ARTICLE

By Richard Edelman

Profit and Value Figure into the Public’s Changing Expectations of Corporate Enterprises

Written by Richard Edelman

The Great Recession of 2008-2009 had profound consequences for business and government alike. Long-established companies such as GM and AIG were forced into bankruptcy. Euro-zone nations were compelled to bail out member states including Greece and Portugal. But the most long-lasting effect of the near-catastrophe may well be the fundamental destruction of trust in institutions.

Over the past 15 years, the Edelman Trust Barometer has measured trust levels in 27 nations, both among opinion elites and the general population. Among the important trends we observe are the dispersion of authority, skepticism of information without repetition, and the emergence of a new set of values that build trust.

The most trusted institution in most nations is now the non-governmental organization. This is a recognition of the importance of environment and proper treatment of employees, but it also signifies a protest against failure by business and government. The most stunning rise of civil society is in China, where NGOs now rank ahead of government in trust, up from 30 percent in 2006 to 84 percent today.

Business is second in trust, followed by media, then government, trailing badly. Business has recovered much of its reputation from the low point five years ago, based on better economic performance and improved competence in delivering goods or services. There are still lagging industries, particularly financial services, where issues of compensation and customer benefit still haunt the sector.

The collapse of trust in government occurred in the last three years, due to a stalemate on policy, corruption and perceived ineffectiveness. In some markets such as the US, the gap between business and government trust is 20 points or more—a record chasm. But business should take little comfort; by a three-to-one margin, respondents ask for more government regulation in fast-evolving industries such as energy, financial services and food.

The reordering of authority is also seen in a loss of trust in traditional leaders—Chief Executive Officers and government officials—who respectively rank ninth and tenth as sources of credible information. In fact, only 20 percent of respondents believe these leaders will tell the truth in a difficult or complex situation. Instead, there is confidence in experts such as academics or engineers, plus reliance on friends or “people like you,” who are viewed twice as credible as a CEO or government leader.

The information flow has been transformed, with search emerging as the first stop, then mainstream media for older respondents and social media for younger ones. The average informed person now has eight daily sources of information, from blogs to television to social networks, and must see a story three to five times before believing it.

The failure of the establishment in the Great Recession has also caused a shift in the trust equation, from value to values. Specifically, respondents now place low importance on tangibles such as excellent financial results, an outstanding CEO, and top ranking within an industry sector. Instead, they trust companies that treat employees well, place customers ahead of profit, and communicate frequently and honestly. The Edelman Trust Barometer 2014 found that 84 percent believe business can make profit while also delivering value to society.

Historically, business has been good at the microeconomic challenges of production, delivery, marketing, pricing, innovation and finance. It has been transactional and faithful to the laws that govern the industry. It has provided jobs and investment opportunities for those seeking returns. All of this has been under the rubric of “License to Operate,” the classic freedom to run the enterprise in a perfect Adam Smith-like world. But today, there must be larger ambition for business, which can be described as “License to Lead.” Business is our best hope when it comes to addressing complex global challenges, but it must be business showing up differently. In the words of Paul Polman, CEO of Unilever, “It is not just about value. It is also the ‘s.’ It is about values as well.”

There is a new opportunity and expectation of business, which is to operate in a manner that makes money for shareholders but also improves society. It is vital for business to establish a new compact with its stakeholders based on open advocacy of its interests, willingness to modify policy after consultation, and clear metrics to measure progress on promises.

What we observe is a new focus by business on creating value for shareholders and society alike—the concept of “Shared Value,” introduced by Professor Michael Porter of Harvard Business School. It is a shift that started 15 years ago with the rise of corporate philanthropy and corporate social responsibility. The second phase was in the last decade, when companies recognized a distinct marketing advantage in sustainability. GE’s “Green is Green” (in the words of CEO Jeffrey Immelt) is a perfect example of positioning that helped cut through the clutter when Ecomagination launched in 2005. The final stage, which we witness today, is business changing its core operations in order to realize lower costs while achieving societal goals. Think of Walmart changing the body style of its trucks to use less energy so it can minimize its environmental footprint and save money for the business.

There are several recent examples of companies taking the lead in societal change without waiting for government sanction or approbation. CVS, one of America’s largest drugstore chains, announced in February that it would ban tobacco and related products from its stores. CEO Larry Merlo said that selling tobacco is inconsistent with the purpose of the company. He accepted the loss of $2 billion in revenue, comfortable in the knowledge that the long-term brand equity benefit and customer loyalty would more than compensate in the long run. Gap, a leading American retailer, only three weeks later decided to raise the pay level for its in-store workers above the minimum wage, to $9 per hour in 2014, then to $10 per hour in 2015. Gap’s CEO, Glenn Murphy, said he wanted the best workers and counted on his colleagues to service customers in the caring Gap style. Mere weeks before that, Unilever, the giant consumer products company, initiated Project Sunlight to enlist consumers in a personal way to make commitments from shorter showers to cold-water laundry.

The best hope for sustained economic growth and societal improvement is for business to continue to innovate. But innovation is being hampered by legitimate public concerns over substantial changes in operating methods in several industries, from fracking to cloud computing. In order to move forward, business will have to set the context for change by taking the bully pulpit. Here is a three-step approach:

Participate: Seek input from a broad range of stakeholders. Partner with non-governmental organizations in the drafting of clearly articulated goals that offer both a business case and a pro-society rationale. Conduct a listening tour of affected communities to address emotional concerns while creating personal relationships with local leaders. Engage employees, enlisting their involvement to ensure organizational alignment around goals and values.

Advocate: Offer a clearly articulated strategy that begins with the context of how a proposed change will improve the lives of customers as well as your bottom line. Go on tour, engaging in debate with critics, informing media of all stripes, from mainstream to social. Enable your partners, from NGOs to academics, by briefing them regularly. Foster a culture that supports employees speaking out, amplifying the engagement and creating mass movement.

Evaluate: Have measurable outcomes, specific quantitative and qualitative targets. Report frequently on progress against metrics. Acknowledge where delivery is under expectation and have a path to improve performance. Amend your strategy and goals while remaining authentic.

Ethical behavior will be the litmus test for business as it takes the initiative in creating new markets. Transparency and consultation with stakeholders will be the minimum standard. Shakespeare wrote in The Merchant of Venice, “If to do were as easy as to know what were good to do, chapels had been churches and poor men’s cottages princes’ palaces.”