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Unconventional Insights for Managing Stakeholder Trust

S U M M E R 2 0 0 8 V O L . 4 9 N O . 4

R E P R I N T N U M B E R 4 9 4 1 3

Michael Pirson and Deepak Malhotra

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SUMMER 2008 MIT SLOAN MANAGEMENT REVIEW 43

I nitiatives to build and maintain trust with various stakehold-

ers — customers, employees, suppliers and investors — have

risen to the top of the executive agenda at many organiza-

tions. We continually hear about “tr ansparency”

initiatives, open-door policies and 360-degree evaluations,

customer-retention programs, voluntary product recalls,

initiatives for corporate social responsibility, rethinking of

“customers as partners” and other trust-building moves. But

the problem is that most companies don’t really understand

how to manage stakeholder trust effectively. In fact, our

research suggests that many of the trust-building initiatives and

approaches that organizations invest in may be of questionable

value. Others might actually destroy trust.

One of the reasons managing stakeholder trust is difficult is

because there are many different stakeholder groups, each with

its own particular needs and perspective. That is, trust is multi-

dimensional, and it’s not obvious which dimension executives

need to focus on when dealing with any particular constituency. Consider

the following: An employee might trust his supervisor because he believes

that she expresses genuine concern for his well-being, or because she is a

very competent manager, or for both reasons. In turn, the supervisor might

trust the employee because she perceives that his values are congruent with

hers, or because she can rely on him to get work done efficiently, or for both

reasons. In a different context, the investment community might trust

a company because top executives are perceived as having integrity, or

because they possess superior management skills, or because they have

taken steps to increase transparency, or because of some other reason

entirely. And so on.

So which dimension of trust should companies target? Specifically, what’s

more important for building trust: a reputation for kind-hearted benevolence

or for fair-minded integrity? Which is more critical: managerial proficiency

or technical competence? When does value congruence matter? And are

initiatives aimed at increasing transparency worth the effort?

Unconventional Insights for Managing Stakeholder Trust

Michael Pirson is a research fellow with the Hauser Center for Nonprofit Organizations at the John F. Kennedy School of Government, Harvard University and a lecturer at the Harvard Extension School. Deepak Malhotra is an associate professor of business administration at the Harvard Business School and the coauthor of Negotiation Genius (Bantam Books, 2007). Comment on this article or contact the authors at [email protected].

Many companies

invest considerable

time and energy

trying to build trust

with customers,

employees, suppliers

and investors. Why are

some of those efforts

doomed to fail?

Michael Pirson

and Deepak Malhotra

M A N A G I N G R E P U T A T I O N

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44 MIT SLOAN MANAGEMENT REVIEW SUMMER 2008 SLOANREVIEW.MIT.EDU

To investigate such issues, we conducted a study of stake-

holder trust in four different organizations. (See “About the

Research,” p. 47.) The research analyzed the relevance (if any) of

various factors (benevolence, integrity, managerial competence,

technical competence, transparency and value congruence) to

different stakeholders (customers, suppliers, employees and

investors). In essence, we asked what matters — and to whom.

Some of the results were unsurprising. Customers, for instance,

stated that a company’s level of technical competence strongly

influences the degree to which they trust the company. Other

findings were unexpected, and a few were even counterintuitive,

leading us to the following key insights: Transparency is over-

rated; integrity is not enough; the right kind of competence

matters; building trust with one group can destroy it with

another; and value congruence matters across the board. (See

“The Truth About Stakeholder Trust.”) A closer look at each

insight provides important lessons for companies trying to build

and sustain trusting relationships with stakeholders.

Transparency Is Overrated The 2001 collapse of Enron Corp. and a slew of other corporate

scandals in the United States helped usher in an era of general

distrust of big business. Most observers, including many public

policymakers, concluded quickly that a lack of transparency was

the problem. As a consequence, most of the proposed remedies

have focused on increasing the availability of information to stake-

holders who might be vulnerable. Thus, the Sarbanes-Oxley Act

of 2002 requires companies to follow better reporting standards;

the U.S. Securities and Exchange Commission’s Regulation Fair

Disclosure regulates against the selective disclosure of information

to analysts and influential stockholders; and corporate governance

codes call for the publication of executive compensation packages.

These remedies presumably increase transparency, making it

difficult for executives to engage in illicit activities. If this is so,

they serve a very important purpose.

We have found, however, that transparency seems to have little

relevance in terms of building stakeholder trust. That is, whether

M A N A G I N G R E P U T A T I O N

Conventional Wisdom Reality

To increase stakeholder trust, companies need to make their operations more transparent.

Transparency actually can diminish trust depending on what is disclosed. Transparency with respect to executive compensation, for example, might easily decrease trust if it reveals no apparent link between pay and performance.

Integrity is crucial for building trust. Integrity is important, but stakeholders who engage with the company on a regular basis (many employees and customers, for example) must also feel that the organization cares about their personal well-being. Even well-meaning, ethical organizations can destroy trust if they are perceived as being fair but callous.

To engender trust, businesses must continually display competency in what they do.

Nobody trusts the incompetent, but people don’t all demand the same kind of know-how. Employees and investors look most for managerial competence, whereas customers and suppliers are more concerned about technical proficiency.

When trust is compromised, a company should act quickly to remedy the situa- tion with the stakeholder group that’s been affected.

Managers first need to determine who all the relevant stakeholder groups are. Only then can they deploy a balanced approach to managing trust that takes into account the various concerns and interests of the different parties. Otherwise, an organization might find itself exacerbating one problem even as it solves another.

The desire to identify with the values of an organization is an important factor in building trust only for employees, regular customers and others who have a close relationship with the company.

Identification (or value congruence) is important for all stakeholders. That is, not only employees and customers, but also suppliers, investors and stakeholders of all types are interested in associating with organizations that they can identify with — and that they perceive match their values.

The Truth About Stakeholder Trust

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companies disclose information may have little effect on their

perceived trustworthiness. In fact, of the various factors we stud-

ied, transparency was the only one that did not affect trust for any

stakeholder group. What explains this?

First, consider that forced disclosure might actually reduce the

quality of what is disclosed. Although fair-disclosure procedures

ensure that every investor is provided with the same information

at the same time, there is some evidence that the quality of infor-

mation shared has diminished since Regulation Fair Disclosure

went into effect.1 Some Wall Street observers complain that

companies that used to share sensitive information willingly

(with at least a subset of stakeholders) are now delaying or with-

holding important information. In addition, past research

suggests that career concerns among executives can create

perverse incentives in the face of financial disclosure: Executives

might focus more on managing the visible numbers (the stock

price, market share and so on) than on strategic initiatives that

could improve the long-term survival and profitability prospects

of the company but that are not rewarded in the short run.2

Second, whether information is disclosed might matter less

than what is disclosed. For example, transparency regarding

executive compensation might do little to build trust if it

reveals vast disparities between the pay of people on the front

lines versus those in the corner offices. Fairness perceptions are

crucial to building trust within organizations, and seemingly

oversized executive pay packages make it difficult for employees

to identify with management.3 Especially when there is no

apparent link between executive compensation and perfor-

mance, perceptions of fairness are damaged and trust diminishes.

In such cases, attempts to build trust through transparency can

easily backfire.

Finally, some empirical evidence suggests that disclosure, far

from being a remedy, can in fact exacerbate the problems it is

supposed to fix. In a fascinating experiment inspired by recent

accounting scandals, participants playing the role of “adviser”

had to tell their “clients” that they had a vested stake in overstat-

ing the value of a particular asset. Theoretically, the disclosure of

a potential conflict of interest should result in a more honest

interaction, eventually leading to a more trusting relationship.

But what really happened? Advisers who were required to dis-

close their bias felt more comfortable exaggerating information.

After all, they reasoned, “I already told them I was biased.” Worse

still, clients perceived these advisers as more trustworthy because

they had disclosed their conflict of interest. In other words,

advisers would have been more truthful, and clients would have

been more careful, if there had been no disclosure at all.4

For a real-life example of the disconnect between transpar-

ency and trust, consider Porsche Automobil Holding SE, the

German luxury-car manufacturer. Ever since Deutsche Börse

AG, the German stock exchange, implemented new reporting

standards in 2001, Porsche has refused to submit the required

quarterly reports. The company contends that quarterly num-

bers can be misleading because of its highly cyclical business,

and it has criticized Deutsche Börse for placing more value on

formal rules than on the quality of information disclosed.5 As a

result of its stand, Porsche has been excluded from the mid-cap

index and has faced threats of being delisted, but the company

still refuses to comply and continues to publish only six-month

and full-year results.

The result of the standoff? Following its exclusion from the

mid-cap index in 2001, Porsche share prices plummeted by 40%

in six weeks. But the stock then rebounded, returning to its pre-

exclusion level within four months, and it has steadily advanced

to new heights each year since. Not only do investors continue to

trust the company, but prospective employees do as well: Porsche

remains among the most popular potential employers in Europe.

In one study, graduating engineers placed the company on the

top of their employer wish list.6 Other stakeholders concur. The

general public consistently lists Porsche as one of the most repu-

table businesses in Germany, and customers worldwide have

rewarded the company with continuously rising profits at a time

when many other car manufacturers around the world have seen

their profits decline.7

Integrity Is Not Enough Not surprisingly, perceptions of honesty and integrity are

crucial to trust for all stakeholders. However, for people who

engage with an organization on a regular basis, integrity is not

enough. These “high-intensity” stakeholders also must perceive

that the organization cares about their well-being. In other

words, benevolence toward the individual, not just good

character and fair dealing, is critical.

Product recalls are a case in point. In 2007 alone, hundreds of

products were recalled for reasons ranging from Salmonella

bacteria in spinach to exploding batteries in computers. Com-

panies that recall defective products early and proactively are

likely to be perceived as having greater integrity than those that

deny or ignore the problem until action is forced on them by

public or governmental pressure. But even some high-integrity

companies that issue voluntary recalls find that they have irrevo-

cably damaged consumer trust, whereas others walk away from

the experience unscathed — or in some cases with enhanced

consumer trust. The difference is in the degree to which a com-

pany is able to signal concern for the well-being of individual

consumers.

Consider what happened to The Coca-Cola Co. in Europe. In

early June 1999, more than 240 people in Belgium and France

reported intestinal problems after drinking Coke, prompting the

Belgian government to ban Coke products for 10 days. Even

though there was no clear evidence that Coke products were the

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46 MIT SLOAN MANAGEMENT REVIEW SUMMER 2008 SLOANREVIEW.MIT.EDU

culprit, the company decided to recall beverages from five Euro-

pean countries, 17 million cases in total, making it the biggest recall

in the company’s history. CEO M. Douglas Ivester publicly stated

that ensuring the quality of its products was Coca-Cola’s highest

priority. “For 113 years our success has been based on the trust that

consumers have in that quality,” he said. “That trust is sacred to

us.”8 Coca-Cola quickly apologized and assumed responsibility,

citing two quality-control issues (impure carbon dioxide and

contaminated wooden pallets) as potential causes. Although it was

later found that Coke products were not responsible for the

reported health problems, the company had proactively demon-

strated benevolence not just in word but also in deed by offering to

cover health care costs for anyone who had been affected by the

incident. Moreover, as a gesture of goodwill, Coca-Cola also

offered free products to each of Belgium’s 4.4 million homes. Less

than two months after the initial incidents, research indicated that

core consumers of Coke products reported the same levels of

intent to purchase as before the crisis had hit.9 Three years later,

sales in Belgium were reportedly better than ever.10

Contrast that with Coca-Cola’s experience in India. In August

2003, a report by the Centre for Science and Environment, a New

Delhi, India-based environmental advocacy group, argued that

Coca-Cola and other producers of soft drinks were selling bever-

ages containing high levels of pesticides. Here, Coke decided to

approach the problem differently. Along with other soft-drink

producers, Coca-Cola quickly refuted CSE’s claims, presented its

own data to the public, accused the CSE of attacking it to further

CSE’s own cause and announced it would sue the organization.

Those actions might have bolstered the public’s perceptions of

Coca-Cola’s integrity, but they displayed a conspicuous lack

of concern for the well-being of individual consumers. The result:

Sales dropped by 30% to 40% in only two weeks, leading to a yearly

sales decline of 15% in 2003 (compared with prior annual growth

rates of 25% to 30%).11 Moreover, even after India’s health

minister had questioned the validity of CSE’s methods12 and

governmental as well as independent research labs had cleared

Coca-Cola of the allegations, the company still paid for a loss of

consumer trust. In 2006, it reported continuously declining sales

volumes and losses that far exceeded the investments made.13

Other companies have also learned the importance of demon-

strating concern for the well-being of customers. In July 2007,

Apple Inc. introduced the iPhone, a much anticipated product,

and priced it at $599. But only two months later — sooner than

anyone had anticipated — the price dropped to $399. People who

had already purchased the product felt mistreated and sent angry

e-mails to the company. In response, CEO Steve Jobs issued an

open letter to Apple customers. He first defended the price cut as

the right strategic move for Apple and justified the decision by

stating that substantive drops in price were standard in the

technology industry — in other words, that Apple had not acted

unethically. But Jobs then acknowledged that Apple needed

“to do a better job taking care of our early iPhone customers. …

Our early customers trusted us, and we must live up to that trust

with our actions in moments like these.” He then offered $100 in

store credit for Apple products to anyone who had purchased the

iPhone at the higher price. In doing so, he helped maintain

a sense of trust among the company’s most ardent fans and

customers.14 Without that gesture of benevolence, Apple might

have faced a huge consumer backlash.

The Right Kind of Competence Matters Nobody trusts the incompetent, but people don’t all demand

the same kind of know-how. Internal stakeholders, such as

employees and investors, look most for evidence of managerial

competence: executives’ ability to control costs and lead the work

force in the organization’s efforts to be competitive and create

value. External stakeholders, such as customers and suppliers,

typically care less about managerial competence and much more

about technical know-how: the organization’s ability to produce

goods and services of high quality and deal effectively with

supply-chain issues. Even high levels of competence in one area

can’t offset insufficient competence in the other, sometimes

leading to stakeholder distrust and organizational failure.

Delta Air Lines Inc. provides a vivid example. Hailed widely

for its operational excellence, Delta has been credited with the

invention of the hub-and-spoke model for airlines and for

being at the forefront of state-of-the-art technology, including

internal management software, ticket kiosks and online travel

agencies. Delta has also been touted as a pioneer in travel

comforts, being among the first to offer iPod plug-ins and

airline seats that allow passengers to lie flat. Such technical

accomplishments helped Delta gain the trust of its external

stakeholders, especially customers.15

Unfortunately, Delta failed to demonstrate similar levels of

managerial competence. Among its various missteps were a

highly publicized executive compensation scandal that destroyed

trust between management and workers, massive layoffs in 2004

that continued through 2006 and a delay in pursuing cost-cutting

strategies even in the face of rising fuel costs and increased

competition from low-fare carriers.16 Not only did such episodes

of managerial incompetence eventually force the airline to

declare bankruptcy in September 2005 (it later emerged from

bankruptcy and announced its intention to merge with North-

west Airlines), they also severely shook the trust of internal

stakeholders — both employees and investors.

On the other hand, managerial proficiency without technical

competency can be equally damaging. In early 2004, Sprint was

the third largest wireless phone company in the United States,

serving about 20 million customers. Its primary competitors had

each managed to acquire twice as many customers due to a series

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SUMMER 2008 MIT SLOAN MANAGEMENT REVIEW 47SLOANREVIEW.MIT.EDU

of mergers (Cingular Wireless, which acquired AT&T Wireless

Systems, had approximately 46 million customers, and Verizon

Wireless served about 41 million people). Sprint responded by

acquiring Nextel Communications, the fifth largest wireless

phone provider, which had 15 million customers, becoming

Sprint Nextel Corp. Sprint’s management was determined to

boost investor confidence by building market share with a deal

that was expected to create synergies and

reduce costs. Analysts applauded the merger,

and the company’s stock rose by almost 30%

over the next 15 months.

But others weren’t so enthusiastic. Motorola

Inc., one of Nextel’s key suppliers, soon discov-

ered that its proprietary network would be

phased out within two years of the merger in

favor of a system run by Sprint. This reduced

Motorola’s commitment to the relationship,

and the transition was beset with technical

problems.17 In 2006, 300,000 customers can-

celed their service, mostly blaming the poor

quality of the former Nextel network, and

Sprint’s reputation for customer service took a

huge hit.18 In an April 2007 poll by Zogby Inter-

national Inc., Sprint ranked lowest in a customer

service satisfaction rating of all industry players

in the United States. Customer complaints

became so frequent that in an unprecedented

move, Sprint itself decided to terminate at least

1,000 service contracts with people who had

called customer service “too often.”

In the case of Delta, no amount of technical

competence and innovation could have

salvaged the trust lost with employees and

investors due to perceived managerial incom-

petence. With Sprint, a focus on long-term

viability and competitiveness (managerial

competence) did little to offset the distrust of

customers who had suffered from a lack of

technical competence.

Building Trust With One Group Can Destroy It With Another Managing trust is a complex process because

stakeholder groups have different needs, and

efforts aimed at solving one trust problem

can exacerbate others. Consider the case of

Deutsche Bundesbahn, the German railway,

which was once a state-owned organization

known for its technical excellence. Customers

trusted its service and reliability so much that

they used the compliment, “You are as punctual as the Deutsche

Bundesbahn.” Unfortunately, though, the organization was not

being run as efficiently as it could be, suffering high operating

losses. In an effort to boost managerial competence, the railway

was privatized as Deutsche Bahn Aktiengesellschaft in 1994.

The result? The organization is now earning substantial profits

and is preparing for an initial public offering. According to

We have studied trust in organizations across four major categories of stakeholders:

customers, employees, suppliers and investors. (Note: We define trust as the psycho-

logical willingness of a party to be vulnerable to the actions of another individual or

organization based on positive expectations regarding the other party’s motivation

and/or behavior.) To aid in our analysis, we developed a framework that differenti-

ated across stakeholder groups along two dimensions. The first measures the

intensity of a relationship, based on length and frequency of interactions. The

second relates to whether a stakeholder is inside or outside the organization.

The two dimensions — intensity and locus — create four archetypes of stake-

holders. (See “Categorization of Stakeholders,” p. 48.) It should be noted that actual

stakeholder groups will not necessarily be perfectly aligned with any of the four

archetypes. For example, a stakeholder’s relationship with an organization can be

of “moderate” intensity (instead of “high” or “low”), and some stakeholders will have

multiple affiliations (for example, as an employee and a customer). As such, the four

quadrants of stakeholders should be viewed more as a general “map” rather than as

a table of four clearly demarcated cells. As an example that approximates the model

case in reality, each stakeholder group in our study can be associated with one of the

archetypes: customers (high-intensity, external), suppliers (low-intensity, external),

employees (high-intensity, internal) or investors (low-intensity, internal).

We investigated trust across the different categories of stakeholders at four

differently structured organizations: a small- to medium-sized manufacturer in

Switzerland, a large logistical company in Germany, a Western European branch of

an international consulting firm and a public university in Switzerland. In particular,

we studied the importance of six factors — integrity, managerial competence,

technical competence, benevolence, transparency and identification (or value

congruence) — to the different stakeholders.

Nearly 1,300 stakeholders — employees, customers, investors and suppliers —

from the four organizations participated in the study. People who reported more

than 100 interactions and more than three years of contact with the organization

were classified as having a high-intensity relationship. Those with fewer than 100

interactions or less than three years of contact were classified as low-intensity

stakeholders. In addition, by definition people were classified as either internal

(employees and investors) or external (customers and suppliers). (Note: Investors

are classified as internal because they are, in effect, owners of the organization.)

From the data, we were able to determine what factors were important to which

stakeholders. (See “What Matters to Whom,” p. 49.) For instance, we found that people

in low-intensity relationships did not base their trust on benevolence (the perceived

concern of the organization toward the stakeholder), but people in high-intensity rela-

tionships did. And integrity was significantly more relevant for people in low-intensity

relationships than in high-intensity ones. Some of the findings were surprising and a

few were even counterintuitive. Those results are discussed in detail in this article.

About the Research

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SLOANREVIEW.MIT.EDU

almost any standard, it is a successfully managed operation. But

there’s a problem: Customer trust has plummeted. Poor service

and constant delays have led to consistently poor reputation

ratings even as profits have increased. The lesson is that unless

a company takes a balanced approach to managing stakeholder

trust, it can find itself exacerbating one problem even as it

solves another.

Consider toymaker Mattel Inc.’s painful saga. In August 2007,

consumers learned that several of Mattel’s toy products were

defective and that others were contaminated with lead paint. In

the following weeks, the company issued three major product

recalls involving more than 20 million items.19 In an effort to

rebuild customer trust, CEO Robert A. Eckert publicly declared

that Mattel itself had been “betrayed” by its Chinese suppliers. He

asserted that these subcontractors had violated the company’s

standards and had used unauthorized lead-based paint. To avoid

future problems, Mattel management promised to implement

a strict system that would include pre- and post-production

controls aimed at suppliers and products.20 In addition, Mattel

terminated its relationship with several suppliers.

The aggressive response might have helped salvage customer

goodwill, but the consequences for trust with other important stake-

holders were devastating. The Chinese government was outraged by

Mattel’s attack on Chinese businesses and institutions, and the

owner of one Chinese toy factory reportedly committed suicide.

Later, after it was found that most of the recalled items (17.4 million)

had nothing to do with lead paint but rather with malfunctioning

magnets, Chinese governmental officials demanded an apology.21

On September 21, Thomas Debrowski, Mattel’s executive vice presi-

dent for worldwide operations, flew to Beijing and publicly issued

the following mea culpa: “Mattel takes full responsibility … and

apologizes personally to you, the Chinese people. ... it’s important for

everyone to understand that the vast majority of these products that

we recalled were the result of a flaw in Mattel’s design, not through

a manufacturing flaw by Chinese manufacturers.”22 This time,

Mattel’s strategy was aimed at rebuilding trust with the Chinese

government and the Chinese suppliers, but this too led to its share of

backlash. Sen. Charles Schumer echoed the reaction of consumer

advocates across the United States when he likened Debrowski’s

words to a “bank robber apologizing to his accomplice rather than

the person who was robbed.”

Although trust trade-offs are sometimes unavoidable, they can

often be anticipated and their negative consequences mitigated.

The key is to avoid defining the set of relevant stakeholders too

narrowly. If Mattel had, from the outset, identified the multiple

stakeholder groups that were affected by the recalls — and which

would thus be affected by the company’s response — it might have

taken a more balanced approach that considered the various

concerns and interests of all those parties.

Value Congruence Matters Across the Board One of the most underestimated determinants of trust is the

desire of stakeholders to identify with the values of an organiza-

tion. Many people believe that value congruence is important

only in relatively few, close relationships, for example, between

spouses, friends or close business partners. But we have found

that although value congruence matters most to employees (that

is, to individuals who are indeed closest to the organization), it is

also an important factor for every other stakeholder group we

studied. In other words, stakeholders of all types are interested in

associating with organizations with whom they can identify —

and with whom they perceive a match in values.

Google Inc. illustrates the critical role that value congruence can

play — both positively and negatively. When Sergey Brin and Larry

Page took Google public in 2004, they created two share classes: Class

A (for outside investors) would have just one-tenth the voting rights

of Class B (for insiders). This sent a signal that Google insiders would

remain in charge and that no outsiders could impose their values.23

48 MIT SLOAN MANAGEMENT REVIEW SUMMER 2008

M A N A G I N G R E P U T A T I O N

Stakeholders can be categorized according to the intensity

of their relationship with the company (based on length

and frequency of interactions) and their locus (that is,

whether they are inside or outside the organization). Those

two dimensions — intensity and locus — can be plotted to

create four archetypes. It should be noted that actual stake-

holder groups will not necessarily be perfectly aligned with

any of the four archetypes. For example, a stakeholder’s

relationship with an organization can be of “moderate”

depth, instead of “high” or “low.” But as a rough simplifica-

tion that approximates the modal case in reality, the major

categories of stakeholders — customers, suppliers, employ-

ees and investors — can be loosely associated with one of

the archetypes.

Categorization of Stakeholders

Locus

Intensity

External

Internal

Low High

Investors Employees

Suppliers Customers

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“[We] intend to operate Google differently, applying the values it has

developed as a private company to its future as a public company,”

Page explained. “We will live up to our ‘don’t be evil’ principle by

keeping user trust and not accepting payment for search results. …

[We] will do our best to make Google a long-term success and the

world a better place.”24 Various stakeholders embraced Google’s

values, which engendered high levels of trust. The company was

named the best place to work;25 in several surveys it received stellar

marks for its reputation;26 and its stock price soared.

Recently, however, Google has come under fire, and a big

source of the problem appears to be the company’s espoused

values. In order to serve the Chinese market, Google made a deal

with the government there to accept self-censorship for certain

topic areas, such as the Tiananmen Square massacre, Tibet and

the independence of Taiwan. Although competitors Microsoft

Corp. and Yahoo! Inc. had made similar concessions, Google’s

actions were seen as particularly reprehensible by many users

because of the company’s values pledge (“don’t be evil”).27 As a

consequence, people’s trust was severely shaken. Google execu-

tives were compared to Nazi collaborators and had to appear in

Congressional hearings to explain their actions. Protestors

marched at the company’s headquarters in Mountain View,

California.28 Later, Sergey Brin would admit that, “on a business

level, that decision to censor ... was a net negative.”29

The online classified service craigslist inc. is another organiza-

tion that views value congruence as a core company asset. Founder

Craig Newmark is more likely to reference “the golden rule” than

“the profit motive” when discussing appropriate guides for iden-

tifying and achieving organizational objectives, and CEO Jim

Buckmaster has told investment bankers and Wall Street analysts

that monetizing its services and finding additional revenue

sources in an effort to maximize profits is “not part of the goal.”30

This approach appeals to craigslist’s customer base and employ-

ees. (Our own data suggests that many stakeholders mistrust

businesses in part because companies have a fiduciary responsi-

bility — and usually strong incentives — to maximize shareholder

value, and their behavior is hence perceived as opportunistic.31)

But, of course, investors have a different perspective altogether.

How might companies deal with this dilemma?

On the one hand, craigslist has been growing at a remarkable

rate and its expected market value (were it to issue an IPO)

continues to increase even as it clings to the values it espoused at

its founding. This suggests that a company can be values-driven

without necessarily incurring a penalty in its market value.

Furthermore, the success of “socially conscious funds”32 suggests

that the conflict between investor values and the values of other

stakeholders might be diminishing. On the other hand, unless

a business is privately held (which craigslist is), it will likely

encounter great difficulty if it continually resolves trust trade-offs

by giving short shrift to investors. Rather, a more effective long-

term approach might favor values-congruent operations and

objectives within the constraints of fiduciary responsibility.

Research has shown that, despite their fiduciary duty to maxi-

mize shareholder value, managers have much more latitude in

managing social responsibility than is often assumed. Moreover,

a meta-analysis of past studies has found that the effect of corpo-

rate social responsibility on financial performance is small but

positive.33 In other words, companies can appease a diverse set of

stakeholders (at least to a degree) without offending investors.

Unfortunately, businesses seem to be doing poorly in terms of

perceived value congruence and trust, and the overall reputation of

corporations in the United States (and throughout the world) leaves

much to be desired. In 2005, 71% of respondents in an annual

survey rated the reputation of U.S. businesses as “not good” or “ter-

rible.”34 Global businesses, meanwhile, were awarded negative trust

ratings by a majority of respondents in more than 14 countries

surveyed by the World Economic Forum in 2006.35 This is certainly

bad news for businesses as a whole. But it also suggests an

Different stakeholder groups do not place the same impor-

tance on the different factors of trust studied: integrity,

managerial competence, technical competence, benevo-

lence, transparency and identification (or value congruence).

For example, people in low-intensity relationships with a com-

pany do not base their trust on benevolence, whereas people

in high-intensity relationships do.

What Matters to Whom

Identification

Managerial Competence

Technical Competence

Benevolence

Integrity

Identification

Managerial Competence

Technical Competence

Benevolence

Integrity

Identification

Managerial Competence

Technical Competence

Integrity

Identification

Managerial Competence

Technical Competence

Integrity

Locus

Intensity

External

Internal

Low High

Indicates that a specific trust element matters relatively more in this type of relationship than in another type of relationship.

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50 MIT SLOAN MANAGEMENT REVIEW SUMMER 2008 SLOANREVIEW.MIT.EDU

opportunity to build trust and leverage it as a core asset for any

company that can successfully balance fiduciary responsibility with

a strong emphasis on stakeholder value congruence.

STAKEHOLDERS DIFFER WITH REGARDS to the kinds and degrees of

vulnerability they face. What they need to believe before they will

trust a company also differs. Managers need to consider those

varying needs and anticipate the trade-offs that exist in strength-

ening relationships with employees, customers, suppliers,

investors and others. In short, companies can’t take a one-size-

fits-all approach to managing stakeholder trust. Nor can they

simply leverage conventional wisdom.

Our work provides an initial step toward building a stakeholder-

specific model of organizational trust. The framework challenges

some existing beliefs and sheds light on a number of areas that

companies would be wise not to ignore. In particular, our results

suggest that managers need to better understand the seemingly

expansive role of value congruence and identification, more fully

consider the contexts in which integrity without benevolence is

a recipe for distrust, more carefully investigate the distinction

between managerial and technical competence, and more rigor-

ously evaluate the costs and benefits of transparency initiatives.

Deeper knowledge in these and other areas will help companies

become more adept at managing stakeholder trust so that they

might reap the numerous benefits, including improved coopera-

tion with suppliers, increased motivation and productivity among

employees, enhanced loyalty from customers and higher levels of

support from investors.

REFERENCES

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2. See, for example, A. Brandenburger and B. Polak, “When Managers Cover Their Posteriors: Making the Decisions the Market Wants to See,” RAND Journal of Economics 27, no. 3 (autumn 1996): 523-541.

3. W. George, “Bill George: Nonperforming CEOs,” Sept. 6, 2007, www. businessweek.com.

4. D.M. Cain, G. Loewenstein and D.A. Moore, “The Dirt On Coming Clean: Perverse Effects of Disclosing Conflicts of Interests,” Journal of Legal Studies 34 (2005): 1-25.

5. “Porsche Faces Delisting From Index as Deutsche Boerse Readies Decision,” Aug. 7, 2001, www.cfo.com.

6. “Porsche Is Highly Regarded By Students in Europe,” July 30, 2007, www.automotoportal.com.

7. “Porsche Tops Quality Survey,” June 8, 2006, http://money.cnn.com; “Porsche Earnings Rise,” January 18, 2002, http://archives.cnn.com; and R. Alsop, “Corporate Reputation Survey: Best-Known Companies Aren’t Always Best Liked,” Wall Street Journal, Nov. 15, 2004, p. B4.

8. “Ivester Responds to Belgian Product Withdrawal,’’ KO Now, June 16, 1999; and “Coca-Cola ‘Regrets’ Contamination,” June 17, 1999, http:// news.bbc.co.uk.

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11. J. Kaye and P. Argenti, “Coca-Cola India,” Tuck School of Business at Dartmouth case no. 1-0085 (Hanover, New Hampshire: Tuck School of Business, 2004).

12. “India: Behind the Scare Over Pesticides in Pepsi and Coke,” Busi- ness Week, Sept. 4, 2006.

13. I. Basu, “Coke Still Floundering in India,” Asia Times, June 23, 2006.

14. J. Pine and J. Gilmore, “Apple’s ‘Phony’ Reaction to iPhone Custom- ers,” Sept. 10, 2007, http://conversationstarter.hbsp.com; and J. Martellaro, “iPhone Pricing: No Conspiracy, Rather Nimble Reactions,” Sept.14, 2007, www.ipodobserver.com.

15. P. Williams and J. Williams, “Why Good Companies Go ‘Bad’ — By Trying to Be Somebody They’re Not,” www.ravenwerks.com.

16. Williams and Williams, “Good Companies.”

17. J.E. Lappin, “The Unmaking of Motorola,” Jan. 25, 2007, www.forbes.com.

18. C. Oster, “The Customer Service Hall of Shame,” April 26, 2007, http://moneycentral.msn.com.

19. P.B. Kavilanz, “U.S. Biz Blamed for Dangerous Chinese Products,” Aug. 2, 2007, http://money.cnn.com.

20. “Mattel Recalls 18.2 Million Chinese-Made Toys,” Aug. 14, 2007, www.ctv.ca.

21. C. Chandler, “Why Mattel’s ‘Apology’ to China Only Makes It Worse,” Sept. 25, 2007, http://chasingthedragon.blogs.fortune.cnn.com.

22. “Mattel Sorry for ‘Design Flaws,’” Sept. 21, 2007, http://news.bbc.co.uk. 23. M. Lewis, “The Irresponsible Investor,” New York Times Magazine, June 6, 2004.

24. L. Page and S. Brin, “Letter From the Founders,” Aug. 18, 2004, http://investor.google.com.

25. “100 Best Companies to Work for: 2007,” Fortune, Jan. 22, 2007.

26. “How Boss’s Deeds Buff Firm’s Reputation,” Wall Street Journal, Jan. 31, 2007; and R. Alsop, “Ranking Corporate Reputations — Tech Companies Score High in Yearly Survey As Google Makes Its Debut in Third Place,” Wall Street Journal, Dec. 6, 2005, p. B1.

27. “Don’t Be Evil: Restoring the Public Trust in Business, Politics and the Media,” June 6, 2006, www.dontbeevil.com.

28. C. Thompson, “Google’s China Problem (and China’s Google Problem),” New York Times Magazine, April 23, 2006.

29. J. Martinson, “China Censorship Damaged Us, Google Founders Admit,” Guardian, Jan. 27, 2007.

30. “Craigslist Meets the Capitalists,” Dec. 8, 2006, http://dealbook. blogs.nytimes.com.

31. M. Pirson, “Facing the Trust Gap: Measuring and Managing Stake- holder Trust” (Ph.D. diss., University of St. Gallen, 2007), www.unisg. ch/www/edis.nsf/.

32. S. Asci, “Socially Conscious Fund Firms Spread Their Asset-Class Wings,” Investment News, Dec. 10, 2007.

33. J. Margolis and J.P. Walsh, “Misery Loves Companies: Rethinking Social Initiatives By Business,” Administrative Science Quarterly 48, no. 2 (June 2003): 268-305.

34. Alsop, “Ranking Corporate Reputations.”

35. B. Coursey, “Trust Trends: Confidence in NGOs On the Rise,” Feb. 13, 2006, www.ethicalcorp.com.

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