Handout 05 Managerial Ethics XLRI 2015

The Ethics of Executive Trust: Building

Trusting Relationships
Ozzie Mascarenhas S.J., Ph.D.
June 15, 2015

Case 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.
2.
3.
4.
5.
6.
7.

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?
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?
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?
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?
Discuss the ethics of 100% FDI in single brand retailing in India since February 2010.
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?
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.
2.

Who is legally wrong: BPCL for suing EY or EY for allegedly targeting BPCL to invest in LK? Why?
Who is ethically and morally wrong: BPCL for suing EY or EY for allegedly targeting BPCL to invest in LK?
Why?

3.
4.
5.
6.
7.
8.

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?
To what extent does BPCLs suit against EY violate the long standing trusting relationships between the two
companies, and why?
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?
Can BPCL legally and ethically claim redress for its blind faith in EYs audit opinions of LK?
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?
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 Relationships

In 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 Taxation was formally implemented by
adding an amendment to the Income Tax Act of 1961. Through the Retrospective Taxation amendment the Indian
Government now had the ability to demand the payment of taxes on any overseas transaction involving
an Indian asset 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 DelhiMumbai 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.
2.
3.
4.
5.

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.
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?
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?
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?
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 Management

Scholars 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).

10

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 longterm 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,

11

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).

12

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 Relationships

Based 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

13

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

14

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 mindset and behavioral habits that could reduce this doubt and ambiguity.
o

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, HewlettPackard 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 underinvest 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

15

Soviet memoirs that this impressed the Soviets, and Premier Nikita Khrushchev used this trustbuilder toward initiating nuclear disarmament.
o

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,

16

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 Levels

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.
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:

17

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),

18

b) Each firms (A or B) agency trust in its own representatives assigned to a collaborative entity (coentity 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

19

Knowledge-based trust theories propose that trust develops over time as one accumulates trustrelevant 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).

20

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 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. The current healthcare crisis as a result
of lack of insurance, high prices of prescription drugs in the U. S. and fragmentation of care are instances
of breakdown of situation normality and structural assurances such that high levels of trust and distrust
could coexist.
Sociological Theory of Trust and Distrust: Sociologists recognize the importance of trust and
distrust as mechanisms for reducing social complexity and uncertainty, and, accordingly, view them as
functional equivalents or substitutes. Luhmann (1979) argues that both trust and distrust function to allow
rational actors to understand, contain, and manage social uncertainty and complexity, but they do so by
different means. Trust reduces social complexity and uncertainty by disallowing undesirable conduct
from consideration and replacing it with desirable conduct. Conversely, distrust functions to reduce social
complexity and uncertainty by allowing undesirable conduct and by disallowing desirable conduct in
considering alternatives in a given situation. In the latter case, distrust becomes a positive expectation of
injurious action (Luhmann 1979). Distrust simplifies the social world, allowing the individual to move
rationally to take protective action based on these positive expectations of harm. Social structures appear
most stable where there is a healthy dose of both trust and distrust to generate a productive tension of
confidence (Lewicki, McAllister, and Bies 1998). Luhmann (1979) even argues that trust cannot exist

21

apart from distrust, and trust cannot increase without increases in distrust. Increases in trust or distrust
apart from increases in the other may do more harm than good. An over-trusted person can often
exploit the over-trusting of a person. Apart from a genuine openness to the possible necessity of distrust,
benign and unconditional trust appears to be an extremely dangerous strategy for managing social
relations (Lewicki, McAllister, and Bies 1998).
Social Psychology Theory of Trust and Distrust: Human psychology functions in a social context.
Hence, if the social context of an exchange situation or an organizational relationship is properly focused
and fully brought into the social equation, then it is quite possible that an individual who trusts a partner
on some attributes (e.g., scientific knowledge, technical skill) may distrust that partner on other features
(e.g., social skills, ethical conduct, compassion skills), and both these states can coexist. According to
social psychologists (Cacioppo and Berntson 1994), positive-valent and negative-valent attitudes can
coexist, and thus, trust that involves confident positive expectations and distrust that implies confident
negative expectations regarding trusting partners, can operate simultaneously in the same individual,
although from different viewpoints (Lewicki, McAllister, and Bies 1998).
Interdependence Theory of Trust and Distrust: Recent definitions of trust imply interdependent
behavioral expectations. Thus, 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. According to Moorman, Zaltman and Deshpande (1992) and Mishra
(1996), vulnerability is an important constituent of trust. That is, in the absence of risk or vulnerability
trust is not necessary, since outcomes are not of consequence to trustors. Sabels (1993) definition of trust
assumes vulnerability: trust is the mutual confidence that no party to an exchange will exploit the others
vulnerability. According to Mayer, Davis, and Schoorman (1995), vulnerability accompanies trust.
They 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.
Following this important trend, we incorporate the domain of vulnerability in the business situation, since
so many modern corporations in all their complexity, speed on innovation, and cost-containment
strategies imply vulnerability. Williams (2001) 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).
In fact, trust-research appears to be premised on the general idea that actors (i.e., individuals, groups
or organizations) become, in some ways, vulnerable to one another as they interact in social situations,
relationships and systems (Bigley and Pearce 1998). As organizational arrangements become more
complex (as in the current health care or business environment), actors vulnerability to one another could
become broader and deeper, and trust may be one of the best mechanisms actors have to cope with these
new conditions (Bigley and Pearce 1998). Often, stakeholders are unfamiliar with business executives,
situations and constraints. Gathered information in this regard may not be complete or totally reliable for
establishing affective bonds with one another. Stakeholder trust may be an effective surrogate in this
regard.
Table 5.4 summarizes various complimentary theories of trust and distrust. They make some key
assumptions: 1) Trust and distrust are mutually inclusive and complementary bi-dimensional conditions;
that is, trust and distrust can coexist and reinforce each other. 2) Trust is good and positive and distrust is
also good and positive, although based on different expectations; trust relates to beneficial expectations;
distrust involves hazardous expectations; life experiences involves both, and often at the same time. 3)

22

Trust-distrust is embedded in the complex, unfamiliar and vulnerable social context of human
relationships.
Modern theory of trust and distrust makes room for both in a given business situation. That is:

When one pays full attention to the role of social context in trust, then trust and distrust can coexist
(Greenhalgh 1995).
Distrust is not mistrust, nor the opposite of trust, but a complimentary dimension that can enable
stakeholders, business executives, and governments to understand the specific and even positive role
of distrust in interpersonal trust.
Trust-distrust is not a one-dimensional but a multidimensional construct (Greenhalgh and Chapman
1994).
One could trust the executives under some dimensions, and legitimately distrust under other
((Lewicki, McAllister, and Bies 1998).
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).
Trust can exist in an environment of uncertainty (Bhattacharya, Devinney, and Pillutla 1998) that
every business situation implies.
Trust can coexist with distrust under situations of unpredictability, error and situational complexity
(Bhattacharya, Devinney, and Pillutla 1998).
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 (Lewicki,
McAllister, and Bies 1998).
Trust reduces social complexity and uncertainty by disallowing undesirable conduct from
consideration and replacing it with desirable conduct. Conversely, distrust functions to reduce social
complexity and uncertainty by allowing undesirable conduct and by disallowing desirable conduct in
considering alternatives in a given situation. In the latter case, distrust becomes a positive
expectation of injurious action (Luhmann 1979).
Distrust simplifies the social world, allowing the individual to move rationally to take protective
action based on these positive expectations of harm (Luhmann 1979).
Social structures appear most stable where there is a healthy dose of both trust and distrust to
generate a productive tension of confidence (Lewicki, McAllister, and Bies 1998).
Apart from a genuine openness to the possible necessity of distrust, benign and unconditional trust
appears to be an extremely dangerous strategy for managing social relations (Lewicki, McAllister,
and Bies 1998).
Trust that involves confident positive expectations and distrust that implies confident negative
expectations regarding trusting partners can operate simultaneously in the same individual, although
from different viewpoints (Lewicki, McAllister, and Bies 1998).
Positive-valent (e.g., trust) and negative-valent (e.g., distrust) constructs are separable and can
coexist. The two constructs may systematically and negatively correlate, but their antecedents and
consequences may be separate and distinct (Cacioppo and Gardner 1993).
Vulnerability is an important constituent of trust. That is, in the absence of risk or vulnerability
trust is not necessary, since outcomes are not of consequence to trustors (Moorman, Zaltman and
Deshpande 1992; Mishra (1996).
Vulnerability accompanies trust. 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 (Mayer, Davis, and
Schoorman 1995).

Table 5.5 synthesizes various critical dimensions of trust under various theories of trust and distrust.
We include five basic theories of trust: a) Social Exchange, b) Agency Theory, c) Rational Expectations,
d) Psycho-logical Theory, and e) Dispositional Theory. Under each theory of trust, we examine seven

23

dimensions of trust: 1) Bases of trust-generation, 2) Nature of trust generated, 3) Dynamics of trustgeneration, 4) Implications of generated trust, 5) Typical benefits of trust generated to the Trusted, 6)
Typical benefits of trust generated to the Trustors, and 7) Typical examples of trustor-trusted dyads. All
dimensions under all five theories of trust are useful in understanding trusting relations in business
management.
Table 5.6 synthesizes stakeholder-business executive interpersonal relations as a function of Low
versus High, Trust and Distrust.
Each quadrant suggests clear implications to various stakeholders,
including corporate and business executives. It is a challenge for all business executives to generate in
their stakeholders low fear, low skepticism and low cynicism such that costs of monitoring and vigilance
over all parties may be significantly reduced. On the other hand, business executives also must do
everything within their power and skills to generate high hope, high faith, high confidence, high
assurance in their stakeholders and welcoming high stakeholder initiatives.
Finally, Table 5.7 sketches costs versus benefits of various stakeholder-business executive trustdistrust encounters. The bottom line of modern healthcare is profits so that the latter fuel ongoing
research and development and innovative modes of healthcare.

Trust in Buyer-Seller Business Management Relationships

Typically, a buyer-seller long-term exchange encounter represents a social exchange of benefits.
Obvious benefits voluntarily provided by the buyer include time, honesty, positive and negative
information about oneself, ones credit, ones family and social careers, and monetary reward for the
product or services; obvious benefits volunteered by the sellers relate to the quality and price of their
products and services, complemented by their competence, benevolence, honesty, reliability, as reflected
in care and concern for the customer.
The notion that customer relationships are key assets of any organization, whether pro-profit or
otherwise, is gaining increasing prominence among both practitioners and academicians (Gruen,
Summers, and Acito 2000). This customer asset management approach has been referred to as
relationship marketing, and recently, has received much attention in the area of building long term
relationships among channel members (Brown, Lusch, and Nicholson 1995; Kumar, Scheer, and
Steenkamp 1995; Morgan and Hunt 1994). Marketing strategies such as book and record clubs, frequent
flyer programs, gold and platinum credit card valued memberships, preferred customer memberships, and
supplier guilds are illustrations of practical long-term relationships. In the professional service sector,
lawyers, bankers, pastors, business executives and doctors employ relationship-building approaches to
their mission and ministry.
Specific examples of relationship marketing include: a) Ritz-Carlton with its personalized welcome
and farewell of guests, using the guests name whenever possible; b) Loyalty programs initiated by
airlines that consist not only of rewarding the most valuable customers in the form of mileage prizes but
also showing recognition of providing special privileges (Wulf, Odekerken-Schrder, and Iacobucci
2001); c) Compaq refused to sell computers directly to customers because that would constitute
competing with its own dealers; the latter considered this refusal as a sign of Compaqs commitment to
them, and the dealers reciprocated by providing the brand greater support and shelf space (Day 1990); d)
Proctor and Gamble desisted from selling its top of the line mens perfume Boss over the Internet lest
this practice should hurt P& Gs relationships with Bosss regular brick and mortar retailers.
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

24

shapes human relations, has been the central focus of psychologists, sociologists, political scientists,
economists, anthropologists, and scholars of organizational behavior and marketing. Researchers have
seen trust as an essential ingredient for a healthy personality, a foundation for interpersonal relationships
and 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, strategic global
competitive alliances (Prahalad and Hamel 1994), and multicultural and multilingual relations (Cox and
Tung 1997; Sheppard 1995).

Types of Business Exchanges and Relationships

Relationships in business management are best understood against exchanges. Gundlach and Murphy
(1993: 36-8) distinguish three fundamental exchanges and exchange-relationships:
Transactional Exchanges: These involve discrete, single, short-term exchange events encompassing a
distinct beginning and a sharp ending (Dwyer, Schurr, and Oh 1987: 13). The purpose of exchange is
narrow: economic goods and services. In general, the investments of time, cost, switching cost,
energy, emotions and search are small. There are no buyer-seller duties before the transaction; if
there are any duties during the transaction, they are completely determined upfront (Golberg 1976).
Contractual Exchanges: These involve a series of many linked, extended, longer-durations exchange
events, each exchange conditioned on the previous, and often involve extended beginnings and
extended endings. These are open-ended contracts in which certain terms (e.g., order amount, price,
terms of trade) may be deliberately left open to be agreed on at a later date. The purpose of
exchange is broad: economic goods and services, social relations, and long-term initiatives. The
investments of time, cost, switching cost, energy, emotions and search are moderate. Besides buyers
and sellers, these contractual exchanges may involve several firms, several functional departments
(e.g., purchasing, R&D, production, costing, financing, marketing, and PR) within them, and
boundary spanning linkages and coordination. They may involve equity (as in foreign wholly owned
or majority owned subsidiaries, joint ventures) or no equity (as in licensing agreements, turn key
projects, collaborations, and some forms of strategic alliances). There are distinct interorganizational duties before the transaction; and several emerge during and after the transaction.
Typical consumer contractual exchanges involve consumers credit-unions, buyer cooperatives,
nursing home care, and child care services.
Relational Exchanges: These involve extended, longest-durations exchange events traceable to
previous beginnings and endings, with several transactions merged together, and often involve
ongoing relationships (Dwyer, Schurr, and Oh 1987: 13), a complex web of operational and social
interdependencies. These are open-ended social or legal contracts in which certain terms (e.g., order
amount, price, and terms of trade) may be deliberately left out to be agreed on at a later date, if ever.
The purpose of exchange is broad: economic goods and services, social relations, and longer-term
initiatives. The investments of time, cost, switching cost, energy, emotions and search are high.
Typical business examples include long-term relations between suppliers, customers, banks,
investors, shareholders, local communities, government agencies, and international institutions (e.g.,
WTO, World Bank, UNIDO). Typical consumer examples include long-term spousal and family
relationships, long-time neighborhoods, church or religious associations, professional associations,
fraternities, and guilds.

All the three exchanges are best placed on a continuum of relationships. The depth, quality, value and
duration of relationships increase from transactional to contractual to relational exchanges. Similarly, the
depth, quality and value of morality, trust, commitment, responsibility and justice increase from
transactional to contractual to relational exchanges.

25

Table 5.8 spells out some business responsibilities implied in transactional, contractual, and relational
exchanges under various transaction typologies. As a contrast, we are gradually witnessing the
emergence and predominance of trusting relational exchanges today. Relational exchanges are connected
over time with mutually benefiting anticipated goals and expectations, careful planning, trust and
commitment (Gundlach, Achrol and Mentzer 1995; Morgan and Hunt 1994). Marketing executive
responsibilities increase as one gets involved with exchanges from pure one-time discrete transactions to
global strategic alliances.
The first two types of exchanges in Table 5.8 are discrete, while the remaining eight are increasingly
relational. However, discrete and relational exchanges are not simply two categories of exchange, but run
on a continuum from discrete to relational exchanges (Anderson and Narus 1991; Dwyer, Schurr, and Oh
1987; Heide and John 1992). The gradual transition from discrete to relational transactions in marketing
has its own implications to marketing executives: it calls for more relational trust and mutual
responsibility between partners of relational exchanges.

Trust and Relational Contracting in Business Management

Basically, a contract states relationships between an enterprise and its stakeholders (Eisenhardt
1989). An enterprise is any pro-profit or non-pro-profit institution such as firms, corporations,
associations or governments that offers a product or service to its target markets. A contract can take
various forms such as exchanges, transactions, or the delegation of the decision-making authority, as well
as formal legal documents.
There are various reasons why we need contracts in our transactions with people. The primal reason
is the nature of the society we live in. Our freedom is expanded by the recognition of contractual rights
and duties (Rawls 1971). Because people in any society are not very isolated from others, share common
needs and wants with others, need others in the areas they are not specialized in, and cannot be certain of
the future, that contracts arise (Macneil 1980). Without the institution of contracts and the right and
duties that accompany them, modern business societies could not exist nor cooperate (Velasquez 1988).
All contracts presume choices that project into the future, and imply mechanisms of exchange
relationships that reduce risk and uncertainty (Lusch and Brown 1996).
Four basic ethical rules that govern social contracts are (Garrett, 1986: 88-91): 1) Both parties to a
contract must have full knowledge of the nature of the agreement they are entering; 2) Neither party must
intentionally misrepresent the facts of the contractual situation to the other party; 3) Neither party must be
forced to enter the contract under duress or force; and 4) The contract must not bind the parties to an
immoral act. Contracts that violate one or more of these ethical rules have been traditionally declared
null and void since they diminish freedom that constitutes the essence of contracts (Rawls 1971: 342-50).
The parties have a duty of complying with the terms of the contract. Failure to do so treats the other
contracting party as a means and not as an end (Kant 1964), and violates mutual trust (Rawls 1971).
An enterprise has contracts (with varying degrees of formality and specificity) with its stakeholders
such as customers and clients, creditors and suppliers, shareholders and bondholders. 1 Basically, the
1

Contracts could be implied or implicit, explicit or normative, depending upon how concrete, specific and comprehensive the
terms of contracts are spelled out. Individual contracts are between individuals, while group contracts are between groups.
Contracts could be viewed and drawn from within by individuals or groups, or by a third party of outsiders. Contracts are
normative when they reflect a social consensus and reinforcement of specific behaviors and exchange patterns, - that is, a mutual
understanding exists between parties as to how they will interact and deal with each other, including the handling of future
contingencies (Lusch and Brown 1996). In general, normative contracts are group contracts viewed from within by the
contracting groups.

26

enterprise may be considered as a "nexus of contracts between its top managers and its stakeholders"
(Jones 1995: 407). The board of directors and shareholders can influence these contracts. In as much as
enterprise managers have a strategic position by which they enter directly or indirectly into contracts with
various stakeholders, they can be considered as contracting agents for the enterprise.
In general, legal and formal agreements define transactional normative contracts, while ethical and
moral principles determine relational normative contracts (Gundlach and Murphy 1993). Business
management can have both individual and group contracts that could be implicit or explicit, legal or
normative, transactional or relational.
All these dyads (explicit/implicit, legal/normative,
transactional/relational) are not categorical but are exchanges that run on a continuum from implicit to
explicit, from legal to social normative, from discrete, short-term transactional to long-term relational
contracts. Other things being equal, legal responsibility increases with explicit, legal, and transactional
contracts, whereas moral responsibility increases with implicit, normative and relational contracts.
Most transactions take place today in the context of ongoing relationships between producers,
suppliers, marketers, customers and consumers. Repeat purchases go beyond pure transactions to brand
loyalty, and sometimes, to an on-going buyer-seller relationship (Ganesan 1994; Kalwani and Narayandas
1995). Industrial buyer-seller relationships have moved from arm's-length adversarial price-battles to
more friendly mutually dependent commitments (Jackson 1985). Even market transactions between
competitor firms have become "domesticated" (Arndt 1979) they have become more relational than
adversarial. Such domesticated transactions take place between the focal firm and its supplier firms, the
focal firm and its channels (Anderson and Narus 1990, 1991; Heide 1994), between the focal firm and
even its competitors, especially in the form of strategic alliances and marketing co-alliances.
We invoke two responsibility principles from the management literature in support of social or
relational contracts:
Social contract: Corporations are responsible because of their social contract of justice behavior
with society; that is, they must constrain self-enhancement to allow society to act and grow
collectively (Dunfee 1999; Walster, Walster, and Berscheid 1978).
Reciprocal Socialization: We are continually taught that if we treat others fairly, we will also be
treated fairly (Lerner 1977). This is a version of the golden rule.

Day (2000) speaks of a relationship spectrum that includes an array of three relationship types:
transactional exchanges, value-adding exchanges, and collaborative exchanges. He suggests that an
increasing amount of marketing related capability is required as one moves from transactional to value
adding to collaborative exchanges.
Based on the variety of definitions and bases of trust provided by scholars, Table 5.4 lists the critical
characteristics (in italics) of trusting relationships in marketing. Ongoing trust-based relationships with a
set of customers can represent the most important business asset of the corporation (Webster 1992).
Continuing to be informed experts on the customers and keeping the rest of the corporation network
informed about them is the foremost duty of trust-building relationships in marketing (Webster 1992).
In the wake of this trend of trust and long-term relationships in marketing, one should expect that
both suppliers and customers might build up their trust in those marketing executives who consistently
exhibit high levels of responsibility to all stakeholders. Obviously, the current thrust of trust and
relationships in marketing practice should also enhance the sense of executive responsibility among
marketing managers and practitioners.

27

Responsibility is best exercised in fostering long term relationships with stakeholders (Drumwright
1994; Ganesan 1994) in a spirit of mutual trust and commitment (Gundlach and Murphy 1993; Morgan
and Hunt 1994). The additional marketing executive responsibilities accrue from the nature of relational
trust. Howsoever conceived, defined or implemented, trusting long-term relationships imply and mandate
higher moral responsibilities than discrete and short-lived transactional relations mandate.

Trusting Relationships in Business Management to

Lessen Transaction Costs
Exchanges and relationships can be facilitated and honored through legal processes and contracts; but
reliance on law can be costly in terms of both resources and time and may potentially erode buyer-seller
interdependence and relationships (Gundlach and Murphy 1993). According to Williamson (1975,
1981), an understanding of transaction costs is central to the study of organizations. Transaction costs
include the costs of reaching an agreement satisfactory to both sides of an exchange or contract, adapting
the agreement to unanticipated contingencies, and enforcing its terms. Nevertheless, because of bounded
rationality and the costs of writing, negotiating, bargaining, and implementing a contract, a
comprehensive contract involving a long-term relationship is not possible; at best, contracts are
incomplete but viable. In such incomplete contracts the hazards of opportunistic behavior are greater
because the termination of the contracted relationship cannot be achieved easily. But all these hazards
can be mitigated or eliminated if there is growing trust between exchange-contract partners. Mutual trust
helps partners to agree to adapt unanticipated contingencies in a mutually acceptable and profitable
manner. In such trusting relationships, parties can easily respond to current inequities through equitable
solutions that can arise and span over a long period of time (Ganesan 1994).
That is, relational exchange participants rely more often on extra-legal (domesticated) governance
to maintain their relationships and resolve disputes (Arndt 1979; Beale and Dugdale 1975). The Japanese
Keiretsu exemplifies this mode of maintaining trade and business relationships among partners.
Interpersonal trust can be an important social resource for facilitating cooperation and enabling social
interactions between various actors in a business environment (Coleman 1988; Zucker 1986). Trust
reduces the need to suspect and monitor each others behavior, the need to formalize monitoring and
control procedures, create completely specified contracts, and can also thereby reduce negotiation costs
(Powell 1990). The efficiency, adjustment, and even survival of any social group depends upon the
presence or absence of trust (Rotter 1967).
If trust facilitates informal cooperation and reduces negotiation costs, then it is invaluable to
organizations that depend upon professional people, cross-functional teams, interdepartmental synergies,
temporary work groups, and other cooperative structures to coordinate customer satisfaction management
(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). Business executives continually
cross group boundaries to secure cooperation from business professionals over whom they have no
hierarchical control, and this may be particularly difficult and challenging across cross-functional, crosscultural, cross-religious and cross-social groups that are commonly encountered in American business
environments (Fiske and Neuberg 1990; Kraemer 1991; Kraemer and Messick 1998; Stikin and Roth
1993).
The best device for creating trust between parties to a business exchange is to establish and support
trustworthiness of both parties (Hardon 1996). Building trustworthy relationships by habitually
discharging mutual obligations between exchange partners can mitigate the risk of opportunism on the

28

part of both parties, and forestall costly legal battles and the consequences of expensive malpractice
insurance premiums (see Whitener et al., 1998).
Moreover, if beliefs about trustworthiness are often associated with the same social and cultural
(ethnic and linguistic) group memberships, and propensities of untrustworthiness are associated with
different social and cultural groups, then developing interpersonal trust as a bonding mechanism may be
very important in marketing products and services in American markets that have widely cross-cultural
professional teams and customers (Brewer and Brown 1998; Kraemer 1994; Kraemer and Messick 1998).
However, there is also a stream of literature that maintains that dissimilar groups can signal
trustworthiness, especially if professionals from different groups bring complementary skills and
competences as demonstrated by board certification, ethics and training (McKnight, Cummings, and
Chervany 1998; Meyerson, Weick, and Kraemer 1996).

Business Management Stakeholder-Executive Cooperation

Trust has long been considered fundamental to cooperative relationships (Blau 1964; Deutsch 1958).
Stakeholder trust is morally desirable: the emotional states associated with trust suggest its goodness; it
creates economic benefits for all parties to the exchange (Wicks, Berman and Jones 1999). Mutual trust
in stakeholder-business executive relationships when both feel they can trust each other and are worthy
of trust in return, provide a critical basis for self-esteem and a sense of security (Baier 1994). In contrast,
when people distrust others and do not trust themselves their self-esteem may be harmed and their sense
of security compromised. Since trust is a moral good, all people involved in a business environment
should try both to cultivate trusting relations and to be seen as trustworthy (Baier 1994; Wicks, Berman
and Jones 1999). Since business relationships with stakeholders are often among relative strangers (who
are likely to be self-interested), mutual trust building is even more imperative (Frank 1988). In addition,
trustworthiness of corporate and business executives can be a source of competitive advantage (Barney
and Hansen 1994).
Working together well requires some level of trust (Bromiley and Cummings 1995), and increasingly
common new work encounters demand that the parties come to trust each other quickly (Meyerson et al.,
1996). Stakeholder-business executive encounters need working together and involve increasingly new
work encounters, both of which need high and quick levels of trust for productive outcomes. Both need
to know how trust initially forms.
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 as 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).
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

29

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).
Knowledge-based trust theories propose that trust develops over time as one accumulates trustrelevant knowledge through experience with the other person (Holmes 1991; Lewicki and Bunker 1995).
Thus, time and interaction history can develop high levels of trust.
Exhibit 5.5 checks trust-distrust combination possibilities with case situations based on the theories
that assert coexistence of trust with distrust.

Reducing Opportunistic Behaviors:

The Role of Trust and Justice
There is much scope for opportunistic behavior (acts of self-interest with guile or unconstrained by
morality) in business, and in marketing in particular. According to the Transaction Cost Economics
(TCE) theory of Williamson (1975, 1985, 1990, 1991, 1993) (marketing) organizations exist because of
their superior abilities to attenuate (marketing) opportunism through the exercise of hierarchical (both
rational and social) controls that, in general, are not accessible to "markets". However, recently some
critics of TCE (e.g., Bromiley and Cummings 1992, 1993; Chiles and McMackin 1996; Goshal and
Moran 1996; Masten 1992; Moran and Goshal 1996) have shown that hierarchical controls need not
necessarily curtail opportunistic behavior. Indeed, they are more likely to cause the opposite effect
(Goshal and Moran 1996). Non-control mechanisms have been suggested instead such as joint ventures
or strategic alliances (Balakrishnan and Koza 1993), trust (Bromiley and Cummings 1992, 1993; Chiles
and McMackin 1996), leveraging work-force ability to take initiative, to cooperate, and to learn (Goshal
and Moran 1996; Pfeffer 1994). Organizations created to attenuate opportunistic behavior fail when they
are unable to create the social context necessary to build the trust and commitment that are needed for
maintaining cooperation in transaction-exchanges. This section examines the roles of dual factors: trust
(rather subjective) and justice (more objective) in reducing opportunistic behavior in marketing
transactions.

Opportunism and Opportunistic Behavior

Opportunism is a central concept in the Transactions Cost Economics (TCE) theory of Williamson
(1975, 1985, 1993). Opportunism is a strategic behavior whereby one makes false or empty "threats and
promises in the expectation that individual advantage will thereby be realized" (Williamson 1975: 26).
Opportunism is "seeking self-interest with guile" (Williamson 1985) or of seeking "self-interest
unconstrained by morality" (Milgrom and Roberts 1992). Opportunistic behavior manifests itself in
various ways such as lying, stealing, cheating or other "calculated efforts to mislead, distort, disagree,
obfuscate, or otherwise, confuse" (Williamson 1985: 47) partners in business. Opportunism is "the
ultimate cause for the failure of markets and for the existence of organizations" (Williamson 1993: 102).
However, for opportunism, "most forms of complex contracting and hierarchy vanish", and markets alone
would be sufficient for handling most transactions through autonomous contracting (Williamson 1993:
97).
TCE makes two behavioral assumptions: a) opportunism, which suggests that one cannot predict
others' behavior, and b) bounded rationality, which implies that one cannot identify one's own best
behavior. Not all are inclined to opportunistic behavior; those who do, the "determined minority"
(Williamson 1993: 98), may do because of the above two assumptions. Some may be inclined to
"instrumental behavior" in which there is no necessary self-awareness that the interests of a part can be

30

furthered by opportunism (Williamson 1975). These people, without being aware, are instrumental in
opportunistic outcomes of others.
According to Williamson (1993: 102), opportunism is primarily a "human condition", a human
tendency or attitude (inclination, proclivity, and propensity). Opportunistic attitudes are "rudimentary
attributes of human nature" (Williamson 1991: 8). Opportunism is distinguished from opportunistic
behavior; the latter are acts of self-interest with guile (Goshal and Moral 1996).
Opportunism differs from mere "self-interested behavior". The latter is presumed to be constrained
by obedience to rules and faithfulness to promises, while opportunism (which is self-interest with guile) is
not. Opportunism seeks self-advantages with no concern for the advantages of the other. Williamson,
however, does not specify the mechanisms (e.g., economic institutions, markets) through which
opportunism is created or reduced (Hart 1990), and instead assumes it be a "human condition" (1993:
102). Even though this behavioral assumption of opportunism is regarded as an "extreme caricature" of
human nature (Milgrom and Roberts 1992: 42), yet Williamson believed that opportunistic behavior
(specific acts of self-interest with guile) can be controlled by proper social sanctions. 2

Determinants of Opportunistic Behavior

Various factors spurring opportunism have been identified:
o

According to TCE, opportunistic behavior is positively related to the opportunity (i.e., expected
benefits) for such behavior, and these are primarily determined by the characteristics of the
transaction such as "asset specificity"; when the latter is high it acts as a "locomotive" for
opportunism (Williamson 1985: 56). That is, when the transaction partner has invested much
capital and technology in the transaction-exchange that cannot be used for other products, the
predator could "hold-up" such assets by being opportunistic; such opportunism is the ultimate
cause of the failure of the free markets and for the existence of organization.

Opportunistic behavior is negatively related to organizational sanctions such as fiat, monitoring

and incentives. Hence, opportunism is not a fixed trait, unaffected by context, but a covariant of
opportunity determinants. Opportunistic behavior is also influenced by opportunism itself as a
tendency, which in turn, may be conditioned by one's upbringing, childhood and adolescent
exposures, and social heredity (Goshal and Moran 1996).

Further, when the outcomes of transaction-exchanges are highly uncertain, opportunistic behavior can
go undetected (Hill 1990: 508), and hence can get stimulated. When behaviors of individuals and of the
outcomes of those behaviors become uncertain, and this uncertainty in turn makes measurability of
individual or group performance uncertain, and when rational control on such behaviors cannot be costeffectively enforced, then opportunism abounds (Ouchi 1979). When short-term gains of opportunistic
behavior are very large, and when opportunistic behaviors are facilitated by a high-discretion (that is,
2

Williamson's theory of TCE has been critiqued by several scholars. Common weaknesses detected are: a) TCE exaggerates
opportunism in markets; over time the invisible hand of the markets will weed out habitual opportunism (Hill 1990); b) according
to TCE, organizations primarily exist because of their ability to attenuate opportunism through control; that is, organization begin
where markets fail; for one thing, organizations may not weed out all opportunism by rational or social control, and the other is,
that in the bureaucratic process of doing so, they may generate more opportunism, as is argued by the "self-fulfillment prophecy"
theory advocated by Goshal and Moran (1996); c) the distinction between markets and hierarchies is overstated; most markets
function within an organizational economy that continuously generates innovations and new products in the market place; thus
"markets begin where organizations begin to fail" may be a more realistic assumption (Rumelt, Schendel, and Teece 1991: 19); d)
TCE over-focuses control; although control is necessary in all organizations, a preoccupation with control obscures and weakens
an organization's fundamental source of advantage over markets (Goshal and Moran 1996).

31

non-fiat, non-monitored) environment within an organization, then opportunism thrives (Goshal and
Moran 1996).

How to Control Opportunistic Behavior

Williamson (1985) postulated three hierarchical governance mechanisms as controlling opportunistic
behavior: fiat (command), monitoring, and incentives. These three are "sanctions" that are "required not
as a normal motive for obedience, but as a guarantee that those who would voluntarily obey shall not be
sacrificed by those who would not," (Williamson 1991: 191).
Fiat is a blunt instrument. Monitoring and incentives may have both positive and negative effect on
opportunistic behavior. For one thing, fiat, monitoring, and incentives imply costs (thus eroding
competitive price advantage) and other practicality considerations, both of which may discourage the use
of sanctions (Goshal and Moran 1996). Further, the use of surveillance, monitoring, and authority may
lead employees to distrust the management, which in turn may lead to increased surveillance and control.
For the controllees, the use of control implies that they are neither trusted nor trustworthy to behave
appropriately without such controls. Managers believe that good behavior of employees is because of the
controls they applied, and not because of any intrinsic motivation on the part of the subordinates, and
hence, managers may develop a jaundiced view of the employees.
Moreover, increased use of rational controls increases the organization's dependence on those
controls, shifts voluntary compliance to compulsory compliance and work-to-rule, and encourages moredifficult-to-detect opportunistic behavior, and eventually, the costs of enforcing these controls will grow
such that they are no longer a viable (cost-effective) option for the organization (Goshal and Moran
1996). The cost of implementing such controls will build up "unneeded bureaucrats and wasteful
bureaucratic practices" that breed inefficiency (Williamson 1991b: 78). Using hierarchy as a response to
the threat of opportunism "involves additional bureaucratic costs that do not have to be borne by actors
who tacitly agree to cooperate and trust each other," (Hill 1990: 508).
If, as discussed earlier, uncertainty causes immeasurability of performance outcome, and if
immeasurability triggers opportunistic behavior, then one can control opportunistic behavior by
controlling uncertainty in organizations. Basically, there are two sources of uncertainty in organizations:
a) external environment arising from the complexity and dynamism of technologies and markets; b)
internal environment of the organization, arising from discretionary behavior of individuals. Hence,
organizations will reduce opportunistic behavior by creating low discretion, high-compliance
environment inside the organization, and they will choose external environments of less complex and less
volatile technologies (Eisenhardt 1985). In general, large-volume, standardized processes and products,
and mature businesses will involve highly programmed (non-discretionary) activities - but these are
market mechanisms and not organizational controls. Hence Hill (1990) argued that for such businesses,
markets are likely to possess superior efficiency characteristics than those of organizations.
Surveillance that is perceived as controlling threatens the controllee's personal autonomy, damages
self-perception, and decreases his/her intrinsic motivation from consummate cooperation to perfunctory
compliance or work-to-rule practice (Enzle and Anderson 1993). As extrinsic rewards are increased, there
is a loss of intrinsic motivation and commitment, both of which may not be restored when extrinsic
rewards are later withdrawn (Baker, Jensen and Murphy 1988). What is even worse, surveillants may
come to distrust their targets as a result of their own surveillance, while targets themselves become
unmotivated and untrustworthy, which in turn may require more intensive surveillance, and increased
surveillance may further damage the target - thus developing a "pathological spiral relationship between

32

the controllers and the controllees wherein both trust and trustworthiness deteriorate (Enzle and Anderson
1993: 263).
One could use less formal (social control) governance mechanisms to attenuate opportunism or
change opportunistic attitudes, such as establishing mutuality of goal-preferences, ensuring mutual
communications to build motivation and commitment, and creating normative integration by inviting
individuals to internalize values and goals of the organization. However, internalization of goals is rarely
uniform within an organization. Those who internalize values less may experience the higher
internalization of others as a threat or as a coercive form of peer pressure to conform (Goshal and Moran
1996). Hence TCE considers social control as a "nonviable" alternative to attenuate opportunism
(Williamson 1993: 98).
One could form "clan organizations" wherein members have attained high and long-standing levels of
socialization, strong social memory, and stable membership that they are very aware that interests of an
organization cannot be furthered by opportunistic stratagems of any sort (Alvesson and Lindkvist 1993).
Were "people in a clan to believe that others would intentionally attempt to misrepresent and seek
personal goals, at the expensive of the collective good, then, the cooperation and tolerance of short-run
inequities necessary for the clan to function would disappear" (Wilkins and Ouchi 1983: 476). The clan
form of an organization therefore perceives no threat of opportunism, even from opportunists (Goshal and
Moran 1996).
Whatever the form (rational or social) control, there must be a "control-context fit" for control to
extenuate opportunism (Eisenhardt 1985; Ouchi 1979). That is, certain kinds of control mechanisms are
more appropriate and effective than others for certain kinds of businesses and activities.
Thus, if opportunistic behavior should be effectively controlled, then the control tools require high
measurability of behavioral outcomes and a control-context fit, both of which maybe hard to obtain
(Goshal and Moran 1996). Hence, the need of controls beyond the rational and social, to moral control
which calls for trust and justice. Table 5.9 summarizes business executive responsibilities under
opportunistic threats in the company and among external stakeholders.

Corporate Integrity as Determining Trust

In the organizational behavior (OB) and human resources management (HRM) literature, scholars
have paid considerable attention to the topic of integrity. For instance, in the context of employee
selection, scholars have examined integrity as a predictor of job performance and counterproductive
behaviors (for a review, see Ones, Visvesvaram and Schmidt 1993). Researchers have also explored the
role of integrity in corporate leadership (Bass 1990; Kirkpatrick and Locke 1991; Yukl and Van Fleet
1992). Other scholars have investigated the function of integrity in determining trust in organization
(Butler and Central 1984; Hosmer 1995; Mayer, Davis and Schoorman 1995). Despite this stream of
management literature on integrity and its great potential for building trust, the concept of integrity is not
clear, or fully defined or conceptualized (Becker 1998; Rieke and Guastello 1995). Specifically, integrity
has been confounded with allied notions such as honesty (Butler and Cantrell 1984; Yukl and Van Fleet
1992), conscientiousness (Barrick and Mount 1991), trust (Mayer, Davis and Schoorman 1995), or a
composite of personality traits such as dependability, adherence to conventional norms, drug avoidance,
job commitment, moral reasoning and sociability (Sackett, Burris and Callahan 1989).

Some Confounding Definitions of Integrity:

33

Integrity means that a persons behavior is consistent with espoused values and that the person is
honest and trustworthy (Yukl and Van Fleet 1992: 151).

Integrity is the reputation for truthfulness and honesty of the trusted person (Butler and Cantrell
1984). Hosmer (1995) incorporates this notion into his theory of organizational trust.

The relationship between integrity and trust involves the trustors perception that the trustee
adheres to a set of principles that the trustor finds acceptable (Mayer, Davis and Schoorman 1995:
719).

Honesty and Integrity

The first two definitions related integrity to honesty. Honesty, from an objectivist view, is the refusal
to pretend the facts of reality are other than what they are; it is a recognition of the fact that one cannot
fake existence or facts regarding the external world. Integrity, on the other hand, is the recognition of the
fact that one cannot fake ones conscience or consciousness, i.e., facts regarding ones true principles and
values (Rand 1957:1019). Within the framework of the Big Five theory of personality, conscientiousness
reflects dependability; that is, being careful, thorough, responsible, organized, and planned, and it also
incorporates volitional variables, such as hardworking, achievement-oriented, and persevering (Barrick
and Mount 1991:4). However, one can vary widely on dimensions such as being careful and organized.
For instance, an absent-minded professor may be careless (e.g., misplacing things) and not organized (say,
in his lectures), but may be ruled by solid moral principles such as justice, productivity and reason.
According to Collins and Schmidt (1993:680), conscientiousness reflects such characteristics as
dependability, carefulness, and responsibility. Thus, honesty requires that one does not use ones
consciousness to distort reality, and integrity requires that one does not betray the convictions of ones
consciousness in action (Becker 1998:158). Integrity is a manifestation of ones rationality; irrational
people do not posses integrity. Integrity requires that reason, not emotion or popularity, be ones primary
guide.

Integrity and Commitment

The third definitional approach (Mayer, Davis and Schoorman 1995: 719) advances the concept of
integrity, as it recognizes that integrity involves an individuals commitment to some principles. To have
integrity, one must adhere to ones conviction about moral principles. One such principle is honesty, and
honesty best serves ones best self-interests. Other principles for integrity are those of independence,
justice and productivity. Honesty is a necessary condition for integrity, but not its sufficient condition
(Becker 1998: 158). Responsibility also relates to integrity insofar as it involves dependably doing what
one has promised to do. Thus, prima facie valid integrity items are (Becker 1998:159).
1.
2.
3.
4.

I value reason, purpose and self-esteem;

I am rational, honest, independent, just, productive, and proud;
My values, goals, and behavior are congruent; and
I am willing to do whatever is necessary to live according to my most cherished values .

However, these principles could be subjective (personal integrity) or intersubjective (those deemed
acceptable by the trustor), the latter is called moral integrity (Mayer, Davis and Schoorman 1995). In any
case, the notion of integrity succumbs to some form of moral relativism. The latter holds that there are no
absolute principles, but, rather, that all ethical principles are valid relative to individual choice and
cultural norms; that is, principles and values are subjective, relative, and socially constructed or created
(rather than discovered) via inner psychological processes (Peikoff 1991). Under such an approach,
historically evil people could still be deemed to have integrity. Hitler followed his own principles [e.g.,

34

promotion of the master race and those of others (e.g., Nazis)]; Saddam Hussein followed his own
principles of ethnic purity and those of others (say, Shiite Muslims who advocated such principles). Such
an approach could not really distinguish a morally integrated person from an amoral one. It would
subjugate morality to personal or public opinion, even if such opinions were incorrect or evil (Becker
1998).
Drawing selectively on Aristotle, Solomon (1992) argues for a virtue-based holistic conceptualization
of business ethics that views human activity in business organization as embedded in larger social and
existential concerns. Altruism isnt self-sacrifice; its just a more reasonable conception of self, as tied
up intimately with community, with friends and family who may, indeed, count more than we do
(Solomon 1992:106). Solomon (1992) argues that virtues are characteristics that define ones connections
with society and community; that participation in the business enterprise should be thought of as one
aspect of living well, cultivating self-respect, and developing satisfying social interdependencies.
Solomon (1992) argues that integrity is a multifaceted attribute that reflects, among other things, moral
courage (i.e., the will to do what one knows one should do), the ability to balance institutional loyalty
with moral autonomy, and the avoidance of hypocrisy and self-deception (i.e., practicing what one
preaches). Integrity also encompasses a kind of moral humility an understanding that ones principles
are not universal. Integrity does not mean being the moral rock around which the rest of the earth
resolves (Solomon 1992:172).
Randian objectivist notion of integrity is egoistic opportunism (Barry and Stephens 1998). Integrity
involves openness, affection and flexibility; an organization known for corporate integrity is composed of
open-minded, caring individuals. Integrity surely involves principles and policies, but it also involves a
sense of social context, moral courage, and standing up for others as well as for oneself (Solomon
1992:174). While Becker (1998) endorses Randian objectivism that attributes integrity to an individual
who is honestly and consistently serving self-interest as long as no tangible harm is inflicted on others,
Solomons (1992) notion of integrity challenges a wider test of ones ability to act in consistent and
principled ways that potentially benefit rather than merely avoid harming, members of social
communities within which ones actions are embedded.

Integrity in the Integrative Social Contracts Theory (ISCT)

Adapting contractarian philosophies of Hobbes (1651/1950), John Locke (1690/1988) and Rawls
(1971) to business ethics, Donaldson and Dunfee (1994; 1995; 1999) argue for bounded moral rationality:
business executives may not be able to comprehend all the moral implications of ethical dilemmas, which
they must resolve. Hence business executives and organizations fulfill ethical obligations through
consent and through conformity to social norms. Some of these norms are microsocial contracts with
various stakeholders including local communities in which the businesses operate. These microsocial
norms are legitimate (i.e., ethical) to the extent they conform to larger macrosocial norms called
metanorms or hypernorms (fundamental moral principles) having roots in cultural, religious and
philosophical beliefs. Hypernorms are unspecified or indeterminate principles fundamental to human
existence (Donaldson and Dunfee 1994: 265). They reflect a convergence of beliefs about morality,
rights and obligations. Hypernorms are contingent on widespread agreement of social and business
communities.
Thus, ISCT emphasizes the role of communities in the lives of individuals in general, and business
executives in particular. Deontologists (e.g. Kant 1797/1996; Rawls 1971) and psychologists who study
moral development (e.g., Kohlberg 1981) agree that moral maturity is predicated upon principles, rational
and impartial ethical choice. However, they see such a moral choice antithetical to Rands selfishness or
her notion of egoism. Existing approaches to business ethics propose a more textured analysis of how

35

moral dilemmas arise and are resolved by individuals who function within multiple and overlapping
social, religious and philosophical systems. Thus, Rawls (1971) argued that we can construct a just
society only when we, acting rationally, realize that our self-interests are inextricably linked with those of
fellow citizens. In contrast, Rands principles are deterministic within the contours of an appropriate
social and political system. ISCTs micro-social norms would be equivalent to them, with a difference.
Both micro-social and macro-social norms are based on both individuals and societies that demand a
wider consensus. In other words, ISCT goes far beyond Rands narrow confines of individual morality.

What Constitutes a Good Trusting Leader?

Was Adolph Hitler a good leader? Was he a good leader in so far as he mirrored the hopes of the
German people, and was he a bad leader in as much he also reflected the hates of the German people? As
a leader he won elections consistently, and he fulfilled his promises by changing Germany along lines his
followers wanted. Obviously, Hitler was a leader, but was he a moral and ethical leader? Was he virtuous
leader? Was he a trusting leader?
James McGregor Burns proposed a theory of transforming leadership that is based on ongoing moral
relationship of leaders and followers. In his book, Leadership, Burns (1978) transforming leadership as a
relationship in which leaders and followers morally elevate each other. For Burns, leadership is about
change and sharing common purpose and values. Transforming leaders help people change for the better
and empower them to improve their lives and the lives of others. For Burns, the values of moral
leadership are those of the Enlightenment liberty, equality, and community a big picture view of the
ultimate ends of leadership. Moral and ethical leadership translates these values into being honest, fair
and just. Following Burns (2004), Table 5.10 identifies ethical virtues, ethical values, and moral values
that should characterize various types of business management leadership.
Delving deep into the psychological and moral depths of leadership, Hollander (2004) describes the
leader-follower relationship as a unified interdependent relationship held together by loyalty and trust,
and rooted in the leaders commitment to principles of justice, equity, responsibility, and accountability in
the exercise of authority and power. Similarly, analyzing the role of emotions in the leader-follower
relationship, Solomon (2004) argues that trust is the emotional core of leader-follower relationship, and
that we can better understand this relationship by analyzing how the leaders and the led provide mutual
trust.

Concluding Remarks
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. Scholars 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 fastpaced 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).
Currently 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

36

Oh 1987). The high levels of trust characteristic of relational exchanges enable exchange partners to
focus on the long-term benefits of the relationship (Ganesan 1994), ultimately enhancing competitiveness
and reducing transaction costs (Noordewier, John, and Nevin 1990). Thus, 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 contrary, highly trusted salespeople have been found to sustain
customer commitment despite management policies that may not always benefit the customer (Schiller
1992).
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.
Trusting long-term
relationships imply and expect higher moral responsibilities than discrete and short-lived transactional
relations expect. Trust is also a dynamic and continuous phenomenon (Flores and Solomon 1998); that is,
one can both trust and distrust people at the same time (Luhmann 1979), given different experiences
within the various facets of complex interpersonal trusting relationships (Lewicki, McAllister, and Bies
1998). As relationships unfold one can continually update ones information and emotion base, and thus,
ones decisions to trust or distrust (Wicks, Berman, and Jones 1999). Hence, it is more important to
develop ones willingness to trust, rather than focus on being trustworthy.
Currently, there is a woeful lack of knowledge and technology in building trust of the public in the
health care system; in fact, some medical professionals are even cynical, believing that loss of trust was
so pervasive in our commercialized health care system that no initiatives to build it would likely succeed
(Mechanic and Rosenthal 1999). Thus, creating social and interpersonal trust should be a part of welldefined technology of structural innovations, positive incentives, teamwork, interpersonal skills, and
disease management initiatives (Landon, Wilson, and Cleary 1998; Scott et al. 1998).

37

Table 5.1: Synthesizing Major Definitions of Trust in Management Studies

Underlying
Theory of
Trust

Personality
Psychology:
Trust is an
individual
characteristic: e.g.,
confidence,
benevolence, and
willingness

Authors

Remarks

Mellinger
(1956)

Trust is an individuals confidence in another persons

intentions and motives, and the sincerity of that persons
word.

Hence some people

are more trusting
than others

Deutsch (1960)

Trust is an individuals confidence in the intentions and

capabilities of the trust partner and the belief that he or she
would behave as hoped; distrust is confidence about a
relationship partners undesirable behavior, stemming from
the knowledge of his or her capabilities and intentions.

Trust and distrust are

not opposites; they
can co-exist. Each is
influenced by
separate factors.

Read (1962)

Trusting individuals: a) expect their interests to be protected

and promoted by those they trust; b) feel confident about
disclosing negative personal information about themselves, c)
feel assured of full and frank information sharing, and d) are
prepared to overlook apparent breaches of trust relationship.

Trust is best when it is

mutual: one trusts
another to be trusted
in turn,

Rotter
(1967: 651)

A generalized expectancy held by an individual that the word,

promise, oral or written statement of another individual or
group can be relied upon.
Trust is mutual confidence that one party will not exploit
mutual vulnerability

Trust is built on
reliability of the
trusted.
Trust is built on
confidence mutual
vulnerability
Trust implies willed
mutual vulnerability
as pre-condition to
strong partnership.

Social
Psychology:

Sabel (1993)

Trust is a
characteristic of
interpersonal
transactions:
e.g., expectations of
partner behavior

Mayer, Davis
and
Schoorman
(1995: 712)
Lewicki,
McAllister, and
Bies
(1998: 439

Economics and
Organizational
Sociology: Trust

Definitions of Trust

Zucker (1986)

is an institutional
phenomenon: e.g., a
mechanism to
reduce uncertainty Shapiro (1987)
and risk of
opportunism

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.
Combining the psychological and behavioral approaches, the
authors define trust in terms of confident positive
expectations regarding anothers conduct, and distrust in
terms of confident negative expectations regarding anothers
conduct.
Building trust among relative strangers reflects the security
one feels about a situation because of guarantees, safety nets,
or other structures. Rational bureaucratic organizational
forms could be trust-producing mechanisms for situations
where the scale and scope of economic activity overwhelm
interpersonal trust relations
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

38

Trust is bipolar: both

confident positive and
negative expectations
regarding the trusted.
Trust is viewed as a
mechanism to
minimize
opportunistic
behavior
Trust is viewed as a
mechanism to
maximize the utility
of ones behavior

Table 5.2: Synthesizing Trusting Relationship Studies in the Marketing

Literature
Authors

Study
Context

Moorman,
Deshpande &
Zaltman
(1993:.82)

Trust between
marketing
researchers and
users of research

Ganesan
(1994: 3)

Trust between
retail buyers and
vendors

Morgan and
Hunt
(1994: 23)

Independent
automobile tire
dealers

Doney and
Capon
(1997: 36)

Buyer-Seller
relations

Garbarino and
Johnson
(1999: 71)

Customer
evaluation of a
nonprofit theatre
as a function of
ones level of
relational bonds

Singh and
Sirdeshmukh
2000

Hewett and
Bearden 2001

Sirdeshmukh,
Singh, and
Sabol
(2002:17)

Definition of
Trust

Trust
Antecedents

Trust
Concomitants

Trust
Outcomes

Willingness to rely
on an exchange
partner in whom
one has
confidence
Willingness to rely
on an exchange
partner in whom
one has
confidence
Trust exists when
one party has
confidence in an
exchange partners
reliability and
integrity
The perceived
credibility and
benevolence of a
target of trust
Trust in an
organization is
customer
confidence in the
quality and
reliability of the
services offered.

Credibility of the
researcher

Willingness to rely
and be vulnerable

Enhances the
quality of userresearchers
interactions

Credibility and
benevolence of the
vendor

Mutual dependence
between retailer
(buyer) and vendor

Credibility: i.e.,
reliability and
integrity of the
trusted;

Functional conflict,
uncertainty; shared
values, communication, resisting
opportunistic
behavior

Positively
influences longterm orientation of
mutual
relationships.
Acquiescence,
cooperation,
reduction in
uncertainty

How agency and

trust mechanisms
cooperate and
compete to affect
consumer
satisfaction and
loyalty

Consumer-trust is
a psychological
state accepting
vulnerability
based on positive
expectations of
sellers behaviors.

Trust building
between corporate
headquarters and
its foreign
subsidiaries
Developing trust
in retail and airline
services

The perceived
credibility and
benevolence of
headquarters

High levels of
exchangeperformance
ambiguity, and
greater
interdependence
between buyers
and sellers
Dependable
credibility and
benevolence of the
trusted

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.

Credibility and
benevolence of the
trusted
Actor satisfaction,
actor familiarity,
play-attitudes,
theatre-attitudes

Frontline
employees FLE)
and Management
Policies and
Practices (PPP):
operational
competence and
benevolence;
problem solving
orientation.

39

Enhances the
likelihood of
future interactions
Customer
commitment as:
identification with
the organization,
psychological
attachment,
concern for its
future, and loyalty
Customers
acceptance of
vulnerability based
on the competence
and benevolence of
the seller

Enhances overall
satisfaction with
and commitment
to the theatre and
future intentions

Acquiescence and
cooperation

Performance of the
subsidiary

Customer value

Customer loyalty

Enhances
consumer
trust/distrust,
overall
satisfaction, and
loyalty

Table 5.3: Foundations of Interpersonal Trust between Stakeholders and

Corporate Executives
Basic
Concepts
of Trust

Basic Theories
of Trust

Basic Factors that

promote Trust

Trust is
something
personal

Trust as a
personality trait, an
individual difference.

Personal reputation for

trustworthiness.

Trust as Trusting
Beliefs

Trust as rational
prediction of ones
good behavior

Honesty, integrity and

past good record of the
trusted party

Trust as
Mistrusting
Beliefs

Trust as rational
expectation of ones
bad behavior

Dishonesty,
unpredictability and
past bad record of the
trusted party

Trust as an
interpersonal
attitude.

Frequency of
interactions and
interpersonal relations;
Mutual openness
(frank information
sharing);
Mutual cooperation.

Trust as Socially
Embedded
expectations.
Trust as Faith in
Humanity

Similarity of values;
Similarity of beliefs,
goals and objectives;
Similarity of
expectations.

Trust as an
institutional or
Organizational
phenomenon

Organizational values;
Institutional
dependence structures;
Organizational faith
building structures;

Complex and
unfamiliar
interpersonal
situations necessitate
trust.

Accepting need for

dependency under
complexity and
unfamiliarity.

Trust as a shield to
ones vulnerability.

Willingness to be
vulnerable

Trust can coexist

with distrust.

Positive distrust can

enhance trust.

Trust is
interpersonal

Trust is
Institutional

Trust is
Situational

40

Stakeholder-Corporate executive Trust

Basic Hypotheses of
Stakeholder-Corporate
executive Trust
Higher the
trustworthiness of the
corporate executive, the
higher is stakeholder
trust.
Higher ones honesty,
integrity and past good
record, the highest is trust
of the trustor.
The higher the dishonesty,
unpredic-tability and past
bad record of the trusted
party, the higher is the
mistrust of the trustor.
Higher the stakeholders
positive attitude toward
the corporate executive
via frequent, mutually
open and cooperative
interactions, the higher is
stakeholders trust.
Higher a stakeholders
trust in the business
corporate profession, the
higher is stakeholder trust
in the corporate executive
trust.
Higher the stakeholders
trust in the legal
institution of business and
bankruptcy provisions,
the higher is stakeholders
trust.
The higher ones
acceptance of the
complexity-unfamiliarity
of the corporate situation,
the higher is stakeholdercorporate executive trust.
Higher ones willingness
to be vulnerable, higher is
ones trust
Ones positive distrust of
the health-delivery system
can enhance stakeholdercorporate executive trust.

Basic Factors that

promote StakeholderCorporate executive
Trust
Corporate executives
techno-professional and
empathy skills can
enhance trustworthiness.
Cultivate honesty,
integrity and a
reputation of
trustworthy behavior
Repair and restitute the
damage of past
dishonesty, lack of
integrity and
untrustworthy behavior
Frequent stakeholdercorporate executive
mutually open and
cooperative
relationships and
interactions can foster
positive attitudes of
trust.
Similarity of
stakeholder-corporate
executive beliefs, values,
goals and expectations
Corporate company
reputation, past trackrecord of honesty, and
corporate executivecredentials can breed
trust.
Stakeholders
acceptance of the
complexity, risk and
uncertainty of the
corporate delivery
system
Stakeholders
willingness to be
vulnerable
Stakeholders positive
distrust of the
corporate-bankruptcy
delivery system

Table 5.4: A Synthesis of Theories and Definitions of Trust and Distrust

Theory
(Authors)

Approach

Definition of
Trust

Definition of
Distrust

Implications for
StakeholderExecutive
Encounters

Table 5.4A: Trust and Distrust as Polar Opposites

Psychology
(Meillinger 1956;
Deutsch 1960; Read
1962)
Behavioral
(Axelrod 1984;
Deutsch 1968;
Erikson 1963; Lewis
& Weigert 1985)

Trust as an individual
trait

Trust is ones
confidence in anothers
positive intentions and
promises.

Distrust is ones diffidence

about ones undesirable
behavior.

Foster trusting and avoid

distrusting confidence of
patients.

Trust as a rational
predictive choice of a
partner. Devoid of real
social context, trust is a
function of incentives.

Trust is cooperative
conduct in a conflicting
interpersonal encounter.

Distrust is a non-cooperative
conduct in a mixed-motive
game situation. Distrust is
psychological disorder.

Normatively, trust is good,

distrust is bad. Nurture trust
to solve intractable conflict
situations and to promote
effective collaboration.

Personality
Disposition
(Rotter 1967, 1971;
Stack 1988; Tardy
1988)
Expectation
(Rotter 1980;
Gambetta 1988;
Zucker 1986)

Trust is a personal predispositional attribute

Trusting predispositions indicate

low expectations and
cooperate better.

Distrusting predispositions
indicate high expectations
and cooperate less with the
trusted.

Distrust is a psychological
disorder that needs to be
corrected. Trust-distrust
transcends the social context.

Trust is a generalized
expectancy

Trust is a set of
expectations that the
trusted will behave
helpful as expected by
the trustor.

Distrust is a set of
expectations that the trusted
will not behave helpful as
expected by the trustor.

Assure stakeholders that you

will act always in their
interests, thus converting
distrust to trust.

Table 5.4B: Trust and Distrust as Complementary Constructs

Organizational
Psychology
(Baier 1986;
Garfinkel 1963;
Lewis and Weigert
1985; Shapiro 1987;
Zucker 1986)
Sociology
(Lewicki, McAllister
& Bies 1998;
Luhmann 1979)

Trust as an organizational
phenomenon supported
by institutional
mechanisms.

Trust as believing in the

institutional systems
(normal situations and
structural assurances)
that support trust.

Distrust as believing in the

institutional systems
(abnormal situations and
structural non-assurances)
that support distrust.

Complexity, undesirability
and vulnerability of modern
business outcomes can
weaken situation normality
and structural assurances that,
in turn, could result in high
distrust levels.

Trust-distrust as a
mechanism for reducing
social complexity and
uncertainty.

Trust and distrust

coexist as functional
equivalents or
substitutes for reducing
social complexity.

Trust is a positive
expectation of beneficial
action; distrust is a positive
expectation of injurious
action.

Do not over-trust. Total,

unconditional trust could be
dangerous for managing
social relations.

Social Psychology
(Cacioppo &
Brenston 1994;
Lewicki, McAllister
& Bies 1998)
Interdependence
(Mayor, Davis &
Schoorman 1995;
Sitkin & Roth 1993;
Williams 2001)

Trust-distrust as a
continuum of ones
psychological state that is
unstable and transitory.

Trust as positive-valent
and distrust as negativevalent attitudes can
coexist.

Trust involves confident

positive expectations and
distrust involves confident
negative expectations
regarding trusting partners.

Trust is a necessary ingredient

for social order; hence, focus
on nurturing trust. Sensitize
to sources of patient distrust
and manage them carefully.

Trust-distrust as
interdependent behavioral
expectations amidst
complexity and
vulnerability.

Trust is a function of
ones dependence upon
and vulnerability
regarding the other
party.

Distrust is also a function of

ones dependence upon and
vulnerability regarding the
other party.

Trust-distrust investment
should not be too high, or too
low, but geared to meet all
situations in a complex risky
world acceptably.

41

Table 5.5: Stakeholder-Corporate executive Interpersonal Relations as a function of

Low and High, Trust and Distrust

STAKEHOLDER
TRUST:

STAKEHOLDER DISTRUST:
HIGH:
LOW:
High fear
High skepticism
High cynicism
High monitoring
High vigilance

Quadrant I:
High-Trust StakeholderCorporate Executive:
HIGH:
High hope,
High faith,
High confidence
High assurance
High initiatives

High value congruence, common objectives,

and frequent interactions;
Pooled positive and trust-reinforcing
experiences; few defense mechanisms;
Conversations are rich, deep, personal and
occasionally complex;
Hence, reason to be mutually confident;
No reason for suspicion;
High willed pooled interdependence and
cooperation;
All opportunities for sharing information
pursued;
New trust-building initiatives sought.

Quadrant III:
Casual-Trust StakeholderCorporate Executive:
LOW:
Low hope,
Low faith,
Low confidence
Low assurance
Few initiatives
Low resistance

Casual acquaintance;
Careful, bounded, arms-length discrete
transactions;
No pooled trust-reinforcing experiences;
Conversations simple and casual;
No reason to fear or be confident;
No closeness or intimacy;
No threats to confidentiality as little
information of consequence is shared;
Limited interdependence and cooperation;
Just professional courtesy.

Source: Adapted from Lewicki, McAllister and Bies (1998: 445).

42

Low fear
Low skepticism
Low cynicism
Low monitoring
Low vigilance

Quadrant II:
Medium-Trust
Stakeholder-Corporate
Executive:
Sustained trust and distrust; trust
constantly verified;
Strong reason to be confident in certain
areas and diffident in others;
Relationships are multiplex, multifaceted,
highly segmented and bounded; like in
strategic alliances;
Significant amounts of information shared
under strict confidentiality;
Collaboration opportunities pursued bur
risks assessed;
Vulnerabilities continuously monitored
and protected.

Quadrant IV:
High-Mistrust StakeholderCorporate Executive:
Undesirable eventualities expected and
feared;
Conversations are cautious, guarded, and
often laced with cynicism
Pooled negative distrust-reinforcing
experiences; bureaucratic checks;
No reason for mutual confidence;
Strong reason for watchfulness;
Significant resources for monitoring;
Harmful or exploitative motives not ruled
out;
Interdependence difficult over time or at
best, carefully managed;
Offensive self-defense.

Table 5.6: Profile of Stakeholder-Business Management Executive Trust

Levels: Costs versus Benefits
Business
Management

executives
Trust Level

Trust
Dimensions

Stakeholders Trust Level

Low

Costs
Low
Benefits

Risks

Costs

Both stakeholder and business

management executive:
low mutual cooperation,
low mutual honesty,
low mutual benevolence
Both stakeholder and business
management executive:
low involvement;
low interdependence;
low investments, and
low benefits.
Business management executiveopportunism
Low executive commitment
High agency costs for the executive:
high trust investment costs;
high affect and emotion costs;
high loss probability;
very few options;
low monitoring ability.
For the stakeholder: no significant
costs
Almost none to executives;
Significant benefits to stakeholders.

High
Benefits

Risks

Corporate executive abuse;

Corporate executive exploitation,
Corporate executive dissatisfaction;
Corporate executive may refuse
cooperation.
Stakeholder opportunism.
Stakeholder betrayal

43

High
High agency costs for the stakeholder:
high trust investment costs;
high affect and emotion costs;
high profit-loss probability;
high costs of very few options;
low monitoring ability.
For the executive: no significant costs
Almost none to stakeholders;
Significant benefits to executives.

Stakeholder abuse;
Stakeholder exploitation,
Stakeholder dissatisfaction;
Stakeholder may switch & not return
Both for stakeholder and business
management executives:
low agency costs such as:
bonding costs
monitoring costs
warranty-guarantee costs;
search costs
Both for stakeholder and corporate
executive:
high commitment;
high mutual cooperation,
healthy interdependence;
high mutual honesty,
high mutual benevolence
high satisfaction
Sustaining high mutual trust;
High dependence;
Stifled creativity due to over-trust;
Few other options due to over-trust.

Table 5.8: Business Executive Ethical Responsibilities as a Function of

Transactional, Contractual, and Relational Exchanges
Nature of
Relationships
with
Stakeholders

Business Management Ethical Responsibilities Under:

Transactional
Exchanges

Contractual
Exchanges

Relational Exchanges

As single, one-time discrete

exchanges, deliver good and
fair value.

Some discrete one-time

exchanges may involve some
contracts.

No necessary relational
responsibilities

As many one-time discrete and

disconnected transactions,
execute each efficiently.
Make centralized purchasing
attractive and maximize
satisfaction from one stop
shopping to develop loyalty.

Respect contracts if any.

Some relational responsibilities

may gradually arise.

Financial contracts (e.g.,

credit cards, life time
customers) may develop and
sustain one-stop-shop loyalty.

Some social contracts (e.g.,

commitment to local communities)
may develop long-term
relationships with customers.

As one time or multiple pure

licensing agreements optimize
transfer satisfaction to both
parties; minimize transfer
costs.

If international, licensing
contracts should be sensitive
to international trade and
commerce laws and host
country national sovereignty.

Factor proportions: adopt

technology to host country
infrastructure; update host skills to
state-of-the-art tech transfer; invite
cross-licensing opportunity.

As domestic and foreign

turnkey projects and/or foreign
technical collaborations,
optimize them in relation to
time, cost, skills and future
opportunity.

If international technical
collaboration, all inherent
contracts should be sensitive
to international business laws
and host country national
sovereignty.

Ensure continued project

suitability to host country
environment and development;
volunteer & invite feedback.

B2B Joint Ventures:

Domestic,
International,
Multinational Or
Global

As domestic or international
branches, divisions, affiliates,
or subsidiaries, optimize then
as above.

If international, all inherent

contracts should be sensitive
to international laws and host
country national sovereignty

Optimize host equity; share risks

equitably; maximize mutual share
of markets, profits and
opportunity; assume responsibility
for host company and country in
terms of growth and development.

B2B Domestic Or
Global Strategic
Technological
Alliances

As strategic technology
collaborations provide valueadding and problem-solving
partnerships; as virtual
corporations, increase
networking efficiencies.
As discrete or many
disconnected transactions,
deliver good and fair value.
Maximize speed, delivery,
billing and payment
efficiencies and satisfaction of
online orders.

Respect patents, intellectual

rights, and cultural
imperatives of host country
partners core processes, core
products, formats and
standards.
Spell contractual
responsibilities that safeguard
consumer privacy, minimize
cyber-fraud, and protect
vulnerable segments such as
children and the elderly.

Assume responsibility for

leveraging mutual and global
resources, core competencies,
markets, shares and profits.

Pure One-Time
Transaction
Many Disconnected
Transactions
One-Stop Shopping
Stakeholders

Business To Business
(B2B) Technology
Transfers

B2B Technology and

Management
Transfers

Internet and Web

Marketing Exchanges

44

Foster long-term loyalties and

trusting relationships by assuring
competence, competitive value,
quality, reliability, operational
benevolence and integrity.

Appendix 6.1: A Timeline of Business Trust and Mistrust in the U. S. Market

[See Kraemer (2009), Rethinking Trust, HBR, pp. 72-75]

Year
1907
1909

Trust-Mistrust Situation
A scheme to corner the market in stock of United Copper causes the
collapse of Knickerbocker Trust and a financial panic.
Moodys publishes an analysis of the stocks and bonds of U. S. railroads
thus helping investors assess the risk of various assets.

1912

The U. S. Attorney sues Coca-Cola for false advertising. The ad industry

falls into public disfavor.

1913

The fallout from the panic of 1907 finally breaks the political resistance to
creating a strong central bank to avert monetary shortages.
Confidence in the prospects of big industrial companies rises, and ordinary
investors start purchasing stocks, besides bonds. The U. S. stock market
soars.
During the Great Depression, the Pecora Commission investigates the
causes of the October 1929 stock market crash, uncovering a wide range of
misdeeds in banking.
Unprecedented government spending for WW II leads to abuses by
contractors, especially in the U. S.
Mutual Funds, developed in the 1920s, take off as investors cautiously
begin to invest in large intermediaries that distribute and manage their
risks.
Ralph Naders Unsafe at Any Speed heightens awareness that business and
consumer interests often clash.

19221929
1930s
1941
1950s
1960s
1970s

Securitization of loans begins, allowing home buyers to borrow from far-off

lenders.

1978

Drexel Burnham Lambert uses risk-analysis tools to build a market for

junk bonds to finance entrepreneurial companies and corporate takeovers.
Junk bonds trading scandals dips their popularity for a while, but, by 2000,
the use of junk bonds becomes pervasive in corporate finance.
Deregulation flourishes during the time of Presidents Nixon and Ronald
Reagan as people start trusting business more than government.

1981
1983
1984
1990s
1995
1997
2000
2001
2006
2008
2009

Jack Stack, the new CEO of Springfield Remanufacturing Corporation,

begins to share financial information and interpretation with all his 119
employees.
A Union Carbide gas spill in Bhopal, India, becomes the worst industrial
disaster in history; this leads to greater skepticism about multinationals in
developing countries.
Executive pay soars as U. S. companies experience a surge in
competitiveness. Global companies increasingly imitate the American
approach to business.
Excitement about the Internet kicks off a period of irrational exuberance
in which investors bid up the stock prices of dot.com companies that have
little or no profit.
eBay institutes its feedback stars rating system, allowing buyers to rate the
trustworthiness of sellers. By 1998, eBays registered user base rises from
341,000 to 2.1 million.
The technology heavy NASDAQ Companies Index reaches a peak of
5048.62 in March 2000 but only a few weeks later falls by 25%. The
Internet bubble bursts.
After a series of financial overstatements, Enron seeks bankruptcy
protection. Tyco, WorldCom, and several energy companies follow suit.
Grameen Bank and its founder, Muhammad Yunus, jointly receive the
Nobel Peace Prize. Grameen Bank is the first business to get this award.
Excessive leveraging from securitization, combined with the bursting of the
housing bubble, leads to a severe credit crunch. Banks stop trusting
companies with loans, and investors stop trusting banks.
After suffering a historical loss, AIG uses its government bailout ($170
billion) to pay employees millions in bonuses.

45

Trust-Building Institution Creation

At one point, JP Morgan locks leading bankers in a
room until they agree to bail out weaker institutions
Moodys is the first to rate public-market securities.
The growth of credit-rating agencies fosters
investor trust.
The National Vigilance Committee is created to
police truth in advertising. The Better Business
Bureau is born as its local subsidiaries.
The U. S. Congress founds the Federal Reserve
System
The U. S. stock market crashes in October 1929 the Great Depression.
The U. S. government helps rebuild trust in
business by regulatory bodies such as FDIC and
SEC.
Harry Truman forms a special Senate committee to
investigate the scam.
The Mutual Funds industry soars.
Congresses passes several consumer safety and
environmental protection laws, including the Strict
Liability Law of 1966.
The U. S. government creates several regulatory
agencies to ensure that businesses act in public
interest.
No federal agency yet to control the junk bond
market. Junk bond rating agencies arise.
Several industries are deregulated: trucking,
advertising, healthcare, airlines, financial
products
The Open Book Management is born.
No federal laws or agencies yet to vigilate MNCs in
the LDCs
The cult and agency-market for CEOs grows.
No federal agency to control this irrational dot.com
market exuberance.
The feedback stars rating system gets
institutionalized in several e-trading companies.
No federal agency to vigilate the NASDAQ activity.
Corporate fraud of irregularities in the accounting
and insider trading burgeons and becomes almost
nationally infectious.
Interest in social entrepreneurship increases and
several such institutions arise.
The world plunges into a severe recession.
President Obama calls it an outrage and asks the
Treasury Department to investigate it.

Exhibit 5.1: Checking Interpersonal Trust Levels with Case Situations

Dimension of Ethics of Trust
Explored

Case 5.1: Managing

Trusting Relationships in
Indian Organized
Retailing

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
(Garbarino and Johnson 1999).

Managing trusting
relationships in Indian
organized versus
unorganized retailing is
almost impossible without the
willingness of each part to
trust.
Trust as an essential
ingredient to successful
relationships can resolve the
current tensions between the
organized and organized
retail sectors in India
Strong relationships of trust
and commitment that fuel
positive attitude and belief
structures are essential for
lasting relationships between
the organized and
unorganized Indian retail
sectors.
Strong and differentiating
differences in trust and
commitment between the
organized and unorganized
Indian retail sectors are
necessary for lasting mutual
benefits.
Trust of various other
stakeholders that are
involved in the organized and
unorganized retail sectors is
necessary in building loyalty
relationships and sustainable
market share for all.

Theories of partnering propose that

stakeholders 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).
A central idea in the theory of partnering
suggests that differences in trust and
commitment are the features that most
distinguish stakeholders as partners from
stakeholders as single transaction buyers
(Berry 1995; Webster 1992).
Stakeholder trust is an essential element
in building strong stakeholder
relationships and sustainable market
share (Urban, Sultan and Qualls 2000).
To gain the loyalty of stakeholders, 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).

A company representative (such a

corporate executive) who proves to be
dishonest and unreliable could easily
jeopardize long-term relationship with a
trusted supplier (Kelly and Schine 1992).
Highly trusted salespeople have been
found to sustain customer commitment
despite management policies that may not
always benefit the customer (Schiller
1992).

The inherent nature of

services, coupled with
mistrust in Indian markets
positions trust as perhaps the
single most powerful
relationship tool currently
available to the unorganized
and organized retail sectors
in India.
Dishonesty and unreliability
among the organized and
unorganized retail sectors of
India can seriously
jeopardize trusting
relationships between them.
Highly trusted partners
among the organized and
unorganized retail sectors of
India can sustain high levels
of customer commitment
despite organizational
policies unfavorable to the
customers.

46

Case 5.2: Bain sues EY

over $60-m loss in
Lilliput Kidswear

Case 5.3: Building IndoJapan Trusting Business

Relationships

If Bain and EY had strong

willingness to trust each
other, the current stressed
relations and litigation
would not have occurred.

If Indo-Japanese commercial
relations should prosper, then
both countries and their
corporations need strong
willingness to trust each other.

Trust as an essential
ingredient to successful
relationships can better
resolve the current deadlock
between Bain and EY than
any other device.
Strong relationships of trust
and commitment that fuel
positive attitude and belief
structures are essential for
lasting relationships
between Bain and EY.

Trust as an essential ingredient

to successful relationships could
be the best antecedent and
precursor for very promising
Indo-Japanese business
relations.
Strong relationships of trust
and commitment that fuel
positive attitude and belief
structures are essential for
lasting relationships between
Indian and Japanese politicians
and businesses.

Strong and differentiating

differences in trust and
commitment between Bain
and EY are necessary for
lasting mutual benefits.

Strong and differentiating

differences in trust and
commitment between Indian
and Japanese politicians and
businesses are necessary for
lasting mutual benefits for both
parties.
Trust of various other
stakeholders that are involved
in Indo-Japanese commercial
relationships may be necessary
in building loyalty relationships
and sustainable and mutual
market share for all.

Trust of various other

stakeholders that are
involved in the Bain and EY
confrontation may be
necessary in building loyalty
relationships and
sustainable market share
for all.
The inherent nature of
services, coupled with
mistrust in Indian markets
positions mutual trust as
perhaps the single most
powerful relationship tool
available to Bain and EY to
settle their grievances.
Dishonesty and unreliability
among the Bain and EY
partners can seriously
jeopardize trusting
relationships between them.
Highly trusted partners
among Bain and EY can
sustain high levels of
customer commitment
despite organizational
policies unfavorable to the
customers.

The inherent nature of

business, coupled with mistrust
in Indo-Japanese markets
positions trust as perhaps the
single most powerful
relationship tool currently
available to the politicians and
business people of the two
countries.
Dishonesty and unreliability
among the Indo-Japanese
partners in business
relationships can seriously
jeopardize trusting
relationships between them.
Highly trusted partners among
the Indo-Japanese business
partners can sustain high levels
of customer commitment
despite organizational policies
unfavorable to the customers.

Exhibit 5.2: Checking Interpersonal Trust Building Capacities with Case Situations
Ethics of Trust-Building Capacity

Case 5.1: Managing

Trusting Relationships
in Indian Organized
Retailing

Case 5.2: Bain sues EY

over $60-m loss in
Lilliput Kidswear

Case 5.3: Building IndoJapan Trusting Business

Relationships

We need to look at both sides of the

trusting relationships: how
stakeholders as trustors should trust the
corporate executives (as trusted), and in
turn, how corporate executives (as
trusted) should cultivate and serve
trustworthiness among stakeholders (as
trustors).
A stakeholders trust in another party
such as a corporate or corporate
executive reflects an expectation or belief
that the other party will behave
benevolently, competently, honestly, and
predictably.

As long as organized and

unorganized retailers (as
trusted) deserve the trust
of their customers (as
trustors), Indian retailing
can be very successful.

As long as EY (as trusted)

deserves the trust of its
client Bain (as trustor),
their trusting relationship
equation will be balanced
and mutually beneficial.

As long as Indian business

partners (as trusted) deserve
the trust of their host Japanese
business partners (as trustors),
their trusting relationship
equation will be balanced and
mutually beneficial.

The Indian customer trust

in the organized vs.
unorganized retailing
sector is that the latter will
behave benevolently,
competently, honestly, and
predictably in every
transaction.

Bains trust in EY is that

the latter will behave
benevolently, competently,
honestly, and predictably in
every transaction.

The Japanese business

partners trust in the Indian
counterpart is that the latter
will behave benevolently,
competently, honestly, and
predictably in every
transaction.

The stakeholder cannot control or force

the corporate 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.

To the extent that the

customers cannot control
or force the Indian
retailing sector to fulfill
the expectation of trust,
they must be willing to
take the risk of being
vulnerable.
Hence, customer trust and
satisfaction will involve
some level of dependency
on the system and
management of the
organized vs. unorganized
retailing sector.

To the extent that Bain

cannot control or force EY
to fulfill the expectation of
trust, it must be willing to
take the risk of being
vulnerable.

To the extent that the Japanese

business partners cannot
control or force the Indian
counterparts to fulfill the
expectations of trust, they must
be willing to take the risk of
being vulnerable.

Hence, as a customer Bains

trust in and satisfaction
with EY will involve some
level of dependency on the
system and management of
EY and its operations.

Hence, as customers, Japanese

partners trust and satisfaction
will involve some level of
dependency on the system and
management of the Indian
counterparts.

Hence, customers trust

can best be strengthened
by a positive attitude
toward the retailers
derived from their
perceptions, beliefs, and
attributions about the
retailers, which, in turn,
are based upon their
knowledge and
observations of the
retailers.
Customers are prepared to
trust and invest tangible
and intangible assets in the
retailing sectors if the
latter are willing to share
information, strengthen
communication, and
deepen relationships with
them.
The challenge for the
retailing sectors in India is
enable customers to build
trusting predispositions in
them.

Hence, Bains trust can best

be strengthened by a
positive attitude toward EY
that is derived from Bains
perceptions, beliefs, and
attributions about EY,
which, in turn, is based
upon Bains knowledge and
observations of EY.

Hence, Japanese trust in the

Indian partners can best be
strengthened by a positive
attitude toward them derived
from their perceptions, beliefs,
and attributions about the
Indian partners, which, in turn,
are based upon their knowledge
and observations of the Indian
counterparts.

Bain will be prepared to

trust and invest tangible
and intangible assets in EY
if the latter are willing to
share information,
strengthen communication,
and deepen relationships
with them.

Japanese partners will be

prepared to trust and invest
tangible and intangible assets in
the Indian counterparts and
projects if the latter are willing
to share information,
strengthen communication, and
deepen relationships with them.

The challenge for EY is

enable clients like Bain to
build trusting
predispositions in them.

The challenge for the Indian

business partners is to
empower their Japanese
counterparts to build trusting
pre dispositions in them.

Thus, stakeholder trust involves some

level of dependency on the corporate
executive and hence, stakeholder
satisfaction (as an outcome) in a
corporate situation will be influenced by
the actions of the corporate/corporate
executives.
Defined thus, stakeholder trust is an
attitude toward the corporate executive
derived from the stakeholders
perceptions, beliefs, and attributions
about the corporate executive, and
these, in turn, are based upon
stakeholders knowledge and
observations of the corporate executive.

The higher the stakeholders trust in the

corporation and its executives defined in
terms of their willingness to share
information, strengthen communication,
and deepen relationships, the more will
the stakeholders be prepared to invest
tangible and intangible assets in the
firm, and hence, the higher are
corporate-transformation prospects.
People with trusting dispositions
cooperate better, whereas people with
distrusting predispositions tend to avoid
cooperative activities, fearing
exploitations (Hardin 1993).

47

Exhibit 5.3: Checking Interpersonal Trust Building Capacities with Case Situations
Based on the Theories of Trust
Dimensions of Trust-Building
Capacities based on the

Case 5.1: Managing

Trusting Relationships
in Indian Organized
Retailing

Case 5.2: Bain sues EY

over $60-m loss in
Lilliput Kidswear

Case 5.3: Building IndoJapan Trusting Business

Relationships

Both organized and the

unorganized sectors
should empower their
customers to have
confidence in their
intentions and motives and
the sincerity of their
marketing promotions.
As trusting individuals,
customers expect the
retailers to fulfill Reads
first three conditions of
trust; then they may be
prepared to overlook
apparent breaches of their
trust relationship.

Both Bain and EY should

empower one another to
have confidence in each
others intentions and
motives and the sincerity of
their transactional
communications.

Both Indian and their Japanese

counterpart partners should
empower one another to have
confidence in each others
intentions and motives and the
sincerity of their transactional
communications.

As a trusting client, Bain

expects EY to fulfill Reads
first three conditions of
trust; then Bain may be
prepared to overlook
apparent breaches of their
trust relationship.

As trusting individuals,
Japanese investors expect the
Indian partners to fulfill Reads
first three conditions of trust;
then Japan may be prepared to
overlook apparent breaches of
their trust relationship.

As trusting individuals,
customers have high
confidence in the
intentions and capabilities
of the Indian retailing
sector and believe that it
would behave as hoped.
Despite their trust,
customers may also
distrust the Indian retailing
sector because of its past
undesirable behaviors and
capabilities.
Despite acting under
conditions of vulnerability
and dependence,
customers may still have
optimistic expectations of
the retailing sector.

As trusting individuals,
Bain may have high
confidence in the intentions
and capabilities of EY and
believe that EY would
behave as hoped.

As an trusting individual,
Bain may be willing to be
vulnerable to the actions of
EY based on Bains
expectations that EY would
do as promised irrespective
of Bains ability to monitor
EY.

Zuckers (1986) defines trust as a

preconscious expectation suggests
that vulnerability is only salient to
trustors after a trustee has caused
them harm.

As trusting individuals,
customers are willing to be
vulnerable to the actions of
the retailer based on their
expectations that the
retailer would do as
promised irrespective of
their capacity to monitor
them.
Customer vulnerability,
however, becomes salient
only when the retailer has
harmed them in previous
transactions.

As trusting individuals, the

Japanese partners have high
confidence in the intentions and
capabilities of the Indian
counterparts and believe that
the latter would behave as
hoped.
Despite their trust, the
Japanese partners may also
distrust the Indian counterparts
because of their past
undesirable behaviors and
capabilities.
Despite acting under conditions
of vulnerability and
dependence, the Japanese
partners may still have
optimistic expectations that the
Indian partners would behave
as hoped.
As trusting individuals, the
Japanese partners are willing
to be vulnerable to the actions
of the Indian counterparts
based on their expectations that
the latter- would do as
promised irrespective of their
capacity to monitor them.

Combining the psychological and

behavioral approaches, Lewicki,
McAllister, and Bies (1998: 439)
define trust in terms of confident
positive expectations regarding
anothers conduct, and distrust in
terms of confident negative
expectations regarding anothers
conduct.

Customer trust may be

defined in terms of
confident positive
expectations regarding the
retailers conduct, and
customer distrust in terms
of confident negative
expectations regarding
retailer conduct.

Bains trust in EY may be

defined as confident positive
expectations regarding EYs
conduct, and Bains distrust
in terms of confident
negative expectations
regarding EYs conduct.

Psychological View of Trust

Mellinger (1956) defined trust as an
individuals confidence in another
persons intentions and motives,
and the sincerity of that persons
word.

Read (1962) argued that trusting

individuals: 1) expect their interests
to be protected and promoted by
those they trust; 2) feel confident
about disclosing negative personal
information about themselves, 3)
feel assured of full and frank
information sharing, and 4) are
prepared to overlook apparent
breaches of trust relationship.
Deutsch (1960) viewed trust as an
individuals confidence in the
intentions and capabilities of the
trust partner and the belief that he
or she would behave as hoped.
Deutsch (1960) also viewed distrust
as confidence about a relationship
partners undesirable behavior,
stemming from the knowledge of his
or her capabilities and intentions.
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.

48

Despite its trust, Bain may

also distrust EY because of
EYs past undesirable
behaviors and capabilities.

Despite acting under

conditions of vulnerability
and dependence, Bain may
still have optimistic
expectations that EY would
behave as hoped.

Bains vulnerability,
however, may become
salient only when EY has
harmed Bain in previous
transactions.

Japanese partners
vulnerability, however, may
become salient only if the
Indian counterparts have
harmed them in previous
transactions.
Japanese customer trust in the
Indian counterpart may be
defined in terms of confident
positive expectations regarding
the latters conduct, and
distrust in terms of confident
negative expectations regarding
the latters conduct.

Exhibit 5.4: Checking Institutional Trust Building Capacities with Case Situations
Dimensions of Institutional TrustBuilding Capacities based on the
Institutional Theories of Trust

Case 5.1: Managing

Trusting Relationships
in Indian Organized
Retailing

Case 5.2: Bain sues EY

over $60-m loss in
Lilliput Kidswear

Case 5.3: Building IndoJapan Trusting Business

Relationships

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).

Especially the organized

retail sector in India must
ensure that impersonal
structures are in place that
can assure successful
future encounters for
customers.
Certain specific rational
bureaucratic
organizational forms or
social structures in the
retail sector in India can
generate trust where the
scale and scope of
economic activity
overwhelm interpersonal
trust relations.
India can mandate certain
institutional and legal
structures such as SBEC
regulations, periodic
audits and other
government vigilance
programs in the organized
retail sector so that they
breed trust in customers.
Customers will feel secure
and protected via
guarantees, safety nets, or
other structures in the
retail sector mandated by
governments.
The safe and structured
atmosphere of the Indian
retail sector will enable
customers, employees and
suppliers develop high
levels of initial trust in the
retail market system.

As a consulting agent EY
must ensure that
impersonal structures are in
place that can assure
successful future client
transactions and endeavors
with Bain.
Certain bureaucratic
organizational forms or
social structures in EY can
generate trust for Bain
especially when the scale
and scope of economic
activity between them can
overwhelm interpersonal
trust relations.

As an inviting host, India must

ensure that impersonal
structures are in place that can
assure successful future client
transactions and endeavors
with Japan.

India can mandate certain

institutional and legal
structures such as SBEC
regulations, periodic audits
and other government
vigilance programs in
consulting companies such
as EY so that they breed
trust in clients like Bain.
Bain will feel secure and
protected via guarantees,
safety nets, or other
structures in EY and other
consulting companies
mandated by governments.
The safe and structured
atmosphere of consulting
companies like EY will
enable customers like Bain
and their employees and
suppliers develop high levels
of initial trust in consulting
market system.
Tough screening and high
professional experience
levels of skilled employees
in the consulting sector such
as EY may help clients like
Bain to trust them
implicitly.
Clients like Bain will feel
comfortable to patronize
consulting companies like
EY and KPMG if the latter
assure situationnormality.
Clients like Bain will feel
comfortable to patronize
consulting companies like
EY if the latter assure the
normal structural
assurances of promises,
legal contracts, guarantees,
regulations and legal
recourse.

India can self-legislate certain

institutional and legal
structures such as SBEC
regulations, periodic audits and
other government vigilance
programs in its businesses such
they breed trust in B2B
partners such as Japan.

Zucker (1986) describes how certain

specific institutional or social structures
and arrangements generate trust. For
instance, rational bureaucratic
organizational forms could be trustproducing mechanisms for situations
where the scale and scope of economic
activity overwhelm interpersonal trust
relations.
Institutional processes such as 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 workplace may enable
employees to develop high levels of
initial trust (Lewis and Weigert 1985;
Shapiro 1987);

Conversely, tough screening and high

professional experience levels of new
recruits may help senior employees to
trust them implicitly.

Tough screening and high

professional experience
levels in the organized
retailing sector may help
customers to trust them
implicitly.

Situation-normality implies the belief

that successful interaction is likely
because the situation is normal or
customary or that everything is in
proper order (Lewis and Weigert 1985).

Customers will feel

comfortable to patronize
the Indian retailing sectors
if the latter assure
situation-normality.

Structural assurances refer to the

socially learnt 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 (McKnight,
Cummings, and Chervany 1998: 479).

Customers will feel

comfortable to patronize
the Indian retailing sectors
if the latter assure the
normal structural
assurances of promises,
contracts, guarantees,
warranties, regulations
and legal recourse.

49

Certain bureaucratic
organizational forms or social
structures in India can generate
trust among Japanese
businesses especially when the
scale and scope of economic
activity between them can
overwhelm interpersonal trust
relations.

Japanese partners will feel

secure and protected via
guarantees, safety nets, or other
structures in Indian industries
and markets mandated by
governments.
The safe and structured
atmosphere of Indian industries
and markets systems will
enable foreign partners like
Japan develop high levels of
initial trust in engaging in the
Indian market system.
Tough screening and high
professional experience levels of
skilled employees in the Indian
industries and markets may
help clients like Japanese
business partners to trust them
implicitly.
Japanese business partners will
feel comfortable collaborating
with Indian counterparts if the
latter assure situationnormality in the Indian
markets.
Japanese business partners will
feel comfortable collaborating
with Indian counterparts if the
latter assure the normal
structural assurances of
promises, legal contracts,
guarantees, regulations and
legal recourse.

Exhibit 5.5: Checking Trust-Distrust Combination Possibilities with Case Situations

Dimensions of Trust-Distrust
Building Capacities based on the
Theories that affirm coexistence of
Trust with Distrust
Social structures appear most stable
where there is a healthy dose of both
trust and distrust to generate a
productive tension of confidence
(Lewicki, McAllister, and Bies 1998).
Trust that involves confident positive
expectations and distrust that implies
confident negative expectations
regarding trusting partners can
operate simultaneously in the same
individual, although from different
viewpoints (Lewicki, McAllister, and
Bies 1998).
Trust can exist in an environment of
uncertainty that every corporate
situation implies. Trust can coexist
with distrust under situations of
unpredictability, error and situational
complexity (Bhattacharya, Devinney,
and Pillutla 1998).
The broader the experience of
stakeholder-management 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 (Lewicki, McAllister, and Bies
1998).
Trust/distrust reduces social
complexity and uncertainty by
disallowing undesirable conduct from
consideration and replacing it with
desirable conduct. Distrust simplifies
the social world, allowing the
individual to move rationally to take
protective action based on these
positive expectations of harm
(Luhmann 1979).
Vulnerability is an important
constituent of trust. That is, in the
absence of risk or vulnerability trust is
not necessary, since outcomes are not
of consequence to trustors (Moorman,
Zaltman and Deshpande 1992; Mishra
(1996).
Apart from a genuine openness to the
possible necessity of distrust, benign
and unconditional trust appears to be
an extremely dangerous strategy for
managing social relations (Lewicki,
McAllister, and Bies 1998).

Case 5.1: Managing

Trusting Relationships
in Indian Organized
Retailing

Case 5.2: Bain sues EY

over $60-m loss in
Lilliput Kidswear

Case 5.3: Building IndoJapan Trusting Business

Relationships

Customer-retailer trust is
most stable where there is
a healthy combination of
both trust and distrust to
generate a productive
tension of mutual
confidence.
Trust that involves
confident positive
expectations and distrust
that implies confident
negative expectations can
operate simultaneously in
the same individual
customer.

Bain-EY mutual trust may

be most stable when there is
a healthy combination of
both trust and distrust to
generate a productive
tension of mutual
confidence.
Trust that involves
confident positive
expectations and distrust
that implies confident
negative expectations can
operate simultaneously in
the same organization such
as Bain or EY.

Indo-Japanese business trust

may be most stable where there
is a healthy combination of
both trust and distrust to
generate a productive tension
of mutual confidence.

Customer trust in the

retailing sector can exist in
an environment of market
uncertainty,
unpredictability, error and
situational complexity
common in businesses
today.
The broader the
experience of buyer-seller
relationships across
multiple retailing contexts
and encounters, the
broader the bandwidth of
their mutual trust.

Bains trust in EY can exist

in an environment of
market uncertainty,
unpredictability, error and
situational complexity
common in businesses
today.

Indo-Japanese partners
mutual trust can exist in an
environment of market
uncertainty, unpredictability,
error and situational
complexity common in
businesses today.

The broader the experience

of Bain-EY relationships
across multiple consulting
and auditing contexts and
encounters, the broader the
bandwidth of their mutual
trust.

The broader the experience of

Indo-Japanese business
partnership relationships
across multiple business
contexts and encounters, the
broader the bandwidth of their
mutual trust.

Customer-retailer
trust/distrust reduces
social complexity and
uncertainty by disallowing
undesirable conduct in
considering alternatives in
a given situation.

Bain-EY trust/distrust can

reduce social complexity
and uncertainty by
disallowing undesirable
conduct in considering
alternatives in a given
transaction.

Indi-Japanese trust/distrust can

reduce social complexity and
uncertainty by disallowing
undesirable conduct in
considering alternatives in a
given partnership situation.

Vulnerability is an
important constituent of
customer-retailer trust. In
the absence of risk or
vulnerability trust may not
be necessary, since
outcomes are not of
consequence to them.
Benign and unconditional
customer trust in the
retailing sector may be an
extremely dangerous
strategy for managing
social relations.

Vulnerability is an
important constituent of
Bain-EY trust. In the
absence of risk or
vulnerability trust may not
be necessary, since
outcomes are not of
consequence to Bain.
Benign and unconditional
Bain trust in EY may be an
extremely dangerous
strategy for managing
business and social
relations.

Vulnerability is an important
constituent of Indo-Japanese
trust. In the absence of risk or
vulnerability trust may not be
necessary, since outcomes are
not of consequence to either
party.

50

Trust that involves confident

positive expectations and
distrust that implies confident
negative expectations regarding
each other can operate
simultaneously among IndoJapanese business partners.

Benign and unconditional

customer mutual trust among
Indo-Japanese business
partners may be an extremely
dangerous strategy for
managing social relations.