Organizational Research unit I case study and DQ Question
nasarb
desining_trustworthy.pdf
R E P R I N T N U M B E R 5 4 4 1 9
S U M M E R 2 0 1 3 V O L . 5 4 N O . 4
Designing Trustworthy Organizations By Robert F. Hurley, Nicole Gillespie, Donald L. Ferrin and Graham Dietz
IN THE AFTERMATH of the well-publicized corporate scandals of Enron, WorldCom and Tyco circa 2001 and 2002, there were major efforts in the United States to restore trust and enforce
corporate compliance. Among other things, the U.S. Congress passed the Sarbanes-Oxley Act of
2002, featuring enhanced whistleblower protections, holding CEOs and CFOs personally responsible
for financial statements, and establishing the creation of the Public Company Accounting Oversight
Board, harsher sentencing rules and even new organizational guidelines to encourage boards to
adopt changes to organization structures and processes to target more systemic approaches to pre-
vent wrongdoing. Corporate spending on compliance increased an estimated $6 billion annually,1
and leading business schools created ethics centers and made ethics training mandatory.
Yet despite these reform efforts, corporate trust violations have gone unabated and public trust in
business has plummeted.2 A full recitation of the significant trust violations of recent years would go
on for pages, covering Olympus Corporation’s accounting fraud, Barclays’ Libor rigging scandal, News
THE LEADING QUESTION How can companies recover from trust failures and create reputations for trustworthi- ness?
FINDINGS Trust failures are often blamed on rogue employees, but usually occur because of faults in the organization’s system.
A common cause of trust failures is a company strategy or culture that serves the interests of one stakeholder group at the ex- pense of others.
Repair requires understanding the systemic causes of the failure and reforming the orga- nizational system.
BAE Systems, whose products include parts of the F-35 Lightning II, is an example of a com- pany that launched a trust repair effort.
Designing Trustworthy Organizations Companies often blame trust violations on ‘rogue employees,’ but these violations are predictable in organizations that allow dysfunctional, conflicting or incongruent activities to take root. BY ROBERT F. HURLEY, NICOLE GILLESPIE, DONALD L. FERRIN AND GRAHAM DIETZ
B U S I N E S S E T H I C S
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Corporation’s phone-hacking scandal, and the BP
Deepwater Horizon oil spill. In fact, some of the most
insidious practices from the Enron era (notably, dis-
guising financial weakness with off-balance-sheet
debt) were front and center again during the global
financial crisis of 2008. In the wake of that financial
crisis, the U.S. Congress passed the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which
extended and tightened the financial regulatory
system and strengthened consumer protections. But
the apparent inability of governments and industry
groups to curb the level of wrongdoing raises im-
portant questions: Why do trust failures continue to
occur with such frequency, and how can they be re-
liably prevented?
The matter is all the more perplexing considering
that there is substantial research on organizational
trust, including what trust is, how trust affects the
functioning of organizations and how trust can be
built, lost and repaired.3 Much of the work sup-
ports commonsense notions about how leaders
can and should earn the trust of followers. One of
us (Robert Hurley) developed the framework
below to help leaders understand how to earn
trust.4 It effectively summarizes the empirical evi-
dence regarding trust drawn from several decades
of research in fields including psychology, game
theory, organizational behavior and sociology,
identifying six types of signals people consider
when deciding whether to trust a person, group or
organization (a “trustee”):
1. Common values: Does the trustee share our val-
ues and beliefs?
2. Aligned interests: Do the trustee’s interests coin-
cide rather than conflict with ours?
3. Benevolence: Does the trustee care about our
welfare?
4. Competence: Is the trustee capable of delivering
on commitments?
5. Predictability and integrity: Does the trustee
abide by commonly accepted ethical standards
(such as honesty and fairness), and is he or she
predictable?
6. Communication: Does the trustee listen and en-
gage in open and mutual dialogue?
In this article, we apply the framework to under-
stand how organizations as a whole can consistently
produce authentic signals of trustworthiness. To
explore the processes of building, losing and
repairing trust in organizations, we conducted a
series of studies that enabled us to detect patterns
across organizations. (See “About the Research.”)
We found that building and sustaining organiza-
tional trust is different from, and not nearly as
intuitive as, building and sustaining interpersonal
trust. Thus, while some insights from the trust lit-
erature in psychology and management might
apply, we believe that a new model is required to
understand how to manage trust in large, complex
organizations operating in highly diverse global
environments. Such a model enables us to explore
three fundamental questions:
• Why do major trust violations occur within orga-
nizations?
• Why do some organizations systematically earn
and sustain stakeholder trust while others experi-
ence repeated trust v iolations? How can an
organization weave trustworthiness into its core?
• When trust violations do occur, why are some
organizations successful at repairing trust while
others aren’t?
Why Trust Violations Occur Trust is a judgment of confident reliance on another
(a person, group, organization or system) based on
positive expectations of future behavior.5 A trust
violation occurs when the trusted party bears some
ABOUT THE RESEARCH Our model is based on research we conducted with colleagues over the last 12 years
to understand how organizations and their leaders earn, maintain and violate trust
and repair it after a violation. We conducted detailed reviews of the academic litera-
tures on trust, trust building and trust repairi and basic experimental, field and
theoretical research into the nature, development and repair of trust. In 2011, we
completed a study commissioned by the Institute of Business Ethics of 30 organiza-
tions that had violated trust and then attempted to repair trust (with varying degrees
of success) during the prior 10 yearsii; the study analyzed case study data based on
both archival and interview sources. We have also conducted deep examinations of
two large corporate and government organizations experiencing trust crises. For
obvious reasons, the identity of the organizations must remain confidential. One was
global and headquartered outside the United States; the other was U.S.-based and
operated primarily within the United States. In both cases we had extensive access
to key employees at all levels and collected interview and survey data. We supple-
mented the above research with an examination of best practices at select
companies that consistently appear on the “Most Admired” and “Best Companies
to Work For” lists compiled by Fortune magazine and data from several hundred
executives and managers attending executive education leadership programs on the
trust issues they experience in their organizations.
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responsibility for an act that significantly deviates
from positive expectations (for example, fraud, de-
ceit, gross incompetence, negligence or exploitation).
When people perceive a trust violation, they lower
their expectations of future behavior — in other
words, they reduce trust.6
Although companies often blame trust violations
on “rogue employees” and “a few bad apples,” our
research indicates that major organizational trust
violations are almost never the result of rogue actors.
Rather, they are predictable in organizations that
allow dysfunctional, conflicting or incongruent ele-
ments of their organizational system to take root.
Numerous cases bear this out: Mattel, the California-
based toy manufacturer, for example, had a strong
reputation for quality, but weak oversight of its
Chinese supply chain resulted in lead paint contami-
nation of toys and massive recalls in 2007. BP’s
Deepwater Horizon oil rig explosion and oil spill in
2010 highlighted the conflict between the company’s
strategy and culture of minimizing costs to enhance
profitability and its focus on safety. The 2011 U.S.
Senate Permanent Subcommittee on Investigations
report on the financial crisis was very critical of Gold-
man Sachs and its role in the Abacus fund, where
investigators found that Goldman’s stated values of
client focus and integrity were at times overshadowed
by a less formal culture that emphasized getting deals
done with less than full disclosure.7
Indeed, virtually all companies that have experi-
enced major trust violations had some, and often
extensive, systems and processes in place to produce
trustworthy behavior (for example, compliance pro-
cedures, quality checks, codes of conduct and ethics
training). However, as important as these systems
and processes may be, other elements undermined
the companies’ ability to deliver on their core re-
sponsibilities to stakeholders. The problem is the
inconsistency in embedding trustworthiness.
Our in-depth analysis of large organizations
that experienced major trust violations highlights
the organizational root causes of trust violations.
When we asked several hundred leaders at a large
multinational company, “What are the most fre-
quent trust issues you encounter at work?,” the
most frequent responses focused on fundamental
aspects of how the organization functioned: orga-
nizational restructuring and instability ; poor
support and follow-through; poor talent manage-
ment; lack of communication and information;
and leadership and strategy issues. When we asked
employees of a government agency, “What one
change would you make to improve trust in the
organization?,” respondents provided similar an-
swers: improve communication, enhance senior
management capability, provide more accountabil-
ity for performance, empower employees and
enhance collaboration across groups.
In examining trust failures, we have found that
one type of incongruence that frequently led to
widespread loss of trust was the development of a
company strategy (and, in turn, the allocation of re-
sources) that either accidentally or deliberately
favored the interests of one stakeholder group while
betraying those of others. This problem has often
been defined as letting shareholder profits take
precedence over core responsibilities to other
stakeholders (such as employees, customers, suppli-
ers or communities). To be sure, it is not uncommon
for organizations to favor some stakeholders’ inter-
ests over those of others.8 Rather than simply
prioritizing certain groups, however, a trust betrayal
occurs when the organization actively caters to a
group (or groups) but fails to uphold responsibili-
ties to others (such as providing employees with a
safe working environment). The balance goes be-
yond merely serving one stakeholder group better
than another to serving the selected group at the
expense of and even causing harm to another group.
Given the global prevalence of social media, online
global forums and 24-hour news cycles, a breach of
trust with any one stakeholder group can rapidly
Although companies often blame trust violations on ‘rogue employees’ and ‘a few bad apples,’ our research indicates that major organizational trust violations are almost never the result of rogue actors.
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undermine an organization’s reputation for trust in
its broader stakeholder community.
Building High-Trust Organizations Creating and sustaining a high-trust organization
requires understanding how the various stakeholders
— the investors, employees, suppliers, customers and
other affected communities — gauge trustworthiness.
Based on our studies of high-trust organizations and
cases of effective trust repair, we propose that the six
criteria highlighted above — common values, aligned
interests, benevolence, competence, predictability and
integrity and communication — can serve as a foun-
dation for organizational trust. But how can an
organization use these criteria to advance trustwor-
thiness when the company already has preexisting
social, technical and political subsystems in place?
Our model draws on trust research, systems theory
and strategic organizational design to conceptualize
the elements of organization design that are central to
engineering high-trust organizations.9 (See “A Model
of Organizational Trust.”) Developing sustainable
trust with a broad range of organizational stakehold-
ers demands effective organizational infrastructure
(strategy; leadership and management; culture; struc-
ture; and systems), which generates and sustains
effective core processes (the development, production
and delivery of products and services). Trustworthi-
ness must be embedded in a way that is congruent and
mutually reinforcing in order to reliably produce sig-
nals of trustworthiness. Organizations that weave
trustworthiness signals into all elements of their
infrastructure and core processes, over time, earn
reputations of trust with their stakeholders. In con-
trast, trust failures occur when important elements
are allowed to become misaligned.
Engineering trustworthiness into each element of
the organization involves setting formal and informal
constraints, incentives, expectations, values and
norms, which influence the behavior of employees
and agents. These formal and informal controls can
promote diligence and honesty — or recklessness
and malfeasance. Having positive signals across all of
the elements can inspire and regulate employees’
trustworthiness; having mixed or deviant messages
can lead to cynicism and unpredictable behavior.
(See “How Trustworthy Is Your Organization?”)
Effective external governance plays an integral
role in supporting organizational trustworthiness.
However, for several reasons, it should be viewed
not as the complete answer but as only a starting
point in creating trust. The legal system and regula-
tory agencies establish minimum standards, but
because regulators are often under-resourced, they
cannot prevent all trust failures. Sadly, external reg-
ulation may give organizations a false sense of
security that can lull them and their stakeholders
into complacency about trustworthy conduct.
QuikTrip, a privately held company based in
Tulsa, Oklahoma, with more than 600 convenience
stores and over $10 billion in annual sales, provides
a helpful illustration of how a trustworthy organi-
zation can be created. An industr y leader, the
company has been on Fortune’s “100 Best Compa-
nies to Work For” list for 11 straight years. The
company has a clear competitive strategy and a
mission that emphasizes obligations to employees,
customers and communities. For example, the
company returns 5% of its net profits to the com-
munities it serves. The leadership team is largely
homegrown and is populated by people who be-
lieve in the company’s values. This is sustained by a
A MODEL OF ORGANIZATIONAL TRUST Organizations that weave trustworthiness signals into all elements of their infrastructure
and core processes, over time, earn reputations of trust with their stakeholders.
Embedding Organizational
Trustworthiness
Strategy Clear mission with
trust-inducing core values that
accommodates stakeholder interests
Leadership and Management Leaders who embody the company values and expect the same from their teams
Culture Strong shared norms and beliefs that encourage upholding companywide values and deter deviance
Systems Planning, reporting, budgeting, HR and compliance reinforce trust-inducing behaviors, linked to the culture and strategy
Product and Service Development, Production
and Delivery Processes that ensure stakeholder needs and expectations are met,
company values upheld and legislation adhered to
Structure Formal organization and
governance that set clear roles and
accountability and provide discretion within
prudent oversight
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rigorous succession planning process that ensures
that those rising in the organization share the com-
pany’s values and deliver results with competence.
In our study of the QuikTrip culture, we found
that “doing the right thing” — for customers and
employees — was almost a religion. The company
has an experienced and active board and clear
accountability for key functions and geographies
across the organization. Key leaders from each
region periodically undergo extensive reviews by
senior management that go beyond profit analysis to
include store quality and employee and customer
satisfaction. The company’s communication, HR
and planning systems all reinforce fairness, compe-
HOW TRUSTWORTHY IS YOUR ORGANIZATION? To provide some guidance for embedding trustworthiness into the organization’s infrastructure and core processes, managers can consider
the following questions.
Strategy •Are we clear about our mission and our strategy to serve all stakeholders?
•Is execution against strategy evaluated from all stakeholders’ perspectives?
•Does the strategy align with the company’s values and meet triple bottom line (people, planet, profit) responsibilities?
• Are decisions made and resources allocated in a way that shows benevolence, integrity and alignment with stakeholder interests?
•Are we developing the competencies required to exceed stakeholder expectations over the long term?
•Do stakeholders perceive that strategic trade-offs are made in a transparent and fair manner?
Leadership and Management
•Does management at all levels model company values?
• Does management serve stakeholder interests before self, act with integrity and competently and predictably deliver on commitments?
•Does management communicate openly, listen and demonstrate concern for employees?
•Do managers hold their teams accountable for competent execution of strategy while upholding company values?
Culture •Are there strong cultural values and beliefs that bond people and unify subcultures to serve stakeholders well?
• Are the values of benevolence (respect, fairness) for stakeholders, integrity, competence (excellence) and predictably delivering on expectations deeply held, so that acting against them would feel wrong and uncomfortable?
• Are values translated and activated such that employees support the organization’s mission, beyond self or subgroup interests?
Structure •Does the structure provide clear roles, responsibilities, accountabilities and alignment of interests across groups?
• Does the structure provide adequate governance and monitoring at all levels to ensure competent execution of strategy in a manner that upholds company values?
•Does the structure engage and facilitate open communication with stakeholders?
Systems • Do selection, induction, training, compensation, promotion, evaluation and succession systems reinforce the espoused values?
• Do communication, planning and information systems enable effective coordination, alignment of interests and meaningful mutual dialogue?
•Are there robust mechanisms to surface and facilitate reporting of ethical violations?
Product and Service Development, Production and Delivery
• Are development and production processes focused on serving both company and stakeholder interests (the interests of customers and suppliers)?
•Is benevolence (safety, sustainability, fairness) a priority for all product and service teams?
•Is there testing to ensure that production competently and predictably meets standards?
• Is the entire supply chain monitored to ensure benevolence, predictability and competence in meeting stakeholder expectations?
•Are products and services advertised in a way that avoids deceptive communication?
• Does the company value communication about (listen to) customer needs and concerns, and respond benevolently to (care about) them? Do products and services exceed expectations?
•Is there a robust product and service recovery process to ensure customer satisfaction even when a failure occurs?
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tence and benevolence. For example, the CEO and
senior management team invest considerable time
each year attending employee meetings around the
United States with the primary goal of listening and
taking action on feedback. The company has low
employee turnover and high customer satisfaction
for its industry, and its community and other stake-
holder relationships are characterized by high trust.
Our research suggests that the key differentiator
between companies that violate trust and those that
sustain it is integrity and consistency within and
across the organization. The organizational
design — how the elements of the organization’s
architecture and core processes are configured and
aligned — enables reliable delivery on the expecta-
tions of stakeholders, and hence minimizes the
likelihood of an organizational trust failure.
Restoring Trust Ironically, trust failures can act as positive catalysts
for creating a high-trust organization. Much can be
learned about how to establish and sustain organi-
zational t r ustwor thiness by examining how
organizations successfully restore trust after a
major violation. (See “How Three Companies
Sought to Repair Trust.”) Beyond immediate crisis
management, the key to restoring stakeholder trust
is identifying the root causes of the failure and im-
plementing and reinforcing real organizational
reforms to tackle the problems.10 In analyzing cases
of companies that have attempted to repair trust,
we identified three critical stages: investigation,
organizational reform and evaluation.11
1. Investigation. One contributing factor to effec-
tive trust repair is the credibility, rigor, independence
and accuracy of the investigation of the trust viola-
tion. Companies are often so concerned with
appearance and damage control that they are un-
willing to engage in the degree of examination
required to root out the entrenched causes of trust
violations. Such was the case of BP after the 2005
Texas refinery explosion and of News Corp. follow-
ing the jailing in 2007 of an employee who had
engaged in phone hacking. As a result, the seeds of
the trust violation are embedded within the system
and can result in future violations (such as BP’s
2010 oil spill in the Gulf of Mexico and News Corp.’s
2011 phone-hacking scandal).
Effective investigations need to make clear how
each element of the organizational system directly
or indirectly contributed to trust failures and what
needs to change to prevent other incidents in the
future. Siemens and BAE Systems, which both paid
fines to settle bribery charges, launched their trust
repair efforts with independent and rigorous inves-
tigations, which led to recommendations for
systemic reforms.
2. Organizational reform. Since trust failures are
typically systemic, the organizational reforms need
to be systemic as well. Structures, systems and pro-
cesses should be the first point of intervention
because they are relatively easy to change and de-
sign. However, such interventions by themselves
are unlikely to produce sustainable change. The
more difficult challenges involve making changes
to the organization’s culture, strategy and leader-
ship and management practice. Indeed, adding
training in ethical conduct probably won’t affect
organizational behavior in any meaningful way if
supervisors, workplace norms and/or performance
management objectives continue to encourage
questionable activities.
In successful repair efforts, systemic reforms need
to be reinforcing and congruent so that trustworthi-
ness becomes embedded in the organization’s culture
over time. Ethics and compliance officers know that
this is the holy grail of trustworthiness, but it is notori-
ously difficult to realize because it often confronts
deeply embedded mindsets. For example, BAE Sys-
tems restricted itself for ethical reasons from using
The more diffi cult challenges involve making changes to the organization’s culture, strategy and leadership and management practice.
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sales contractors in some parts of the world, which
created enormous challenges for the global sales force.
Yet the fact that the company implemented the re-
strictions, despite the difficulties they caused, clearly
communicated to the organization that management
was serious about reform. Companies that are serious
about their trustworthiness are convinced that real
culture change doesn’t happen without changing how
employees do their work and are rewarded, as well as
changes in the behaviors that leaders model.
3. Evaluation. Even when a trust crisis recedes, old
habits have a way of returning. Reforms must be evalu-
ated to ensure they are working as intended, and
shortfalls must be addressed. BAE Systems, for exam-
ple, works with an auditing firm to evaluate the
execution of its reforms. Because it takes time to change
systems and deep change is hard to realize, in some
respects the most important part of trust repair is the
ongoing assessment, learning and course correction
required to build authentic, sustained trustworthiness.
Successful trust repair requires going beyond crisis
communication, first to take a systems perspective to
accurately diagnose and reform the true faults in the
organizational system, and then to evaluate the effec-
tiveness of the reforms. Through this process,
organizations not only repair trust but also embed
trustworthiness into the organization’s design, making
the organization more resilient to future trust failures.
It is challenging for companies to meet goals
and manage trust in complex, competitive and
dynamic markets and a globally interconnected,
HOW THREE COMPANIES SOUGHT TO REPAIR TRUST Restoring stakeholder trust involves implementing and reinforcing organizational reforms to tackle the problem.
COMPANY ISSUE ELEMENTS OF REPAIR
Siemens Agreed to pay fine of more than $1 billion to settle charges of using bribery to secure government contractsiii
• Appointment of an externally led, comprehensive and independent investigation, including a staff “amnesty”
•Appointed a respected independent expert to advise on reforms
• Revised codes of conduct, reformed policies on compliance and anticorruption and created an internal ombudsman and compliance help desk
•Trained more than 200,000 employees on anticorruption practices to shift beliefs and values
•Streamlined structure to provide clear line of responsibility
•Revised strategy to avoid competing in known corruption hot spots
•Fivefold increase in staff numbers dedicated to compliance
•High-profile departures and more than 900 disciplinary actions
BAE Systems Agreed to pay more than $400 million in fines to settle charges alleging corporate briberyiv
•Formed the independent Woolf Committee to investigate and make 23 recommendations
•New responsible trading principles guide staff in commercial decision making
• Revised codes of conduct and policies and procedures on bribes, donations, hospitality and political lobbying
• New governance structures: oversight by an independent ethical leadership group and an ethics helpline
•Training programs in ethics, especially for senior managers
•Independent audit of implementation of reforms
Mattel Toys A Chinese supplier outsourced produc- tion resulting in the use of lead paint in the production of millions of toys, a substance banned for health reasons in many of Mattel’s mature marketsv
•Ceased production in named facilities, followed by massive recall
•Full and proactive cooperation with regulators worldwide
•Thorough investigation with extended remit to include all Chinese vendors
•A second voluntary recall, linked to faults in Mattel’s own design of a toy
•Coordinated sector-level discussions on mandatory safety regulation
•Revised and strengthened supply chain audits and procedures
•Established a new “corporate responsibility division” reporting directly to the CEO
•Agreed to an audit by an independent NGO of its supply-chain practices
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multi-stakeholder community. Companies that do
this well develop robust trustworthy organizational
systems that enable them to reliably deliver on their
core responsibilities to stakeholders and rapidly
recover in the event of a trust failure. They reap ben-
efits from having earned a sustained reputation of
trust among employees, customers, investors, sup-
pliers and communities. In fact, we would argue, and
some research supports the idea, that high-trust or-
ganizations also tend to be high-performing, with
lower employee and customer turnover, lower
monitoring costs and even better financial re-
turns.12 The good news is that we know how to
engineer trustworthy organizations. If leaders and
senior managers get smarter about how to manage
trust, perhaps we can stop the deluge of damaging
headlines and reverse the declining measures of
trust in business by manifesting authentic and con-
sistent signals of trustworthiness.
Robert F. Hurley is a professor of management and director of the Consortium for Trustworthy Organizations at Fordham University in New York City. Nicole Gillespie is a senior lecturer in manage- ment at the University of Queensland in Australia. Donald L. Ferrin is a professor of organizational be- havior and human resources at the Lee Kong Chian School of Business at Singapore Management Uni- versity. Graham Dietz is a senior lecturer in human resource management at Durham University in the United Kingdom. Comment on this article at http:// sloanreview.mit.edu/x/54419, or contact the authors at [email protected].
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ii. G. Dietz and N. Gillespie, “Building and Restoring Orga- nizational Trust.”
iii. E. Lichtblau and C. Dougherty, “Siemens to Pay $1.34 Billion in Fines,” New York Times, December 15, 2008; and S. Schubert and T.C. Miller, “At Siemens, Bribery Was Just a Line Item,” New York Times, December 21, 2008.
iv. M. Peel and S. Kirchgaessner, “BAE to Pay $450M to End Bribery Case,” Financial Times, February 5, 2010.
v. L. Story, “Lead Paint Prompts Mattel to Recall 967,000 Toys,” New York Times, August 2, 2007.
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