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Corporate Reputation Review Volume 13 Number 2

www.palgrave-journals.com/crr/

ABSTRACT While past research has examined organizational trust with key stakeholders, including employees, little research has examined how organizations can repair trust with the general public. Public trust in an organization is critical to ensuring legitimacy and fi rm survival. However, the type of violation of public trust can impact the repair strategies fi rms may choose to enact. This paper examines the construct of public trust, discusses the important aspects of trust violation and devel- ops a framework for organizations to repair trust with the public. We argue that communication and strategic institutional reforms are necessary to repair trust, but are more important following competence, rather than integrity violations. Corporate Reputation Review (2010) 13, 124 – 141. doi: 10.1057/crr.2010.12

KEYWORDS: cooperation ; public trust ; reputation

Public trust, which can be readily defi ned as the degree to which external stakehold- ers, such as the public, hold a collective trust orientation toward an organization, is a relatively understudied area. The public ’ s trust orientation toward an organization is important for several reasons. First, organi- zations tend to be poor at knowing how to repair trust ( Schwartz and Gibb, 1999 ). As such, understanding how to repair trust can be a critical resource management can apply in order to limit damage caused by organizational failures ( Lewicki and Bunker,

1996 ). Failure to appropriately acknowledge and respond to trust violations can only fur- ther harm the organization ’ s reputation and legitimacy in the marketplace ( Bradford and Garrett, 1995 ). Second, the public ’ s failure to trust an organization may harm the organiza- tion ’ s reputation, or the estimation in which a particular company is held by various con- stituents ( Fombrun, 1996 ). As an important quality ascribed to an organization ( Weigelt and Camerer, 1988 ), reputation provides legitimacy and can be utilized as a resource to help achieve competitive advantage ( Fombrun and Shanley, 1990 ; Barney, 1991 ). Given the public ’ s role as a key stakeholder, the fi rm ’ s ability to survive may be depend- ent on the public ’ s ability to trust the fi rm ’ s actions and the goods or services it produces. Third, studying public trust follows research done on collective trust dimensions; most studies examining inter- and intra-organi- zational trust focus on its effects on organi- zational outcomes, its relational origins and damaged relationships rather than how trust may be repaired ( Zaheer and Harris, 2005 ; Dirks et al. , 2009 ).

Yet, a nascent literature exists, however, on how organizations and individuals restore trust following its violation (eg Dirks et al. , 2009 ; Gillespie and Dietz, 2009 ; Kim et al. , 2004, 2006 ; Pfarrer et al. , 2008 ). In particu- lar, experimental studies of individual trust violations show that the optimal response to an integrity violation is different than to a

Repairing Public Trust in Organizations

Laura Poppo School of Business, University of Kansas , Lawrence , KS , USA

Donald J. Schepker School of Business, University of Kansas , Lawrence , KS , USA

Poppo and Schepker

competence violation: trust repair is more successful when individuals deny responsi- bility for integrity violations but accept responsibility for competence violations ( Kim et al. , 2004, 2006 ). More recently works extend that trust repair for organiza- tions is more complex, involving multi- response, multi-stage processes ( Pfarrer et al. , 2008 ; Gillespie and Dietz, 2009 ; see also Lewicki and Bunker, 1996 ).

In this paper, we extend these works by developing a more nuanced understanding of organizational responses to repair public trust following an organizational failure. Our approach is consistent with Gillespie and Dietz (2009) who argue that understanding trust repair in organizations is fundamen- tally different than trust-repair at an inter- personal level because response strategies are generally more elaborate than simply deny- ing and accepting responsibility for the fail- ure (eg Kim et al. , 2004, 2006 ). Yet, we also extend that the public, as a stakeholder, is a critical context variable and boundary con- straint, making a generalized theory or generic perspective of organizational response strategies to trust violation problematic. While Gillespie and Dietz (2009) advocate the use of inter-personal strategies to re-build employees ’ trust following a competence violation, this strategy cannot be applied to public trust simply because the public lacks an intimate, direct relationship with manag- ers. Thus, a research gap exists: what types of strategies can organizations use to repair public trust following a competence violation and an integrity violation?

Our approach is consistent with prior works that conceptually advance or experi- mentally demonstrate that organizational repair strategies depend on nature of the violation, integrity or competence ( Kim et al. , 2004, 2006 ; Gillespie and Dietz, 2009 ). While both types of violations cause a stake- holder group to question the previously shared common understanding of the organization and how it functions, integrity

violations are intentional, dishonest acts whereas competence violations threaten beliefs that the organization possesses the requisite business skills and knowledge to complete its intended functions. In addition, our focus in this paper is under- standing voluntary organizational repair efforts – thus, we do not consider extreme types of organizational failures that result in fi rms ’ dissolving, restructuring due to liquidity issues or requiring political / legal interventions. Related, we presume that organizational efforts to trust repair are possible.

In developing our approach to public trust and its repair, fi rst we defi ne public trust and its violations by comparing it to both personal and inter-organizational defi nitions of trust. In this section we also review the conventional literature, institu- tional theory, regarding how public trust is created. Second, we review institutional and principal agent logics for why violations to public trust are likely to occur. Third, we examine the effects of organizational failures on public trust, and fi nally we examine voluntary strategies that organizations take to repair either competence or integrity violations.

This approach and analysis of public trust generates insights, such as: (1) organizations are more likely to communicate to the pub- lic following competence than integrity vio- lations, which in turn has a greater impact on public trust; (2) organizations will deny responsibility for integrity violations but will apologize for competence violations, a log- ic contrary to that proposed for restoring stakeholders ’ trust ( Pfarrer et al. , 2008 ) and employees ’ trust ( Gillespie and Dietz, 2009 ) but consistent with individual trust experi- ments (eg Kim et al. , 2004 ); and (3) or- ganizations are more likely to implement strategic and bureaucratic reforms in re- sponse to competence violations than integ- rity violations, which in turn has a greater positive impact on public trust, which is

Repairing Public Trust in Organizations

contrary to the proposed logic for restoring employees ’ trust following an integrity violation ( Gillespie and Dietz, 2009 ).

A CONVENTIONAL VIEW OF PUBLIC TRUST Public trust can be readily defi ned as the degree to which the general public as a stakeholder group holds a collective trust orientation toward an organization. This defi nition is consistent with trust as funda- mentally a psychological state ( Kramer, 1999 ) in which one willingly relies on another based on a positive expectation of the other ’ s intentions or behavior ( Rousseau et al. , 1998 ). The key distinction, however, is that public trust relates two groups: the public and the organization; whereas per- sonal trust focuses on an individual ’ s trust of another person. Public trust, therefore, rep- resents an aggregate perception of trust to a singular entity, which is similar to that of organizational trust: the extent to which members of one organization hold a collec- tive trust orientation toward another organization ( Zaheer et al. , 1998 ; Zaheer and Harris, 2005 ).

Public trust, however, is distinguished from both organizational trust and personal trust in that personal relations cannot be readily and easily deployed to both build trust as well as function as a behavioral con- trol mechanism. Both inter-organizational and inter-personal exchanges can take the form of meaningful relationships in which direct experiences with the other provide assurance and develop a sense of behavioral predictability, an essential precursor to a trusting belief (eg Luhmann, 1979 ; Larson, 1992 ; Lewicki and Bunker, 1996 ; Poppo et al. , 2008 ). Related, the observability that stems from frequent, on-going, fi ne-grained interaction also functions as a behavioral control mechanism, provided that parties continue to observe and work closely with one another ( Kale et al. , 2002 ; Poppo and Zenger, 2002 ).

External stakeholders, such as the public, are not intimately involved in a company ’ s operations, coordinating information and activities, and thus providing the observabil- ity and frequent contact that defi nes more personal or relational bases of trust. Further- more, while individuals from the stakehold- er group may develop relationships with individual employees, these relationships at most represent a small fraction of an organization and its activities. The lack of fi ne-grained interdependence means the public cannot develop relational ( Kramer, 1999 ; Zaheer and Harris, 2005 ) and proc- ess-based ( Zucker, 1986 ) sources of trust. That is, organizations are unlikely to effec- tively build public trust through relational or personal vehicles.

When groups, such as the public, are socially and geographically distant, trust will be built through legitimate institutions ( Zucker, 1986: 55 ), which can serve as ad- ministrative or symbolic substitutes for per- sonal or relational, trust ( Sitkin and Roth, 1993 ). Legitimacy ‘ is a generalized percep- tion or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and defi nitions ’ ( Suchman, 1995: 574 ). Legitimacy, thus, is a collective concept, which implies that an organization can deviate from a social norm at the individual level as long as the public does not disapprove of the divergence or as long as the public is not aware of its deviance.

Two institutional sources of legitimacy are likely to build public trust: structural and strategic. Structural institutional sources include intermediaries, such as the board of directors or independent auditors, as well as the organization ’ s formal structure, includ- ing fi rm-specifi c roles, positions and proce- dures. In order for these mechanisms to produce generalized trust, the locally pro- duced trust must transfer to the more aggregate audience, the public. This is most

Poppo and Schepker

likely to happen when the mechanism is associated with an objective, standardized interaction or format, which can be ‘ repeat- ed by others individuals without changing the common understanding of the acts ’ ( Zucker, 1986: 63 ). In effect, the public uses legitimizing structures to locate the organi- zation in a socially constructed category, such as ‘ a capacity to perform specifi c kinds of work ’ ( Suchman, 1995: 581 ) or to con- duct business with integrity.

Few works examine how a fi rm builds trust outside of its own environment ( Thomas, 1998 ). Since the public collec- tively cannot observe relational aspects of the fi rm, they must examine aspects of the fi rm ’ s behavior that are broader and pre- sented by the organization itself. In particu- lar, the public may initially bestow trust to the organization because of the assumption that trust is warranted as long as no con- trary evidence exists ( McKnight et al. , 1998 ). However, once violations occur, mistrusted organizations must re-establish trust by exhibiting trustworthiness ( Kim et al. , 2004 ; Schweitzer et al. , 2006 ).

Public Trust: Integrity and Competence Dimensions While many defi ne trust as a collective belief, well developed in the literature are its distinct types. Most common are the distinctions of benevolence, integrity and competence ( Mayer et al. , 1995 ; Zaheer and Harris, 2005 ). Benevolence refers to the ‘ extent to which a trustee is believed to want to do good to the trustor, aside from an egocentric profi t motive ’ ( Mayer et al. , 1995: 718 ); this form of trust is inherently personal and relational, characterized by a strong emotional attach- ment, affective commitment, and expressions of genuine care and consideration for the other. Trust violation studies generally focus on the latter, integrity and competence, ar- guing that these two are the most important qualities when determining a party ’ s trust- worthiness ( Kim et al., 2004, 2006 ; Barber,

1983 ; Mayer et al. , 1995 ). At the individual and organizational level, benevolent trust requires relatively intimate, personal and highly relational interactions ( Ring, 1996 ; Lewicki and Bunker, 1996 ); in effect, because of social bonds, parties are willing to care for the other, beyond the profi t motive.

Recent work defi nes benevolent trust at a collective level: the concern for the well- being of stakeholders ( Gillespie and Dietz, 2009 ). While this form of trust is arguably important for an intimate stakeholder group, such as employees ( Gillespie and Dietz, 2009 ), it is less likely to be a focal aspect of public trust. Because an individual ’ s identi- fi cation with a particular cause and stake- holder group depends on personal values and convictions, at a collective level this dimen- sion will lack cohesion and consensus simply because it is idiosyncratic – people don ’ t identify or engender a feeling of belonging to the same social group or category. Our logic suggests, for example, that the public will not have a collective trust orientation on whether a company adequately cares for its employees. With this said a victimized stakeholder group, such as the use of child labor, may gain legitimacy and obtain a degree of public consensus over time. His- torically, this is likely to happen when the government takes a public stand of the event, threatening regulations or sanctions. These events are beyond the scope of this paper as our focus is on voluntary (not man- dated) organizational strategies to repair public trust.

Benevolence is inherently a relational bond of affective concern and engendering feelings of goodwill. Competence and integrity indicate whether the organization acts according to institutionally derived beliefs. Integrity and competence rely on a cognitive function: we base the choice of what we trust on good reasons and knowl- edge, albeit incomplete knowledge, for if we had complete knowledge there would be no need to trust ( McAllister, 1995 ).

Repairing Public Trust in Organizations

Integrity-based trust refers to the trustor ’ s perception that the trustee is adhering to a set of principles the trustor fi nds at least acceptable ( Mayer et al. , 1995 ; Kim et al. , 2004 ). Work that considers breaches or vio- lations of trust among multiple actors gener- ally highlights the importance of integrity when examining trust violations among multiple actors ( Sitkin and Roth, 1993 ; Kim et al. , 2004 ). An integrity violation means that one party intentionally violates an agreed-upon practice or principle ( Kim et al. , 2006 ). In the transaction cost literature, a lack of integrity is linked to opportunism: ‘ a self-interest seeking with guile ’ which can occur when there is asymmetric or incom- plete information, such as unobservable or hidden actions or information ( Williamson, 1996 ). In the inter-organizational literature, integrity is linked to trusting beliefs in another, characterized by good-faith efforts to behave in accordance with implicit or explicit commitments and to be perceived as honest and fair (eg Cummings and Bromiley, 1996 ; Zaheer et al. , 2002 ; Husted and Folger, 2004 ; Poppo et al. , 2008 ). Lacking integrity, persons acting on the behalf of an organization are perceived as dishonest: they lie, deceive or cheat, often for selfi sh gain.

Competence-based trust refers to the trustor ’ s perception that the trustee pos- sesses the requisite skills and knowledge nec- essary for the task ( Butler and Cantrell, 1984 ). Thus, when an individual lacks the training and knowledge to adequately per- form the job, a trust violation can occur ( Kim et al. , 2004, 2006 ). Most works focus on the institutional controls to assure com- petence, such as selection procedures, mon- itoring and contracts that specify task responsibilities, as well as sanctions for non- compliance. However, competence-based trust is important to the public, as the organization ’ s competence directly affects the goods and services provided to the pub- lic. While failures of integrity may affect the esteem in which an organization is held,

failures of competence may harm the public ’ s confi dence in purchasing an organization ’ s products.

THREATS TO INSTITUTIONAL SOURCES OF PUBLIC TRUST Our logic, thus far, is that institutional mechanisms create a legitimate understand- ing of the organization that the public then uses to determine its trust in an organization. Yet, well acknowledged across a broad set of literatures is that institutions are imperfect governance mechanisms. Institutions cannot provide complete assurance that actions and behaviors that are inconsistent with the public ’ s trust in an organization will not take place.

The fundamental challenge is that insti- tutional controls cannot perfectly fulfi ll their agency function: one party acting on behalf of the other, such as employees acting on behalf of the CEO. Agency problems arise because the principal (eg the CEO, the intermediary or the public) ‘ cannot perfect- ly and costlessly monitor the agent ’ s action and information ’ ( Pratt and Zeckhauser, 1995: 3 ; Shapiro, 2005 ). The result is agen- cy costs: losses due to asymmetric informa- tion and unobservability because information cannot be costlessly shared and behavior cannot be costlessly monitored.

Examples of information asymmetries are numerous ( Milgrom and Roberts, 1988 ; Pratt and Zeckhauser, 1995 ; Shapiro, 2005 ). For these situations, information advantages exist because the agent has exclusive access to specialized information. Armed with an informational advantage, agency costs can increase as agents attempt to infl uence decisions to their advantage and benefi t through the manipulation of information that they provide to the principal ( Milgrom and Roberts, 1988 ).

Unobservable action further challenges institutional mechanisms because devising solutions to the agency problem, such as formal controls, monitoring systems and

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incentive schemes, are at best second-best solutions. When monitoring is expensive or substitutes are cheap, there is less monitoring and monitoring is of poorer quality ( Pratt and Zeckhauser, 1995: 5 ). Measuring the performance or outcome of an activity is imperfect because these activities do not measure the actual behavior; such noise may cause agents to ‘ game the system or beat the numbers ’ ( Jacobides and Croson, 2001: 27 ). Related, most tasks involve multiple activi- ties, yet monitoring may only focus on a subset of activities, leading agents to exert effort only on the measurable aspects ( Holmstrom and Milgrom, 1991 ).

Formal bureaucratic controls, such as the use of explicit operating procedures, are also problematic because they are inherently incomplete ( Macneil, 1978 ; Williamson, 1996 ). Intermediaries, even when armed with for- malized routines, responsibilities and proce- dures, are unlikely to regulate and monitor all organizational actions. Related, trust vio- lations can occur because bureaucratic con- trols, such as routines and procedures, are not fully specifi ed; as a result predictability and reliability of employee ’ s actions cannot be guaranteed simply because bureaucratic controls are incomplete.

A third potential fallacy of institutional mechanisms is whether credible sanctions and punishments exist to deter malfeasance. For example, well-documented is the high level of inter-fi rm cooperation in the Japanese automotive industry because close, highly interdependent work practices, and long- standing work relationships created a high level of inter-organizational trust (eg Dyer, 1996 ). Hagen and Choe (1998) argue, how- ever, that institutional sanctions, namely reputation loss, are a critical factor as well: since Japanese suppliers operate in a very closed, dense, hierarchical network, reputa- tion loss due to cheating or not following through on promises means that unreliable fi rms will no longer be awarded future busi- ness. Yet, reputation loses its effectiveness as

a disciplining force if the institutional mech- anism, such as an intermediary operating as a fi duciary for the public, doesn ’ t operate in a close-knit network. Instead, the intermedi- ary may have more to lose (eg signifi cant business relationships) by instituting sanctions than by fully upholding its fi duciary duties. Shapiro (1990: 355) argues that the social organization of most intermediaries enables them to ‘ manipulate organization structure to conceal misconduct from victims, investiga- tors, and unwitting participants ’ .

Even if the wrongdoing becomes public, the affected parties can strategically infl uence the disclosure of information, presumably to their benefi t. As a result ‘ they are also able to diffuse culpability for their misdeeds to others ’ ( Shapiro, 1990: 355 ). Moreover, because enforcement offi cials need offenders to reveal the information and routines that systematically create the wrongdoing, offenders often negotiate a reduced punish- ment or immunity. Thus, ineffective sanc- tions and punishment undermines institutional production of public trust.

In sum, the above logic advances that in- complete and imperfect information implies that institutional controls are not perfect governance mechanisms for maintaining trust. That is, trust is inherently a dynamic phenomenon. Violations will undermine the production of trust, as interests of principals and agents are not perfectly aligned. In ad- dition, violations will also undermine trust because bureaucratic controls are incom- plete: they do not completely specify rules, procedures and protocols underlying com- plex organizational activities.

THE EFFECTS OF ORGANIZATION- LEVEL FAILURES ON PUBLIC TRUST Because institutional mechanisms are imper- fect guarantees of trust, threats to public trust exist. This is potentially problematic since the public ’ s trust in a corporation can be critical for the organization ’ s future survival ( Coombs and Holladay, 2002 ). In addition,

Repairing Public Trust in Organizations

while trust is extremely hard to develop between the public and organizations, it is much easier to destroy ( Slovic, 1993 ; Nakayachi and Watabe, 2005 ). Thus, or- ganizations that spend years attempting to build and develop such trust with the public can see that trust disappear after one solitary unethical, immoral or untrustworthy action.

Gillespie and Dietz (2009) identify organization-level failures as a single major incident or a cumulative series of incidents resulting from the actions of agents of the organization that threaten the organization ’ s legitimacy and may harm the well-being of one or more of the organization ’ s stakehold- ers. In order to be considered an organiza- tion-level failure, the failure must be suffi ciently great to threaten the organiza- tion ’ s legitimacy ( Anheier, 1999 ), harm must be borne by outside stakeholders of the or- ganization, and the failure must arise from the consequence of actions or inactions of organizational agents.

Organization-level failures may include accounting fraud, incompetence, fatal accidents, bankruptcies and product safety incidences. Failures must occur at high levels of organizations and be particularly salient in order to effect outside stakeholders. Each kind of failure harms the public ’ s ability to trust the organization going forward. For instance, Mattel ’ s issues with product safety and toy quality in the summer of 2007 caused irreparable damage to its public repu- tation and resulted in a lack of trust in the marketplace. How could Mattel not commu- nicate, monitor or inspect offshore manufac- turers to assure that lead paint would not be used in toys?

Gillespie and Dietz (2009) further argue that while each condition is necessary to qualify an organizational failure, organiza- tional failures will still vary in magnitude. We argue that the type of violation com- mitted by the organization is critical in determining efforts necessary to repair pub- lic trust going forward. In this next section

we discuss the characteristics that set apart competence and integrity violations.

Gauging Losses to Public Trust: Competence versus Integrity Violations While organizational failures arise from institutional shortcomings, unexamined in these works is whether a competence or integrity violation is more damaging to trust and to fi rm performance ( Gillespie and Dietz, 2009 ; Pfarrer et al. , 2008 ). In this section we extend these works by arguing that control- lability fi gures prominently to the potential damage of the violation on public trust. There is good reason to believe that the pub- lic will evaluate competence violations dif- ferently than integrity violations.

For trust violations among individuals, theorists advance that integrity violations have a greater negative effect on another ’ s willingness to trust that person than compe- tence violations ( Kim et al. , 2004, 2006 ). Laboratory studies indicate that people weigh negative information about integrity more heavily than positive information; whereas they weigh positive information about competence more heavily than nega- tive information (see Snyder and Stukas, 1999 for a review). Integrity violations are more likely to spill over to multiple facets of the relationship between two individuals; a distrustful or deceitful individual may be willing to be deceiving in all facets of a relationship in order to get ahead. Violations involving integrity also tend to arouse great- er negative affect in individuals than other such violations ( Trafi mow et al. , 2005 ). Alternatively, violations of competence are more likely to be facet-specifi c, indicating the individual was placed into a position in which he or she had no previous experience or lacked the requisite knowledge and skills to perform a specifi c task ( Dirks et al. , 2009 ). Thus, competence-based violations are not as likely to spill over from one isolated aspect of an individual ’ s performance to another aspect of the performance.

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However, at the organizational level, we advance that integrity and competence vio- lations are treated and examined differently, and have an opposite effect on trust. First, these violations differ to the extent that the public perceives them as ‘ controllable ’ by the organization ( Tomlinson and Mayer, 2009 ; Mayer et al. , 1995 ). As a violation or action increasingly goes beyond the control of the organization, the trustee will be seen as less culpable or blameworthy ( Lewicki and Bunker, 1996 ). Integrity-based viola- tions that are isolated and limited to a sin- gular or small group of employees are not likely to be perceived as representative of the beliefs of all members of the organiza- tion. The public therefore discounts the effect of the violation on their willingness to trust the organization simply because they don ’ t expect an organization to be able to detect and to control a few dishonest indi- viduals. Thus, integrity-based violations are perceived as less controllable for the organ- ization, as they are typically perpetrated by a few organizational members acting in con- cert and deliberately deceiving other mem- bers of the organization; even the best designed control systems cannot be fully effective at preventing or detecting unethical behavior by a small group of employees. The organization may more easily distance itself from an integrity violation by removing the individuals responsible and committing itself to an ethical environment.

Competence violations may be harder for the organization to claim uncontrollability. While the organizational failure may be an isolated incident, such as Mattel ’ s recall of specifi c toys, it is often due to negligence, incompetence or poor oversight, making it diffi cult for the public to discount the or- ganization ’ s responsibility for the violation. Organizations are responsible for coordinat- ing the activities that produce a product or service and a competence violation threatens its ability to achieve this core purpose and functionality: its capacity to train employees,

manage processes, and put in place opera- tional controls and procedures that in turn enables it to adequately perform the work that it does. Competence violations may also be viewed as a symptom of greater organi- zational problems and dysfunction. That is, the public perceives the competence viola- tions as symbolic of an organization-wide inability to properly manage and operate the organization, especially with regard to core business functions. A second characteristic of a trust violation that impacts public trust in organizations is the salience of the viola- tion in question. In general, media attention focused on an organization has a negative impact on the fi rm ’ s overall reputation ( Fombrun and Shanley, 1990 ).

We advance that integrity-based viola- tions may be less salient than competence- based violations for several reasons. First, competence-based violations, such as prod- uct safety incidents and industrial accidents, often have easily identifi able victims ( Marcus and Goodman, 1991 ). Identifi able victims and greater accident severity may yield greater negative attention surrounding a competence-based violation. Second, integ- rity-based violations often result in losses to shareholders, but affect few other stakehold- ers. Finally, integrity-based violations often have smaller severity than competence-based violations, Enron, Worldcom and other corporate failures notwithstanding. On the basis of this logic we advance

P1a: To the extent that competence violations are perceived as more controllable and salient than integrity violations, competence-based viola- tions will have a greater negative effect on the public ’ s willingness to trust an organiza- tion than integrity-based violations.

P1b: To the extent that competence violations are perceived as more controllable and sali- ent, competence violations have a stronger negative effect on the public ’ s collective assessment of its trust in the organization ’ s

Repairing Public Trust in Organizations

competence compared to the effect of integrity violations on the public ’ s collective assessment of its trust in the organization ’ s integrity.

We extend this core logic to consider the effects of competence and integrity viola- tions on fi rm performance. When compe- tence violations threaten the legitimacy of an organization ’ s core function and raison d ’ ê tre, they are more damaging to fi rm per- formance than integrity violations: that is, if the competence violation threatens the qual- ity of the organization ’ s product or service, then consumers, a sub-group of the public, are less likely to buy it. Integrity violations are less likely to impact fi rm performance simply because a clash or confl ict with hon- esty does not systematically deter consumers from purchasing the product or service. At most, the public may disassociate from the company in a cognitive, symbolic fashion: We don ’ t like the fact that Company X hired dishonest employees. This general logic may also extend to other types of confl icts in- volving social practices such as child labor or the use of part-time employees because the company does not pay for benefi ts for part-time help. The public may not readily identify with the organizational values, but the lack of identifi cation does not imply the customers will not consume the product.

We further extend that if the competence violation is part of the core function of the organization ’ s business, then the violation has a greater negative impact on fi rm per- formance. Competence violations in periph- eral functions (eg accounting) might highlight ineffectiveness in the fi rm ’ s management and require correction; however, competence violations in core functions indicate the fi rm ’ s inability to carry out its most signifi - cant operations. Core activities are those in which the fi rm should have the greatest resources and capabilities and failures to maintain adequate levels of competence indicate the fi rm either is not competent in

the core activities or has not effectively allocated resources to ensure effective com- petence in the core operations. As such, we argue that violations closer to the core of a fi rm ’ s operation will have a greater effect on fi rm performance following competence violations.

P1c: Competence violations have a greater negative effect on fi rm performance than integrity violations.

P1d: Competence violations closer to a fi rm ’ s core operations will have a greater negative effect on fi rm performance than competence violations further from the fi rm ’ s core operations.

ORGANIZATIONAL EFFORTS TO REPAIR PUBLIC TRUST While trust breakdowns occur frequently between the public and organizations, mech- anisms to repair trust have rarely been inves- tigated ( Ferrin et al. , 2007 ). However, a growing stream of literature has been building to identify ways in which individuals, and consequently organizations, can begin to rebuild trust following violations. For instance, Bottom et al. (2002) examined trust repair following opportunistic behavior and noted that cooperation can be rebuilt through apologies and simple explanations, but most importantly, trust repair requires substantive amends made by the deceiving party. Fur- thermore, the extant literature has also noted that structural and strategic mechanisms can be used, such as placing a fi rm under volun- tary regulation, following a trust violation that can illustrate a commitment to preventing future trust violations and result in greater trust ( Nakayachi and Watabe, 2005 ).

In a laboratory study, Schweitzer et al. (2006) found that trust could be restored when individuals note a consistent series of trustworthy actions, but trust harmed by untrustworthy actions and deception may never be fully restored. Instead, such

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deception acts as a violation of integrity, whereby the offending party may be stig- matized indefi nitely due to the nature of the transgression.

Recent studies have also illustrated the effectiveness of apologies and denials in dif- ferent conditions (eg Kim et al. , 2004 ). Stud- ies have shown that apologies can be effective in repairing trust when violations of competence have occurred, while denials can be more effective when violations relate to integrity ( Kim et al. , 2004 ). Finally, recent organizational literature has examined the processes of trust repair between organiza- tions and their employees. Tomlinson and Mayer (2009) examine how fi rms can repair damaged perceptions of benevolence, abil- ity and integrity through a variety of attri- butional strategies. Critical among all aspects of trust repair literature is the role that the nature of the violation plays in affecting the response strategies both individuals and fi rms may take in repairing trust.

Overall, the greater focus on trust repair in recent literature highlights a growing need for fi rms to understand how to repair trust following organizational failures and trust-based violations. In particular, this lit- erature suggests that understanding the rea- sons for the trust violation, providing an adequate explanation for the violation, apol- ogizing for the violation or denying respon- sibility, and communicating policies and procedures to prevent future violations of trust are all critical mechanisms fi rms must employ in order to begin to redevelop trust between the organization ’ s stakeholders and the fi rm itself. More generally, this literature suggests organizations will seek to repair their image in the eyes of others by using various impression management techniques ( Carter and Dukerich, 1998 ; Baumeister and Jones, 1978 ; Leary and Kowalski, 1990 ) and mechanisms that attempt to foster trust, while also attempting to regulate distrust (eg Gillespie and Dietz, 2009 ; Sitkin and Roth, 1993 ; Lewicki and Bunker, 1996 ). Lastly,

scholars generally agree that organizational responses to integrity violations are decid- edly different than competence violations: the nature of the transgression is pivotal in determining the success of the fi rm ’ s repair efforts ( Gillespie and Dietz, 2009 ; Dirks et al. , 2009 ). We build upon and extend this literature in specifying mechanisms organi- zations use to repair public trust following competence and integrity violations.

Communication to the Public Following an organizational failure, the fi rm must begin to repair the public ’ s trust in the organization. In this section we outline two critical aspects of communication that will affect trust repair: (1) communication quality, timeli- ness and acknowledgement, and (2) whether the organization apologizes or denies responsi- bility for the organizational failure. We argue, however, that the type of trust violation, com- petence or integrity infl uences the effectiveness and type of the communication.

Communication quality, timeliness and

acknowledgement

Communication after an organization-level failure is not merely important, it is a neces- sity. The primary trust repair objectives are to overcome salient negative expectations, restore confi dence (ie distrust) and create positive expectations about future trustwor- thiness ( Gillespie and Dietz, 2009 ). In the period following an organization-level fail- ure, the fi rm has the ability to reframe the account of the failure ( Bies, 1987 ; Seeger, 2006 ). Firm communication can help pro- vide an immediate response to the failure, shape immediate public reaction and provide details to prevent false information from being reported ( Seeger, 2006 ). In order for communication to be successful, however, it must be timely and transparent.

Prior conceptual works on initial respons- es to organizational failures indicate that when an organization-level failure occurs, it is necessary for fi rms to respond to the

Repairing Public Trust in Organizations

situation ( Bradford and Garrett, 1995 ). In particular, affected stakeholders must be notifi ed early with a timely, well-considered and credible response ( Gillespie and Dietz, 2009 ). Timeliness of fi rm response after an organization-level failure is critical in order to limit the amount of erroneous informa- tion reported, to assure the public that no future trust violations will occur and to outline the basic plan for uncovering the details relating to the violation ( Seeger, 2006 ; Reynolds, 2006 ). In particular, Pfarrer et al. (2008) argue that following an organ- izational failure, fi rms should seek numerous ways to provide information to stakeholder groups, such as voluntarily disclosing the organizational failure, openly investigating the incident and cooperating with various stakeholders, such as regulatory offi cials. Similarly, Gillespie and Dietz (2009) argue that when attempting to restore employee trust following an organization-level failure, managers need to acknowledge the event and announce a full investigation.

Related work on voluntary disclosure fi nds that performance losses are less when organizations voluntarily come forward and disclose wrongdoings versus not coming for- ward and having the failure become public at a later date ( Lee et al. , 2004 ). Further- more, in experimental testing, reticence was found to be worse than the optimal response strategy of ‘ apologize ’ or ‘ deny ’ given trust violations and no better than the suboptimal strategy, indicating that attempting to do something is better than nothing when trust violations occur ( Ferrin et al. , 2007 ). Empirical examination also confi rms the importance of timely responses: Goldberg and Harzog (1996) examined the experi- ences of Ashland Oil and Exxon following environmental disasters involving oil spills and found that Ashland ’ s stock price and earnings were signifi cantly less affected by the failure than Exxon due to a more rapid and positive response to the organization- level failure.

In addition to providing a timely response, transparency and honesty are critical facets of the fi rm ’ s response to an organization- level failure ( Korsgaard et al. , 2002 ). Full disclosure enables an accurate diagnosis of the failure ’ s root cause and can provide a shared understanding of the causes and fail- ures when solving the problems uncovered ( Gillespie and Dietz, 2009 ). Voluntary dis- closure for organizational learning and pre- vention of future violations can be benefi cial to the fi rm ’ s ability to repair its reputation and repair trust with critical stakeholders ( Haunschild and Sullivan, 2002 ). Finally, providing dishonest information can only backfi re, as individuals with knowledge of the situation may have confl icting evidence that someday may be uncovered ( Schlenker et al. , 2001 ). Transparency in communicat- ing the fi rm ’ s response allows the public greater information with which to form an impression and begin to trust the fi rm. Without being transparent, the organization risks alienating stakeholders and appearing to have something to hide.

On the basis of this literature and logic, acknowledging an organizational failure and commitment to a follow-up investigation are optimal responses to a trust violation. Alternatively, a ‘ no response ’ strategy to an organizational failure is not desirable: it sig- nals to the public that management is not willing to commit to voluntarily disclosing information, which the public in turn views as a managerial ploy to cover up or alter the facts.

P2a: Voluntary acknowledgement of an organi- zational failure and a commitment to a follow-up investigation has a greater posi- tive impact on public trust than a no response strategy.

We contend, however, the criticality of this initial communication is likely to depend on the type of violation. Following an integ- rity-based trust violation, communication is

Poppo and Schepker

necessary to disclose the ongoing investiga- tion, root causes behind the integrity violation and the fi rm ’ s response. However, since most integrity-based violations can be segregated from the organization itself and are uncon- trollable for the fi rm given incomplete con- trols, communication is less necessary in helping repair trust, as blame is more likely to be assigned to the identifi able individuals responsible than to the organization itself.

An initial discussion of the events and stakeholders violated, as well as a full diag- nosis of the problems, the root causes and steps to resolve the issue will be more crit- ical following a competence-based violation. These violations are inextricably intertwined with the fi rm ’ s operations in most cases. Without a swift, effective communication strategy and response to a competence-based trust violation, the fi rm may not be able to convince stakeholders to continue support- ing and trusting the organization going for- ward. Firms facing competence violations must provide a timely accounting of the failure, share issues relating to the root caus- es of the failure, as they are uncovered, and provide accurate information. Introducing false information to third parties that is un- covered as false will only further harm the public ’ s trust in the organization further. Thus, in order to restore the public ’ s faith in the organization ’ s products and services, timely and accurate communication is nec- essary following a competence violation.

P2b: Organizations are more likely to commu- nicate (quickly and transparently) to the public following competence-base trust vio- lation than an integrity-based violation, which in turn has a greater impact on public trust than the alternative.

Apologies versus denials

When choosing to respond to the public regarding an organizational failure, a second critical aspect is whether the organization apologizes or denies responsibility. Apologies

indicate that an organization admits respon- sibility for a violation, but that the organiza- tion will not repeat the offense ( Goffman, 1971 ). An apology is a fi rst step toward rec- onciliation ( Lewicki and Bunker, 1996 ) and further indicates an organization ’ s integrity and concern for those affected by the trans- gression ( Korsgaard et al. , 2002 ; Gillespie and Dietz, 2009 ). Denials may be less effec- tive as they may indicate no need to rectify the organization ’ s behavior, which may raise concern about future actions ( Kim et al. , 2004 ).

This literature suggests that apologies can be effective in starting trust repair, as it shows concern and compassion for victims affected by the trust transgression and dis- plays a commitment toward preventing future transgressions. Denials are less effec- tive trust repair mechanisms because they represent an acknowledgement of guilt, which may yield long-term harm and dis- advantages to the organization ( Marcus and Goodman, 1991 ; Pfarrer et al. , 2008 ).

An alternative view, however, is that denials can prevent the organization from taking responsibility when responsibility may harm the organization. Denying responsibility for an event may enable the public to give the organization the benefi t of the doubt. Sigal et al. (1988) asked indi- viduals to watch a videotape of a simulated debate in which one candidate was accused of sexual or fi nancial misconduct by the other candidate. The researchers found that the party accused of misconduct received more votes and was considered to be more trustworthy, honest and ethical upon deny- ing culpability for the event rather than apologizing for it. This research suggests that in some situations, denial can represent a plausible option for the party rather than accepting responsibility.

Similar results are also found in experimen- tal studies of trust repair: trust levels are high- er when a person apologizes for a competence violation than when a person apologizes for

Repairing Public Trust in Organizations

an integrity violation ( Kim et al. , 2004, 2006 ). This notion coincides with the fi ndings of Tomlinson et al. (2004) , who noted that apologies are effective at restoring trust after a violation in some situations but not all. Finally, Riordan et al. (1983) fabricated reports of a senator taking bribes and found that character evaluations were less negative when the senator denied the allegations rather than accepted responsibility.

We infer from these studies that when responding to competence violations, organi- zations will be more likely to apologize for the violation, whereas for integrity violations, organizations will be more likely to deny responsibility for the event. We reason that competence violations are often interde- pendent with the fi rm ’ s operations and are often more controllable for the fi rm. How- ever, such apologies should not be consid- ered an admission of responsibility for the violation. Such admissions may bring for- ward unwanted legal claims for the organiza- tion ( Tyler, 1997 ). Integrity violations, however, are often the result of a few indi- viduals acting unethically. Thus, an apology admits that the organization is responsible for putting in place ‘ faulty ’ bureaucratic / institutional controls, which enabled the integrity violation. In addition, it may also suggest that the few unethical individuals are representative of the values of other employ- ees in the organization. In order to assure that the public understands that the unethical act is not representative of values or behaviors of its employees and is not the result of faulty controls, the organization is likely to deny responsibility for integrity violations. A denial allows the organization to shift blame for the event onto a few individuals.

This logic contrasts with that from Gillespie and Dietz (2009: 140) who argue that when restoring public trust with employees, an apology for an integrity violation will be more effective than no apology or an apology with an external attribution for organizational failures. Our

logic also contrasts with Pfarrer et al. (2008) , who argue that organizations should apolo- gize to stakeholders for an integrity violation in order to rebuild its legitimacy.

P3a: Organizations are more likely to respond to integrity violations by denying respon- sibility than by accepting responsibility, which in turn has a greater impact on pub- lic trust than the alternative.

P3b: Organizations are more likely to apologize for actions or effects without accepting responsibility for a competence violation than denying or accepting responsibility, which in turn has a greater impact on pub- lic trust than the alternative.

Structural and Strategic Institutional Repair Mechanisms When an organization failure occurs, it threatens the organization ’ s legitimacy, which in turn makes the public less inclined to fully trust the organization. A solution to this threat is to restore the organization ’ s legitimacy through institutional mechanisms that re-direct and regulate behavior such that a reoccurrence of the organization failure is unlikely. Communication strategies may be seen as a form of ‘ cheap talk ’ . Any organiza- tion can apologize for an event or illustrate compassion; however, organizations that undertake strategic and institutional repairs in order to prevent future violations illus- trate a stronger commitment than organiza- tions that are unwilling to commit themselves through such actions. Critical to this logic is that the instructional mechanism is associ- ated with an objective, standardized interac- tion or format that corrects for the violation. On the basis of this logic, we expect the use of institutional mechanisms to depend on whether the event is an integrity or compe- tence violation.

When an integrity violation occurs, dis- trust exists – that is, the party does not know if I can ‘ trust ’ this person to be honest in a

Poppo and Schepker

different context as s / he may lie or cheat again ( Sitkin and Roth, 1993 ; Gillespie and Dietz, 2009 ). Given asymmetric information and the inability to craft perfect controls, violations will occur as a small number of persons exploit a system that works well for individuals with more representative values. As a result, structural institutional reforms will not deter integrity violations that rep- resent aberrant cases. Because organizations cannot control the occurrence of the event, they cannot craft an institutional mechanism to avoid its reoccurrence. Organizations can restore public trust by removing the indi- viduals associated with the violation; remov- ing the ‘ bad apples ’ responsible for the violation can help provide reassurance that future integrity-based trust violations are sig- nifi cantly less likely to occur.

For competence violations, organizations cannot respond to such violations by mere- ly removing the culpable parties, as who is to blame is much less easily identifi able. By defi nition, competence violations result from a lack of due diligence on the part of the organization in managing and coordinat- ing its operations. The violation is not per- son-specifi c; rather it is symbolic of an organization ’ s inability to put in place the proper roles, positions and procedures. As a result, removing incompetent employees is a less effective trust repair mechanism for competence violations. Instead organizations will restructure the organization in order to better direct and align employee activities, given the root problems that gave forth to the violation. Restructuring may involve new positions and modifi ed or new opera- tions and / or procedures. Restructuring can better realign the organization to ensure proper oversight of activities and prevent future competence violations.

Furthermore, the use of strategic institu- tional mechanisms, such as submitting to voluntary self-regulation or institution of new formal policies and procedures moni- tored by the organization, can also enhance

the public ’ s trust in an organization follow- ing a competence violation. Prior works suggest that institutional-based trust mecha- nisms can enhance and repair trustworthi- ness, especially when imposed voluntarily ( Sitkin and Roth, 1993 ; Nakayachi and Watabe, 2005 ). In effect, such institutional and strategic repair mechanisms reveal the fi rms ’ intentions to act in a trustworthy manner ( Nakayachi and Watabe, 2005 ).

Such strategic and institutional reforms will not be as effective following an integ- rity violation, however. Integrity violations often occur as the organization is unable to implement perfect control systems and can- not costlessly monitor employee behavior. Strategic and institutional changes cannot eliminate such agency problems and prevent future integrity violations from occurring. Thus, implementing such reforms following integrity violations would constitute costly repairs that are not completely effective in preventing future violations. Thus, we would expect such strategic repair mecha- nisms to occur only following competence violations.

P4a: Organizations are more likely to fi re and remove associated employees in response to an integrity violation than a competence violation, which in turn has a greater pos- itive impact on public trust.

P4b: Organizations are more likely to implement structural, strategic and institutional reforms in response to a competence violation than an integrity violation, which in turn has a greater positive impact on public trust.

CONCLUSIONS Our fi rst contribution in this paper is to be- gin to develop an approach to understanding public trust – its relationship to other forms of trust; why institutional mechanisms are prone to be imperfect governance devices; and which trust repair strategies are more likely and therefore more effective. This

Repairing Public Trust in Organizations

approach informs the nascent literature on trust repair, and the nonexistent literature on the repair of public trust.

Consistent with prior works, our approach highlights the importance of distinguishing the type of trust violation, as response strat- egies appear to be contingent on the kind of violation (eg Kim et al. , 2004, 2006 ; Gillespie and Dietz, 2009 ). A second contribution of this research is establishing that the stake- holder group, in this case the public, appears to be an important boundary constraint in considering the effects of violations on trust and trust-repair responses. Through our analysis, we develop a number of proposi- tions that are different and contrary to those proposed by others ( Kim et al. , 2004, 2006 ; Gillespie and Dietz, 2009 ; Pfarrer et al. , 2008 ). Thus, our research establishes that the stakeholder group is an important contex- tual factor that impacts response strategies.

Limitations One limitation of our approach is that we consider voluntary trust repair. In doing so we argue that benevolent abuses, such as organizational practices that exploit vulner- able people ( Gillespie and Dietz, 2009 ) will not invoke, on average, voluntary responses from organizations because the public is unlikely to operate as a collective in how they view this practice. Our logic is that an individual ’ s identifi cation with the potential abuse is largely idiosyncratic and this vari- ance impedes a unifi ed collective judgment. Thus, if fi rms try to repair trust in these domains, we suspect it is likely to be due to political or legal pressures or mandates, and it is likely to be targeted at the offended stakeholder (which is not necessarily the public). Thus, future works may focus on considering the effects and repair strategies of public trust when reform is mandated and / or when sanctions are imposed.

Our paper endorses a logic that is based on a Western mindset and focus. Such repair strategies, communicative responses and

institutional mechanisms may not be appro- priate outside of the United States. Future research should examine the strategies for trust repair that may be used in fi rms oper- ating outside of the United States and examine how culture may serve as a con- textual constraint in such strategies.

Future Research Our research suggests that depending on the stakeholder group, in particular, responses to trust violations are likely to be different. For example, Gillespie and Dietz (2009) argue that in response to integrity violations, fi rms are more likely to implement ‘ distrust ’ mechanisms: apologies, sanctions and bureaucratic reforms to limit future abuses. Yet, we argue for the public domain, organizations are likely to deny culpability for integrity violations. Furthermore, because the integrity violation is isolated and limited to a few ‘ dishonest ’ managers, organizations are unlikely to implement bureaucratic reforms – internal controls and incentives cannot perfectly forestall self-interested types from fi nding ways to manipulate a situation to their advantage. The question remains, however, as to whether fi rms implement bureaucratic reforms privately, as they do not want to signal through public disclosure their failure to devise better ex ante control systems.

Future research may also consider public trust in other stakeholders that are intimate- ly involved in the governance of organiza- tions, such as directors and CEOs. Left unexplored in our paper is the effect of or- ganizational integrity or competence viola- tions on the public ’ s trust in those that are responsible for overseeing the organization. In our paper, we have assumed that organ- izational failures can be repaired: when attributions are made to temporary factors that can be corrected by the organization, individuals are more likely to attribute positive future expectations to dealing with the organization. However, when failures

Poppo and Schepker

are attributed to stable factors that are not expected to change in the future, individu- als develop negative expectations, such as for dealing with the organization or product ( Tomlinson and Mayer, 2009 ).

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