BTM 550 2008 WINTER 06:
Handout 05 Managerial Ethics XLRI 2015The Ethics of Executive
Trust: Building
Trusting RelationshipsOzzie Mascarenhas S.J., Ph.D.
June 15, 2015Case 5.1: Managing Trusting Relationships in Indian
Organized Retailing
The Indian retail market, which grew at 11.2% compound annual
growth rate (CAGR) during 2007-2009, is estimated to grow from $427
billion in 2010 to $637 in 2015, with food and grocery accounting
for the major share (Shekhar 2011). The Indian retail market is
broadly classified into the unorganized sector and the organized
sector. Unorganized retailing is the traditional form of retailing
in India with the retail outlets located near residential areas and
mostly run by unlicensed retailers. The unorganized market is a
sellers market with a limited number of brands and little choice
available to customers. It is unregulated, free of tax laws, and
grows very slowly. Organized retailing refers to the modern form of
formal trading activities such as registered shops, malls,
supermarkets, factory outlets, and supermalls, and is generally
located in high traffic commercial areas. For instance, while the
clothing market is highly fragmented with numerous organized and
unorganized sectors operating under various retail formats, the
Indian apparel and footwear industry is highly organized and
represents currently the largest market opportunity for the
organized retailers. Branded apparel industry is about 20% of the
total apparel market in India. Mens clothing accounts for about 42%
of all branded apparel sales, while womens apparel constitutes just
36% and childrens wear is at 22% currently. While the unorganized
retail market is still dominating in India, the organized sector
rapidly grew at CAGR19.5% during 2007-2009, thanks to the emergence
of the large middle income class which seeks for quality goods and
services. The Indian retail market contributed 10% to GDP and 6.5%
of employment in 2009.
Despite uncertainty and slowdown in the Indian economy, India
has recorded sustained growth in merchandise retail during the
decade 2002-2012, and is expected to do so in the coming decade.
This is primarily because Indias GDP has been growing at an average
6% during this period. Growth in GDP translates to growing per
capita income to increased discretionary spending to growing per
capita consumption of food and apparel and entertainment, which
means augmented merchandise retail trade. Also, owing to rapid
urbanization, Indias urban share in merchandise retail is estimated
to grow from 40% in 2002 and 48% in 2012 to nearly 56% in 2021.
Today in India (2014) there are 53 cities with populations
exceeding a million, while there were only 23 such cities in 1991.
But Indian organized retail will continue to face rigid government
regulations, complex taxation rules, and high cost of real estate
in urban areas. Organized retail is capital-intensive with long
gestation period. Hence FDI liberalization in the retail sector
(which is a State subject) would be critical.
The Indian organized retail market began to grow steadily since
1991 with the liberalization of the retail markets to FDI. The
father of organized retailing in India is presumably Kishore Biyani
who first introduced the Pantaloons retail chain in India (Biyani
later pioneered three upscale linked outlets: Brand, Brand Factory,
and the City Bazaar). Currently, organized retailing is sprawling
in major cities of India with shopping centers, multiplex malls,
and supermalls that offer variety shopping, entertainment and food
all under one roof. The free flow of FDI into organized retailing
in India is periodically resisted by politicians who fear that the
swelling organized retail sector may destroy the neighborhood
kirana stores, thus undermining Indian culture. Apparently, single
brand retail is doing well in India. In 2006, the Indian government
allowed only up to 51% FDI in single brand retail. This has
increased FDI in Indian retailing. In February 2010, the Indian
government allowed 100% FDI in single brand retail, in wholesale
cash and carry and 51% FDI in multi brand retail. This may
intensify both domestic and foreign competition in organized
retailing. The organized sector, however, has its own problems of
supply side of procurement with fragmented sourcing, unpredictable
availability, unsorted food provisions and daily fluctuating
prices, and problems of demand side of high consumer expectations
of product quality, variety, hygiene, and fresh produce, reasonable
prices, coupled with fast changing lifestyles and demographic
shifts and product obsolescence. Moreover, with the advent of
information and communication technology (ICT), Indian consumers
are expecting integrated customized solutions to their
multidimensional demands. Even after two decades of organized
retailing in India margins are low and do not match with foreign
counterparts. In this context, building strong trusting relations
with suppliers and customers becomes imperative and challenging. A
leading organized retailer like Brand, Brand Factory, Big Bazaar,
Pantaloon, Shoppers Stop, Lifestyle, and the like may handle as
many as 400,000 products and services with millions of transactions
per day. The retailing phenomenon can even be more complex and
demanding during particular festivals and holiday seasons.Malls and
independent stores are still struggling in India. They have found
the capital cost of investing in land and filling the go-downs a
losing proposition. High rentals between 15-20% of sales and low
footfalls in malls, have led many a mall to insolvency and
bankruptcy. Consumer behavior also revealed that most Indians do
not like or afford to spend on premium retail prices. Most mall
consumer spends are mainly at the food-courts and the multiplexes
(Krishna 2015: 62-63). One of the reasons why the kiranas thrive is
because retailers, barring a few, have not made modern retailing a
career option, said B. S. Nagesh, vice-chairman of Shoppers Stop,
one of the largest organized retailers in India, in an interview
with the Businessworld (see BW Businessworld, June 15, 2015: p.
64). Of the 450 million workers in India, only 30 million (less
than 6.7%) are in he organized sector, while the rest continue in
the informal employment sector, according to Kronos, the global
human resource technology firm. Most of the informal workers
experiment with entrepreneurship and the kirana store offer the
lowest market-entry barrier. One can start a kirana store with
small finance from family and friends. Presumably, it is the same
spirit which the Uber and Ola have tapped to make taxi driver their
partners. Some of these drivers actually also own small shops and
drive taxis for that extra income (Krishna 2015: 64).Historically,
the Indian consumer has always been hyper-local, preferring his
neighborhood baniya. There is a rural, semi-urban, agro-social and
cultural (linguistic) bonding and mutuality between the buyer and
the seller, the customer and the kirana vendor, between the
neighborhood stores and the neighboring small communities that are
unique to multi-linguistic and culturally diverse India and that
are unparalleled in other large urban or city environments. Our
goal has always been to bring the experience of a neighborhood shop
in a large store, which is convenience and great service says
Kishore Biyani, Chairman, Future Group. The big retailers have
underestimated the underlying strength of the Kiranas and their
importance in the unorganized job market. Organized impersonal
retailing with its mass-distribution and possibly one-time,
disconnected, discreet transactional nature, goals and objectives
may not be able to capture, attract, and retain such deep
buyer-seller loyalties that the unorganized kirana stores command.
Giant retailers are learning this now and are seeking partnership
with rural kirana vendors (Krishna 2015). How Organized and Online
Marketing and Kirana Shops Can support Each other
In 2006, when large retail giants in India such as Reliance
Industries, Future Group, the Aditya Birla Group, and others
invested Rs 40,000 crore (then US$ 10 billion) to expand organized
retailing, there was strong sentiment that this project would kill
the neighborhood kiranas. Today in 2015, barely nine years later,
the opposite has happened: the retail giants seem to empower the
kiranas to survive, blossom and prosper. Neighborhood kirana stores
know their customers like none. Giant retailers like Amazom.com,
Brand, Brand Factory, Pantaloons, and City Bazaar have now learnt
that partnering with them is their best bet. Jeff Bezos, the
founder of Amazon.com, wants to use the Kirana network, earlier
seen as competition, to grow retail sales. His target is to bring
Indias 5,000 kiranas under Amazon umbrella within two years. His
kirana business model is simple: the kirana store earns Rs 20 for
every package delivered to the customers doorstep, and Rs 15 for
every packet picked up by the customer from his store.
Bhuvaneshwari Rice Shop, founded in 2012, is a 500 square foot
kirana store of Madan Mohan Reddy, age 21, of Bangalore. He works
hard over 17 hours a day and makes around Rs. 50,000 a month. He is
tech savvy graduate, ambitious, and uses a large smartphone. A
digital literate, he knows about products such as the mobile wallet
and is open to cash-on-delivery to win new customers. Some 18
months ago, January 2014, Amazon.com, the $89 billion online retail
giant, began its I Have Space(IHS) program using the street corner
mom & pop kirana network to deliver products to Amazon
customers. Reddy saw his future instantly, made a phone call and
registered as a delivery partner. Rest is history. He provided his
PAN card details to Amazon.com, and the latter gave him a Samsung
tablet and a palm-sized credit card payment device to connect the
payments to Amazons seller app and the cloud server on the backend.
Reddy has not looked back since. Because of Amazom.com he has extra
reach and more customers. His sales have increased by Rs 20,000 per
month and he makes an additional Rs 15,000 by delivering products
ordered on Amazon at his store. When customers come to his store to
pick up their Amazom.com orders, they buy products and services
from his stores. Moreover, when he began delivering Amazon products
doorstep to some of his loyal customers, they asked him if he would
deliver groceries too. Madan earns currently Rs 85,000 a
month.Madans success story is infectious. The Amazon HIS program is
catching on in Bangalore and will be scaled up in other major
cities of India. This recent kirana attention is because the
kiranas know the customer better than anybody and their services
add more value to our customer service experience, says Amit
Agarwal, managing director of Amazon India. The kiranas may know
the customer more, but do not capture that information, while
Amazon can use this data mine for advantage.
Kiranas are also hubs for booking rail, air and bus tickets
along with centers for filling up passport and tax forms and mobile
recharge vouchers to supplement their revenue. Over the years,
kiranas have widened their services to include selling apparel,
mobile repairs, and ironing clothes. Reports by CRISIL and Ernst
& Young estimate the total number of kiranas in India at 12
million outlets and they clearly seem to dominate the $550 billion
retail market. The organized retail sector accounts for less than
8% of Indian retail sales, and this share has crept up only by 3%
during the last ten years. If you cant beat them, join them, is the
current Amazon strategy. While Flipkart and Snapdeal have not made
the kirana partnership their immediate agenda, Kishore Biyanis $3
billion Future Group is committed to learning from and linking with
the Kiranas. References:
Bahree, Megha (2011), India Unlocks Door for Global Retailers,
The wall Street Journal, November 25, A1.
Bloomberg Business Week (2011), Wal-Mart waits with Carrefour as
India wins Instant gain: Retail, November 30.
Ministry of Commerce (2011), FDI Policy in Multi Brand Retail,
Government of India, November 28.
Shekhar, Raja B. (2011), Impact of Service Quality on Apparel
Retail Customer Satisfaction A Study of Select Metropolitan City of
Hyderabad, Journal of Management Research, 3:2, 13-26.
The Indian Economist (2011), Indian Retail Reform: No Massive
Rush, December 2.
The Indian Economist (2011), Indian Retail: The Supermarkets
Last Frontier, December 3.Krishna, Vishal (2015), Lucrative
Liaisons, in BW Businessworld June 15, 2015, pp. 62-66).Ethical
Questions:1. Retailing is a buyer-seller trust building game. As an
organized retailer executive, how do you plan and strategize
building the trusting brand community of suppliers and customers?2.
As a middleman between brands suppliers and highly brand-conscious
customers, what vulnerabilities do you foresee on both sides, and
how do you plan on working round such vulnerabilities?
3. Sophisticated organized retailing today needs highly
specialized talent of informed and problem-solving salesmanship and
building lifetime loyalties among major target markets how will you
recruit, train, develop and retain such sales force retailing
talent, and all these with high principled ethics?
4. Taxation still favors small businesses in India; moreover,
regulations restrict real estate purchases, especially agricultural
land for safeguarding backward integration of food production and
logistics. In this context, how will you build trusting
relationships with government authorities and regulations
enforcement people?
5. Discuss the ethics of 100% FDI in single brand retailing in
India since February 2010.
6. Given 100% FDI in single brand retailing study its social,
ethical and moral impact on the single brand domestic industry as
well as on the lifestyles of the Indian consumer. For instance,
will it intensify both domestic and foreign competition in
organized retailing? 7. As a corporate retailing executive in
India, how would you empower organized retailing by building
trusting relationships, and even with competition?
8. As a corporate organized retailing executive in India, how
would you design and build a win-win partnership by building
trusting relationships with the immense 12-million kirana network
in India? What will be its ethical ramifications?Case 5.2: Bain
sues EY over $60-m loss in Lilliput Kidswear [See Reuters (2014),
Bain sues EY over $60-m loss in Lilliput Kidswear, Business Line,
Saturday, June 14, 2014, Kolkota, p. 1].Global private equity firm
Bail Capital Partners LLC (BCPL) is suing EY (formerly Ernst &
Young) in a US court claiming that the auditing firm cost it
roughly $60 million by advising it to invest in Lilliput Kidswear
(LK), a childrens clothing company in India. BCPL alleges that it
invested around $60 million in LK in May 2010 for a non-controlling
equity interest of 30.99 percent stake, based on false financial
statements that EY had audited and certified. BCPL and ten other
subsidiaries of BCPL have sued Ernst & Young Global Ltd in a
Massachusetts court, claiming that their investment in LK is
currently rendered worthless. EY, however, retorted that these
allegations of wrongdoing are baseless and EY will vigorously
defend this matter.BCPL who had invested the capital in Lilliput in
2010 had plans to expand LK before taking it to an initial public
offering (IPO). Around 2012, BCPL was alerted to serious problems
with the accounting in LK via a call from a whistleblower, soon
after an IPO for LK was approved. BPCL halted the LK IPO process
after investigating the whistleblowers claims and finding inflated
sales at LK, according to the suit. The suit alleges that BPCL,
which has a long standing global relationship with EY, was
specifically targeted by EY to invest in LK, because the
Boston-based BPCL had the resources to pay a higher investment
price of LK and the prestige and knowledge to take the company to
an IPO. According to a copy of the complaint filed with the
Stuffolk Country Court, obtained by Reuters, the law suit also
alleged that BPCL invested in LK because it relied on false
financial statements and EYs false audit opinions, and that EY
continued to certify LKs financial statements even as Lilliputs
fraud grew with EYs active assistance. BPCL is suing EY for fraud,
aiding and abetting fraud, negligent misrepresentation, and unfair
and deceptive trade practices based on EYs involvement in the
scheme to defraud BPCL.Kids under the age of 12 constitute close to
a quarter of the total population of India. The Kids-wear market is
growing fast and KPMG estimates this market to grow from Rs. 30,000
crore in 2013 to Rs. 43,000 crore by 2021. However, this market is
highly fragmented with the 3 major players in the organized sector
till 2013, namely Lilliput, Gini & Jony, and Catmoss, occupying
a meager 5% of the total market. The uncontrolled expansion that
these companies have done showed its effects in the form of high
debt-ridden financials for these retailers along with stiff
competition from mom-and-pop stores. Lilliput Kids-wear, which
ventured into direct retail in 2003, had 290 exclusive stores in
India and 40 abroad. Not only was it forced to shut shops, but it
also had a debt of Rs. 850 crore in its books (as of 2013).
However, with other players such as Mahindra Groups Mom & Me,
and other international players like Zara, Gucci etc. also entering
the Indian market, the overall awareness for organized retail in
this segment has gone up.
Ernst & Young (EY) had a longstanding relationship with Bain
Capital by virtue of providing audit and advisory services to the
group companies for years. EY advised Bain to invest in Lilliput
Kids wear, for which it was the auditor, since January 2010. The
audited financial statements presented to BCPL showed a thriving
business with growing revenues and earnings while the reality was
in stark contrast. LK had intentionally falsified its financial
statements to hide its poor performance, with inaccurate revenues,
costs, with loans outstanding as well as inflated sales figures. EY
certified LKs financial statements for more than a year and
provided those certifications to Bain. The situation came to a head
when Bain was alerted by a whistleblower about the fraud happening
in LK. After investigating these claims, Bain decided to stop a
planned IPO of LKs stock and sued EY for $60 million for fraud,
aiding and abetting fraud, negligent misrepresentation, and unfair
and deceptive trade practices."According to Bains lawsuit, the
fraud at LK was done with the full knowledge and assistance of EY,
who knew that LK had inflated its sales, concealed loans, and
forged bank confirmations, yet assured Bain about the veracity of
the financial records. Allegedly, EY was in full complicity with LK
and shared details of its planned audit procedures with Lilliput in
advance and even allowed Lilliput to perform certain audit testing
on itself. Seemingly, it even went to the extent of issuing
unqualified audit opinions and later eliciting LKs help in
back-filling its audit work papers to show that it had conducted
audit procedures that it had in reality not performed. EY served
both as Lilliput's outside statutory auditor, having the duty of
performing unbiased check on the retailer's financial statements as
well as seller's agent, i.e. LKs financial advisor to bring on
board new investors wherein its compensation was based on the
selling price of LK's shares an obvious conflict of interest. In
fact, EY gained financially from both sides by earning a lucrative
fee as auditor as well as getting a 'success fee' for obtaining a
high valuation for Lilliput.Recent initiatives incorporated in the
Companies Act 2013 of India, provide some relief to PE investors
like BPCL. Section 147 and 448 would tighten the noose on auditors
intentionally endorsing false and misleading financial statements,
reports etc. The government is also planning to institute a Market
Research and Analysis Unit to check for financial scams and
administer market surveillance on defaulting companies as well as
develop an early warning system for potential fraudulent activities
in companies.The case involves three key stakeholders Bain Capital
Partners, Lilliput Kids wear and Ernst & Young. It brings to
light the classic case of breach of trust. This is arguably the
most high-profile alleged accounting fraud case which also involves
negligent misrepresentation, and unfair and deceptive trade
practices. The events in case have led to breakdown of the mutual
trust between Bain and EY, painstakingly built over several years.
This is likely to cause a big blow to their professional relation
as Bain would be more suspicious of any future dealings with EY,
thus increasing the transaction cost due to higher monitoring
requirement. In todays world where all companies are lobbying to
get their way around various policies, controlling majority of the
worlds resources, it becomes extremely important to see the impact
of such unethical and unfair practices on the overall development
of a nation, especially developing nations such as India.
Companies manage to achieve strategic efficiencies as a result
of mutual trust that develops as a result of longstanding ties with
their partners. This enables companies to reduce various
transactional costs, and gain mutually. This is how the
relationship between Bain Capital and EY can and should be defined.
However, by trusting EY and not taking a second opinion, Bain
managed to save on the due diligence costs but faced with a much
bigger loss as a result of EYs inaccurate information. Providing
inaccurate information with the intent to misguide Bain Capital was
morally incorrect on EYs part, and would greatly hamper their
working ties, and any strategic benefits that they could have got
otherwise in the long run.As per the current guidelines of the
Central Vigilance Commission of Indias Code of Ethics for chartered
accountants: a) A professional accountant should be straightforward
and honest in performing professional services; b) A professional
accountant should be fair and should not allow prejudice or bias,
conflict of interest or influence of others to override
objectivity, and c) When in public practice, an accountant should
both be, and appear to be, free of any interest which might be
regarded, whatever its actual effect, as being incompatible with
integrity and objectivity.
Bain Capital and TGP Capital were the primary affected parties
as the value of their investment was eroding rapidly. Lilliput
stands to lose not just its current source of funding but also a
tarnished image would make it difficult for it raise funds in the
future. Lilliput's founder, Sanjeev Narula, initially cooperated
with the audit but then stopped, protesting that the probe went too
far. Subsequently the High Court ordered that the audit dispute be
settled by an arbitration tribunal.Sources close to Bain and TPG
had acknowledged later on that their due diligence failed to find
irregularities prior to the investment. The sources say the buyout
firms were encouraged by the fact that Lilliput had an independent
board, a reputable auditor - the local affiliate of Ernst &
Young, S.R. Batliboi & Co - and prior ownership by an
established, large, local private equity firm. However, there
should no compromises with the procedure of due diligence, as even
some corporations of South Korea which were deemed too big to fail
went bankrupt and led to the Asian Financial Crisis of 1997. When
asked for his opinion on the issue, the LK founder, Narula, very
rightly said that the whole situation could have been resolved
better through face-to-face talks with Bain Capital than by the
court.Ethical Questions:
1. Who is legally wrong: BPCL for suing EY or EY for allegedly
targeting BPCL to invest in LK? Why?2. Who is ethically and morally
wrong: BPCL for suing EY or EY for allegedly targeting BPCL to
invest in LK? Why?
3. EY was an auditor of LKs financials and Bain Capital had a
non-controlling stake of 30.99% in LK. How do you ethically and
morally assess conflict of interest in these transactions?4. To
what extent does BPCLs suit against EY violate the long standing
trusting relationships between the two companies, and why?5. Should
BPCL have taken a second opinion on LK, and not univocally trust on
EYs certified audit opinions on LK, especially after receiving the
whistleblowers call in 2012?6. Can BPCL legally and ethically claim
redress for its blind faith in EYs audit opinions of LK?7. To what
extent is EYs involvement in targeting BPCL to invest in LK a
fraud, aiding and abetting fraud, negligent misrepresentation, and
unfair and deceptive trade practice?8. For building and reinforcing
trusting relationships between long-standing partners such as EY
and BPCL, how would you resolve this BPCLs suit against EY amicably
and out of court? Case 5.3: Building Indo-Japan Trusting Business
RelationshipsIn his telephonic conversation with Narendra Modi soon
after the latters election victory, Japanese Prime Minister Shinzo
Abe said that he would like to work closely with Modi towards
further development of Japan-India Strategic and Global
Partnership. Japan is also seeking early clearance for its proposed
investments in the ambitious industrial corridor projects. In May
2014, the Japanese Ambassador to India, Takeshi Yagi, had led a
group of senior Japanese officials from investment and project
funding agencies of the Japanese Government for a meeting with
Industry Secretary Amitabh Kant to discuss investment and funding
plans in the newly planned industrial corridors of India. Japan has
committed $4.5 billion (about Rs 27,000 crore) for the Delhi-Mumbai
industrial corridor. Japan is also considering giving financial and
technological support to a similar industrial corridor between
Chennai and Bangalore. India is the biggest receiver of Official
Development Assistance from Japan and Indian companies; India is
also the second biggest (after the Chinese) receiver of assistance
from Japan Bank for International Cooperation.Most of these
Indo-Japanese projects, however, have suffered a setback following
tough requirements under the new Land Acquisition Act. The
Department of Industrial Policy and Promotion (DIPP) has asked the
Rural Development Ministry to make exceptions for Government-led
infrastructure projects.Tadashi Yanai, Chairman of Fast Retailing
Group, met Prime Minister Narendra Modi on Wednesday, June 25,
2014, expressing his intentions to source garments from India for
the Uniqlo chain of casual clothing. Modi welcomed Yanais interest
and highlighted the advantages that India enjoys, including
availability of cotton, skilled labor, robust infrastructure, a big
domestic market and good ports for exports. As of February 2014,
Uniqlo had a total of 1,383 stores in Japan, China, Hong Kong,
Taiwan, Korea, UK, USA, France and Russia. Yanai, who is also the
President and CEO of the Fast Retailing Group, wants now to enter
Asia, and India, in particular. At present India allows 100% FDI in
single brand retail and up to 51% in multi-brand retail. According
to Yanai, Asia is the focal point for generating prosperity and
eradicating poverty.Meanwhile, Japan is putting pressure on India
to sort out taxation, labor and other problems that Toyota,
Mitsubishi and Honda are currently facing in India. Labor unrest
has emerged as a big problem affecting Japanese investments in
India. The Indian arm of Toyota Motors temporarily shut down two of
its plants near Bangalore following strikes by some employees who
were protesting delays in salary hikes. Suzuki Motors faced violent
labor protests in 2012 that led to one death and several arrests.
Retrospective taxation is another issue bothering the Japanese
investors. The Finance Ministry has placed tax demands on certain
Japanese companies, which includes a bill of $2 billion on
Mitsubishi and about $600 million on Honda.Current Japanese
Ambassador to India, Takeshi Yagi, has sent a letter to the Prime
Ministers Office (PMO) urging early resolutions and solutions to
issues affecting Japanese companies in India and their
fast-tracking proposed investments, especially in the ambitious
industry corridor projects of India. Earlier, the Japanese Embassy
had also sent notes to the Finance and Commerce Ministries
stressing on the need for a predictable and transparent business
environment. During an interview, the Department of Industrial
Policy and Promotion (DIPP) said to Business Line, We are aware of
the problems related to various Japanese companies that have been
raised by the Japanese Ambassador. We have asked different
Ministries and Departments that are involved to act on
them.Recently, the BJP Government seems to have agreed that
retrospective taxation is not a good idea. Accordingly, Japan has
renewed its attempts to sort out the tax related issues with the
BJP Government. Japan wants to intensify its ties with India also
to counter Chinese influence in the region. Japans Chief Cabinet
Secretary Yoshihide Suga told a press conference in Tokyo recently
that Modi was very friendly toward Japan. We expect to further
deepen our political and economic relations with India, Suga
said.[The Indian government maintains that some Foreign Portfolio
Investors (FPIs) and Foreign Institutional Investors (FIIs) had
gone to the tax Authority of Advance Ruling (AAR) which ruled that
MAT was applicable.The tax authority clarified that the current
demand of 20 per cent minimum alternate tax (MAT) on capital gains
made by the foreign investors (FPIs and FIIs included) is what is
genuinely due to the government. This law is retrospective of all
tax dues of the past years. Hence, it was called the law of
retrospective taxation. It is not new, but just a reassertion of a
law in force for the last fifty years in India. Retrospective
Taxationwas formally implemented by adding an amendment to the
IncomeTaxAct of 1961. Through theRetrospective Taxationamendment
theIndian Government now had the ability to demand the payment
oftaxeson any overseas transaction involving anIndianasset dating
back over 50 years. What FIIs and FPIs are asking is retrospective
exemption and not retrospective application of a tax law. They were
referring to reported apprehensions among foreign investors that
the government was creating a new tax demand using retrospective
tax legislation which they fear would deter foreign investment."The
Income-Tax department has won cases in tribunals (Authority of
Advanced Ruling) on levy of MAT on capital gains made by FIIs. If
we do not demand tax now, then we could be hauled up by authorities
like CAG and CBI," the sources said. Read more at:
http://economictimes.indiatimes.com/articleshow/
46838009.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst]...
Recently, Takeshi Tagi had also requested that the Finance
Ministry of India ask the RBI to allow currency swap transactions
for the Japan Bank for International Cooperation (JBIC). There is a
huge demand for rupee-based loans in India for various projects and
JBIC could offer dollar or Yen funds through a swap. But RBI
prohibits this. If such transactions are allowed, JBIC would be
able to lend at much lower interest rates because of its high
credit rating. This will also help JBIC offer long term low
interest rupee loans for projects not connected with the
Delhi-Mumbai Industrial Corridor (DMIC), where JBIC has 26% stake.
Incidentally, India and Japan have an extant arrangement for
swapping their local currencies against the US dollar; the size of
the swap deal has been recently expanded to $50 billion from $15
billion. This swap is primarily aimed at tackling short-term
liquidity problems an insurance facility that could help both
governments deal with any balance of payment problems arising out
of or leading to extreme volatility in exchange rates. That is,
central banks of both countries can approach each other for dollars
against payment of their local currencies. The current proposal is
that an Indian bank, with the consent of the RBI, could provide
rupees to JBIC against yen or dollar payments which JBIC would lend
to Indian projects. JBIC would bear the exchange rate risk.
Separately, Tokyo has also approached RBI for its approval for
Japanese Bank Mizuho in Ahmedabad (See Financial Express, July 2,
p.3).Sources:
Amiti Sen (2014), Japan writes to India on Problems faced by its
Companies here, Business Line, Tuesday, June 26, 2014, p.4; Japans
Uniqlo wants to source Garments from India, Business Line, Tuesday,
June 26, 2014, p.4.Bhattacharya, Roudra (2014), Prod RBI to allow
Currency Swap for JBIC: Tokyo to Govt., The Financial Express,
Wednesday, July 2, 2014, p. 3.Ethical Questions:
1. Based on Chapter 05 and what follows, design a strategic
ethical plan for building lasting industrial and commerce
relationships between India and Japan that are based on mutual
trust.2. While mistrust is the opposite of trust, distrust can
coexist with trust. To what extent are relationships between two
economic powers like Japan and India best ethically developed as
combinations of trust with distrust?3. Mutual trust also includes
vulnerability. Explore the current mutual vulnerabilities between
Japan and India as market powers, and how would you ethically
cultivate mutual trust despite such vulnerabilities?
4. Transparency is a necessary condition for the ethics of
trust. How can you bring about transparency, predictability and
trust in Indias commercial transactions with Japanese partners,
especially in relation to taxation, retrospective taxation, excise
duty, and FDI regulation?5. Good employee relations are very
important for building trusting relations in companies. How would
you go about building strong employee trust in top management (and
vice versa) in an Indo-Japanese business transactions context?6.
Indo-Japanese business relations are often among strangers meeting
for the first time. What specific models and theories will you
invoke for building ethical and moral Indo-Japanese trusting
relations among stranger partners?The Ethics of Executive Trust
Hire well, manage little, affirms Warren Buffett. He builds
trust and relies on trusting relationships. His model of extreme
decentralization would not work unless he trusted the operating
managers, and they delivered. A notable fact is that nobody at
Berkshire Hathaway is awarded stock options. Having hired well,
Buffett limits his interactions with his CEOs to the minimal, only
to get involved in capital expenditure (CAPEX) decisions. He allows
100% operating freedom to his managers, with full expectation that
they will be conscientious. This tightrope walk has ensured that
Berkshire has never lost a CEO to competition in all these decades.
It also demonstrates the fiduciary responsibility that is ingrained
in the Berkshire culture. In May 2009, when the world was barely
merging out of the credit crisis, Warren Buffetts partner Charlie
Munger said something fundamental about Berkshire Hathaway that
resonated with the 35,000 people present at the annual meeting: Our
model is a seamless web of trust thats deserved on both sides.
Thats what we are aiming for. The Hollywood model, where everyone
has a contract and no trust is deserved on either side, is not what
we want at all. Warren Buffett added: We dont want relationships
that are based on contracts. It is this seamless web of deserved
trust that is unique to Berkshire (See Mahalakshmi N. and Rajesh
Padmashali (2015), 50 Master Moves that Shaped Berkshire Hathaway,
Outlook Business, Special Issue, India, June 12, 2015, p. 38,
40).Franklin Covey said that trust is a combination of character
and competence. Most executives work on improving their competence,
almost forgetting that building their character has far greater
impact on people round them than their skill sets. Organizations
and leaders high on competence but low on character will not
survive in the long run said Shivkumar, Chairman and CEO of PepsiCo
India Holdings Pvt. Ltd, in his recent JRD Tata Ethics Oration,
XLRI, Jamshedpur, Jharkhand, India. He added, Trust in a leader
generates confidence and optimism in every sphere. Trust in a
leader builds a powerful ecosystem (Shivkumar 2014: p. 5).
Building trust and living interpersonal trust are crucial
corporate executive virtues that are needed today. Once you have
developed and solidified a high level of genuine interpersonal
trust with all your stakeholders, especially employees and
customers, then you are on the right path of managing and
transforming your company. A high-level of interpersonal trust
between all stakeholders and you in a business situation will break
down communication barriers, foster serious conversation and
sharing of ideas, and will eliminate anxieties, fear, guilt,
rigidity, blame and resentment. When your stakeholders trust you
and you trust them, then, you speak freely, they speak freely, and
your mutual sustained transparency is a gateway to survival,
revival and sustained corporate recovery and transformation. The
informal and transparent communication networks that you establish
between all concerned parties will hoist and empower the company
for steady growth and prosperity. Conversely, when there is low
trust, high mistrust and high distrust among stakeholders in a
business situation, communications and conversations are stressed
and fragmented, teamwork and team spirit are very low, and the
company is heading toward its ruin and extermination. Such is the
crucial role of interpersonal trust in business. This Chapter
explores the phenomenon of corporate interpersonal trust. Human
beings are naturally predisposed to trust. It is a
survival-mechanism, (that is, it is in our genes and childhood and
adolescent learning), that has served our species quite well. Our
willingness to trust, however, can get us into trouble, especially
when we trust too readily, and have difficulty distinguishing
trustworthy people from untrustworthy ones. In the wake of massive
and pervasive abuses of trust (e.g., Enron, Tyco, WorldCom, AIG,
Washington Mutual, Fannie May, Freddie Mack, Bernie Madoff, and all
other new corporate scandals that surface each day), social
psychologist Roderick Kramer suggests that we rethink trust today.
[Appendix 6.1 provides a timeline of business trust and mistrust
situations in the U.S. market of the last century]. May be we trust
poorly, or trust too readily. At a general or species level, this
may not matter very much as long as there are more trustworthy
people than not. Nevertheless, at the individual level, it can be a
real problem. We could be very vulnerable. To survive as
individuals, we must learn to trust wisely or temperately (Kramer
2009). Most people are disgusted with the state of corporate ethics
in America riddled as it is with too many acts of dishonesty and
unethical dealings. The result is a lack of peoples trust in the
American business. Commenting on the sequential debacles of Enron,
Adelphia, Tyco, and World.com in 2001-2002, Brett Trueman,
professor of accounting, Haas School of Management, UC, Berkeley,
remarked: This is why the market keeps going down every day
investors dont know who to trust. As these things come out, it just
continues to build (cited in Maxwell 2003: 3).
Mutual trust is a symbiotic relationship leaders must first
trust others before others will trust them. Building trust takes
time, courage, and consistency, but the results and rewards are an
unimpeded flow of intelligence. Good leaders do not want yes-people
around them; they want everyone to tell the truth even though it
may cost them jobs. Exemplary leaders encourage, and even reward,
openness and dissent. Dissent may make you briefly uncomfortable;
but better information (via dissent) helps you to make better
decisions. Good leaders, moreover, admit mistakes. Admitting your
mistakes not only disarms your critics but also encourages your
employees to own up their own failings. Speaking truth to power
(e.g., to a boss) requires both a willing listener and a courageous
speaker. It took tremendous courage for an Enron employee to
confront Jeffrey Skilling with the facts of the companys financial
deception (OToole and Bennis 2009).
Previous studies of long-term orientation in channel
relationships (e.g. Anderson and Narus 1990; Anderson and Weitz
1989, 1992) have concentrated mainly on the importance of
transaction-specific investments (TSIs) in determining long-term
relationship orientation. TSIs, it is presumed, would create
dependence and lock-in customers, both necessary for long-term
orientation. While TSIs and dependence may be necessary conditions
for long-term relationships, they are not sufficient, since both
focus on present and existing conditions. We need to supplement
them by trust, which looks for the long-term future (Ganesan 1994).
This is trust based virtue-ethics.If trust facilitates informal
cooperation and reduces negotiation costs, then it is invaluable to
corporate and business organizations that depend upon professional
people, cross-functional teams, interdepartmental synergies,
skilled work groups, and other cooperative structures to coordinate
business treatment (see Creed and Miles 1996; Powell 1990; Ring and
Van de Ven 1994). Further, in those firms where flatter
organizations are advocated, trust can certainly facilitate
cooperation across boundaries such as functional areas, divisions,
and management-versus-union lines (Williams 2001). Executives and
employees may be continually required to cross group boundaries to
secure cooperation from stakeholders over whom they have no
hierarchical control, and this may be particularly difficult and
challenging across cross-cultural, cross-religious and cross-social
groups that are commonly encountered in business situations (see
Fiske and Neuberg 1990; Kraemer 1991; Kraemer and Messick 1998;
Stikin and Roth 1993).
The best device for creating trust between business executives
and stakeholders is to establish and support trustworthiness of
both parties (Hardon 1996). Building trustworthy relationships by
habitually discharging mutual obligations between parties to
transactions can mitigate the risk of opportunism on the part of
both parties, and forestall costly legal battles and the
consequences of expensive fraudulent insurance premiums (see
Whitener et al., 1998).
The Importance of Trusting Relationships in Business
ManagementScholars have seen trust as an essential ingredient for a
healthy personality, as a foundation for interpersonal
relationships, as a foundation for cooperation, and as a basis for
stability in social institutions and markets. Mutual trust between
business partners has been found to be very vital in the uncertain,
complex, volatile and fast-paced business environment of today,
especially given modern developments of globalization, and
strategic global competitive alliances (Prahalad and Hamel 1994),
multicultural and multilingual relations (Cox and Tung 1997;
Sheppard 1995).
There are many reasons why reciprocal trust among corporate
executives and various stakeholders is becoming important in all
business transactions. Trust leads to successful relationships and
improves communication, cooperation, satisfaction, and purchase
intent in a marketing-exchange context (Anderson and Narus 1990;
Doney and Canon 1997; Morgan and Hunt 1994). Interpersonal trust
can be an important social resource for facilitating cooperation
and enabling social interactions between various actors in a
business environment (see Coleman 1988; Zucker 1986). Trust reduces
the need: a) to suspect and monitor each others behavior, b) to
formalize monitoring and control procedures, c) to create
completely specified contracts, and thus, d) can reduce negotiation
costs (Powell 1990). The growing importance of relationships in
business has also heightened interest in the role of trust in
fostering such relationships (Bendaupudi and Berry 1997; Blau 1964;
Garbarino and Johnson 1999; Kozak and Cohen 1997; Sirdeshmukh,
Singh, and Sabol 2002). For instance, considerable effort has been
devoted to examining the role of trust in relationship development,
particularly within distribution channels in marketing (Doney and
Capon 1997; Morgan and Hunt 1994; Nicholson, Compeau, and Sethi
2001). Several conceptual (e.g., Gundlach and Murphy 1993;
Nooteboom, Berger, and Noorderhaven 1997) and empirical (e.g.,
Garbarino and Johnson 1999; Tax, Brown, and Chandrashekaran 1998)
approaches have proposed trust as a key determinant of relational
commitment. We can adopt these approaches to incorporate and build
trust in business situations.Business literature, in general and
marketing literature, in particular, has advocated for decades the
need for customer trust and stakeholder relationships. However, the
need has been academically expressed more recently. Some quotes and
opinions in this regard:
One of the most salient factors in the effectiveness of our
present complex social organization is the willingness of one or
more individuals in a social unit to trust others (Rotter 1967:
651).
Trust is the cornerstone of long-term relationships (Spekman
1988: 79). Trust is generally viewed as an essential ingredient for
successful relationships (Berry 1995; Dwyer, Schurr and Oh 1987;
Moorman, Deshpande and Zaltman 1993; Morgan and Hunt 1994;
Garbarino and Johnson 1999).
A central idea in the theory of partnering suggests that
differences in trust and commitment are the features that most
distinguish customers as partners from customers who are
single-transaction buyers (Berry 1995; Webster 1992).
Theories of partnering propose that customers with strong
relationships not only have higher levels of trust and commitment,
but also that trust and commitment become central in their attitude
and belief structures (Morgan and Hunt 1994).
In personal selling or retailing what differentiates relational
partnerships from functional (or transactional) relationships is
the level of trust and commitment to the other party (Levy and
Weitz 1995; Weitz, Castleberry and Tanner 1995).
Customer trust is an essential element in building strong
customer relationships and sustainable market share (Urban, Sultan
and Qualls 2000).
To gain the loyalty of customers, you must first gain their
trust (Reichheld and Schefter 2000: 107).
The inherent nature of services, coupled with abundant mistrust
in America, positions trust as perhaps the single most powerful
relationship marketing tool available to a company (Berry 1996:
42).
Thus, for instance, there is much focus on mutual trust and
trustworthy relationships in marketing, especially in relation to
commitment in marketing (Achrol 1991; Gundlach, Achrol, and Mentzer
1995; Morgan and Hunt 1994), and buyer-seller relationships and
contracts (Doney and Cannon 1997; Dwyer, Schurr, and Oh 1987). This
focus can and should be easily transferred to the discipline of
business management. The high levels of trust characteristic of
relational exchanges enable exchange partners and stakeholders to
focus on long-term benefits of the relationship (Ganesan 1994),
ultimately enhancing competitiveness and reducing transaction costs
(Noordewier, John and Nevin 1990).
A company representative who proves to be dishonest and
unreliable could easily jeopardize long-term relationship with a
trusted supplier (Kelly and Schine 1992). On the other hand, highly
trusted salespeople have been found to sustain customer commitment
despite management policies that may not always benefit the
customer (Schiller 1992). What is Trust? In recent years, the issue
of trust has been seriously discussed in management and marketing
literature. The view of trust as a foundation for social order
spans many intellectual disciplines and levels of analyses
(Lewicki, McAllister, and Bies (1998: 438). Understanding why
people trust, and how trust shapes human relations has been the
central focus of psychologists, sociologists, political scientists,
economists, anthropologists, and students of organizational
behavior and marketing.
According to Lewicki and Bunker (1995), the study of trust may
be categorized based on how trust is viewed: as an individual
difference, as a characteristic of interpersonal transactions, and
as an institutional phenomenon. Specific disciplines have been
associated with these three approaches. Thus,
Personality psychologists view trust as an individual
characteristic (Rotter 1967, 1970, 1980);
Social psychologists define trust as an expectation about the
behavior of others in transactions, focusing on the contextual
factors that enhance or inhibit the development and maintenance of
trust (Lewicki and Bunker 1995, 1996); lastly,
Economists and sociologists have focused on trust building
institutions that reduce uncertainty and anxiety (Zucker 1986).
Each discipline has its own focus, and accordingly, provides
only a partial or incomplete description of trust. McAllister
(1995: 25) argues for two bases of trust, one (cognition-based
trust) grounded in cognitive judgments of the competence of an
exchange partner, and the second (affect-based trust) founded on
affective bonds between exchange partners. Lewicki and Bunker
(1995) distinguish three types of trust: Calculus-, knowledge, and
identification-based trust, and Sitkin (1995) propose three others
- competency-, benevolence- and value-based trust. Sirdeshmukh,
Singh, and Sabol (2002) derive customer trust in the service area
from operational competence, operational benevolence, and problem
solving orientation on the part of both frontline employees and
management policies and practices that back frontline employees.
Mayer, Davis, and Schoorman (1995: 712) argue that trust is the
willingness of a party to be vulnerable to the actions of another
party based on the expectation that the other will perform a
particular action important to the trustor, irrespective of the
ability to monitor or control the other party. Most organizational
scientists (e.g., Granovetter 1985; Ring and Van de Ven 1992) view
trust as a mechanism that mitigates opportunistic behavior among
exchange partners. Rousseau, Sitkin, Burt, and Camerer (1998: 395)
combine common themes from trust definitions based on sociology,
psychology, and economics, and define trust as a psychological
state comprising the intention to accept vulnerability based on
positive expectations of the intentions or behaviors of
another.
Table 5.1 summarizes major differences in the definitions of
trust reflected in the Management Literature.Definitions of Trust
in the Marketing Literature
Marketing scholars have emphasized different aspects of trust.
In an organizational context of trusting independent marketing
researchers, Moorman, Zaltman and Deshpande (1993: 82) define trust
as a willingness to rely on an exchange partner in whom one has
confidence. According to Morgan and Hunt (1994: 23) trust exists
when one party has confidence in an exchange partners reliability
and integrity. In the context of buyer-seller relations, Doney and
Capon (1997: 36) define trust as the perceived credibility and
benevolence of a target of trust. In the service area, Sirdeshmukh,
Singh, and Sabol (2002: 17) define consumer trust as the
expectations held by the consumer that the service provider is
dependable and can be relied on to deliver on its promises.
Accordingly, Sirdeshmukh, Singh, and Sabol (2002) derive
dependability and reliability of the service provider based on
three service qualities: operational competence, operational
benevolence, and problem-solving orientation. All three are
expected from both frontline employees (FLEs) and management
policies and practices (MPPs). An important aspect across all
definitions of trust in marketing is the notion of trust as a
belief, a sentiment, or an expectation about an exchange partner
that results from the latters competence, credibility, reliability
or intentionality (Ganesan 1994).
As is obvious, Moorman, Zaltman and Deshpande (1993) and Morgan
and Hunt (1994) focus primarily on the credibility or confidence
aspects of trust, without specific considerations of the notion of
benevolence in trust. Both definitions draw from Rotters (1967,
1980) definition of trust cited earlier which is based on
generalized expectancy of partners reliability. While Moorman,
Zaltman and Deshpande (1993) incorporate willingness in their
definition of trust, Morgan and Hunt (1994) do not. The former
argue that willingness is a critical facet of trust since one could
cognitively agree that a potential is trustworthy, but not go to
the next step of willing to rely on that partner (Moorman, Zaltman
and Deshpande 1992: 315). Doney and Capon (1997) add benevolence to
credibility to their definition of trust, while Sirdeshmukh, Singh,
and Sabol (2002) consider benevolence as an antecedent to
trust.
Further, according to Moorman, Zaltman and Deshpande (1992) and
Mishra (1996), vulnerability is an important constituent of trust;
in the absence of risk or vulnerability, trust is not necessary,
since outcomes are not of consequence to trustors. Sabel (1993:
1133) defines: trust is the mutual confidence that no party to an
exchange will exploit the others vulnerability. Ganesan (1994) and
Mayer, Davis and Schoorman (1995) view trust in conative and
behavioral terms. Other marketing researchers use cognitive or
evaluative definitions of trust, empirically verifying the link
between trust evaluations and behavioral response (Doney and Capon
1997; Morgan and Hunt 1994; Sirdeshmukh, Singh, and Sabol
2002).
Table 5.2 summarizes and synthesizes these divergent views of
trust in the marketing literature. Most studies of trusting
relationships in marketing are from a marketer/service provider
perspective, and not from the consumers viewpoint. Hence, most of
the theoretical underpinnings of trust have been derived from
inter-organizational contexts and constructs (Singh and Sirdeshmukh
2000). The few consumers viewpoint studies on trust that exist
invoke either the agency theory (e.g., Bergen, Dutta, and Walker
1992; Casson 1997) or psychological approaches (e.g., Garbarino and
Johnson 1999; Morgan and Hunt). More recently, some have tried
combination of these two approaches (e.g., Singh and Sirdeshmukh
2000; Singh, Sirdeshmukh, and Sabol 2002).
Further, earlier trust-studies in marketing (e.g., Anderson and
Narus 1990; Anderson and Weitz 1989, 1992; Moorman, Zaltman and
Deshpande 1992, 1993 and Morgan and Hunt 1994) have treated trust
as a uni-dimensional construct. However, later studies (e.g., Doney
and Capon 1997; Ganesan 1994; Sirdeshmukh, Singh, and Sabol 2002)
have treated trust as a multidimensional construct; the latter
provides greater diagnostic with respect to the effect of trust on
long-term or short-term orientation (Ganesan 1994).
Building Trusting RelationshipsBased on reviews of interpersonal
trust literature, and as applied to the business
executive-stakeholder context, we define trust under three facets
(Whitener et al., 1998: 513): a) A stakeholders trust in another
party such as a business or corporate executive reflects an
expectation or belief that the other party will behave
benevolently, competently, honestly, and predictably.
b) The stakeholder cannot control or force the business or
corporate executive to fulfill this expectation, and thus, trust
involves a willingness to be vulnerable and a risk that the
executives may not fulfill that expectation.
c) Thus, stakeholder trust involves some level of dependency on
the business/corporate executive and hence, stakeholder
satisfaction (as an outcome) in a business situation will be
influenced by the actions of the business/corporate executives.
Defined thus, stakeholder trust is an attitude (see Fishbein and
Ajzen 1975; Robinson 1996) held by the stakeholder toward the
business executive. This attitude derives from the stakeholders
perceptions, beliefs, and attributions about the business
executive, and these, in turn, are based upon stakeholders
knowledge and observations of the business executive.The
Biochemistry of Human Trust[See Kraemer (2009: 70-73)]Thanks to our
large brain, humans are born physically powerless and highly
dependent on caretakers. Thus, we enter the world hardwired to make
social connections. For instance, within an hour of its birth, the
baby will draw her head back to look into the eyes and the face of
the person gazing at her. Within a few more hours, the infant will
orient her head in the direction of the mothers voice. Within a few
more hours, the baby can actually mimic a caretakers expressions
and keep on exchanging mimics. In short, we are social beings
socially hardwired from our birth. Scientists now consider the
nurturing qualities of life the parent-child bonding and mutual
exchanges between caretakers as the critical attributes that drive
brain development. Serious lack of nurturing bonding may even
impair brain development. This partly explains the success of the
human species in terms of survival. We are born to be engaged and
to engage others, which is what trust is largely about. The natural
tendency to trust makes sense in our evolutional history.Research
indicates that the brain chemistry governing our emotions plays an
important role in trust. According to Paul Zak, a cutting edge
scientist in the new field of neuroeconomics, oxytocin, a powerful
natural chemical found in our bodies (which, incidentally, also
plays major role in a mothers birth-labor management and milk
production) can enhance trust and trustworthiness between people
playing experimental trust games. Even a squirt of oxytocin-laden
nasal spray is enough to do it. Other researchers have confirmed
this oxytocin is connected with positive emotional states that
create social connections. Even animals become calmer, docile and
less anxious when injected with oxytocin.We tend to trust people
who resemble us physiologically. Lisa DeBruine provides compelling
evidence on this feature. She developed a clever technique for
creating an image of another person that could be morphed to look
more and more (or less and less) like a study participants face.
She found that trust significantly increased with greater levels of
similarity. The tendency to trust people who are similar to us may
be rooted in the possibility that such people might be related to
us. Other studies affirm that we like and trust people who are
members of our own social group more than we like and trust
outsiders and strangers. Psychologist Dacher Keltner and her
associates have also shown that physical touch also has a strong
connection to the experience of trust. In an experimental game
widely used to study decisions to trust, an experimenter would
touch slightly and unobtrusively the back of some individuals when
explaining the game while distancing from others. The former were
more likely to cooperate with their partner than compete against.
Keltner also notes that greeting rituals throughout the world
involve touching.
Our brain wiring can also hinder our ability to make good
decisions about how much risk to assume in our relationships.
Researchers identify two cognitive illusions that increase our
propensity to trust: a) person invulnerability (this illusion makes
us underestimate the likelihood that bad things will happen to us)
and b) unrealistic optimism (this illusion overestimates the
likelihood that good things will happen to us). By the first
illusion, we ignore high risks of street crimes, drunken driving,
over-speeding and the like thinking that nothing will happen to us.
By the second illusion, we fondly entertain high hopes of marrying
well, having great industrial careers, long life, and so on when
the true odds of such combined outcomes is low. The Psychology of
Trust
Thus, it does not take much to tip humans towards trust. Trust
is our regular default position; we trust routinely, reflexively,
and somewhat mindlessly across a broad range of social situations.
Trust rarely occupies the foreground of conscious awareness; we
trust instinctively. Roderick Kraemer prefers to call this
presumptive trust our tendency to approach many situations without
suspicion. Most of us, unless we have been victims of trust
violation too early in life, have a predisposition or bias toward
trust (Kraemer 2009: 71).Presumptive trust, however, can also be
disastrous when combined with the way we process information. For
instance, we have a proclivity to see what we want to see.
Psychologists call this the confirmation bias. That is, we pay
attention to and overweigh information that supports our hypothesis
or theory about the world, while we easily downplay or discount
evidence to the contrary. Moreover, we are heavily influenced by
social stereotypes we too easily link virtues such as honesty,
trustworthiness, reliability and likeability with facial
characteristics, good looks, age, gender, race, and the like.
Psychologists call such tendencies our implicit theories of
personality. We categorize and label people quickly and render
social judgments swiftly. Thus, we may easily overestimate the
trustworthiness of people while making ourselves physically,
financially and emotionally vulnerable. This could be even more
dangerous if people fake outward sign of trustworthiness. Virtually
any indicator of trustworthiness can be manipulated or faked by
smiles, maintaining strong eye contacts, gentle touch, cheery
banter, and the like.
Further, we often rely on trusted third parties to verify the
character or reliability of other people. Calling and interviewing
references is a case in point. We easily roll over our trust from
one known and trusted party to another who is less known. This is
transitive trust says Kraemer (2009: 72). Transitive trust can lull
people into a false sense of security. Evidence suggests that
Bernie Madoff was very skilled at cultivating and exploiting social
connections one of his hunting grounds was the Orthodox Jewish
community, a tight-knit social group.We can never be certain of
anothers motivations, intentions, character, or career/business
ambitions. We simply have to choose between trust (thereby opening
ourselves to potential abuses if we are dealing with an exploiter
this is Beta or Type II error) or distrust (which means missing out
on all the benefits if the other person happens to be honest and
caring this is alpha or Type I error). This doubt and ambiguity
lingers over every decision to trust.
Social Psychologist Roderick Kraemer (2009: 74-77) offers a few
practical rules to adjust your mind-set and behavioral habits that
could reduce this doubt and ambiguity.
Know Yourself: Do you trust too much and too readily? Are you an
optimist that believes most people are decent, harmless, and
trustworthy? Hence, do you easily and indiscriminately open up to
people by disclosing sensitive and critical information about
yourself and family, about others, or about your company, before
prudent, incremental foundations of trust have been established?
Alternately, are you the opposite of all of the above, and hence,
too mistrustful when venturing into relationships with others? Both
are bad positions. Thus, figure out who you are, easily trusting
the wrong people or congenitally mistrusting the right people? If
you are the former, then you must get better at interpreting the
cues of people you receive. If the latter, that is, you are good at
getting and interpreting cues but have difficulty forging trusting
relationships, then you will have to expand your repertoire of
behaviors.
Start Small: All trust entails risk, but you can manage the risk
by keeping it sensible or small or shallow, especially in the early
stages of a relationship. Shallow trust implies small but
productive behaviors whereby you communicate your willingness to
trust. For example, in the 1980s, Hewlett-Packard allowed its
engineers to take equipment home whenever they needed to without
much red tape HP trusted them. When later the engineers returned
the equipment, they validated HPs trust in them, and, over time,
cemented it. Trust is incremental and hence you can manage it
intelligently, and it is also contingent (i.e., it is tied to
reciprocity). Mutual and small or incremental deeds of trust can
help you build strong but tempered trust with others. Write an
Escape Clause: If you have a clearly articulated plan for
disengagement, you can engage more fully and with more commitment.
Far from undermining trust, such hedging of ones bets allows
everyone in a negotiation or an organization to trust more easily
and comfortably. Hedging or a good back up plan can afford more
breathing room as well. Send strong signals: In order to ensure
that trust builds incrementally from initial acts to deeper and
broader commitments, it is important to send loud, clear and
consistent signals. Sending strong signals invites other tempered
trusters and deters potential predators. Most of us tend to
under-invest in communicating our trustworthiness to others,
because we take it for granted that others know us and our virtues
of fairness, honesty and integrity. Our reputation for toughness,
for integrity, and for equity can send a strong signals to the
negotiating partners. Recognize the other Persons Dilemma: Our
trust dilemmas are many and anxiety provoking: with whom should I
invest my money? With whom should I forge a joint venture?
Meanwhile, the other side of the business equation has its own
dilemmas and need reassurance as to how much they should trust us.
The best trust builder is to have empathy and attention for the
dilemmas and corresponding perspectives of the other party. For
instance, in his famous commencement address at American University
in 1963, President JF Kennedy praised the admirable qualities of
the Soviets and declared his willingness to work toward mutual
nuclear disarmament with Soviet leaders. We know from Soviet
memoirs that this impressed the Soviets, and Premier Nikita
Khrushchev used this trust- builder toward initiating nuclear
disarmament. Look at Roles as we as People: Adopt clear and
compelling roles, and downplay social connections. The latter are
important, but often they get in the way of trust. For instance, we
trust engineers because we trust engineering theories and
principles, and that engineers are trained to apply them. Similarly
with other professions and roles, such as Doctors and Lawyers. Deep
trust in a professional role can substitute our lack of personal
experience with people. Role-based trust, however, is not
fool-proof, as the recent Wall Street meltdown and Bernie Madoff
demonstrate. Remain Vigilant and always Question: Human beings seek
closure, and this is true with trust dilemmas as well. When we
doubt a business deal like merger or acquisition we do due
diligence, and we think we can close the deal. But keep vigilant
and questioning. The business landscape changes constantly and that
may make your due diligence outdated or flawed. Despite being
uncomfortable we need to question the people whom we trust. People
can also change. This is tempered trust.
Trust plays a critical role in business, economics and the
social vitality of nations. Our predisposition to trust, however,
can make us vulnerable. The above seven rules are a primer on how
to temper and discipline your trust and trusting relationships.
Although neuro-economists, behavioral scientists and social
psychologists provide powerful new techniques such as brain imaging
and agent modeling to discover how we make judgment of trust, yet
in day-to-day operations we need some rules to temper our trust by
sustained and disciplined ambivalence (Kraemer 2009).Exhibit 5.1
Checks Propositions from Interpersonal Trust theory against the
three Case Situations that head this Chapter.Building Trust in the
Initial Stages
Trust can build even at earlier stages of interpersonal
relationships, and does not necessarily have to depend upon longer
and relationships that are more frequent. It is more challenging to
build trust during initial stakeholder-business executive
relationships when several factors are significantly low such as
interpersonal familiarity, perceived similarity of values and the
length and frequency of interactions. Additionally, there could be
several situational factors that can stimulate mistrust and/or
distrust such as high risk, vulnerability, past damages sustained
and past track record of questionable behaviors among certain
business executives. The latter have been found to build mistrust
(e.g., Doney and Cannon 1997; Nicholson, Compeau and Sethi 2001).
As a situational-contextual phenomenon, sociologists have
associated trust with situation-complexity and unfamiliarity
(Williams 2001) that generate vulnerability and risk (Mayer, Davis
and Schoorman 1993), which in turn, could nurture positive distrust
one can shield against (Lewicki, McAllister and Bies 1998; Mechanic
1997). A typical buyer-seller or stakeholder-business executive
exchange encounter is an interpersonal exchange of social and
economic benefits. Trust occurs in the context of this exchange.
Trust as an Expectation or Rational Prediction of Behavior
Research within management literature has focused on trust
primarily in terms of rational prediction (Lewis and Weigert 1985:
969) wherein agents conceive distrust as a highly risky situation
that must one must reduce or avoid by rational choices that predict
distrust. Such predictive accounts of trust appear to eliminate
what they say they describe (Becker 1996: 47), thus disregarding or
removing core elements of trust (Flores and Solomon 1998; Lewis and
Weigert 1985). Under this view, trust exists only in an uncertain
and risky environment; that is, trust cannot exist in an
environment of certainty (Bhattacharya, Devinney, and Pillutla
1998).
Trust is also defined as a generalized expectancy held by an
individual that the word, promise, oral or written statement of
another individual or group can be relied upon (Rotter 1980: 1).
Trust is a set of expectations shared by all those involved in an
exchange (Zucker 1986: 54). Trust is based on an individuals
expectations that others will behave in ways that are helpful or at
least not harmful (Gambetta 1988). Williams (2001: 378) defines
trust as ones willingness to rely on anothers actions in a
situation involving the risk of opportunism. In contrast, distrust
entails the belief that a persons values or motives will lead one
to approach all situations in an unacceptable way (Sitkin and Roth
1993: 373).
These definitions of trust imply behavioral expectations. For
instance, Hosmer (1995) defines trust as one partys optimistic
expectations of the behavior of another, when the party must make a
decision about how to act under conditions of vulnerability and
dependence. Mayor et al. (1995) define trust as the willingness of
a party to be vulnerable to the actions of another party based on
the expectation that the other will perform a particular action
important to the trustor, irrespective of the ability to monitor or
control the other party. Zuckers (1986) definition of trust as a
preconscious expectation suggests that vulnerability is only
salient to trustors after a trustee has caused them harm. In
reciprocal terms, distrust is understood as the expectation that
others will not act in ones best interests, even engaging in
potentially harmful behavior (Govier 1994).
Exhibit 5.2 checks propositions of interpersonal trust against
levels of trust in the three case situations. Exhibit 5.3 checks
interpersonal trust building capacities with case situations based
on the theories of interpersonal trust.Institution-based Initial
Trust LevelsInstitution-based trust means that one believes the
necessary impersonal structures are in place to enable one to act
in anticipation of a successful, future endeavor (Shapiro 1987;
Zucker 1986). Zucker (1986) describes how certain specific
institutional or social structures and arrangements generate trust.
For instance, rational bureaucratic organizational forms could be
trust-producing mechanisms for situations where the scale and scope
of economic activity overwhelm interpersonal trust relations.
Public auditing of firms, SEC regulations, FTC mandates and other
government vigilance programs may increase customer trust in those
companies. Institution-based trust researchers maintain that trust
reflects the security one feels about a situation because of
guarantees, safety nets, or other structures (Shapiro 1987; Zucker
1986). Thus, the safe and structured atmosphere of a classroom may
enable students to develop high levels of initial trust (Lewis and
Weigert 1985; Shapiro 1987); tough screening and high professional
experience levels of new recruits may help senior employees to
trust them implicitly.
Trusting intention at the beginning of a relationship may be
high because of institution-based trust stimulators.
Institution-based trust literature speaks of two such stimulators:
situation normality and structural assurances. Situation-normality:
defined as the belief that successful interaction is likely because
the situation is normal (Garfinkel 1963) or customary (Baier 1986),
or that everything is in proper order (Lewis and Weigert 1985).
Structural assurances: defined as the socially learned belief that
successful interaction is likely because of such structural
safeguards or contextual conditions as promises, contracts,
regulations, legal recourse, and guarantees are in place.
Both situation normality and structural assurances can affect
trusting beliefs, and trusting intentions in the following
manner:
Situation Normality Affect Trusting Beliefs and Trusting
Intention: For instance, a patient who enters a clinic or a
hospital environment may anticipate a successful visit with the
doctor because of normal situations such as safe and adequate
parking, clean and secure physical surroundings, professional
credentials (as indicated by doctors certificates displayed
prominently). Other subsequent experiences may also reinforce
trusting beliefs and intentions such as keeping appointments, good
customer service and fiduciary responsibility as reflected in the
professional appearance of doctors and nurses, and the friendly,
yet professional healthcare providing services. Similarly,
stakeholders (e.g., customer, client, employee, supplier, creditor,
and distributor) may believe that what they observe in the
corporate or business environment is normal or more than customary,
and which may help them feel comfortable enough to rapidly form
trusting beliefs in, and a trusting intention toward, the firm.
Situation normality also can relate to the stakeholders comfort
with their roles in relation to the corporate or business
executives roles in that setting (see Baier 1986).
Structural Assurances Affect Trusting Beliefs and Trusting
Intention: Regulations regarding certification of health or
business professionals, spot-checking of healthcare or business
delivery facilities, and quality assurances should enable
stakeholders to feel assured about their expectations regarding the
doctor or the business firm (see Sitkin 1995). In addition,
guarantees, promises, contracts and legal recourse should mitigate
a stakeholders perceived risk involved in forming trusting
intention (Zaheer, McEvily and Perrone 1999), and enable the
stakeholder to believe that the trusted persons will make every
effort to fulfill these contracts and promises, lest they should
meet with social disapproval or legal action (Sitkin 1995). For
instance, believing that various safeguards bound a healthcare
delivery situation (e.g., screening procedures of doctors and
nurses, board certification of doctors and nurses, Hippocratic
oaths) enables one to believe that the individuals (e.g., doctors,
nurses) in the situation are trustworthy. Further, belief in the
very institution of healthcare at the national, state and local
levels with all its reliability and authentication procedures will
enable stakeholders believe in the persons that deliver healthcare
within it. Additional structures (e.g., no discrimination, fairness
of treatment) supporting fairness in the clinic or hospitals may
generate further cognitive consistency and consonance that leads to
trusting beliefs and intention. Typical structural assurances in
the business world are GAAP and FASB, Sarbanes-Oxley Act of 2002,
external auditors, forensic auditors when necessary, social audit,
SEC vigilance, consumer advocacy watchdogs, better business bureau,
various board certifications and professional associations,
government audit, EPA compliance, and labor unions. Structural
assurances should be more influential in initial relationships than
in later, especially since information about the trusted person may
not be complete when the relationship begins, making situational
information quiet salient (McKnight, Cummings, and Chervany 1998:
479).
Trusting Beliefs Affect Trusting Intention: Several scholars
have found a positive link between trusting beliefs and trusting
intention (e.g., Dobing 1993; Mayer, Davis, and Schoorman 1995).
Thus, if an employee believes that his/her boss is benevolent,
competent, honest, and predictable, one is likely to form a
trusting intention toward that person (see McKnight, Cummings, and
Chervany 1998). In general, beliefs and intentions tend to stay
consistent (Fishbein and Ajzen 1975; Ajzen 1988).
Exhibit 5.4 checks institutional trust building capacities with
case situations based on propositions from the theories of
institutional trust.Inter-organizational Trust and Investments
Fang, Palmatier, Scheer and Li (2008) explore inter-organizational
trust that can occur at three distinct organizational levels in an
inter-firm collaboration: a) Inter-organizational trust between
collaborating firms (say, A and B), b) Each firms (A or B) agency
trust in its own representatives assigned to a collaborative entity
(co-entity such as suppliers or distributors of A or B
collaborating among themselves), and c) Trust among the
representatives assigned to the entity (intra-entity).
Inter-organizational and agency trust can motivate collaborating
firms resource investments in the co-entity (e.g., suppliers,
distributors), particularly in the context of a differentiating
strategy. Intra-entity trust promotes coordination within the
co-entity, while inter-organizational trust and a differentiating
strategy can magnify that effect. Thus, managing and building trust
at multiple levels between collaborating organizations is critical
to the success of that collaboration.Inter-organizational trust
affects and stimulates investments into one another. These
investments could be in tangible and nonfungible assets such as
manufacturing facilities, specialized machine equipment and tools,
office buildings and corporate headquarters, as also in intangible
assets such as employees who possess irreplaceable tacit knowledge,
employees who are trusted representatives of the firm, and
strategic technologies and patents. Inter-organizational trust
increases relationship investments, communication, and reduces
costs of opportunistic behavior (Selnes and Sallis 2003). Mutual
trust functions as a safeguarding and controlling mechanism that
enables information sharing and reduces the perceived risk of
opportunism and conflict between collaborating firms (Lane, Salk
and Lyles 2001). Conversely, lack of such trust can lead to
suspicion and conflict (Bamford, Ernst and Fubini 2004) and may
prevent future investments and even lead to the withdrawal of
existing investments (Inkpen and Beamish 1997).Given our
understanding of interorganizational trust in the context of social
exchange and agency theories, and given the fact that they can
foster benefits of communication, information sharing, and
increased relational investments, we propose the following:
Table 5.3 summarizes the theories of trust and corresponding
Propositions we have discussed thus far. Most of these theories and
propositions deal with the initial stages of trust among relatively
unfamiliar strangers. In general, as much as we can assume
stakeholders to be unfamiliar with the business situation and the
newly appointed business expert or executive, these theories can
help in initiating and building trusting beliefs and intentions. In
summary, in explaining the initial stages of trust, personality
psychologists view trust as a personal psychological trait such as
liking or as an individual difference (Deutsch 1960; Mellinger
1956). Others treating trust as a characteristic of interpersonal
interactions, consider trust as an interpersonal attitude (Anderson
and Dedrick 1990; Jones and George 1998) or as socially embedded
expectations (Ross, Frommelt and Hazelwood 1987; Rotter 1971; 1980)
and relationships (Morgan and Hint 1994). As an institutional
phenomenon, organizational scholars have focused on developing
initial levels of organizational trust among relative strangers
(McKnight, Cummings and Chervany 1998) or building deeper levels of
trust among long partnerships and relationships (Williams 2001).
Finally, social psychologists define trust as an expectation about
the behavior of others in transactions, focusing on the contextual
factors that enhance or inhibit the development and maintenance of
trust (Lewicki and Bunker 1996). Exhibit 5.3 checks propositions
from institutional theories of trust against institutional trust
building capacities under the three case situations Later Stages of
Trust Development
Knowledge-based trust theories propose that trust develops over
time as one accumulates trust-relevant knowledge through experience
with the other person (Holmes 1991; Lewicki and Bunker 1995). Thus,
time and interaction history can develop high levels of trust.
Typically, trust development is often conceived as ones
experiential process of learning about the trustworthiness of
others by interacting with them over time (Lewicki and Bunker 1996;
Mayer et al., 1995; Ring and Van de Ven 1994). Stakeholders and
business executives may relate to each other in multiple ways, in
multiple encounters, and even multiple relationships within a given
encounter. For instance, a stakeholder sees in the business expert
an excellent specialist in the field that the stakeholder is
interested in, a great diagnostician with a very high level of
professionalism, a good work ethic, but less patient, less
friendly, less compassionate, less communicative, and less
listening. The stakeholders relationship with the business
executive is a function of all these attributes and encounters, and
consequently, the stakeholder may trust the executive on some
domains (such as academic excellence, professionalism work-ethic,
and business diagnostic skills), but distrust in other domains and
encounters (e.g., communication, listening, respect, compassion or
patience with stakeholders). That is, the stakeholder may feel
comfortable to trust the executive on some counts, but feel
inappropriate to trust in other aspects (Baier 1985; Govier 1994).
That is, parties to a trust (distrust)-relationship can hold
simultaneously different views of each other not always consistent
and accurate. Continuous encounters with the executive may
accumulate and interact to create a rich texture of experience that
may be dominantly trusting, but with occasional distrusting
moments. Within the stakeholder-executive relationship may occur
many linkages (link multiplexity) depicting the richness of
interpersonal relationships (Katzenstein 1996).
Social network literature assumes that multiplex relationships
are simply (or unidimensionally) trusting in nature (Husted 1994;
Ibarra 1995). That is, the stakeholder-business executive
relationship or encounter should be based on multiple linkages:
professional, academic, diagnostic, communication, confidentiality,
compassionate caring, listening capacity, interaction capacity,
gentle bedside manners, good follow-up, and the like. Both trust
and distrust can exist within multiple relations (Lewicki,
McAllister, and Bies 1998), but by and large, the higher the
bandwidth (richness and scope of relationships) and the larger
number of linkages, the higher are the chances of building trusting
than distrusting relationships. The broader the experience of
stakeholder-business executive relationships across multiple
contexts and encounters, the broader the bandwidth; partners
accumulate knowledge of each others strengths and weaknesses to
generate interpersonal relationships of trust (or distrust). In
this connection, skeptical or indifferent behavioral attitudes can
undermine the potential for developing trusting relationships
(Wicks, Berman, and Jones 1999).
However, earlier theories of trust confound distrust with
mistrust; that is, trust and distrust were considered as polar
opposites. We review both sets of theories: a) those that consider
trust and distrust as polar opposites, b) and those that consider
trust and distrust as complementary theories of trust.Trust and
Distrust as Complementary Constructs Trust and distrust are
reciprocal terms. Both trust and distrust are separate but linked
dimensions. They are not polar opposites on a single continuum such
that low trust means high distrust and high trust means low
distrust. Trust and distrust both entail certain expectations, but
whereas trust expectations anticipate beneficial conduct from
others, distrust expectations anticipate injurious conduct
(Lewicki, McAllister, and Bies 1998). Both involve movements toward
certainty: trust concerning expectations of things hoped for and
distrust concerning expectations of things feared. Hence, both
states can coexist (Priester and Petty 1996); they are functional
equivalents (Luhmann 1979).
Social network literature assumes that multiplex relationships
are simply (or unidimensionally) trusting in nature (Husted 1994;
Ibarra 1995). That is, the stakeholder-business executive
relationship or encounter should be based on multiple linkages:
professional, academic, diagnostic, communication, confidentiality,
compassionate caring, listening capacity, interaction capacity,
good follow-up, and the like. Both trust and distrust can exist
within multiple relations (Lewicki, McAllister, and Bies 1998), but
by and large, the higher the bandwidth (richness and scope of
relationships) and the larger number of linkages, the higher are
the chances of building trusting than distrusting relationships.
The broader the experience of stakeholder-business executive
relationships across multiple contexts and encounters, the broader
the bandwidth; partners accumulate knowledge of each others
strengths and weaknesses to generate interpersonal relationships of
trust (or distrust). In this connection, skeptical or indifferent
behavioral attitudes can undermine the potential for developing
trusting relationships (Wicks, Berman, and Jones 1999).
Organizational Psychology Theory of Trust and Distrust:
Institution-based trust means that one believes the necessary
impersonal structures are in place to enable one to act in
anticipation of a successful future endeavor (Shapiro 1987; Zucker
1986). Zucker (1986) describes how certain specific institutional
or social structures and arrangements generate trust.
Institution-based distrust means that one believes the necessary
impersonal structures are not in place. For instance, rational
bureaucratic organizational forms could be trust-producing
mechanisms for situations where the scale and scope of economic
activity overwhelm interpersonal trust relations. Public auditing
of firms, SEC regulations, FTC mandates and other government
vigilance programs may increase customer trust in those companies.
Institution-based trust researchers maintain that trust reflects
the security one feels about a situation because of guarantees,
safety nets or other structures (Shapiro 1987; Zucker 1986). Thus,
the safe and structured atmosphere of a classroom may enable
students to develop high levels of initial trust (Lewis and Weigert
1985; Shapiro 1987). Tough screening and high professional
experience levels of new recruits may help senior employees to
trust then implicitly.
Trusting intention at the beginning of a relationship may be
high because of institution-based trust stimulators.
Institution-based trust literature speaks of two such stimulators:
situation normality and structural assurances. Situation-normality:
defined as the belief that successful interaction is likely because
the situation is normal (Garfinkel 1963) or customary (Baier 1986),
or that everything is in proper order (Lewis and Weigert 1985).
Structural assurances: defined