Trust in the Financial Services Industry

1. Trust in the Financial Services Industry Reinhard Bachmann Research Project Workshop Project Ref ES/N013344/1: Delivering Inclusive Financial Development and Growth SOAS University of London 3.-4. March 2017

2. What is Trust? • Mind Experiment • The Real World • Social Coordination Mechanisms • Reduce Uncertainty • Allow for Specific Assumptions • Pre-commitment • Social Systems Can Evolve

3. Trust, Uncertainty and Risk • Trust Absorbs Uncertainty • Trust Produces Risk > How can an actor find ‘good’ reasons to assume that the inherent risk of trust low?

4. Trust and Institutions • Luhmann (1979): Legal Norms (but should remain latent) • Other Relevant Institutions in Business Relationships > shared knowledge > ‘world-in-common’ Other views: e.g., Coleman (1990): L/G><=p/1-p

5. Types of Trust and Trustworthiness • Calculus-based • Knowledge-based • Identity-based (Lewicki and Bunker 1996) • Ability • Benevolence • Integrity (Mayer, Davis, Schoorman 1995)

6. Organizational Components of Trustworthiness • External Governance: Institutions and regulations • Internal Governance: Role and composition of Board of Directors • Strategy: signaling real values and priorities • Structures and Processes: sets parameters for certain behaviours • Culture: shared beliefs • Leadership and management practices: sets examples • Public Reputation: judgement by stakeholders > Congruence (Gillespie and Dietz 2009)

7. What can be learned from the GFC? • ‘Financial markets hinge on trust, and that trust has eroded’ (Stiglitz 2008) • ‘We cannot survive without the trust of our clients’ (Lloyd Blankfein, BBC 2010) > What went wrong and what needs to be done to help build trust (again)?

8. External Governance • Clinton and Bush relaxed regulation • In 1999 Glass-Seagall Act removed the separation of commercial (depository) banks and investment banks in US • Canada and Australia kept tighter regulation • -> G20’s Basel III Committee: capital reserves of 7% required.

9. Internal Governance, Structures and Process Incentive Systems: Short-term vs. Long-term Increase in Risk Management Capacity . Corporate Systems; Composition and Role of the Board

10. Culture Change ‘Just as there was a time when people could smoke on airplanes, .. there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done, That just changed.’ (Michael Lewis 2010)

11. Conclusion • Trust is central category in financial services industry • Regulation is central to trust and financial services industry • Internal governance, structures, processes and culture are equally important to develop/increase trust • Trust and trustworthiness can be demonstrated/managed

12. Further Reading • Bachmann, R. and A. Zaheer (eds.) (2006), Handbook of Trust Research, Cheltenham: Edward Elgar. • Bachmann, R. and A. Zaheer (eds.) (2008), Landmark Papers on Trust, 2 Volumes, Cheltenham: Edward Elgar. • Bachmann, R. and Inkpen, A. (2011), Understanding Institutional-based Trust Building Processes in Inter-organizational Relationships. In: Organization Studies 32,2. pp. 281-301. • Bachmann, R, Gillespie, N. and Priem, R. (2015), Repairing Trust in Organizations and Institutions: Toward a Conceptual Framework. In: Organization Studies 36 (2015), 9: pp. 1123-1142