are and why they exist.

Earning the Right to Trust

The opposite of any business problem is seldom the best solution.  It's more likely to become the next problem.

Risk management is not the best solution to stupid (unjustifiable risk).   Independence is not the best solution to stupid (insider avarice).  And trust is not the best solution to stupid (misplaced trust).  They are all examples of false dilemmas.

But, this seems to be the way the Corporate Governance industry works.

Take the prescription of trust to fix the financial industry.  As one popular commentator puts it:

"It is time for financial executives to think about the changes they can make to earn back people's trust and demonstrate that they are trustworthy and can bring back stability" 

Though said in respect of the Libor rigging scandal, the notion that the ills of capitalism fall on the shoulders of Corporations, their Boards and executives who breached trust is unquestioned.

But trust will not be the solution until it ceases to be part of the problem.

Contrary to popular opinion the global financial system was not based on banks and others saying "trust me".  No, it was customers saying to themselves "we trust you".

Unwilling or unable to understand what institutional investors were buying many still bought on trust.  Relying on hope, rating agencies and that the bank and their board would do the hard work of capitalism for them by correctly pricing the buyers risked.  Sure.

Make no mistake, the global financial crisis was a failure of the buy side of capitalism.  There is nothing remarkable about sellers not understanding what they are selling or, in the case of Libor, acting unlawfully.  Yes, it's immoral and wrong but it unremarkable in the history of capitalism (but for the size).  What is remarkable is buyers not understanding what they just bought and the trillion dollar price tag.  It's the worst form of uncommercial capitalism.  Choosing to trust but not taking the responsibility or mitigating the risk that comes with it.

Misplaced trust, not mistrust, is at the core of the problems that afflict capitalism but it seems no one's solution.

Perhaps the better way to bring stability back to the financial services sector is for the Corporations who buy their products and services to earn the right to trust again. We forget that investors and shareholders who have suffered the most are Corporations too.  It was as much their boards and executives that failed to understand what their managers were doing, needed to be doing and were too afraid to ask the hard questions.

What is needed is a return to good judgement on the sell side and the buy side.  That starts with understanding how to exchange the best possible promises. Commercial capitalism is based more on promises than trust.  After all, no one consents to being trusted and they may not even know what they are trusted to do or not do.  Trust is based first and foremost on good judgement.  Without good judgement and a shared understanding of promises there is only hope and fear. 

To be clear, trust will return to the financial system when Corporations earn the right to trust again by exercising good judgement.  Until then, the Corporation'sStrength (S), Resilience (R) and Endurance (E) will depend on rebuilding confidence through a return to commercialism and the basics of good honest trade.

Remember, according to Directorship SRE is the objective of the Corporation and profit the outcome.  A corporation can no more rely on trust to assure SRE as it can greed or exploitation of its Trading Partners for shareholder value.  Both are at best commercially unjustifiable and at worst stupid.  Corporations will earn the right to trust again when they return to the principles of sound commerce and trade and good judgement.

But before you rush to defend trust as the foundations of capitalism, remember that though the opposite of distrust is trust, the solution to distrust is to earn the confidence of another by keeping the best possible promises. 

 

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