‘It’s not what you do but how you do it’: Chaebol urged to build trust through tranparency and communication

2014-02-16 16:15

‘It’s not what you do but how you do it’

Chaebol urged to build trust through tranparency and communication
Kim Bo-eun

The troubled chaebol chiefs have recently come under the spotlight. Controversies arose as several received reduced sentences in the trials that took place earlier this month. Currently, a handful of conglomerate chairmen are either awaiting trial, on trial or have been sentenced for embezzlement, breach of trust and tax evasion.
This gives a stark picture of the levels of integrity at the nation’s most successful companies. While conglomerates such as Samsung and LG are world leaders in technology, they barely meet standards of integrity.
As society is increasingly more connected and granted greater access to previously privileged information, the behavior of companies and executives has become easier to scrutinize, and demand for corporate transparency is strong.
However, companies have been slow to respond to this call. Their focus on reputation and operational success, as well as their top-down business culture, has prevented them from making the crucial pivot. But such change can no longer be delayed, said a corporate trust expert at DJE Holdings, parent company of global PR firm Edelman.
“A number of Korean companies are in trouble, and they need to wake up fast,” said DJE Holdings Vice President Alan VanderMolen.
Defining trust
Trust is better understood when associated with reputation. According to VanderMolen, reputation refers to the sum of the perceptions of past behavior and is a lagging indicator. Trust, on the other hand, is an expression of how stakeholders believe businesses are going to behave in the future and is a leading indicator. The stakeholders here refer to consumers, investors, employees and NGOs.
There are five broad factors of trust, according to Edelman: integrity, engagement, products and services, purpose and operations. The first two are considered the most important. Integrity is defined as complying with the law and being transparent, while engagement refers to listening and responding to customer, employee and societal needs.
Lack of trust: background
Edelman conducts the Trust Barometer global trust survey each year, where it examines trust levels in businesses, government, NGOs and media in markets around the world.
A year ago, Korea had the lowest level of trust in businesses out of the 26 countries in the survey. Although the figure slightly rose this year, it is still low. Businesses are still the least trusted institution in the country among the four.
VanderMolen attributed this outcome to a number of factors. First is the companies’ focus on reputation instead of trust.
“There was a management theory at business schools where researchers tried to put a capital market value on reputation, but I think that is now a dated concept. The more relevant concept is putting a value on trust, which can be codified so that you can see the cost of having low trust.”
However, he pointed out that businesses here measure the reputational fallout from issues related to misconduct instead of fundamentally changing the way they engage with society.
“Business needs to make a pivot — it needs to do so very quickly. That pivot is understanding what stakeholder expectations are of business behavior and starting to align operations with those, or you’re going to have a complete fallout of trust, in particular for chaebol.”
The second factor for Korean businesses’ low trust is their focus on operational success instead of trust. Korean companies score best in operational success and product and service quality but don’t do well in terms of engagement and integrity, the two most important ingredients of trust.
“Businesses here do not understand that operational success and product and service success aren’t enough to sustain long-term business growth.”
The patriarchal culture here has also contributed to the low trust in businesses. “The big businesses and the government here are seen as patriarchal — as long as they’re taking care of society broadly, they can conduct their commercial manners as they see fit. That’s the entrenched behavior,” said VanderMolen.
While society has increasingly scrutinized corporate entities, thanks in part to the greater availability of information from the mobile web and social networks, business leaders have been slow to respond, which has driven trust in businesses even lower.
Need for change
Essentially, businesses need to change because society demands it. The 2014 Edelman Trust Barometer shows a massive gap between stakeholders’ expectations and perceived performances of businesses in terms of integrity and engagement.
The gap was smaller between expectations and operations or product and service quality. This is because operations have now become a basic expectation, VanderMolen said. Good operations have become the foundation on which to build trust, but it’s not enough to just deliver quality products and services.
“You need to get that product to the market in a way that meets the expectations of stakeholders — the sourcing practices need to be ethical, the manufacturing processes need to be sustainable and the wages paid to your people should be market rate and fair,” said VanderMolen.
“It’s not just what you do but how you do it; nobody’s really questioning operations — it’s about higher-level values.”
This demand emerged in part with the rapid growth of the Internet, in particular, the mobile web. Korea has an exceptionally high smartphone penetration rate and tremendous Internet speeds and bandwidths.
“You now have a situation of almost forced transparency and forced dialogue because both opinion leaders and the general population here have tremendous access to information. There are discussions of how companies, executives, regulators and government leaders behave.”
However, in Korea, companies and leaders still operate with an outdated top-down model.
“The CEO or government official talks to a handful of national media with key messages, expecting the media to communicate the information down to the general population with no feedback loop,” he said.
“In actuality, what’s happening is you’ve got that model turned upside down — you have consumers with news information now, with the ability to sift through and select information directly from the corporation or government through the media or peer-to-peer networks in order to make up their own mind and then to force the dialogue up.”
But elite groups in society engage in one-way communication instead of enabling parts of the dialogue that is most important to and expected by stakeholders to earn their trust.
The consequences of not raising trust levels are compelling. “If trust in businesses does not rise, sooner or later the government will have no choice but to regulate them more heavily — and no business wants that.”
How to gain or regain trust
NGOs are by far the most trusted institution in Korea among the four studied, with a trust level of 72 percent, followed by media with 50 percent, the government with 44 percent and businesses with 39 percent. These figures show that the high level of trust in NGOs pulls up the average level of trust in the country significantly.
They also indicate that it is difficult for businesses to gain or recover stakeholders’ trust on their own because of their significantly low trust figure.
“If you’re a business, you have to look into partnerships, whether it be with the government or with NGOs. Because businesses don’t have the credibility to convene dialogue on their own, they have to look at third parties,” VanderMolen said.
Businesses, of course, need to increase transparency and create a recipe for transparency, which can be done together with NGOs.
However, businesses do have to exercise caution in working with these entities, VanderMolen said. “NGOs here can be a two-edged sword. You want to choose the areas where you work with NGOs carefully. A lot of times businesses decide that they want to work with a high-profile charity to get a halo effect or to take attention away from bad stuff they’re doing.”
“However, working with a pro-transparency NGO would signify that the business is making a positive commitment,” he said. “The chaebol need to make a commitment to increased transparency together with a definition of the term ‘transparency’ and with a marked timeline.”
Businesses need to commit to self-regulation publicly and report progress in areas most important to stakeholders — paying taxes, being more transparent about business transactions and looking after customers and employees.
VanderMolen said there is also opportunity to gain or regain trust based on the commercial success of Korean businesses in global markets. This opportunity would be for the government and businesses to craft a narrative of Korea’s successes, emphasizing the partnership between the two institutions, and to tell this narrative globally.
“It would be about the wonderful story of successful industries, quality products and national competitiveness,” he said. “By telling the story globally, you can get a trust halo that comes back in domestically. The very skeptical populace starts to feel good and trust businesses and the government more and then work with them to address the issues.”
When domestic media sees the story being told by foreign media, it will translate the story back into the local language.
“There’s an opportunity to tell an outside-in story instead of an inside-out story because of the more accepting overseas audience. This can act as a springboard for addressing the domestic trust issue,” VanderMolen said.image001-10

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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