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Crisis of Trust: Rules become meaningless if they are broken with impunity

by Rachel Botsman
09 October 2017
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When we see the rich and powerful get away scot-free, it is no wonder we lose our faith in institutions, writes author Rachel Botsman.



When the Ipsos poll started in 1983, 85 percent of the people trusted the clergy to tell the truth. It was the most trusted profession. By January 2016, the clergy had fallen 18 percentage points to come in as only the eighth most trusted profession overall.

Consider this: the average Briton now trusts the random stranger they meet on the bus or in a supermarket to tell the truth more than they trust a member of the clergy on the other side of a confessional.

So why is trust in so many elite institutions collapsing at the same time? There are three key, somewhat overlapping, reasons: inequality of accountability (certain people are being punished for wrongdoing while others get a leave pass); twilight of elites and authority (the digital age is flattening hierarchies and eroding faith in experts and the rich and powerful); and segregated echo chambers (living in our cultural ghettoes and being deaf to other voices).

For institutions to retain credibility and our confidence, there must be penalties – loss of power or position, fines – when they break the rules or the rules become meaningless.

Take something clear-cut like traffic regulations. In Britain, the legal convention is to drive on the left. If over the course of, say, a week, we saw hundreds of cars veering down the wrong side of the road without any consequences, the power of the traffic rule would quickly dissolve.

Similarly, rogues within institutions must be seen to pay or be punished. When they get off scot-free, our faith in the institution is shaken. And in recent years, we’ve seen many leaders get off scot-free. Consider banks. How did the crash of 2008 – the largest man-made economic catastrophe since the Depression – result in the jailing of only a single investment banker and minimal reform of Wall Street? What did that do to our trust?

Over the past couple of decades, the banking industry has had its skirts lifted to reveal some very grubby underwear. From Enron to Arthur Andersen, Freddie Mac to Fannie Mae, Lehman Brothers to Bear Stearns, AIG to Northern Rock, Nick Leeson to Bernie Madoff, the BHS pension funds fiasco to the Libor scandal, the list goes on, and it has taken a hard toll on trust.

...banks are not filled with bad people. It’s more a case that people working in banks are operating in a toxic culture with a perverse incentive structure that permits unethical behaviour and misaligned interests.

Perhaps the biggest blow, though, has come from the fact that only a handful of CEOs, the “captains of finance” who played a role in creating the financial crisis, faced any form of punishment. The few who lost their jobs, most notably Ken Lewis of Bank of America and Dick Fuld, the former CEO of fallen Lehman Brothers, walked out the door with multimillion-dollar golden parachutes.

The message is clear: if you are rich and powerful, you can break the rules, as long as it makes a lot of money. It’s an acute case of moral hazard. When things went belly up, the bankers didn’t face any real consequences.

Some bankers, such as Madoff and Leeson, proved inherently untrustworthy. But for the most part, banks are not filled with bad people. It’s more a case that people working in banks are operating in a toxic culture with a perverse incentive structure that permits – and even breeds – unethical behaviour and misaligned interests. They acknowledge as much themselves.

Labaton Sucharow, a respected law firm based in the United States, conducted an independent survey to find out how financial insiders view other professionals within their industry. More than half of respondents believed that their competitors engaged in illegal or unethical behaviour.

Nearly a quarter admitted they would engage in insider trading if they could get away with it and just under a third believed that financial services professionals might need to engage in illegal or unethical behaviour to be successful.

“The succession of scandals means it is simply untenable now to argue that the problem is one of a few bad apples”, admits Mark Carney, the governor of the Bank of England. “The issue is with the barrels in which they are stored.”
 
Rachel Botsman is the Author of Who Can You Trust? (Portfolio Penguin)


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