Trust is in short supply in recent years. What does that mean for investors?

Trust is in short supply in recent years. What does that mean for investors?
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The 2017 Edelman Trust Barometer shows a dramatic drop in levels of trust in institutions across the globe. Investors and business leaders should take this seriously and reevaluate the way they approach much of their strategic planning.  

Global investment works because of a system of trust among investors. Investors do not have to trust one another, but they do have to trust the institutions that enforce obligations between parties. Trust is a crucial component of social capital, which strengthens civil society and creates rich environments for individuals and groups to manufacture and consume goods and services. In short, trust is the lubricant of capitalism. Individuals and groups trust entities that treat them fairly and reciprocate accordingly. The surprising political outcomes of 2016 – such as Brexit and the election of Donald Trump –  and the resulting political uncertainty suggest that trust, and related concepts, are in short supply and that capitalism’s lubricant is becoming more viscous, threatening to clog up the works.

Inequality, reciprocity, and trust

In 1986 an economist and several friends created an experiment to challenge the idealized set of assumptions economists use to model humans as self-interested rational actors. The dictator game, as the experiment is called, asks one player (the dictator) to split a pot between themselves and a second player. The second player is passive – they do not act. They simply receive what the dictator offers; without the power to negotiate with or respond to the dictator, or even to refuse the offer outright. One might expect that in such a game the dictator would always allocate all of the pot to themselves. That is what a truly rational, self-interested actor would do. Interestingly, this happens less than half the time.The question, of course, is why.

Daniel Kahneman, the game’s creator, offered one explanation – most individuals are willing to pay something to be seen as ‘fair.’ The dictator is given the pot through luck, not work of their own, and it seems a bit unfair not to share their luck with others. Behavioral economics is littered with studies that seem to confirm the importance of fairness and an aversion to inequality. Fairness is just one piece of an interlocking triumvirate of ideas that help to sustain social and economic life. Trust and reciprocity are the other two. We trust entities that are fair and reciprocate positively when they are. Likewise, we lose trust and punish offenders who we perceive to be unfair. It is difficult to conceive of one of these ideas being realized without its two siblings. Unfortunately, it appears that several facts threaten the current state of this tripartite regime.

The collapse of trust

Last year, Oxfam published several startling statistics. The 62 wealthiest individuals in the world have more wealth that the bottom 50%. The wealth of the top 1% is equal to that of the remaining 99% of global population. While some of the details in calculating these figures has been disputed, their overall magnitude has not. With such inequality present, it is perhaps not surprising that levels of trust have declined across the globe. However, what is surprising is the size and scope of the decline. While this alone is disturbing, increasing inequality and declining trust in institutions creates unique challenges for investors and business leaders.

Released annually at the World Economic Forum, the Edelman Trust Barometer identifies the level of trust the general population in more than two dozen countries has in the institutions of government, business, media, and NGOs. The last year saw such a dramatic drop in levels of trust across the globe that its authors suggest that ‘trust has imploded.’

According to a survey of more than 32,000 individuals in 28 developed countries across Europe, the Americas, Africa, and Asia, trust in government institutions reached an all-time low and is now the least trusted institution in 14 counties. Overall, nearly 60% of individuals across the surveyed countries lack trust in government institutions.  The media scored slightly higher but is at its lowest recorded levels in 17 surveyed countries. The news is worse for political leaders who are trusted by just 29% of the population. This data should be a concern to any investor, but three specific findings are worth highlighting:

1. The survey distinguishes between two groups: the informed public – who is college educated who regularly consume business news – and the general population. While it is not surprising that the two groups differ in their trust of institutions, the spread is quite large. Last year the gap between the two widened to 15 percentage points. Several states with recent electoral surprises had the widest gaps – the United States and United Kingdom. The mass population in 20 countries distrusts their institutions, compared to only six for the informed public.

2. In a global echo of Brexit sound bites, all surveyed countries see a growing distrust of experts.  Individuals report that they are as likely to trust ‘someone like themselves’ about company-specific information as they are an academic or technical expert. This may make it difficult for global organizations to control messages to current and potential customers.

3. This distrust has reached all the way up to the CEO suite. In the last year, the credibility of chief executives fell 12 percentage points. Currently, just 37% of individuals trust these corporate leaders – the lowest point in the Barometer’s history.

Investors take pause

While the Barometer suggests that business remains the most trusted institution, heightened levels of distrust will likely threaten the integrity of many institutions that businesses need to be successful. Executives and investors should consider trust in light of its impact on democracy and political stability. As trust has fallen, so has the number of full democracies in the Economist Intelligence Unit’s 2016 Democracy Index. In the past year, 78 countries slid backward in their democracy scores while just  38 saw improvement. One country losing ground was the United States which was “ downgraded from a “full democracy” to a “flawed democracy” because of a further erosion of trust in government and elected officials there.” Furthermore, lack of trust among nations may begin to challenge their ability to build productive agreements. This should serve as a wake-up call for those in institutions tasked with creating and executing strategic plans.

Corporate planning efforts will likely need to be re-evaluated as previously stable political and economic institutions appear to be built on shaky foundations. Blackstone CEO Larry Fink noted in his letter to CEOs that many strategic execution plans made a year ago are likely obsolete. Business should lay out – and investors ought to demand – a well-articulated plan to navigate these increasingly tricky waters. They may need to go out of their way to maintain trust among each other and with consumers by publicizing fairness and reciprocity. As the dictator game shows, just because one can keep the entire prize, it may not always be wise to do so.

Categories: Economics, Finance

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