INTRODUCTION

Overacenturyandahalf,capitalismhasprovenitsworthtopeoplearoundthe
world.Peoplehaveprosperedinpartsoftheworldwherecapitalismhasthrived;
sufferedinpartswherethesystemhasshriveled.Trustisthefuelforcapitalism(The
WallStreetJournal,2008).Trustgeneratesconfidenceforindividuals,organisations
andthegovernmenttoworkhandinhandwithoneanothertocreatevalueand
growth.Regrettably,corporationshavelongmadetheglobalethicalcrisisoftrust
popularsincethebiggestdupeofconsumersbytheU.S.tobaccomanufacturerswho
widelyadvertisedto43millionAmericansin1954thattheresearchresults
postulatingthatsmokingcouldcausecancerwasquestionableandlobbiedtothe
publicthatcigarettesweresafe(Cummings,2002).Ontopofthat,itwasthelackof
trustthatengenderedthesystemtocomecrumblingdownduringthe2008financial
crisis.Ironically,thecodeoftrustwasbreachedbytheveryfinancialinstitutionsthat
was,andstillis,supposetoserveasourfiduciaries.Despitethefactthatcapitalism
stillstandsasthebestmodelforworldprosperity,trustcriticallyneedstoberestored
andthedutyliesinallofusinbusinesstoplayapart.

WHATISTRUST
Sociologist,economistandpsychologisttendtousedifferentdefinitionsof
trust.Nevertheless,fundamentallyspeaking,trustisbeingcertainabouthowanother
personwillact(Frankel,2011).Trustiscrucialtobusinessinthelongrun.Inthe
absenceorlackoftrust,employeestendtobelessloyalandmotivatedtocarryout
theirduty.Businessescouldlosecustomerstoacompetitoriftrusthasbeenbreached.
Alackoftrustinsupplierrelationshipcouldleadtoandincreaseintransactioncosts,

asmoreresourcesnowneedtobeallocatedtomonitoringandcontractenforement.A
corporationwholosesitsinvestorstrust,couldeasilybedrivendowntoitsknees.
Undoubtedly,managingstakeholderstrustiscrucialtothesustainabilityofa
company.Therefore,thisessayaimstodiscussabouttheroleandchallengesof
buildingtrustbetweenbusinessesandtheirstakeholders.
Ethicalbasissuchashonesty,reliabilityandtrustworthy,beingthefoundation
oftrustisveryimportantforthelongevityinsuccessofacompanytoupholdagood
brandimageamongitsstakeholdersandshareholders(GainesRoss,2011).Trustis
thebedrockofacompanysreputationandcredibility.Itisbuiltonthebeliefthata
companywillexercisefairtreatmentforemployees,buildsafeproducts,keeptheir
promisesandbewellgoverned.Inotherwords,companiesareexpectedtodothe
rightthing.Theethicalvalueoftrustisnotonlyapillarthatholdsacompanyup,but
alsoallowsittodifferentiateitselffromitscompetitors.Thisqualityisinvaluabletoa
companyasitcreatesabarriertocompetitionandashieldonreputationshoulda
crisishappen.
Astakeholderisdefinedasanyonewhohasaninterestinthebusiness(BBC,
2014).Theycanbeinviduals,groupsororganisationsthatcanaffectorbeaffectedby
theactivityofthecompany.Businesseshavebothinternalandexternalstakeholders.
Internalstakeholdersareinvidualswhoworkdirectlywithinthebusinesssuchas
employees,investorsandowners.Externalstakeholderscompriseofcustomers,
suppliersandthepublic.Eachstakeholderpossessesdifferentexpectationsand
interestonthevalueofabusiness(Pirson&Malhotra,2008).Forinstance,an
employeewouldexpectasafeworkplaceandfaircompensation;aninvestorlookto
makeagoodreturnonthemoneyinvested;andcustomerexpectsaproductorservice

thatisworthpayingfor.Bymeetingtheseexpectations,overtime,thecompanyis
abletobuildtrustwithitsstakeholders.
ROLEOFCOMPANYTOITSSTAKEHOLDERS
Thereisasetofresponsibilitiesthateverycompanyholdstowardstheir
stakeholders.Tounderstandacompanysroletotheirstakeholders,wecanreferto
theprinciplesofcompanystakeholderresponsibility.Firstly,companiesneedtobring
stakeholdersinteresttogether.Companiesmustpresentreturnstoitsshareholders.
However,profitsarenotnecessarilyconflictingwithstakeholdersinteresttheyact
asascorecardindicatingtheperformanceofthecompanyinmanagingstakeholder
relationships(Freeman,Velamuri,&Moriarty,2006).Mostimportantly,managers
mustbalancestakeholdersinterest.Otherthanthat,companieshavetoacknowledge
thatstakeholdersascomplexhumanbeingswithvalues.Thismeanstheyneedto
engageincommunicatingwiththeirstakeholders.Forexample,criticsrepresentthe
unmetmarketneeds.Engaginginanintensivedialoguewiththemmaybenefitthe
businessesbyprovidingthecompanieswithnewideasandperspectives.Companies
arealsorequiredtoactwithpurposetofulfilltheircommitmentstostakeholders.For
instance,TheGrameenBankseekstoeradicatepovertyandtheITTIndustrieswants
toinventproductsthatcanimprovepeopleslives.Companiesneedtogenerate
profitsinordertopursuetheirpurposesandtheywillbeunabletodothatwithout
strongengagementwiththeirstakeholders.

THEBREACHOFTRUSTANDITSCONSEQUENCES
Theglobalcrisisoftrusthasattractedagreatdealofpublicinterest,overthe
pasttwodecades.Thisisduetoitssignificancefortheeconomichealthofnotonly

corporations,butalsosocietyingeneral.Thecompaniesthathavemademajor
headlinesinthepastforbreachingthetrustsystemwereEnron,WorldCom,Tyco
InternationalandCocaCola,tonameafew.Theiractionshavemarredthe
companiesreputationandalsocausedstakeholdersconfidencetosuffer.Thereare
manywaysacompanycanbreachstakeholderstrust.Acommoncaseofproduct
recallsbycompanycouldgravelyaffectconsumerstrustonthecompanyandits
product.In2007alone,closeto500productswererecalledrangingfromissuesof
shortcircuitingautomobiledevicestothediscoveryofEcolibacteriaingroundbeef
orspinach.Itwasfoundthatcompaniesthatrecalleddefectiveproductsproactively
aremorelikelytocreateaperceptionofhavinggreaterintegritythancompanieswho
deniedtheissueuntilthepublicorgovernmentalpressureforceaproductrecallact
ontothem.TheformerisevidentinMattelsrecalloftoysin2007duetothelead
paintcontentintheproductswhereasthelatterisshownbyFordsrecallofthefaulty
Firestonetyresinyear2000aftermorethan100fatalaccidents(Pirson&Malhotra,
2008).Inspiteofthat,somefirmswhovoluntarilyrecalledtheirproductsfindthatthe
issuehasdonesomeirreversibledamagetoconsumertrust,somewouldwalkoutof
thematterwithunscathedreputation.Thisimpliestheimportanceoftrustanda
concernonthewellbeingofconsumersincorporationsustanabilityandcredibility.
Letslookatthecaseoftheworldrenownedcompany,CocaColainEurope.
InJune1999,morethan240peopleinBelgiumandFrancewerediagnosedwith
intestinalproblemsafterconsumingCoke.TheBelgiangovernmentthenenacteda
10daybanonthesaleofCokeproducts.Althoughtherewasnostrongevidencethat
Cokeproductswerethecauseofit,thecompanyrecalleditsproductsfrom5
Europeancountries,atotalof17millioncases.CEODouglasIvesterpublicly

affirmedthatCocaColaplacesgreatestpriorityinensuringthequalityofitproducts.
Healsomentionedthatthecompanyssuccessoverthe113yearshasbeenbasedon
consumerstrustinthequalityoftheirproductsandthattrustissacredtothem.Coke
immediatelyassumedresponsibilityandissuedanapologytothepublic.Italsowent
totheextentofciting2qualitycontrolissuesthecontaminationofwoodenpallets
andcarbondioxideaspotentialseedoftheimpurities.Eventhoughlateronresearch
reportedthatthehealthproblemsdidnotoriginatefromCocaColaproducts,the
companyhadtodemonstratebenevolenceindeedtosaveitstaintedreputationand
plungingstockprices.Itofferedtocompensatethehealthcarecostforthevictimsof
theincidentandgaveoutfreeproductsto4.4millionhomesinBelgium.Cokealso
carriedouthugemarketingcampaignandthankeditscustomersfortheirloyalty.Ina
littleshortof2monthssincetheincident,researchfoundthatcoreconsumersof
CocaColabeveragesexpressedsamelevelsofdesiretopurchaseasbefore(Leith,
2002).Thisprovesthattrustwassuccessfullyregainedaftermassivedemonstrationof
effortsandconcern.Thataside,thelessonlearnedisthattheconsequencesof
breachingtrustcanbeverycostly.

MECHANISMSTOREGAINTRUST
IfitwerenotforCocaColaspromptactionstoregainthetrustofits
consumers,soonerorlater,itsinvestorsandemployeestrustwouldbeaffectedas
well.Thiscouldinturnbringthecompanydowntoitsknees.Thisprovesthatan
effectiveresponsetoabreachoftrustcallsfortargetedinterventionsaimedat
managingdistrustanddisplayingtrustworthinessagain.Thereexistmechanismsto
helpcompaniesdetect,preventandreacttoanymisconduct,thecompliancebased

codeofethicslegalandethicalcompliancemechanisms.Thisformofdistrust
regulationservesasthecentrepieceoftrust.However,theproblemwithlegal
compliancemechanismisthatseveralabusesthatexasperatedthepublicisentirely
legal,forinstance,acaseofmisleadingaccountingstatementscanstillbecompletely
inaccordancewiththegenerallyacceptedaccountingprinciples(GAAP).Juriescould
alsohaveahardtimegraspingsophisticatedfinancialconceptswhilewellcounseled
culpritshavemanywaystodeceptivelydistancethemselvesfromresponsibilities(M.,
McNamee,Carney,&Borrus,2002).Besidesthat,criminallawonlyappliesto
extremecases.Hence,violationsaredifficulttoenforce.Thisraisedconcernsamong
stakeholdersonthelackofethicsintodaysbusinessworld,particularlyinthe
financialsystem,asthereexistmorelucrativeincentivesforunethicalconduct.
Consequently,variouslawshavecomeintoeffect,especiallyaftertheEnronscandal,
suchastheSarbanesOxleylaw,whichbasicallyimposesmorestringentpenaltiesfor
financialmanipulation.Nevertheless,thelegalcompliancemechanismshaveseento
beinadequateingeneratingandrestoringtrustwithinacompanyanditsstakeholders
(Trevino,G.,D.,&B.,1999).
Currentbusinessenvironmentpresentsagreatopportunitytobuildan
organisationalculturethatgoesbeyondlegalcompliance(Paine,1996).Thereare
certainlegalcompliancecharacteristicsthatarelesssignificantthanbroader
perceptionsofthemechanismsorientationtowardsethicalaspirationsandvalues.
Theorganisationsethicalclimatesuchasfairemployeetreatmentsandethical
leadershipplaysabigroleinnurturingaculturebasedontrustandintegrity.Thisis
whereethicalcomplianceplaysarole.Withinanorganisation,ethicalcomplianceis
imposedforthebenefitofthecompanyanditsemployees.Theexistenceofethical

standardsdoesnotonlyreducetheprobabilitiesofaworkplacelawsuit,ithelpto
constructapositiveworkenvironment.Thismechanismcanhelpbusinessesputmore
emphasisontrustandintegrityintheircorporateculture.Asaresult,itcouldlessen
thesinglemindedfocusonshareholdervaluethatassessestheperformanceofa
corporationbasedsolelyonthebasisofstockprice.Ethicalcompliancefocusinstead
onelevatingtheinterestofemployees,customerandthecommunity.Forexample,
reassessinganexecutivespaytocreateasenseoffairnessandmanagingthe
expectationsofinvestorstotheyaremorerealisticaboutthereturnsoftheir
investmentinthecompanycanachieveinahighlycompetitivemarket.Whenit
comestotrustrestoring,havingsolidcorporatevaluesembeddedinacompanys
consciencecanhelpiteasethroughacrisis.
Asidefromthedistrustregulation,trustworthinessdemonstrationcouldalsobe
usedtoregaintrustofstakeholderswithinacompany.Thismechanismcomprisesof
statementsandactionsthatwillpresentnewevidenceofthecompanysability,
integrityandbenevolenceabovethedistrustregulations(Dietz&Gillespie,2012).
Examplesofinterventionsareapologies,payingcompensation,transparencyand
variousethicalpractices.AverygoodcasethatexhibitsthisisMattelsproductrecall
crisisin2007.ItwasdiscoveredthatFisherPriceproductsfromChinesesuppliers
containedillegallyhighcontentsofleadtaintedpaint.Subsequentinvestigations
foundproblemsinotherproductssourcedfromChinaaswell.ThedayMattelwas
alertedtotheissue,theyinstantlyceasedproductioninthatspecificfacility;promised
tofullycooperatewiththeauthoritiesandinitiatedadetailedinvestigationanideal
actofthedistrustregulation.Withinamonth,thecompanyhadsufficientdatatocall
foramassiveglobalrecall.Theyputabarrierinthedistributionlinetostopthetoys

fromreachingtheconsumersandalertedallretailersregardingtheproblem.Indoing
so,thecompanyhasshowcasedasubstantialamountofinvestmentinitsbenevolence
andintegrity.TheincidentcostsMattelanestimatedtotalof$40millionandtheir
stockpriceswentdownby30%in5months(CNNMoney,2009).Regardless,the
crisisdidnotseemtohavedamagedMattelsreputation.Theresultofapollon
Americanconsumersfoundthat75%werepleasedwithMattelsresponsetothe
crisis.

TRUSTISMULTIDIMENSIONAL
Theactofestablishingtrustbetweenbusinessesandstakeholdersiseasiersaid
thandone.Oneofthereasonsthistaskisdifficultisbecausetrustismultidimensional
anditisnotalwaysapparentwhichdimensionacompanyshouldfocusonwhen
dealingwithanystakeholders(TheGuardian,2008).Considerthefollowing:An
employeemaytrusthisbossduetothegenuineconcernthebossshowsforhiswell
being,oritcouldbebecausethebossisaverycompetentperson,orevenboth.Your
bossmaytrustyoubecauseyourvaluesareparalleltohers,orbecauseyouare
efficientingettingtasksdone,orboth.Acompanysinvestormaytrustthetop
managementbecausetheyareperceivedtoupholdstrongintegrity,orbecausethey
tookeffortstoincreasetransparency,oritcouldbeforsomedifferentreasonentirely.
Sowhichdimensionoftrustshouldanorganisationstresson?

CONFLICTINGINTEREST
Ontopofthat,conflictinginterestamongdifferentgroupsofstakeholdersand
shareholderscausestheactofbuildingtrustbetweenbusinessesandstakeholdersas

theyhaverespectiveparticularneedsandperspectivesthatcouldcompeteoneanother
(FreemanR.,1984).Shareholdersdemandforthehighestreturnpossibleonthe
capitalgainswithminimalriskwhilstconsumersdesirequalityproductsatlowprices.
Employeeswanthigherwages,goodworkplaceconditionsandanenticingbenefits
package.Therefore,itwouldbechallengingtobalancethesedesirespractically.Some
stakeholderssdesireswouldbesatisfiedwhileexacerbatingothers.
InthecaseofDeutscheBundesbahn,aGermanrailwaycompanythatusedtobestate
owned.Consumerstrustedthereliabilityofthecompanysomuchtotheextentthat
thereusedtobeasayingyouareaspunctualasDeutscheBundesbahn(Pirson&
Malhotra,2008).Unfortunately,thecompanywasincurringhighoperatinglosses,in
spiteoftheirtechnicalcompetence.Toovercomethisproblem,therailwayswere
privatized.Asaresult,thecompanyisnowgeneratingprofitsandevenexpectingan
IPO.Thedownsideofit,customertrusttookaplungeduetothepoorserviceand
constantdelays.Thishascauseddamagedtotheirlonglivedperceivedtechnical
competenceandconstantpoorreputationratings.
CONCLUSION
Inconclusion,itisevidentthatgoodethicsmeansgoodbusiness.Companies
needtogenerateaprofitforsurvivalandgrowthpurposes;nevertheless,thepursuitof
profitsmustbedonewithinethicalbounds.Inthelongrun,businessesthatthriveare
notthosewhosetittheirobjectivetodosorather,itisthoseperserveredtobehave
sustainably.Successandprosperityarethebyproductsofthatbehaviour.Therefore,
ethicsisindeedavitalingredientforbusinessestosucceedanditwillcontinuetobe
theframeworkforsuccessinthe21stcentury.

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MGT 305
Assignment 2
Trust: The Unwritten Contract
Between Business and Stakeholders
Lecturer: Mrs. Chithra Latha
Vasuthevan

Name: Hoo Jo Ee
Student ID: B1302003
Course: Bachelor of Economics