Why sticking plaster and a few tweaks to the system won’t restore confidence

Businesses need to focus on long-term value and contribution to society if they are to regain stakeholder confidence, argues Dave Knight, managing director of Two Tomorrows (Europe)

With the world mobilising to try to minimise the impacts of the deepening recession, there have been clear calls for action to bring back market confidence. Confidence, it is argued, will create the right conditions to enable financial flows to restart, loans to be provided, the wheels of commerce to be oiled.

Confidence, or the lack of it, is a fine line. It’s little more than a feeling. Of course, confidence can be bolstered through appropriate process, systematic risk-assessment and investment appraisals. I’m sure that over the last few years at RBS, Lehman Brothers and Enron, these mechanisms were widely used. So why were the catastrophic risks that are now apparent not identified, and why is trust in business consistently low?

As the stock markets still struggle to find confidence, what lessons can we learn that can be applied more widely across business to restore and grow confidence?

One of the reasons that the quick fixes don’t seem to be working, even with the unprecedented amount of money being pumped into economies globally, is that many people just don’t feel they can trust a system that has so spectacularly failed. The contention is that the same system, albeit with a lot of sticking plaster and a few tweaks here and there, can continue to operate and pull us out of recession. So if we accept that a change of focus may grow confidence, what face will it take?

Business can contribute to building confidence by being more able to identify and assess a broader range of risks and opportunities. Markets should reward those organisations that contribute to a civil society. Generating sufficient operating revenue to meet costs is a given; how far beyond this financial balance organisations seek to go depends on their model and level of societal return chosen. A blind pursuit of year-on-year growth for shareholders in the absence of a wider view may be beneficial for a few, but will erode the confidence of those who ultimately support the success of an organisation.

A number of leading organisations certainly recognise this and have worked for many years to ensure they spread confidence in what they are doing. One such organisation that has been able to consistently demonstrate a strong operating model is The Co-operative Group. The recent launch of their ‘Good for everyone’ advertising campaign is designed to show how a more accountable and inclusive approach to business can provide broader benefits to society. Operating in this way is likely to lead to greater confidence. Tellingly, the financial arm of the group, The Co-operative Financial Services, has delivered good financial results and not been hit to the same degree as shareholder-led organisations.

So what kind of tools are they using to build confidence? They invest considerable resources in engaging with those impacted by, or who impact, the organisation to better understand the risks and opportunities associated with their businesses. When looking at investment, they have rejected loans to business totalling over £1bn that fail to meet the ethical criteria built from their engagement. The group places value on and tracks a broader range of measures that are not linked directly with short-term financial performance.

This focus readily translates to other businesses and sectors. Improving accountability to owners, investors, consumers, regulators and wider society can deliver greater confidence, enhanced risk awareness and an improved understanding of business impact on wider society. Shifting focus to not only encompass year-on-year financial return but also longer-term business value and societal return is one key way to provide the foundation for a return to confidence.