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Mortgaged Trust

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My father, z’l, was a first-generation Milwaukee trial lawyer. Anyone that knew him was well-versed in the analogies and aphorisms he used to convey powerful life lessons. Perhaps, this creative gift traces its roots back to the gritty history of Jewish survival in Eastern Europe, or maybe my dad simply was gifted with the ability to employ a persuasive and imaginative turn of phrase. Of the many he used during my formative years, by far the most penetrating and piercing one was, “You’ve Mortgaged Your Trust.” He used this rebuke when I was 16 and stayed out all night after one of my high school football games instead of being home by midnight. Fast forward 33 years, I have seen the social and moral consequences of mortgaging trust play out in nearly every crisis of leadership and, most recently, in the 2013 Edelman Trust Barometer.

The glaring double entendre that attaches to Edelman’s latest gauge of trust in institutions should not be lost on anyone. Financial institutions have been hit hardest over the last five years by declining trust as the majority of surveyed global markets give banks trust levels below the 50 percent trust threshold. Most notably, European trust in banking systems (excluding Russia and Poland) hovers around 22 percent – a 20 percent drop since the height of the financial crisis in 2008. Many factors, of course, are at work here to reflect such low trust levels in banks. But trust – like no other indicator – is a qualitative benchmark that relies heavily on consistent and meaningful engagement with stakeholders.

Unlike technology, consumer goods and food companies, banks simply have failed to develop a “customer concept” in their stakeholder strategies. Banks skew far too heavily toward a purely “transactional” mindset and need to integrate far more relational thinking into their strategic platform. For too long, banks have relied on the false premise that if it “can’t be measured, it can be managed.” As a consequence, the “quants” – those such as hedge fund managers who favor quantitative analysis – have owned the hill without particularly compelling results.

As long as the banking system is unable to embrace or simply avoids the adaptive behavior required to build trust, risk for banks will continue to increase. That’s because a positive correlation exists between low trust levels, internal risk and regulatory and nongovernmental activism. On the other hand, banks seeking to build resilience in a changing and uncertain world will embed critical trust attributes into their business models. These include stakeholder-centric transparency, shared accountability and a pivot to more customer-minded business practices. And, in so doing, this will mollify the scrutiny that comes with fragile trust.

Despite all the complex risk modeling, the irony is this: the current trust reality for banks is really not a function of external market forces that the quants didn’t anticipate. Rather, it’s a byproduct of poorly or unmanaged internal risks and, therefore, controllable and largely avoidable.

Banks now are facing the complexity of consequence for their decision to “mortgage their trust” which, indeed, was theirs alone. Similarly, rebuilding trust is a decision only the banking system can make.

Harlan Loeb is the global chair of the Crisis & Risk practice at Edelman.

Image by Diana Parkhouse.

  • http://twitter.com/DavidBrain David Brain

    Harlan great piece. One perspective to add to this is that AP Banks have not mortgaged their trust at all. In fact in most markets they have been making trust deposits to reverse your father’s analogy. No market in AP (even Korea where business trust is at record lows) has banks at below 50% trust and in many markets they are well above this. Just goes to show, that if you don’t undermine the whole system and offer huge bonuses for ‘casino’ activities then there is no reason that banks in the ‘West’ cannot recover.

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