The Economy

A Question of Trust

The public’s lack of trust in political and business leaders harms the business environment, say CFOs.
David W. OwensSeptember 22, 2014

“The chief business of the American people is business,” said Calvin Coolidge. Most people are familiar with the aphorism, but the famously taciturn president had more to say on the subject: “They are profoundly concerned with producing, buying, selling, investing and prospering in the world. I am strongly of the opinion that the great majority of people will always find these the moving impulses of our life.”

Judging from the results of a survey conducted in the fourth quarter of 2013, Coolidge was on to something. The 2014 Edelman Trust Barometer, a survey of the general public in 27 countries, shows that people have more trust in business than in the government—58% said that they trust business leaders to “do what is right,” versus 44% for government. In the United States, the gap is wider — 58% versus 37% — thanks to a 16-point plunge in trust in government from 2013.

Still, that leaves plenty of people who distrust business, too. As a result, we decided to ask what CFOs and other financial executives thought of the Edelman results and issues of trust in the Duke University/CFO Magazine Global Business Outlook Survey for the second quarter of 2014.

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Nearly 60% of U.S. finance executives indicated that they believed the general business environment has been harmed by a lack of public trust in business and governmental leaders, and 47% acknowledged that public perceptions influenced the business decisions made in their companies. However, far fewer (38%) thought that this “trust deficit” would translate into difficulties for their own companies.

Some industries appear to be more sensitive to public perception than others. Two-thirds of the executives from the health care sector, and half from financial services, said that their own companies had been affected by the lack of public trust. Financial services companies were by far the most likely to see the effects show up in their financial statements. Nearly 4 in 10 U.S. respondents from financial services said that a lack of public trust had lowered their company’s revenues — much higher than the average of 18% for U.S. respondents overall.

More Symptoms Abroad

North Americans were the least likely to say that a lack of public trust had affected either the business environment or their own companies. In other regions of the world, finance leaders were not as confident in their companies’ immunity to public-trust issues (see chart, below).

14Sept_DeepDive_p46v2 public trustIn Latin America in particular, the gap narrowed between perceived effects of distrust on the business environment and its impact on their own companies. In that region, 74% of business leaders said that the lack of public trust has affected their companies, not too far off from the number (80%) who said it was affecting the business environment in general. For Latin American finance executives, government policy appears to be translating into business actions more directly than is the case with their neighbors to the north.

Responses from China and Japan revealed a similar trend. In China, 52% of the respondents were concerned about the impacts of public mistrust on their own businesses — 14 points higher than in the United States. In Japan, the number concerned about the effects on their companies jumped to 66%.

Is Regulation the Cure?

If more regulation is the cure to the disease of public mistrust, U.S. finance executives don’t want any part of it, according to the Duke/CFO survey. Sentiment against tighter regulation was strongest in the United States, where a mere 16% of respondents agreed with the statement that more or stronger regulation was needed to improve public trust. This finding is not surprising, given that the survey also showed that government policies are top-of-mind for many U.S. finance chiefs.

Three-quarters of U.S. respondents said government policies were already either a big concern (48%) or a medium concern (29%) for their businesses. The more strictly an industry is regulated, the less likely CFOs were to see the need for any additional oversight. At financial services companies, three-quarters of respondents said that regulatory requirements were already a “big concern” — two to three times higher than in any other industry segment except for health care and pharmaceuticals.

In other countries, finance executives seemed more receptive to a larger role for government. Respondents from Japan (38%), Europe (36%), China (33%), and Africa (30%) were about twice as likely as their U.S. peers to look to more or stronger regulation as a remedy. Finance executives in Asia (outside of China and Japan) were even more insistent on some kind of regulatory action, with 53% agreeing that more or stronger regulation of businesses was needed, while 42% of finance executives in Latin America favored new or stronger regulation to improve public trust.

14Sept_DeepDive_p47v2Keeping House

Overall, however, the Duke/CFO survey provides evidence that companies are reluctant to rely solely on government intervention to address the problem of public trust. Many have already taken steps themselves to keep their houses clean. Approximately half of the respondents from the United States, Europe, Asia, and China reported that they have strengthened their own companies’ governance policies and procedures in reaction to public concerns about business trust. Those percentages are even higher for Latin America (73%), Africa (80%), and Japan (87%). (See chart, above.)

Similarly, more than half of the respondents from the United States (52%), Europe (57%), and China (58%) said that their companies have emphasized increased transparency in business dealings and reporting in response to concerns about public trust. The focus on transparency is even stronger in Japan, where 91% of the executives surveyed said they have emphasized it, and in Africa and in Latin America, where 8 out of 10 respondents have done so.

These companies don’t appear to be interested in simply papering over the issue of public perception, either. Regardless of their region of origin, only about a quarter of the respondents said that they use marketing and PR to counteract the lack of public trust.

It appears that most finance leaders believe that, if they can keep their own houses in order, public perception may well take care of itself.

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