Invest in trust—a paradox?

by Prof. Dr. Andreas Suchanek | November 03, 2020
For many years, the Dr. Werner Jackstädt Chair for Business Ethics examines the role of trust in business and ways how to nurture it with investments. Now, it stumbled upon a paradox, or so it seems.

Business is about profits, isn’t it?

Imagine a company that communicates on its website: “We are committed to making profits. Therefore, we only observe the law and keep promises if it pays off.”

I assume that you might react as I do – I wouldn’t trust this company because it openly says that they see everything – including me – only as a means for their own profit.

This, however, leads to an interesting puzzle: Isn’t it normal – actually the foundation of most theories of business administration as well as corporate strategies – to assume that business, and even its responsibility, is about “increasing its profits”. For example, Noble Prize winner Milton Friedman expressed this idea in one of the most famous articles in business ethics. So then, why should it be a problem to say so quite openly?

About Prof. Dr. Suchanek

In business management, (ethical) discernment of decision-makers plays a vital, but often underestimated role for the long term success of value creation. It is one of the central challenges of “good management” to constantly align success and responsibility in business. The well-known conflict between market and moral or profit and ethics and possible approaches are the main focus of Prof. Dr. Suchanek’s research and teaching at HHL. The idea is to transform the conflict into a chance of creating value: The costs of responsible behavior are an investment in trust, which pays often well over time.

Prof. Dr. Suchanek regularly shares his thoughts on the website of the Wittenberg Center for Global Ethics. Find an excerpt of his latest published articles (in German) by clicking here.

The importance of trust in the economy

The answer can be found if you look closer to your intuition as to why you wouldn’t trust this company. Maximizing one’s profits – at all costs, as it were – may harm others. And if a profit-maximizing company can operate in such as fashion and assume to get away with it, it may actually do that – examples abound. However, you might be the one who’s getting harmed. Maybe you are the supplier whose invoice isn’t paid and you run into liquidity problems; maybe you are the customer who doesn’t get the promised service or goods; maybe you are a competitor who is deprived of a good deal because the other company offered bribes etc. In those cases you have good reasons not to trust this company.

A lack of trust can prevent cooperation for mutual advantage

However, this may be costly for both sides. A lack of trust can prevent cooperation for mutual advantage: “I’ll pay only after you’ve delivered.”– “I deliver only after you’ve paid.” The possible consequence: no deal, although it might have been advantageous for both parties. And even if cooperation takes place, it will often come with an increase in transaction costs, since both parties want to prevent being exploited by the other side (not to mention the psychological costs of cooperating with someone you don’t trust).

The paradox arises

Put differently: trust is an asset. And it is worthwhile to invest in assets. However, this is where the paradox arises:

  1. If you invest in an asset, you typically do so in order to have (higher) profits in the future.
  2. Investing in trust can be equated (although not reduced to) with observing the law and keeping promises.
  3. If a company’s dominant aim is to maximize profits, it follows that it should invest in an asset as long as it pays off.

Let’s now combine these three assertions and assume that a profit-maximizing firm wants to invest in trust.

Let’s further assume that this company starts with transparent communication, writing on its website: “We are committed to making profits. Therefore, we only observe the law and keep promises if it pays off.” If it is correct that such a communication undermines trust, then we have a paradox.