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Trust has been eroded lately in many institutions and in many ways.
- Toyota once was an icon of the car industry. After a series of vehicle recalls, the reputation of the company was seriously damaged.
- The Roman Catholic Church dealt inadequately, in the eyes of many, with allegations of sexual abuse by clerics.
- After the collapse of Lehmann Brothers in 2008 trust amongst financial institutions vanished. Nike and Gatorade, sponsors of golf celebrity Tiger Woods, saw as much as $12bln wiped off the value of their shares in the wake of the sex scandal around Mr. Woods.
- The EU countries, the European Commission and the IMF had to build an unprecedented financial package after financial markets lost trust in Greece, Portugal and Spain.
All these are examples of trust (or the lack of it). Trust in companies and institutions also affects trust in leaders. Business leaders, especially bankers, have lost their public status as a consequence of the financial and economic crisis and because of their perceived greed. Political leaders in many countries are also under fire. Research in the Netherlands shows that politicians are considered even less trustworthy than used car salesmen.
Leaders can only be effective if they are trusted. Trust has to be given voluntarily, it cannot be coerced. Therefore, regaining trust is one of the most important challenges of leadership today. There are huge opportunities for leaders to build trust. Employees and other stakeholders prefer trust over distrust.
Trust is an important lubricant for business. It reduces what economists call transaction costs and therefore allows transactions to be completed without requiring exhaustive information. Relationships characterized by high levels of social trust are more apt to openly exchange information and to act with caring benevolence toward one another. Higher trust promotes economic growth, employment and prosperity.
Trust is a mental state. It cannot be verified or be measured easily. It has to do with the belief in the honesty, fairness, or benevolence of another party. If you trust the other party and you are not betrayed, you will be better off after the transaction than if you had not trusted (and vice versa). Trust is a moral conception, but it is not necessarily dependent on the good character, vices, or morals of the other party. Within criminal organizations for example mutual trust can be high.
There is a dynamic balance between trust and control. If you trust another party, you expect that they will act in a way that benefits you, without being able to control their behavior. But trust does not imply the absence of control. Certain levels of control are necessary and legally obliged in today's business environment in order to prevent major consequences of human mistakes or unavoidable risks. Consider for example Sarbanes Oxley, IFRS or other control mechanisms. Trust implies the freedom to act within limits. It is a leader's job to define those limits in terms of governance and controls.