A recent Harvard Business Review article coauthored by Doug Conant, Campbell Soup’s former CEO and Stephen MR Covey, discusses the “Connection Between Employee Trust and Financial Performance” and references a model developed by Trust Across America-Trust Around the World, a program whose focus is creating tools to help organizations build trust. The quantitative and holistic model is called the FACTS® Framework and it identifies, through over seven years of data, America’s most trustworthy or high integrity public companies, and further benchmarks their performance against the S&P 500.
Why should this interest you? Very simply, the breakdown in trust following the 2008 financial crisis put Main Street and Wall Street at odds, and little has improved since those tumultuous years. Billions of dollars of investible assets sit on the sidelines, the outcome of fear and greed, and investors suffer due to a lack of trust “worthy” alternatives. Trust is a tiebreaker in all relationships, and until financial institutions begin to think of it as a tangible asset and a business imperative, Main Street investors will not return to Wall Street.
Beyond increasing employee engagement, here are some other “hard facts” about high and low trust.
- Volkswagen lost 20% of its stock value after the emissions scandal and Target’s profits fell 34.3% after it’s data breach.
- A study by Murphy, Shrieves and Tibbs called “Determinants of the Stock Price Reaction to Allegations of Corporate Misconduct” finds that allegations of misconduct are accompanied by statistically significant control-firm adjusted declines in reported earnings, increases in stock return variability, and a decline in concordance among analysts’ earnings estimates.”
- In a 2008 study by Karpoff, Lee and Martin called “The Cost to Firm’s of Cooking the Books,” the authors find The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge.
Now the good news…
- According to a 2011 Booz & Co. study, “The Global Innovation 1000: Why Culture is Key,” companies with both highly aligned cultures and highly aligned innovation strategies have 30 percent higher enterprise value growth and 17 percent higher profit growth than companies with low degrees of alignment.
- A 2013 study by Guiso, Sapienza and Zingales called “The Value of Corporate Culture” finds that proclaimed values appear irrelevant. Yet, when employees perceive top managers as trustworthy and ethical, firm’s performance is stronger.
- In a Harvard Business School working paper from July 2013 called “The Impact of Corporate Sustainability on Organizational Processes and Performance,” Robert G. Eccles, Ioannis Ioannou, and George Serafeim provide evidence that high sustainability companies (those integrating both environmental and social issues) significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.
As a Main Street investor, given the choice between investing in the stock of a high trust or low trust company, which would you choose? We call this opportunity Trust Based Investing™, or Responsible Investing 2.0. The strategy removes much of the risk, and rewards the individual investor with peace of mind and the ability to support companies that place values before value. Trust not only works, but it may be the catalyst that brings both the weary and leery investor back to the stock market.
By Barbara Brooks Kimmel
Barbara Brooks Kimmel is the Co-Founder and Managing Member of FACTS® Asset Management, a New Jersey based Registered Investment Advisory firm. She is also the CEO & Cofounder of Trust Across America-Trust Around the World. Barbara is the Editor of the award-‐winning Trust Inc. book series including Trust Inc., Strategies for Building Your Company’s Most Valuable Asset (November 2013). She is also the co-creator of the FACTS® Framework. Barbara has also been the President of Next Decade, Inc an award-winning communications firm, since 1994, and in 2012 was named one of “25 Women who are Changing the World” by Good Business International. Barbara earned a BA degree in International Affairs from Lafayette College and an MBA from Bernard M. Baruch Graduate School of Business at the City University of New York.