Magazine Summer 2013 Research Feature

Designing Trustworthy Organizations

Companies often blame trust violations on ‘rogue employees,’ but these violations are predictable in organizations that allow dysfunctional, conflicting or incongruent activities to take root.

Robert F. Hurley, Nicole Gillespie, Donald L. Ferrin, and Graham Dietz Reading Time: 15 min 

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BAE Systems, whose products include parts of the F-35 Lightning II, is an example of a company that launched a trust repair effort. Image courtesy of Flickr user Official Navy Imagery.

In the aftermath of the well-publicized corporate scandals of Enron, WorldCom and Tyco circa 2001 and 2002, there were major efforts in the United States to restore trust and enforce corporate compliance. Among other things, the U.S. Congress passed the Sarbanes-Oxley Act of 2002, featuring enhanced whistleblower protections, holding CEOs and CFOs personally responsible for financial statements, and establishing the creation of the Public Company Accounting Oversight Board, harsher sentencing rules and even new organizational guidelines to encourage boards to adopt changes to organization structures and processes to target more systemic approaches to prevent wrongdoing. Corporate spending on compliance increased an estimated $6 billion annually,1 and leading business schools created ethics centers and made ethics training mandatory.

Yet despite these reform efforts, corporate trust violations have gone unabated and public trust in business has plummeted.2 A full recitation of the significant trust violations of recent years would go on for pages, covering Olympus Corporation’s accounting fraud, Barclays’ LIBOR rigging scandal, News Corporation’s phone-hacking scandal, and the BP Deepwater Horizon oil spill. In fact, some of the most insidious practices from the Enron era (notably, disguising financial weakness with off-balance-sheet debt) were front and center again during the global financial crisis of 2008. In the wake of that financial crisis, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which extended and tightened the financial regulatory system and strengthened consumer protections. But the apparent inability of governments and industry groups to curb the level of wrongdoing raises important questions: Why do trust failures continue to occur with such frequency, and how can they be reliably prevented?

The matter is all the more perplexing considering that there is substantial research on organizational trust, including what trust is, how trust affects the functioning of organizations and how trust can be built, lost and repaired.3 Much of the work supports commonsense notions about how leaders can and should earn the trust of followers. One of us (Robert Hurley) developed the framework below to help leaders understand how to earn trust.

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About the Authors

Robert F. Hurley is a professor of management and director of the Consortium for Trustworthy Organizations at Fordham University in New York City. Nicole Gillespie is a senior lecturer in management at the University of Queensland in Australia. Donald L. Ferrin is a professor of organizational behavior and human resources at the Lee Kong Chian School of Business at Singapore Management University. Graham Dietz is a senior lecturer in human resource management at Durham University in the United Kingdom.

References

1. J. Schaller, “Almost Ten Years After the Enron Meltdown: More Costs, More Persecution, More Compliance?” July, 7, 2010, www.natlawreview.com.

2. “2013 Edelman Trust Barometer,” January 2013, www.edelman.com.

3. See, for example, K.T. Dirks, R.J. Lewicki and A. Zaheer, “Repairing Relationships Within and Between Organizations: Building a Conceptual Foundation,” Academy of Management Review 34, no. 1 (January 2009): 68-84; and R.M. Kramer and T.R. Tyler, eds., “Trust in Organizations: Frontier of Theory and Research” (Thousand Oaks, California: Sage Publications, 1996).

4. R.F. Hurley, “The Decision to Trust,” Harvard Business Review 84, no. 9 (September 2006): 55-62; and R.F. Hurley, “The Decision to Trust: How Leaders Create High-Trust Organizations” (San Francisco: Jossey-Bass, 2011).

5. D.J. McAllister, “Affect and Cognition-Based Trust as Foundations for Interpersonal Cooperation in Organizations,” Academy of Management Journal 38, no. 1 (February 1995): 24-59.

6. P.H. Kim, K.T. Dirks and C.D. Cooper, “The Repair of Trust: A Dynamic Bilateral Perspective and Multilevel Conceptualization,” Academy of Management Review 34, no. 3 (July 2009): 401-422.

7. C. Levin and T. Coburn, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” 2011, http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/FinancialCrisisReport.pdf.

8. M.D. Pfarrer, K.A. Decelles, K.G. Smith and M.S. Taylor, “After the Fall: Reintegrating the Corrupt Organization,” Academy of Management Review 33, no. 3 (July 2008): 730-749.

9. N. Gillespie and G. Dietz, “Trust Repair After an Organization-Level Failure,” Academy of Management Review 34, no. 1 (January 2009): 127-145; D.A. Nadler and M.L. Tushman, “Competing by Design: The Power of Organizational Architecture” (New York: Oxford University Press, 1997); and W.W. Burke and G.H. Litwin, “A Causal Model of Organizational Performance and Change,” Journal of Management 18, no. 3 (September 1992): 523-545.

10. Gillespie and Dietz, “Trust Repair After an Organization-Level Failure.”

11. G. Dietz and N. Gillespie, “The Recovery of Trust: Case Studies of Organisational Failures and Successful Trust Repair,” occasional paper no. 5, Institute of Business Ethics, London, 2012, www.ibe.org.uk.

12. See, for example, I.S. Fulmer, B. Gerhart and K.S. Scott, “Are the 100 Best Better? An Empirical Investigation of the Relationship Between Being a ‘Great Place to Work’ and Firm Performance,” Personnel Psychology 56, no. 4 (December 2003): 965-993; and P.A. Saparito, C.C. Chen and H.J. Sapienza, “The Role of Relational Trust in Bank–Small Firm Relationships,” Academy of Management Journal 47, no. 3 (June 2004): 400-410.

i. K.T. Dirks and D.L. Ferrin, “Trust in Leadership: Meta-Analytic Findings and Implications for Organizational Research,” Journal of Applied Psychology 87, no. 4 (August 2002): 611-628; K.T. Dirks and D L. Ferrin, “The Role of Trust in Organizational Settings,” Organization Science 12, no. 4 (July/August 2001): 450-467; Gillespie and Dietz, “Trust Repair After an Organization-Level Failure”; Hurley, “The Decision to Trust”; and R.J. Lewicki, E.C. Tomlinson and N. Gillespie, “Models of Interpersonal Trust Development: Theoretical Approaches, Empirical Evidence, and Future Directions,” Journal of Management 32, no. 6 (December 2006): 991-1022.

ii. G. Dietz and N. Gillespie, “Building and Restoring Organizational Trust.”

iii. E. Lichtblau and C. Dougherty, “Siemens to Pay $1.34 Billion in Fines,” New York Times, December 15, 2008; and S. Schubert and T.C. Miller, “At Siemens, Bribery Was Just a Line Item,” New York Times, December 21, 2008.

iv. M. Peel and S. Kirchgaessner, “BAE to Pay $450M to End Bribery Case,” Financial Times, February 5, 2010.

v. L. Story, “Lead Paint Prompts Mattel to Recall 967,000 Toys,” New York Times, August 2, 2007.

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Comments (2)
Daniel T C Lee
Excellent Article!
Trust is about perceptions and expectations, not just the results delivered.
There are two highly interrelated areas of trustworthy organizations: 
  (i) The External area - Customer expectations
  (ii) The Internal areas - Management and Staff perceptions 
In my capacity as the Regional Service Business strategist for various large and small organizations, I have recognized that we cannot address everyone's expectations and needs.  There is a need to define customer segments and who are actually your customer, and who just isn't.  Companies fail when they are trying to address everyone's needs without knowing if these are really their customer targets.
Upon identifying the customer segment, there is a need to manage these customers' expectations.  I have seen how an organization is actually run by the customers rather than the management.  The philosophy 'The customer is always right' is taken to the extreme leading to a crisis within the organization.  Customers do have self interests which may conflict with the organizational longer term objectives.
Again the selection of the right customers helps in reducing such conflicts, and appropriate communication helps to address this.
The related internal factors is the lack of understanding of the organization's resources required when committing to expectations.  This is especially so when a senior member of the management has inadequately designed performance measurements that focuses only on specific initiatives rather than the entire organizational well-being.  Staff turnover becomes high or costs overrun may result from delivering expectations and commitments made by that member of management to internal or external parties.  Alternatively, the staff may also end up distrusting the management, and fail to deliver the expectations, thus leading to a spiraling of distrust throughout the organization.  These eventually boils down to the competence of the management, the structure of the organization and the communication culture that has developed.
Praveen Kambhampati
I have known organizations which have used phrases like "Pran Jaaye per dhammidee na jaaye" ( Let life go but not a cent, (Dhammidee is an ancient Indian currency)) but the organization has submerged into oblivion and the stakeholder hands have changed. 

Similar organization an MNC, The senior VP had explicitly mailed its employees, do anything violate any policies but get business and retain customer. week back this announcement the corporate ethics team was following up with the Indian regional office to complete the mandatory ethics training by all employees because the performance appraisal is liked to the ethics training compliance. The organization had been acquired by a global major. 

On a different plane, Rogue employees  are sometimes productive the organization cannot bind them with policies, rules and rulers. The Rogue employees have usually independent thinking and the organization should have a mechanism to get productivity from the creative side of such resources. This is definitely not say or advocate indiscipline or nurture violations but to identify and drive the energies of such independent resources constructively to the organizational needs. 

Organizations are unfortunately find it good as long as the rogue employee is aligned to a certain lobby or senior manager and the social instincts keep the bosses in good humor. 

Long term vision of organization would not usually give these jitters of policy violations and impacts on organizational trust and customer dependability. 

Companies like for example, Accenture which are usually cash cows are capable to overcome these violations much easily and they have a different mechanism to align or dis-align any such deviations. These are much tougher for organizations which are more technology seeded and need a strong and conservative approach to stand steady in turbulence.