Trust central to good governance

The rorting of the expenses system by some British MPs further drained the already low well of public faith in politicians. After the John Major ‘cash for questions’ and Tony Blair ‘cash for coronets’ scandals, under Gordon Brown it plumbed its lowest depths with ‘cash for expenses’ for everything from moat maintenance and installation of faux Tudor beams to payment for a female MP’s husband’s hire of porn films.
A forest fire of public outrage flared as politicians from across the spectrum were exposed with their fingers in the till. All they could say was that the system was at fault, claim that it was all within the rules and therefore repentance was not required. This did nothing to enhance their standing. How could these people express outrage at the greed of bankers and urge recessionary prudence on the electorate?

Having lost the Confucian ideal, the solution is of course to ‘restore trust’.
The logic and method run as follows: if politicians have become increasingly untrustworthy there must be more mechanisms and regulations in place to render their actions and behaviour transparent and therefore accountable.
Gordon Brown said “We will have a clean-up, we will have discipline, we will have a new system that takes it out of MPs’ hands altogether”.
Doesn’t that rather miss the point? As Jeffrey Sonnenfeld wrote in the Harvard Business Review following the post-Enron scramble to intensify regulation, “It’s not rules and regulations. It’s the way people work together”. He argued that a virtuous cycle of respect, trust and candour around the board table characterised great boards but can be broken at any time.

To trust is human. Apparently we are made that way, born to be engaged and to engage - which is the essence of trust. The degree to which one party trusts another is a measure of belief in the honesty, benevolence and competence of the other party. A failure in trust may be forgiven more easily if it is interpreted as a failure of competence rather than a lack of honesty.
For all the recent talk of trust in political and business circles, there seems to be a fundamental misunderstanding of its nature. It is an active two-sided relationship in which both parties assume something. One needs to be trustworthy to be trusted, and to hold a belief in others to behave as you would expect them to.

Better regulation for MPs, bankers and finance companies can't be the whole answer, important as it is. It is necessary to establish the parameters of fair play. But if it appears that the most commonly asked question is 'What can I get away with without technically breaching the regulations?' which is what the media would have us believe with British MPs, then tightening regulation even further without correcting the moral compass is not going to solve the problem.

Trust is essential for business and economic success.
Recent financial scandals suggest that people are not always very smart about whom they trust. Bernie Madoff, for example, took in some very clever people. There will be thousands of New Zealand investors who felt that they had been taken in by finance companies.

What is required is an appropriate balance between compliance systems - which set the boundaries, provide measures of accountability and the basis for investor confidence - and a culture of honesty and competence among those charged with driving performance. Trust in failed institutions will not be rebuilt until leaders communicate honestly and create industries and organisations where that is the norm. When Gallup recently asked 10,000 employees in America what leaders need to provide, the four things they came up with were trust, compassion, stability and hope. The leaders were surprised. Confucius would not have been.

The Registrar of Companies’ report to the Commerce Committee into the ‘mezzanine’ (non-bank) finance industry in March indicated that much was at fault at the interface between governance and regulation. None of the professions involved was blameless, some business models were flawed and aspects of the regulatory approach were deserving of greater comment.
But before we fall prey to what appears an increasingly common tendency to demonise, it is important that the causes of the failure are clearly understood. If the sector serves a useful function as a source of credit, then there needs to be faith that the whole system is functioning optimally. This includes a regulatory framework that is rigorous without being stifling, political oversight and competent practitioners who are acting ethically to deliver favourable returns to shareholders and investors.

The report said some finance companies failed through mismanagement and allegedly corrupt practice. Some failed because they were unable to adapt to rapidly changing credit conditions. That does not connote dishonest practice. There is considerable merit, then, in a comprehensive parliamentary inquiry as it would encourage a broader appreciation of systems and behavioural failures, test whether regulations are ‘fit for purpose’, and create a foundation for rebuilding public confidence. It would also enable an organisation such as the Institute of Directors to develop suitable best-practice tools.

Trust is an important and renewable resource but takes time, determination and consistency to build as there is no easy way to institutionalise it. Honesty at the top though, is a start and, so goes another Chinese proverb, if someone does not lead, no-one will follow.