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BURNED BY ENRONESQUE ACCOUNTING scandals, investors and governments are imposing rigorous reporting requirements to keep companies on the straight and narrow.
These reactions are a symptom of a fundamental force in the economy: a crisis of trust among stakeholders of corporations. Stakeholders are not only a company’s shareholders, but also customers, employees, business partners and communities, and in recent years their trust has been profoundly shaken. Naturally, they are now trying to protect themselves, often via legislation. But companies that scramble reactively to implement one-off responses to each new set of compliance regulations won’t rebuild stakeholder trust—they’ll just spend a lot of money on shortsighted solutions.
Companies committed to gaining stakeholder trust, as well as better planning and decision making are, instead, taking an integrated approach to the related issues of governance, risk management, and compliance (GRC). The approach comprises of people, processes, corporate culture, and especially systems. Technology provides affordable mechanisms for information sharing that can scale globally. Automation not only reduces expensive “human middleware” but also offers entirely new collaborative and analytical possibilities. Integrated GRC solutions help improve relations with stakeholders and, ultimately, facilitate trust and competitive advantage.
1.0 Corporations Need to Rebuild and Strengthen Stakeholder Trust
In business, “trust” is the twofold expectation that the other party will deliver value and that they will behave in a way that’s consistent with four core values (see Figure 1):
- Honesty. The company is truthful, accurate, and complete in communications with stakeholders.
- Accountability. The company makes clear commitments and abides by them.
- Consideration of others’ interests. The company understands and shows regard for the interests, desires, and feelings of others.
- Transparency. Stakeholders have access to company information that affects their interests.
Transparency, which underpins the three other core values, has been an important trigger for the current crisis of trust. The expression “What are they hiding?” demonstrates the relationship between transparency and trust. As I’ve argued, “trust depends on transparency and transparency depends on trust. Indeed, as people learn to collaborate well over time, transparency and trust reinforce each other, generating a virtuous cycle.”2 Until recently though, the ability to be transparent has been limited to small business ecosystems. Think of it this way: many rural businesses extend credit to locals.
Word gets around in a small community, and everyone knows who can be trusted to pay their tabs and make good on their promises. It’s not blind faith, because everyone’s behavior is visible (i.e., transparent). But village community systems don’t scale easily to big cities. In places where participants’ behavior isn’t easily visible to others, businesses traditionally ask for guarantees: a letter of credit or a lien on an asset, for example. And for other stakeholders (consumers, suppliers, communities), it’s been a matter of gathering whatever information was available and hoping for the best.
But now, thanks to exponentially greater access to information, we can track information, rules, accountabilities, processes, and behaviors on any scale. Stakeholders of all types now have unprecedented visibility into the behavior, performance, management, and operations of companies. The optimistic old adage, “you do well by doing good” is coming to life. It used to be that a lot of companies did very well by being bad—creative accounting, unfair labor practices, and shady environmental behaviors could help beef up the bottom line. But thanks to increasingly sophisticated communication technologies and the interconnectedness of business webs, stakeholders now quickly uncover the rogues—and warn others against them. Like it or not, corporations are becoming naked, and as I’ve said before, if you’re going to be naked, you’d better be buff. Fitness is no longer merely optional.
2.0 Pervasive Fragmentation Complicates the Pursuit of Stakeholder Trust
At the same time that stakeholders have the means and interest to scrutinize corporate behavior, fast growing global firms find it ever more challenging to build and maintain trust. These firms are typically fragmented across a variety of dimensions (see Figure 2)—and lack the coherence needed to engage in consistent trustworthy behaviors towards ever growing collections of stakeholders. An integrated approach to fulfilling the core values that facilitate trust allows everyone across the firm to act in concert and live up to internal and external standards (see: “An Integrated Approach to Transparency is Essential,” below).
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