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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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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.