This is an Out-take from our 2019 Compendium
As Andy Haldane, chief economist at the Bank of England, has said: "Finance is built on trust. It is based on promises about tomorrow, often paper promises backed by nothing other than words on a page. When trust in those promises breaks down, so too does the financial system.”
Kenneth Arrow, the Nobel Prize-winning economist, was among the first to acknowledge the significance of trust in our day-to-day transactions. In 1972 he argued that "... virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time”.
Some 20 years later, in his widely-read 1995 book, "Trust: The Social Virtues and the Creation of Prosperity", Francis Fukuyama argued for the significance of social trust in the realm of economic development.
Today, perhaps thanks to a marked decline in general social trust, it is even more clear that trust matters to the full functioning of our institutions, in the realm of economic transactions and in everyday life.
Trust serves as a sort of informal "currency" that facilitates social exchange. It reduces the "transaction costs" in exchange relationships with strangers and supports the cooperation that is central to creating and maintaining social order. While it cannot bear the full weight of making society work, trust provides a major element, a kind of "social glue", that allows for the smooth functioning of groups, firms, organisations and institutions, public or private. In short, trust allows for activities that would not occur without it and enables us to benefit by the interconnectedness of our interactions with one another across national boundaries and online.
Trust in the economy, and the institutions that support it, is important to perceptions of economic wellbeing in a society. When trust in these institutions breaks down, and when trust in government as an instrument of regulation and oversight is low, the economy stalls as financing breaks down and investments by ordinary people decline. It is therefore imperative that regulators give thought not only to the trustworthiness of the firms they oversee, but to the public's faith in those regulatory agencies themselves.
Trust also helps to lower the need for regulation: where we can rely on trust and trustworthiness, we may reduce investment in costly controls, intrusive forms of surveillance and monitoring, overly prescriptive regulations and punitive sanctions for breaches. As such, management attention to promoting a high-trust culture may pay sustained dividends in the form of reduced governance, risk and compliance costs.
Consumer reaction to the failure of companies to act in a trustworthy manner is often swift and sure. It is hard for companies to recover from the loss of consumer confidence; some never do. In the current climate of low general trust in societal institutions across the globe, it could not be more important for those in banking and financial services to tend to the task of building a culture of trust within their organisations, with their customers and with stakeholders more broadly.
Indicators are that banks have a way to go in this regard. More pointedly, bankers have a long way to go, as the public’s confidence in firms themselves appears to be somewhat higher than its faith in those who staff them.
This has dollar implications. A recent study from Accenture ties a loss of trust among a firm's stakeholders — customers, employees, investors, suppliers, analysts and the media — to a financial loss that is "conservatively" estimated at $180 billion. The trick, then, is to create and maintain a culture of conduct that requires trustworthiness and reduces violations of trust. As Baroness Onora O'Neill has said: "We need to focus first on trustworthiness and secondly on the intelligible communication of evidence of trustworthiness to others, without which they cannot place or refuse trust intelligently."
That is, trust must become a management priority within firms, and clearly evidenced in demonstrable cultural norms among employees. The challenge lies in operationalising this mandate.
Firms rely largely on staff surveys, ethics training and "town-hall meetings" to address these matters. Although significant amounts are invested in such tools each year, it is an indication of management's lack of confidence in them that a multiple of that spend is typically invested in surveillance and monitoring systems aimed at catching bad actors.
While these tools may be somewhat useful and may, at a minimum, represent what might be considered "good hygiene", they leave management reliant on fairly blunt instruments when compared with what is today made possible by computational social science.
"As we continue to see the impact of technology and big data in other parts of financial services, one interesting question is how innovation and enhanced technology will support the measurement and management of culture. ... For example, we might see firms routinely leverage broader data to make stronger predictions about potential misconduct risk, which could be useful to help focus scarce compliance resources," Kevin Stiroh, the head of supervision at the New York Federal Reserve Bank, said in a recent speech.
Computational social science offers much here. It is well-established that interpersonal trust and perceived “psychological safety" among employees and managers is vital to creating high-performance workplace teams. Computational social science techniques allow us to measure and map these interpersonal trust dynamics, sifting signals from company data sets to produce previously unavailable insights into the drivers of employee conduct.
Such insights permit active management of culture, conduct risk and company performance more broadly. It is encouraging, therefore, that firms, and regulators, have begun to explore the application of computational social science to regulatory and risk management challenges.
This piece first appeared in Thomson Reuters on March 5, 2019.
STEPHEN SCOTT is a risk management expert and CEO of Starling, a globally recognized leader in the RegTech space. Operating at the nexus of data science, network science, and behavioral science, Starling's Predictive Behavioral Analytics tools are used by leading financial services firms to assess and mitigate culture and conduct related risks.
KAREN S. COOK is Professor of Sociology and Director of the Institute for Research in the Social Sciences at Stanford. She conducts research on social networks, social exchange, and trust and has edited several books on these topics, including Trust in Society (2001), Trust and Distrust in Organizations: Emerging Perspectives (2004), and Whom Can You Trust? (2009). Professor Cook serves on the academic advisory board at Starling.