Trust me – I’m a professional…

As businesspeople, a critical question in assessing whether or not to invest corporate or personal human capital is: what is the risk in the ‘exchange contract’ with others that this entails? Professor Stephen J. Perkins provides a thought provoking perspective and discusses what questions people can ask themselves to arrive at an answer to this question mindful of their own circumstances.

August 2019
Professor Stephen J. Perkins

Trust me – I’m a professional…

As businesspeople, a critical question in assessing whether or not to invest corporate or personal human capital is: what is the risk in the ‘exchange contract’ with others that this entails? Professor Stephen J. Perkins provides a thought provoking perspective and discusses what questions people can ask themselves to arrive at an answer to this question mindful of their own circumstances.

August 2019
Professor Stephen J. Perkins

Recent commentary by the Economist newspaper cites the case of $100bn+ turnover Chinese telecommunications company Huawei, saying that in the absence of a lifelong commitment of trust between supplier and client, selling what it calls its ‘sensitive tech’ will be hard.

Some 20 years ago Cambridge academic, Christel Lane, pointed out that given the complexity and uncertainties of the global business environment, inter-organisational and interpersonal trust can be viewed as a precondition for superior performance and competitive business success. Especially given the rise of knowledge-intensive products and more information-based production models. Which, in turn, require more sharing of often sensitive information. Professor Lane surfaces the dilemma for decision-makers – competitive intensification across transnational boundaries makes it inherently risky to invest on the basis of trust.

A bit of theory from the social sciences helps specify the issue under consideration. It has been pointed out that the only reason why people need to trust is that they are engaged in social relationships. An assumption is that people are at least to some degree interdependent. Trust can be characterised as the situation where one individual puts themselves at risk by accepting the authority over their actions by another.

Engaging in economic exchange relations as illustrated in the previous paragraph means that consequences arise from the degree to which prior action or co-operation of the ‘trustee’ (i.e. the other party to the exchange) enables or restricts completion of what the ‘trustor’ sets out to achieve when investing in the exchange.

There is a risk of opportunistic behaviour on the trustee’s part that may be detrimental to the interests of their business exchange partner, whose decision to trust may be affected by uncertainty about how the other party will behave when the exchange contract is put into practice. In validating trust, the information problem may be compounded by a time delay between expected and actual outcomes. Pre-committing to trust another may open up a vulnerability that the other may take advantage of.

Despite promises a seller of goods or services may make the onus is on the buyer to discover whether or not to commit. ‘Let the buyer beware’, as the phrase goes. Not just in goods or services: if someone decides to trust the offer of an employment contract, they are trusting that the ‘letter’ will be enacted by the employer in the spirit expected by the recruit.

Additional complexity may be factored-in from the wider network of relationships surrounding the seller and buyer’s exchange. In the Huawei case, questions have arisen as to the influence of the Chinese government. Influence that might have strategic implications within Huawei’s telecommunications clients’ host nations. Can they trust Huawei’s assurances that theirs is an arms-length relationship with the state restricting access to client data or indeed the operation of the service itself, when the state in question is seen as a competitor both in trade and national security? In an employment setting, will the person to whom the manager doing the recruitment is accountable reinforce or seek to reinterpret the enacted nature of the employment offer?

The moral dimension of trust due diligence

Such considerations emphasise the role of due diligence intended to build confidence in the wider institutional context: for example, confidence that contracts are legally enforceable, with all that that entails. And also, that there is shared reciprocal morality between the parties to the exchange.

Turning to a different setting, a report published in July 2019 found a ‘deficit of trust’ in the way the UK military is handling its relations with its members. The MoD’s website contains a report stating that “A review into inappropriate behaviour in the armed forces, conducted by Air Marshal Michael Wigston … was commissioned in April following a number of allegations of inappropriate behaviour … designed to analyse the culture of the armed forces and make recommendations on further action to improve behaviours. The report found that while good behaviour was the norm and service personnel could for the large part be trusted to behave appropriately, there is still an unacceptable level of inappropriate behaviour in the military.”

Entering an open-ended exchange relationship involves deciding how much a contract can be relied on, or trusted, compared with a series of one-off deals. This applies at the business investment level as much as at the employment relationship (human capital) level. In either case, a contract may be more or less instrumental, but implicitly the parties ask themselves whether they can rely on each other in relational not just explicitly instrumental terms – what assumptions can be made about reciprocal morality to do right by each other?

Making due diligence enquiries before making a commitment to invest in a business as a going concern is an attempt to assess that risk. And the same applies before putting human capital at risk by entering into an employment contract, given its indeterminate character. Why indeterminate? Because, in the case of an employment contract, this involves what over half a century ago a labour economist (Hilde Berhend) termed an ‘effort bargain’:

something for something; a willingness to accept authority and to give performance in return for reward. But without having absolute precision on what will occur in practice.

A manager or employer needs to develop an answer on what they need to do to offer confidence to the other party that they can be trusted as a ‘going concern’ within tolerable levels of risk. Factoring in the risk appetite of the parties, they need to answer the ‘what’s in it for me?’ question. Organisations need to persuade stakeholders they have the social capital (skilled leaders, good employment relations) to do so with credibility as part of going concern commitment. Markets will decide whether or not they succeed in doing so.


Pragmatism and the technological approach to ‘managing’ trust

What on the face of it is an economic matter seems to have taken a political turn. Reverting to the Economist’s Hauwei analysis, however, if unconditional trust is simply incompatible with business conditions, a pragmatic (risk-management) approach is worth considering. Instead of being a political question, trust management may be treated as a technological one. One suggestion is to extend ’ABC’ cyber security techniques to business exchange relations: ’Assume nothing, Believe nobody, and Check everything’. A product or other ‘business offer’ should be neither trusted nor distrusted by reference solely to a single factor (e.g. country of origin in Hauwei’s case). Relying on common standards and high levels of transparency so that those involved in the exchange relationship can do their own due diligence assessment against their own risk appetite may offer a way of navigating the trust dilemma, balancing the desire to enter an exchange relationship with perceived limits to confidence that each party will honour the terms of the contract as expected.

We might think of it as a professionalisation of the process of navigating around the trust dilemma in business exchanges. In its classical definition those drawing on professional services can be confident that common standards are at the core of professional integrity, and that behaviour is regularly and transparently assessed against these standards on which the professional’s license to operate depends. Critiques have pointed to flaws in this classic definition – where evidence of professions becoming self-serving has surfaced, for example. Regulation of the professions by disinterested institutions becomes an important corrective here.

The Economist is scornful of Huawei’s efforts to persuade clients to accept written assurances of an arms-length relationship to the Chinese government, where the latter is not viewed as a disinterested ‘regulator’. Low or non-existent trust may have to be designed-in to keep business offerings credible. In other words, the offer needs to be transparently packaged against common international standards so that clients and users can readily do their own checks within the contexts of their own risk management systems. Clients thus do not need to put their trust in the supplier – this is not assumed nor claims taken at face value, instead the client must dynamically check the position within their own risk-tolerance range and then own the consequences of the judgements they arrive at.

These principles may apply whether the business exchange is for a product or service offer, or an offer of an employment contract. It’s not perfect, but at least both parties to the exchange relationship get to decide what to put into the common ground between them and how to act on it.

Demography and trust

Finally, organisational leaders may wish to reflect on the interplay of trust and generational shift. In a new book, ‘Extra Time: 10 Lessons for an Ageing World (2019)’, Camilla Cavendish points out that by 2020, and for the first time in history, there will be more people on the planet over 65 than under five. More grandparents than children. One possible signal to addressing this question comes in research undertaken among a sample of companies in the Far East to establish influences on the propensity of executives to pursue corporate social responsibility.

Using evidence on business performance outcomes, younger managers appear to prioritise short-term profit maximisation to deliver positive signals to achieve market validation of their expertise. More mature mangers appear to prioritise career and financial security and thus avoid more risky short-term business interventions. While the latter may thus inspire more trust as a going concern to invest in for the longer term, reduced risk tolerance may stymie business competitiveness that is sustainable given market volatility.

Balance may be the sensible approach for investors to adopt ensuring boards are not dominated by a majority of either newbies or oldies – beating a path to trust through compromise.

← Back