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Handout 05 Managerial Ethics XLRI 2015The Ethics of Executive Trust: Building

Trusting RelationshipsOzzie Mascarenhas S.J., Ph.D.

June 15, 2015Case 5.1: Managing Trusting Relationships in Indian Organized Retailing

The Indian retail market, which grew at 11.2% compound annual growth rate (CAGR) during 2007-2009, is estimated to grow from $427 billion in 2010 to $637 in 2015, with food and grocery accounting for the major share (Shekhar 2011). The Indian retail market is broadly classified into the unorganized sector and the organized sector. Unorganized retailing is the traditional form of retailing in India with the retail outlets located near residential areas and mostly run by unlicensed retailers. The unorganized market is a sellers market with a limited number of brands and little choice available to customers. It is unregulated, free of tax laws, and grows very slowly. Organized retailing refers to the modern form of formal trading activities such as registered shops, malls, supermarkets, factory outlets, and supermalls, and is generally located in high traffic commercial areas. For instance, while the clothing market is highly fragmented with numerous organized and unorganized sectors operating under various retail formats, the Indian apparel and footwear industry is highly organized and represents currently the largest market opportunity for the organized retailers. Branded apparel industry is about 20% of the total apparel market in India. Mens clothing accounts for about 42% of all branded apparel sales, while womens apparel constitutes just 36% and childrens wear is at 22% currently. While the unorganized retail market is still dominating in India, the organized sector rapidly grew at CAGR19.5% during 2007-2009, thanks to the emergence of the large middle income class which seeks for quality goods and services. The Indian retail market contributed 10% to GDP and 6.5% of employment in 2009.

Despite uncertainty and slowdown in the Indian economy, India has recorded sustained growth in merchandise retail during the decade 2002-2012, and is expected to do so in the coming decade. This is primarily because Indias GDP has been growing at an average 6% during this period. Growth in GDP translates to growing per capita income to increased discretionary spending to growing per capita consumption of food and apparel and entertainment, which means augmented merchandise retail trade. Also, owing to rapid urbanization, Indias urban share in merchandise retail is estimated to grow from 40% in 2002 and 48% in 2012 to nearly 56% in 2021. Today in India (2014) there are 53 cities with populations exceeding a million, while there were only 23 such cities in 1991. But Indian organized retail will continue to face rigid government regulations, complex taxation rules, and high cost of real estate in urban areas. Organized retail is capital-intensive with long gestation period. Hence FDI liberalization in the retail sector (which is a State subject) would be critical.

The Indian organized retail market began to grow steadily since 1991 with the liberalization of the retail markets to FDI. The father of organized retailing in India is presumably Kishore Biyani who first introduced the Pantaloons retail chain in India (Biyani later pioneered three upscale linked outlets: Brand, Brand Factory, and the City Bazaar). Currently, organized retailing is sprawling in major cities of India with shopping centers, multiplex malls, and supermalls that offer variety shopping, entertainment and food all under one roof. The free flow of FDI into organized retailing in India is periodically resisted by politicians who fear that the swelling organized retail sector may destroy the neighborhood kirana stores, thus undermining Indian culture. Apparently, single brand retail is doing well in India. In 2006, the Indian government allowed only up to 51% FDI in single brand retail. This has increased FDI in Indian retailing. In February 2010, the Indian government allowed 100% FDI in single brand retail, in wholesale cash and carry and 51% FDI in multi brand retail. This may intensify both domestic and foreign competition in organized retailing. The organized sector, however, has its own problems of supply side of procurement with fragmented sourcing, unpredictable availability, unsorted food provisions and daily fluctuating prices, and problems of demand side of high consumer expectations of product quality, variety, hygiene, and fresh produce, reasonable prices, coupled with fast changing lifestyles and demographic shifts and product obsolescence. Moreover, with the advent of information and communication technology (ICT), Indian consumers are expecting integrated customized solutions to their multidimensional demands. Even after two decades of organized retailing in India margins are low and do not match with foreign counterparts. In this context, building strong trusting relations with suppliers and customers becomes imperative and challenging. A leading organized retailer like Brand, Brand Factory, Big Bazaar, Pantaloon, Shoppers Stop, Lifestyle, and the like may handle as many as 400,000 products and services with millions of transactions per day. The retailing phenomenon can even be more complex and demanding during particular festivals and holiday seasons.Malls and independent stores are still struggling in India. They have found the capital cost of investing in land and filling the go-downs a losing proposition. High rentals between 15-20% of sales and low footfalls in malls, have led many a mall to insolvency and bankruptcy. Consumer behavior also revealed that most Indians do not like or afford to spend on premium retail prices. Most mall consumer spends are mainly at the food-courts and the multiplexes (Krishna 2015: 62-63). One of the reasons why the kiranas thrive is because retailers, barring a few, have not made modern retailing a career option, said B. S. Nagesh, vice-chairman of Shoppers Stop, one of the largest organized retailers in India, in an interview with the Businessworld (see BW Businessworld, June 15, 2015: p. 64). Of the 450 million workers in India, only 30 million (less than 6.7%) are in he organized sector, while the rest continue in the informal employment sector, according to Kronos, the global human resource technology firm. Most of the informal workers experiment with entrepreneurship and the kirana store offer the lowest market-entry barrier. One can start a kirana store with small finance from family and friends. Presumably, it is the same spirit which the Uber and Ola have tapped to make taxi driver their partners. Some of these drivers actually also own small shops and drive taxis for that extra income (Krishna 2015: 64).Historically, the Indian consumer has always been hyper-local, preferring his neighborhood baniya. There is a rural, semi-urban, agro-social and cultural (linguistic) bonding and mutuality between the buyer and the seller, the customer and the kirana vendor, between the neighborhood stores and the neighboring small communities that are unique to multi-linguistic and culturally diverse India and that are unparalleled in other large urban or city environments. Our goal has always been to bring the experience of a neighborhood shop in a large store, which is convenience and great service says Kishore Biyani, Chairman, Future Group. The big retailers have underestimated the underlying strength of the Kiranas and their importance in the unorganized job market. Organized impersonal retailing with its mass-distribution and possibly one-time, disconnected, discreet transactional nature, goals and objectives may not be able to capture, attract, and retain such deep buyer-seller loyalties that the unorganized kirana stores command. Giant retailers are learning this now and are seeking partnership with rural kirana vendors (Krishna 2015). How Organized and Online Marketing and Kirana Shops Can support Each other

In 2006, when large retail giants in India such as Reliance Industries, Future Group, the Aditya Birla Group, and others invested Rs 40,000 crore (then US$ 10 billion) to expand organized retailing, there was strong sentiment that this project would kill the neighborhood kiranas. Today in 2015, barely nine years later, the opposite has happened: the retail giants seem to empower the kiranas to survive, blossom and prosper. Neighborhood kirana stores know their customers like none. Giant retailers like Amazom.com, Brand, Brand Factory, Pantaloons, and City Bazaar have now learnt that partnering with them is their best bet. Jeff Bezos, the founder of Amazon.com, wants to use the Kirana network, earlier seen as competition, to grow retail sales. His target is to bring Indias 5,000 kiranas under Amazon umbrella within two years. His kirana business model is simple: the kirana store earns Rs 20 for every package delivered to the customers doorstep, and Rs 15 for every packet picked up by the customer from his store. Bhuvaneshwari Rice Shop, founded in 2012, is a 500 square foot kirana store of Madan Mohan Reddy, age 21, of Bangalore. He works hard over 17 hours a day and makes around Rs. 50,000 a month. He is tech savvy graduate, ambitious, and uses a large smartphone. A digital literate, he knows about products such as the mobile wallet and is open to cash-on-delivery to win new customers. Some 18 months ago, January 2014, Amazon.com, the $89 billion online retail giant, began its I Have Space(IHS) program using the street corner mom & pop kirana network to deliver products to Amazon customers. Reddy saw his future instantly, made a phone call and registered as a delivery partner. Rest is history. He provided his PAN card details to Amazon.com, and the latter gave him a Samsung tablet and a palm-sized credit card payment device to connect the payments to Amazons seller app and the cloud server on the backend. Reddy has not looked back since. Because of Amazom.com he has extra reach and more customers. His sales have increased by Rs 20,000 per month and he makes an additional Rs 15,000 by delivering products ordered on Amazon at his store. When customers come to his store to pick up their Amazom.com orders, they buy products and services from his stores. Moreover, when he began delivering Amazon products doorstep to some of his loyal customers, they asked him if he would deliver groceries too. Madan earns currently Rs 85,000 a month.Madans success story is infectious. The Amazon HIS program is catching on in Bangalore and will be scaled up in other major cities of India. This recent kirana attention is because the kiranas know the customer better than anybody and their services add more value to our customer service experience, says Amit Agarwal, managing director of Amazon India. The kiranas may know the customer more, but do not capture that information, while Amazon can use this data mine for advantage.

Kiranas are also hubs for booking rail, air and bus tickets along with centers for filling up passport and tax forms and mobile recharge vouchers to supplement their revenue. Over the years, kiranas have widened their services to include selling apparel, mobile repairs, and ironing clothes. Reports by CRISIL and Ernst & Young estimate the total number of kiranas in India at 12 million outlets and they clearly seem to dominate the $550 billion retail market. The organized retail sector accounts for less than 8% of Indian retail sales, and this share has crept up only by 3% during the last ten years. If you cant beat them, join them, is the current Amazon strategy. While Flipkart and Snapdeal have not made the kirana partnership their immediate agenda, Kishore Biyanis $3 billion Future Group is committed to learning from and linking with the Kiranas. References:

Bahree, Megha (2011), India Unlocks Door for Global Retailers, The wall Street Journal, November 25, A1.

Bloomberg Business Week (2011), Wal-Mart waits with Carrefour as India wins Instant gain: Retail, November 30.

Ministry of Commerce (2011), FDI Policy in Multi Brand Retail, Government of India, November 28.

Shekhar, Raja B. (2011), Impact of Service Quality on Apparel Retail Customer Satisfaction A Study of Select Metropolitan City of Hyderabad, Journal of Management Research, 3:2, 13-26.

The Indian Economist (2011), Indian Retail Reform: No Massive Rush, December 2.

The Indian Economist (2011), Indian Retail: The Supermarkets Last Frontier, December 3.Krishna, Vishal (2015), Lucrative Liaisons, in BW Businessworld June 15, 2015, pp. 62-66).Ethical Questions:1. Retailing is a buyer-seller trust building game. As an organized retailer executive, how do you plan and strategize building the trusting brand community of suppliers and customers?2. As a middleman between brands suppliers and highly brand-conscious customers, what vulnerabilities do you foresee on both sides, and how do you plan on working round such vulnerabilities?

3. Sophisticated organized retailing today needs highly specialized talent of informed and problem-solving salesmanship and building lifetime loyalties among major target markets how will you recruit, train, develop and retain such sales force retailing talent, and all these with high principled ethics?

4. Taxation still favors small businesses in India; moreover, regulations restrict real estate purchases, especially agricultural land for safeguarding backward integration of food production and logistics. In this context, how will you build trusting relationships with government authorities and regulations enforcement people?

5. Discuss the ethics of 100% FDI in single brand retailing in India since February 2010.

6. Given 100% FDI in single brand retailing study its social, ethical and moral impact on the single brand domestic industry as well as on the lifestyles of the Indian consumer. For instance, will it intensify both domestic and foreign competition in organized retailing? 7. As a corporate retailing executive in India, how would you empower organized retailing by building trusting relationships, and even with competition?

8. As a corporate organized retailing executive in India, how would you design and build a win-win partnership by building trusting relationships with the immense 12-million kirana network in India? What will be its ethical ramifications?Case 5.2: Bain sues EY over $60-m loss in Lilliput Kidswear [See Reuters (2014), Bain sues EY over $60-m loss in Lilliput Kidswear, Business Line, Saturday, June 14, 2014, Kolkota, p. 1].Global private equity firm Bail Capital Partners LLC (BCPL) is suing EY (formerly Ernst & Young) in a US court claiming that the auditing firm cost it roughly $60 million by advising it to invest in Lilliput Kidswear (LK), a childrens clothing company in India. BCPL alleges that it invested around $60 million in LK in May 2010 for a non-controlling equity interest of 30.99 percent stake, based on false financial statements that EY had audited and certified. BCPL and ten other subsidiaries of BCPL have sued Ernst & Young Global Ltd in a Massachusetts court, claiming that their investment in LK is currently rendered worthless. EY, however, retorted that these allegations of wrongdoing are baseless and EY will vigorously defend this matter.BCPL who had invested the capital in Lilliput in 2010 had plans to expand LK before taking it to an initial public offering (IPO). Around 2012, BCPL was alerted to serious problems with the accounting in LK via a call from a whistleblower, soon after an IPO for LK was approved. BPCL halted the LK IPO process after investigating the whistleblowers claims and finding inflated sales at LK, according to the suit. The suit alleges that BPCL, which has a long standing global relationship with EY, was specifically targeted by EY to invest in LK, because the Boston-based BPCL had the resources to pay a higher investment price of LK and the prestige and knowledge to take the company to an IPO. According to a copy of the complaint filed with the Stuffolk Country Court, obtained by Reuters, the law suit also alleged that BPCL invested in LK because it relied on false financial statements and EYs false audit opinions, and that EY continued to certify LKs financial statements even as Lilliputs fraud grew with EYs active assistance. BPCL is suing EY for fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practices based on EYs involvement in the scheme to defraud BPCL.Kids under the age of 12 constitute close to a quarter of the total population of India. The Kids-wear market is growing fast and KPMG estimates this market to grow from Rs. 30,000 crore in 2013 to Rs. 43,000 crore by 2021. However, this market is highly fragmented with the 3 major players in the organized sector till 2013, namely Lilliput, Gini & Jony, and Catmoss, occupying a meager 5% of the total market. The uncontrolled expansion that these companies have done showed its effects in the form of high debt-ridden financials for these retailers along with stiff competition from mom-and-pop stores. Lilliput Kids-wear, which ventured into direct retail in 2003, had 290 exclusive stores in India and 40 abroad. Not only was it forced to shut shops, but it also had a debt of Rs. 850 crore in its books (as of 2013). However, with other players such as Mahindra Groups Mom & Me, and other international players like Zara, Gucci etc. also entering the Indian market, the overall awareness for organized retail in this segment has gone up.

Ernst & Young (EY) had a longstanding relationship with Bain Capital by virtue of providing audit and advisory services to the group companies for years. EY advised Bain to invest in Lilliput Kids wear, for which it was the auditor, since January 2010. The audited financial statements presented to BCPL showed a thriving business with growing revenues and earnings while the reality was in stark contrast. LK had intentionally falsified its financial statements to hide its poor performance, with inaccurate revenues, costs, with loans outstanding as well as inflated sales figures. EY certified LKs financial statements for more than a year and provided those certifications to Bain. The situation came to a head when Bain was alerted by a whistleblower about the fraud happening in LK. After investigating these claims, Bain decided to stop a planned IPO of LKs stock and sued EY for $60 million for fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practices."According to Bains lawsuit, the fraud at LK was done with the full knowledge and assistance of EY, who knew that LK had inflated its sales, concealed loans, and forged bank confirmations, yet assured Bain about the veracity of the financial records. Allegedly, EY was in full complicity with LK and shared details of its planned audit procedures with Lilliput in advance and even allowed Lilliput to perform certain audit testing on itself. Seemingly, it even went to the extent of issuing unqualified audit opinions and later eliciting LKs help in back-filling its audit work papers to show that it had conducted audit procedures that it had in reality not performed. EY served both as Lilliput's outside statutory auditor, having the duty of performing unbiased check on the retailer's financial statements as well as seller's agent, i.e. LKs financial advisor to bring on board new investors wherein its compensation was based on the selling price of LK's shares an obvious conflict of interest. In fact, EY gained financially from both sides by earning a lucrative fee as auditor as well as getting a 'success fee' for obtaining a high valuation for Lilliput.Recent initiatives incorporated in the Companies Act 2013 of India, provide some relief to PE investors like BPCL. Section 147 and 448 would tighten the noose on auditors intentionally endorsing false and misleading financial statements, reports etc. The government is also planning to institute a Market Research and Analysis Unit to check for financial scams and administer market surveillance on defaulting companies as well as develop an early warning system for potential fraudulent activities in companies.The case involves three key stakeholders Bain Capital Partners, Lilliput Kids wear and Ernst & Young. It brings to light the classic case of breach of trust. This is arguably the most high-profile alleged accounting fraud case which also involves negligent misrepresentation, and unfair and deceptive trade practices. The events in case have led to breakdown of the mutual trust between Bain and EY, painstakingly built over several years. This is likely to cause a big blow to their professional relation as Bain would be more suspicious of any future dealings with EY, thus increasing the transaction cost due to higher monitoring requirement. In todays world where all companies are lobbying to get their way around various policies, controlling majority of the worlds resources, it becomes extremely important to see the impact of such unethical and unfair practices on the overall development of a nation, especially developing nations such as India.

Companies manage to achieve strategic efficiencies as a result of mutual trust that develops as a result of longstanding ties with their partners. This enables companies to reduce various transactional costs, and gain mutually. This is how the relationship between Bain Capital and EY can and should be defined. However, by trusting EY and not taking a second opinion, Bain managed to save on the due diligence costs but faced with a much bigger loss as a result of EYs inaccurate information. Providing inaccurate information with the intent to misguide Bain Capital was morally incorrect on EYs part, and would greatly hamper their working ties, and any strategic benefits that they could have got otherwise in the long run.As per the current guidelines of the Central Vigilance Commission of Indias Code of Ethics for chartered accountants: a) A professional accountant should be straightforward and honest in performing professional services; b) A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity, and c) When in public practice, an accountant should both be, and appear to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.

Bain Capital and TGP Capital were the primary affected parties as the value of their investment was eroding rapidly. Lilliput stands to lose not just its current source of funding but also a tarnished image would make it difficult for it raise funds in the future. Lilliput's founder, Sanjeev Narula, initially cooperated with the audit but then stopped, protesting that the probe went too far. Subsequently the High Court ordered that the audit dispute be settled by an arbitration tribunal.Sources close to Bain and TPG had acknowledged later on that their due diligence failed to find irregularities prior to the investment. The sources say the buyout firms were encouraged by the fact that Lilliput had an independent board, a reputable auditor - the local affiliate of Ernst & Young, S.R. Batliboi & Co - and prior ownership by an established, large, local private equity firm. However, there should no compromises with the procedure of due diligence, as even some corporations of South Korea which were deemed too big to fail went bankrupt and led to the Asian Financial Crisis of 1997. When asked for his opinion on the issue, the LK founder, Narula, very rightly said that the whole situation could have been resolved better through face-to-face talks with Bain Capital than by the court.Ethical Questions:

1. Who is legally wrong: BPCL for suing EY or EY for allegedly targeting BPCL to invest in LK? Why?2. Who is ethically and morally wrong: BPCL for suing EY or EY for allegedly targeting BPCL to invest in LK? Why?

3. EY was an auditor of LKs financials and Bain Capital had a non-controlling stake of 30.99% in LK. How do you ethically and morally assess conflict of interest in these transactions?4. To what extent does BPCLs suit against EY violate the long standing trusting relationships between the two companies, and why?5. Should BPCL have taken a second opinion on LK, and not univocally trust on EYs certified audit opinions on LK, especially after receiving the whistleblowers call in 2012?6. Can BPCL legally and ethically claim redress for its blind faith in EYs audit opinions of LK?7. To what extent is EYs involvement in targeting BPCL to invest in LK a fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practice?8. For building and reinforcing trusting relationships between long-standing partners such as EY and BPCL, how would you resolve this BPCLs suit against EY amicably and out of court? Case 5.3: Building Indo-Japan Trusting Business RelationshipsIn his telephonic conversation with Narendra Modi soon after the latters election victory, Japanese Prime Minister Shinzo Abe said that he would like to work closely with Modi towards further development of Japan-India Strategic and Global Partnership. Japan is also seeking early clearance for its proposed investments in the ambitious industrial corridor projects. In May 2014, the Japanese Ambassador to India, Takeshi Yagi, had led a group of senior Japanese officials from investment and project funding agencies of the Japanese Government for a meeting with Industry Secretary Amitabh Kant to discuss investment and funding plans in the newly planned industrial corridors of India. Japan has committed $4.5 billion (about Rs 27,000 crore) for the Delhi-Mumbai industrial corridor. Japan is also considering giving financial and technological support to a similar industrial corridor between Chennai and Bangalore. India is the biggest receiver of Official Development Assistance from Japan and Indian companies; India is also the second biggest (after the Chinese) receiver of assistance from Japan Bank for International Cooperation.Most of these Indo-Japanese projects, however, have suffered a setback following tough requirements under the new Land Acquisition Act. The Department of Industrial Policy and Promotion (DIPP) has asked the Rural Development Ministry to make exceptions for Government-led infrastructure projects.Tadashi Yanai, Chairman of Fast Retailing Group, met Prime Minister Narendra Modi on Wednesday, June 25, 2014, expressing his intentions to source garments from India for the Uniqlo chain of casual clothing. Modi welcomed Yanais interest and highlighted the advantages that India enjoys, including availability of cotton, skilled labor, robust infrastructure, a big domestic market and good ports for exports. As of February 2014, Uniqlo had a total of 1,383 stores in Japan, China, Hong Kong, Taiwan, Korea, UK, USA, France and Russia. Yanai, who is also the President and CEO of the Fast Retailing Group, wants now to enter Asia, and India, in particular. At present India allows 100% FDI in single brand retail and up to 51% in multi-brand retail. According to Yanai, Asia is the focal point for generating prosperity and eradicating poverty.Meanwhile, Japan is putting pressure on India to sort out taxation, labor and other problems that Toyota, Mitsubishi and Honda are currently facing in India. Labor unrest has emerged as a big problem affecting Japanese investments in India. The Indian arm of Toyota Motors temporarily shut down two of its plants near Bangalore following strikes by some employees who were protesting delays in salary hikes. Suzuki Motors faced violent labor protests in 2012 that led to one death and several arrests. Retrospective taxation is another issue bothering the Japanese investors. The Finance Ministry has placed tax demands on certain Japanese companies, which includes a bill of $2 billion on Mitsubishi and about $600 million on Honda.Current Japanese Ambassador to India, Takeshi Yagi, has sent a letter to the Prime Ministers Office (PMO) urging early resolutions and solutions to issues affecting Japanese companies in India and their fast-tracking proposed investments, especially in the ambitious industry corridor projects of India. Earlier, the Japanese Embassy had also sent notes to the Finance and Commerce Ministries stressing on the need for a predictable and transparent business environment. During an interview, the Department of Industrial Policy and Promotion (DIPP) said to Business Line, We are aware of the problems related to various Japanese companies that have been raised by the Japanese Ambassador. We have asked different Ministries and Departments that are involved to act on them.Recently, the BJP Government seems to have agreed that retrospective taxation is not a good idea. Accordingly, Japan has renewed its attempts to sort out the tax related issues with the BJP Government. Japan wants to intensify its ties with India also to counter Chinese influence in the region. Japans Chief Cabinet Secretary Yoshihide Suga told a press conference in Tokyo recently that Modi was very friendly toward Japan. We expect to further deepen our political and economic relations with India, Suga said.[The Indian government maintains that some Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors (FIIs) had gone to the tax Authority of Advance Ruling (AAR) which ruled that MAT was applicable.The tax authority clarified that the current demand of 20 per cent minimum alternate tax (MAT) on capital gains made by the foreign investors (FPIs and FIIs included) is what is genuinely due to the government. This law is retrospective of all tax dues of the past years. Hence, it was called the law of retrospective taxation. It is not new, but just a reassertion of a law in force for the last fifty years in India. Retrospective Taxationwas formally implemented by adding an amendment to the IncomeTaxAct of 1961. Through theRetrospective Taxationamendment theIndian Government now had the ability to demand the payment oftaxeson any overseas transaction involving anIndianasset dating back over 50 years. What FIIs and FPIs are asking is retrospective exemption and not retrospective application of a tax law. They were referring to reported apprehensions among foreign investors that the government was creating a new tax demand using retrospective tax legislation which they fear would deter foreign investment."The Income-Tax department has won cases in tribunals (Authority of Advanced Ruling) on levy of MAT on capital gains made by FIIs. If we do not demand tax now, then we could be hauled up by authorities like CAG and CBI," the sources said. Read more at: http://economictimes.indiatimes.com/articleshow/ 46838009.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst]...

Recently, Takeshi Tagi had also requested that the Finance Ministry of India ask the RBI to allow currency swap transactions for the Japan Bank for International Cooperation (JBIC). There is a huge demand for rupee-based loans in India for various projects and JBIC could offer dollar or Yen funds through a swap. But RBI prohibits this. If such transactions are allowed, JBIC would be able to lend at much lower interest rates because of its high credit rating. This will also help JBIC offer long term low interest rupee loans for projects not connected with the Delhi-Mumbai Industrial Corridor (DMIC), where JBIC has 26% stake. Incidentally, India and Japan have an extant arrangement for swapping their local currencies against the US dollar; the size of the swap deal has been recently expanded to $50 billion from $15 billion. This swap is primarily aimed at tackling short-term liquidity problems an insurance facility that could help both governments deal with any balance of payment problems arising out of or leading to extreme volatility in exchange rates. That is, central banks of both countries can approach each other for dollars against payment of their local currencies. The current proposal is that an Indian bank, with the consent of the RBI, could provide rupees to JBIC against yen or dollar payments which JBIC would lend to Indian projects. JBIC would bear the exchange rate risk. Separately, Tokyo has also approached RBI for its approval for Japanese Bank Mizuho in Ahmedabad (See Financial Express, July 2, p.3).Sources:

Amiti Sen (2014), Japan writes to India on Problems faced by its Companies here, Business Line, Tuesday, June 26, 2014, p.4; Japans Uniqlo wants to source Garments from India, Business Line, Tuesday, June 26, 2014, p.4.Bhattacharya, Roudra (2014), Prod RBI to allow Currency Swap for JBIC: Tokyo to Govt., The Financial Express, Wednesday, July 2, 2014, p. 3.Ethical Questions:

1. Based on Chapter 05 and what follows, design a strategic ethical plan for building lasting industrial and commerce relationships between India and Japan that are based on mutual trust.2. While mistrust is the opposite of trust, distrust can coexist with trust. To what extent are relationships between two economic powers like Japan and India best ethically developed as combinations of trust with distrust?3. Mutual trust also includes vulnerability. Explore the current mutual vulnerabilities between Japan and India as market powers, and how would you ethically cultivate mutual trust despite such vulnerabilities?

4. Transparency is a necessary condition for the ethics of trust. How can you bring about transparency, predictability and trust in Indias commercial transactions with Japanese partners, especially in relation to taxation, retrospective taxation, excise duty, and FDI regulation?5. Good employee relations are very important for building trusting relations in companies. How would you go about building strong employee trust in top management (and vice versa) in an Indo-Japanese business transactions context?6. Indo-Japanese business relations are often among strangers meeting for the first time. What specific models and theories will you invoke for building ethical and moral Indo-Japanese trusting relations among stranger partners?The Ethics of Executive Trust

Hire well, manage little, affirms Warren Buffett. He builds trust and relies on trusting relationships. His model of extreme decentralization would not work unless he trusted the operating managers, and they delivered. A notable fact is that nobody at Berkshire Hathaway is awarded stock options. Having hired well, Buffett limits his interactions with his CEOs to the minimal, only to get involved in capital expenditure (CAPEX) decisions. He allows 100% operating freedom to his managers, with full expectation that they will be conscientious. This tightrope walk has ensured that Berkshire has never lost a CEO to competition in all these decades. It also demonstrates the fiduciary responsibility that is ingrained in the Berkshire culture. In May 2009, when the world was barely merging out of the credit crisis, Warren Buffetts partner Charlie Munger said something fundamental about Berkshire Hathaway that resonated with the 35,000 people present at the annual meeting: Our model is a seamless web of trust thats deserved on both sides. Thats what we are aiming for. The Hollywood model, where everyone has a contract and no trust is deserved on either side, is not what we want at all. Warren Buffett added: We dont want relationships that are based on contracts. It is this seamless web of deserved trust that is unique to Berkshire (See Mahalakshmi N. and Rajesh Padmashali (2015), 50 Master Moves that Shaped Berkshire Hathaway, Outlook Business, Special Issue, India, June 12, 2015, p. 38, 40).Franklin Covey said that trust is a combination of character and competence. Most executives work on improving their competence, almost forgetting that building their character has far greater impact on people round them than their skill sets. Organizations and leaders high on competence but low on character will not survive in the long run said Shivkumar, Chairman and CEO of PepsiCo India Holdings Pvt. Ltd, in his recent JRD Tata Ethics Oration, XLRI, Jamshedpur, Jharkhand, India. He added, Trust in a leader generates confidence and optimism in every sphere. Trust in a leader builds a powerful ecosystem (Shivkumar 2014: p. 5).

Building trust and living interpersonal trust are crucial corporate executive virtues that are needed today. Once you have developed and solidified a high level of genuine interpersonal trust with all your stakeholders, especially employees and customers, then you are on the right path of managing and transforming your company. A high-level of interpersonal trust between all stakeholders and you in a business situation will break down communication barriers, foster serious conversation and sharing of ideas, and will eliminate anxieties, fear, guilt, rigidity, blame and resentment. When your stakeholders trust you and you trust them, then, you speak freely, they speak freely, and your mutual sustained transparency is a gateway to survival, revival and sustained corporate recovery and transformation. The informal and transparent communication networks that you establish between all concerned parties will hoist and empower the company for steady growth and prosperity. Conversely, when there is low trust, high mistrust and high distrust among stakeholders in a business situation, communications and conversations are stressed and fragmented, teamwork and team spirit are very low, and the company is heading toward its ruin and extermination. Such is the crucial role of interpersonal trust in business. This Chapter explores the phenomenon of corporate interpersonal trust. Human beings are naturally predisposed to trust. It is a survival-mechanism, (that is, it is in our genes and childhood and adolescent learning), that has served our species quite well. Our willingness to trust, however, can get us into trouble, especially when we trust too readily, and have difficulty distinguishing trustworthy people from untrustworthy ones. In the wake of massive and pervasive abuses of trust (e.g., Enron, Tyco, WorldCom, AIG, Washington Mutual, Fannie May, Freddie Mack, Bernie Madoff, and all other new corporate scandals that surface each day), social psychologist Roderick Kramer suggests that we rethink trust today. [Appendix 6.1 provides a timeline of business trust and mistrust situations in the U.S. market of the last century]. May be we trust poorly, or trust too readily. At a general or species level, this may not matter very much as long as there are more trustworthy people than not. Nevertheless, at the individual level, it can be a real problem. We could be very vulnerable. To survive as individuals, we must learn to trust wisely or temperately (Kramer 2009). Most people are disgusted with the state of corporate ethics in America riddled as it is with too many acts of dishonesty and unethical dealings. The result is a lack of peoples trust in the American business. Commenting on the sequential debacles of Enron, Adelphia, Tyco, and World.com in 2001-2002, Brett Trueman, professor of accounting, Haas School of Management, UC, Berkeley, remarked: This is why the market keeps going down every day investors dont know who to trust. As these things come out, it just continues to build (cited in Maxwell 2003: 3).

Mutual trust is a symbiotic relationship leaders must first trust others before others will trust them. Building trust takes time, courage, and consistency, but the results and rewards are an unimpeded flow of intelligence. Good leaders do not want yes-people around them; they want everyone to tell the truth even though it may cost them jobs. Exemplary leaders encourage, and even reward, openness and dissent. Dissent may make you briefly uncomfortable; but better information (via dissent) helps you to make better decisions. Good leaders, moreover, admit mistakes. Admitting your mistakes not only disarms your critics but also encourages your employees to own up their own failings. Speaking truth to power (e.g., to a boss) requires both a willing listener and a courageous speaker. It took tremendous courage for an Enron employee to confront Jeffrey Skilling with the facts of the companys financial deception (OToole and Bennis 2009).

Previous studies of long-term orientation in channel relationships (e.g. Anderson and Narus 1990; Anderson and Weitz 1989, 1992) have concentrated mainly on the importance of transaction-specific investments (TSIs) in determining long-term relationship orientation. TSIs, it is presumed, would create dependence and lock-in customers, both necessary for long-term orientation. While TSIs and dependence may be necessary conditions for long-term relationships, they are not sufficient, since both focus on present and existing conditions. We need to supplement them by trust, which looks for the long-term future (Ganesan 1994). This is trust based virtue-ethics.If trust facilitates informal cooperation and reduces negotiation costs, then it is invaluable to corporate and business organizations that depend upon professional people, cross-functional teams, interdepartmental synergies, skilled work groups, and other cooperative structures to coordinate business treatment (see Creed and Miles 1996; Powell 1990; Ring and Van de Ven 1994). Further, in those firms where flatter organizations are advocated, trust can certainly facilitate cooperation across boundaries such as functional areas, divisions, and management-versus-union lines (Williams 2001). Executives and employees may be continually required to cross group boundaries to secure cooperation from stakeholders over whom they have no hierarchical control, and this may be particularly difficult and challenging across cross-cultural, cross-religious and cross-social groups that are commonly encountered in business situations (see Fiske and Neuberg 1990; Kraemer 1991; Kraemer and Messick 1998; Stikin and Roth 1993).

The best device for creating trust between business executives and stakeholders is to establish and support trustworthiness of both parties (Hardon 1996). Building trustworthy relationships by habitually discharging mutual obligations between parties to transactions can mitigate the risk of opportunism on the part of both parties, and forestall costly legal battles and the consequences of expensive fraudulent insurance premiums (see Whitener et al., 1998).

The Importance of Trusting Relationships in Business ManagementScholars have seen trust as an essential ingredient for a healthy personality, as a foundation for interpersonal relationships, as a foundation for cooperation, and as a basis for stability in social institutions and markets. Mutual trust between business partners has been found to be very vital in the uncertain, complex, volatile and fast-paced business environment of today, especially given modern developments of globalization, and strategic global competitive alliances (Prahalad and Hamel 1994), multicultural and multilingual relations (Cox and Tung 1997; Sheppard 1995).

There are many reasons why reciprocal trust among corporate executives and various stakeholders is becoming important in all business transactions. Trust leads to successful relationships and improves communication, cooperation, satisfaction, and purchase intent in a marketing-exchange context (Anderson and Narus 1990; Doney and Canon 1997; Morgan and Hunt 1994). Interpersonal trust can be an important social resource for facilitating cooperation and enabling social interactions between various actors in a business environment (see Coleman 1988; Zucker 1986). Trust reduces the need: a) to suspect and monitor each others behavior, b) to formalize monitoring and control procedures, c) to create completely specified contracts, and thus, d) can reduce negotiation costs (Powell 1990). The growing importance of relationships in business has also heightened interest in the role of trust in fostering such relationships (Bendaupudi and Berry 1997; Blau 1964; Garbarino and Johnson 1999; Kozak and Cohen 1997; Sirdeshmukh, Singh, and Sabol 2002). For instance, considerable effort has been devoted to examining the role of trust in relationship development, particularly within distribution channels in marketing (Doney and Capon 1997; Morgan and Hunt 1994; Nicholson, Compeau, and Sethi 2001). Several conceptual (e.g., Gundlach and Murphy 1993; Nooteboom, Berger, and Noorderhaven 1997) and empirical (e.g., Garbarino and Johnson 1999; Tax, Brown, and Chandrashekaran 1998) approaches have proposed trust as a key determinant of relational commitment. We can adopt these approaches to incorporate and build trust in business situations.Business literature, in general and marketing literature, in particular, has advocated for decades the need for customer trust and stakeholder relationships. However, the need has been academically expressed more recently. Some quotes and opinions in this regard:

One of the most salient factors in the effectiveness of our present complex social organization is the willingness of one or more individuals in a social unit to trust others (Rotter 1967: 651).

Trust is the cornerstone of long-term relationships (Spekman 1988: 79). Trust is generally viewed as an essential ingredient for successful relationships (Berry 1995; Dwyer, Schurr and Oh 1987; Moorman, Deshpande and Zaltman 1993; Morgan and Hunt 1994; Garbarino and Johnson 1999).

A central idea in the theory of partnering suggests that differences in trust and commitment are the features that most distinguish customers as partners from customers who are single-transaction buyers (Berry 1995; Webster 1992).

Theories of partnering propose that customers with strong relationships not only have higher levels of trust and commitment, but also that trust and commitment become central in their attitude and belief structures (Morgan and Hunt 1994).

In personal selling or retailing what differentiates relational partnerships from functional (or transactional) relationships is the level of trust and commitment to the other party (Levy and Weitz 1995; Weitz, Castleberry and Tanner 1995).

Customer trust is an essential element in building strong customer relationships and sustainable market share (Urban, Sultan and Qualls 2000).

To gain the loyalty of customers, you must first gain their trust (Reichheld and Schefter 2000: 107).

The inherent nature of services, coupled with abundant mistrust in America, positions trust as perhaps the single most powerful relationship marketing tool available to a company (Berry 1996: 42).

Thus, for instance, there is much focus on mutual trust and trustworthy relationships in marketing, especially in relation to commitment in marketing (Achrol 1991; Gundlach, Achrol, and Mentzer 1995; Morgan and Hunt 1994), and buyer-seller relationships and contracts (Doney and Cannon 1997; Dwyer, Schurr, and Oh 1987). This focus can and should be easily transferred to the discipline of business management. The high levels of trust characteristic of relational exchanges enable exchange partners and stakeholders to focus on long-term benefits of the relationship (Ganesan 1994), ultimately enhancing competitiveness and reducing transaction costs (Noordewier, John and Nevin 1990).

A company representative who proves to be dishonest and unreliable could easily jeopardize long-term relationship with a trusted supplier (Kelly and Schine 1992). On the other hand, highly trusted salespeople have been found to sustain customer commitment despite management policies that may not always benefit the customer (Schiller 1992). What is Trust? In recent years, the issue of trust has been seriously discussed in management and marketing literature. The view of trust as a foundation for social order spans many intellectual disciplines and levels of analyses (Lewicki, McAllister, and Bies (1998: 438). Understanding why people trust, and how trust shapes human relations has been the central focus of psychologists, sociologists, political scientists, economists, anthropologists, and students of organizational behavior and marketing.

According to Lewicki and Bunker (1995), the study of trust may be categorized based on how trust is viewed: as an individual difference, as a characteristic of interpersonal transactions, and as an institutional phenomenon. Specific disciplines have been associated with these three approaches. Thus,

Personality psychologists view trust as an individual characteristic (Rotter 1967, 1970, 1980);

Social psychologists define trust as an expectation about the behavior of others in transactions, focusing on the contextual factors that enhance or inhibit the development and maintenance of trust (Lewicki and Bunker 1995, 1996); lastly,

Economists and sociologists have focused on trust building institutions that reduce uncertainty and anxiety (Zucker 1986).

Each discipline has its own focus, and accordingly, provides only a partial or incomplete description of trust. McAllister (1995: 25) argues for two bases of trust, one (cognition-based trust) grounded in cognitive judgments of the competence of an exchange partner, and the second (affect-based trust) founded on affective bonds between exchange partners. Lewicki and Bunker (1995) distinguish three types of trust: Calculus-, knowledge, and identification-based trust, and Sitkin (1995) propose three others - competency-, benevolence- and value-based trust. Sirdeshmukh, Singh, and Sabol (2002) derive customer trust in the service area from operational competence, operational benevolence, and problem solving orientation on the part of both frontline employees and management policies and practices that back frontline employees. Mayer, Davis, and Schoorman (1995: 712) argue that trust is the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control the other party. Most organizational scientists (e.g., Granovetter 1985; Ring and Van de Ven 1992) view trust as a mechanism that mitigates opportunistic behavior among exchange partners. Rousseau, Sitkin, Burt, and Camerer (1998: 395) combine common themes from trust definitions based on sociology, psychology, and economics, and define trust as a psychological state comprising the intention to accept vulnerability based on positive expectations of the intentions or behaviors of another.

Table 5.1 summarizes major differences in the definitions of trust reflected in the Management Literature.Definitions of Trust in the Marketing Literature

Marketing scholars have emphasized different aspects of trust. In an organizational context of trusting independent marketing researchers, Moorman, Zaltman and Deshpande (1993: 82) define trust as a willingness to rely on an exchange partner in whom one has confidence. According to Morgan and Hunt (1994: 23) trust exists when one party has confidence in an exchange partners reliability and integrity. In the context of buyer-seller relations, Doney and Capon (1997: 36) define trust as the perceived credibility and benevolence of a target of trust. In the service area, Sirdeshmukh, Singh, and Sabol (2002: 17) define consumer trust as the expectations held by the consumer that the service provider is dependable and can be relied on to deliver on its promises. Accordingly, Sirdeshmukh, Singh, and Sabol (2002) derive dependability and reliability of the service provider based on three service qualities: operational competence, operational benevolence, and problem-solving orientation. All three are expected from both frontline employees (FLEs) and management policies and practices (MPPs). An important aspect across all definitions of trust in marketing is the notion of trust as a belief, a sentiment, or an expectation about an exchange partner that results from the latters competence, credibility, reliability or intentionality (Ganesan 1994).

As is obvious, Moorman, Zaltman and Deshpande (1993) and Morgan and Hunt (1994) focus primarily on the credibility or confidence aspects of trust, without specific considerations of the notion of benevolence in trust. Both definitions draw from Rotters (1967, 1980) definition of trust cited earlier which is based on generalized expectancy of partners reliability. While Moorman, Zaltman and Deshpande (1993) incorporate willingness in their definition of trust, Morgan and Hunt (1994) do not. The former argue that willingness is a critical facet of trust since one could cognitively agree that a potential is trustworthy, but not go to the next step of willing to rely on that partner (Moorman, Zaltman and Deshpande 1992: 315). Doney and Capon (1997) add benevolence to credibility to their definition of trust, while Sirdeshmukh, Singh, and Sabol (2002) consider benevolence as an antecedent to trust.

Further, according to Moorman, Zaltman and Deshpande (1992) and Mishra (1996), vulnerability is an important constituent of trust; in the absence of risk or vulnerability, trust is not necessary, since outcomes are not of consequence to trustors. Sabel (1993: 1133) defines: trust is the mutual confidence that no party to an exchange will exploit the others vulnerability. Ganesan (1994) and Mayer, Davis and Schoorman (1995) view trust in conative and behavioral terms. Other marketing researchers use cognitive or evaluative definitions of trust, empirically verifying the link between trust evaluations and behavioral response (Doney and Capon 1997; Morgan and Hunt 1994; Sirdeshmukh, Singh, and Sabol 2002).

Table 5.2 summarizes and synthesizes these divergent views of trust in the marketing literature. Most studies of trusting relationships in marketing are from a marketer/service provider perspective, and not from the consumers viewpoint. Hence, most of the theoretical underpinnings of trust have been derived from inter-organizational contexts and constructs (Singh and Sirdeshmukh 2000). The few consumers viewpoint studies on trust that exist invoke either the agency theory (e.g., Bergen, Dutta, and Walker 1992; Casson 1997) or psychological approaches (e.g., Garbarino and Johnson 1999; Morgan and Hunt). More recently, some have tried combination of these two approaches (e.g., Singh and Sirdeshmukh 2000; Singh, Sirdeshmukh, and Sabol 2002).

Further, earlier trust-studies in marketing (e.g., Anderson and Narus 1990; Anderson and Weitz 1989, 1992; Moorman, Zaltman and Deshpande 1992, 1993 and Morgan and Hunt 1994) have treated trust as a uni-dimensional construct. However, later studies (e.g., Doney and Capon 1997; Ganesan 1994; Sirdeshmukh, Singh, and Sabol 2002) have treated trust as a multidimensional construct; the latter provides greater diagnostic with respect to the effect of trust on long-term or short-term orientation (Ganesan 1994).

Building Trusting RelationshipsBased on reviews of interpersonal trust literature, and as applied to the business executive-stakeholder context, we define trust under three facets (Whitener et al., 1998: 513): a) A stakeholders trust in another party such as a business or corporate executive reflects an expectation or belief that the other party will behave benevolently, competently, honestly, and predictably.

b) The stakeholder cannot control or force the business or corporate executive to fulfill this expectation, and thus, trust involves a willingness to be vulnerable and a risk that the executives may not fulfill that expectation.

c) Thus, stakeholder trust involves some level of dependency on the business/corporate executive and hence, stakeholder satisfaction (as an outcome) in a business situation will be influenced by the actions of the business/corporate executives.

Defined thus, stakeholder trust is an attitude (see Fishbein and Ajzen 1975; Robinson 1996) held by the stakeholder toward the business executive. This attitude derives from the stakeholders perceptions, beliefs, and attributions about the business executive, and these, in turn, are based upon stakeholders knowledge and observations of the business executive.The Biochemistry of Human Trust[See Kraemer (2009: 70-73)]Thanks to our large brain, humans are born physically powerless and highly dependent on caretakers. Thus, we enter the world hardwired to make social connections. For instance, within an hour of its birth, the baby will draw her head back to look into the eyes and the face of the person gazing at her. Within a few more hours, the infant will orient her head in the direction of the mothers voice. Within a few more hours, the baby can actually mimic a caretakers expressions and keep on exchanging mimics. In short, we are social beings socially hardwired from our birth. Scientists now consider the nurturing qualities of life the parent-child bonding and mutual exchanges between caretakers as the critical attributes that drive brain development. Serious lack of nurturing bonding may even impair brain development. This partly explains the success of the human species in terms of survival. We are born to be engaged and to engage others, which is what trust is largely about. The natural tendency to trust makes sense in our evolutional history.Research indicates that the brain chemistry governing our emotions plays an important role in trust. According to Paul Zak, a cutting edge scientist in the new field of neuroeconomics, oxytocin, a powerful natural chemical found in our bodies (which, incidentally, also plays major role in a mothers birth-labor management and milk production) can enhance trust and trustworthiness between people playing experimental trust games. Even a squirt of oxytocin-laden nasal spray is enough to do it. Other researchers have confirmed this oxytocin is connected with positive emotional states that create social connections. Even animals become calmer, docile and less anxious when injected with oxytocin.We tend to trust people who resemble us physiologically. Lisa DeBruine provides compelling evidence on this feature. She developed a clever technique for creating an image of another person that could be morphed to look more and more (or less and less) like a study participants face. She found that trust significantly increased with greater levels of similarity. The tendency to trust people who are similar to us may be rooted in the possibility that such people might be related to us. Other studies affirm that we like and trust people who are members of our own social group more than we like and trust outsiders and strangers. Psychologist Dacher Keltner and her associates have also shown that physical touch also has a strong connection to the experience of trust. In an experimental game widely used to study decisions to trust, an experimenter would touch slightly and unobtrusively the back of some individuals when explaining the game while distancing from others. The former were more likely to cooperate with their partner than compete against. Keltner also notes that greeting rituals throughout the world involve touching.

Our brain wiring can also hinder our ability to make good decisions about how much risk to assume in our relationships. Researchers identify two cognitive illusions that increase our propensity to trust: a) person invulnerability (this illusion makes us underestimate the likelihood that bad things will happen to us) and b) unrealistic optimism (this illusion overestimates the likelihood that good things will happen to us). By the first illusion, we ignore high risks of street crimes, drunken driving, over-speeding and the like thinking that nothing will happen to us. By the second illusion, we fondly entertain high hopes of marrying well, having great industrial careers, long life, and so on when the true odds of such combined outcomes is low. The Psychology of Trust

Thus, it does not take much to tip humans towards trust. Trust is our regular default position; we trust routinely, reflexively, and somewhat mindlessly across a broad range of social situations. Trust rarely occupies the foreground of conscious awareness; we trust instinctively. Roderick Kraemer prefers to call this presumptive trust our tendency to approach many situations without suspicion. Most of us, unless we have been victims of trust violation too early in life, have a predisposition or bias toward trust (Kraemer 2009: 71).Presumptive trust, however, can also be disastrous when combined with the way we process information. For instance, we have a proclivity to see what we want to see. Psychologists call this the confirmation bias. That is, we pay attention to and overweigh information that supports our hypothesis or theory about the world, while we easily downplay or discount evidence to the contrary. Moreover, we are heavily influenced by social stereotypes we too easily link virtues such as honesty, trustworthiness, reliability and likeability with facial characteristics, good looks, age, gender, race, and the like. Psychologists call such tendencies our implicit theories of personality. We categorize and label people quickly and render social judgments swiftly. Thus, we may easily overestimate the trustworthiness of people while making ourselves physically, financially and emotionally vulnerable. This could be even more dangerous if people fake outward sign of trustworthiness. Virtually any indicator of trustworthiness can be manipulated or faked by smiles, maintaining strong eye contacts, gentle touch, cheery banter, and the like.

Further, we often rely on trusted third parties to verify the character or reliability of other people. Calling and interviewing references is a case in point. We easily roll over our trust from one known and trusted party to another who is less known. This is transitive trust says Kraemer (2009: 72). Transitive trust can lull people into a false sense of security. Evidence suggests that Bernie Madoff was very skilled at cultivating and exploiting social connections one of his hunting grounds was the Orthodox Jewish community, a tight-knit social group.We can never be certain of anothers motivations, intentions, character, or career/business ambitions. We simply have to choose between trust (thereby opening ourselves to potential abuses if we are dealing with an exploiter this is Beta or Type II error) or distrust (which means missing out on all the benefits if the other person happens to be honest and caring this is alpha or Type I error). This doubt and ambiguity lingers over every decision to trust.

Social Psychologist Roderick Kraemer (2009: 74-77) offers a few practical rules to adjust your mind-set and behavioral habits that could reduce this doubt and ambiguity.

Know Yourself: Do you trust too much and too readily? Are you an optimist that believes most people are decent, harmless, and trustworthy? Hence, do you easily and indiscriminately open up to people by disclosing sensitive and critical information about yourself and family, about others, or about your company, before prudent, incremental foundations of trust have been established? Alternately, are you the opposite of all of the above, and hence, too mistrustful when venturing into relationships with others? Both are bad positions. Thus, figure out who you are, easily trusting the wrong people or congenitally mistrusting the right people? If you are the former, then you must get better at interpreting the cues of people you receive. If the latter, that is, you are good at getting and interpreting cues but have difficulty forging trusting relationships, then you will have to expand your repertoire of behaviors.

Start Small: All trust entails risk, but you can manage the risk by keeping it sensible or small or shallow, especially in the early stages of a relationship. Shallow trust implies small but productive behaviors whereby you communicate your willingness to trust. For example, in the 1980s, Hewlett-Packard allowed its engineers to take equipment home whenever they needed to without much red tape HP trusted them. When later the engineers returned the equipment, they validated HPs trust in them, and, over time, cemented it. Trust is incremental and hence you can manage it intelligently, and it is also contingent (i.e., it is tied to reciprocity). Mutual and small or incremental deeds of trust can help you build strong but tempered trust with others. Write an Escape Clause: If you have a clearly articulated plan for disengagement, you can engage more fully and with more commitment. Far from undermining trust, such hedging of ones bets allows everyone in a negotiation or an organization to trust more easily and comfortably. Hedging or a good back up plan can afford more breathing room as well. Send strong signals: In order to ensure that trust builds incrementally from initial acts to deeper and broader commitments, it is important to send loud, clear and consistent signals. Sending strong signals invites other tempered trusters and deters potential predators. Most of us tend to under-invest in communicating our trustworthiness to others, because we take it for granted that others know us and our virtues of fairness, honesty and integrity. Our reputation for toughness, for integrity, and for equity can send a strong signals to the negotiating partners. Recognize the other Persons Dilemma: Our trust dilemmas are many and anxiety provoking: with whom should I invest my money? With whom should I forge a joint venture? Meanwhile, the other side of the business equation has its own dilemmas and need reassurance as to how much they should trust us. The best trust builder is to have empathy and attention for the dilemmas and corresponding perspectives of the other party. For instance, in his famous commencement address at American University in 1963, President JF Kennedy praised the admirable qualities of the Soviets and declared his willingness to work toward mutual nuclear disarmament with Soviet leaders. We know from Soviet memoirs that this impressed the Soviets, and Premier Nikita Khrushchev used this trust- builder toward initiating nuclear disarmament. Look at Roles as we as People: Adopt clear and compelling roles, and downplay social connections. The latter are important, but often they get in the way of trust. For instance, we trust engineers because we trust engineering theories and principles, and that engineers are trained to apply them. Similarly with other professions and roles, such as Doctors and Lawyers. Deep trust in a professional role can substitute our lack of personal experience with people. Role-based trust, however, is not fool-proof, as the recent Wall Street meltdown and Bernie Madoff demonstrate. Remain Vigilant and always Question: Human beings seek closure, and this is true with trust dilemmas as well. When we doubt a business deal like merger or acquisition we do due diligence, and we think we can close the deal. But keep vigilant and questioning. The business landscape changes constantly and that may make your due diligence outdated or flawed. Despite being uncomfortable we need to question the people whom we trust. People can also change. This is tempered trust.

Trust plays a critical role in business, economics and the social vitality of nations. Our predisposition to trust, however, can make us vulnerable. The above seven rules are a primer on how to temper and discipline your trust and trusting relationships. Although neuro-economists, behavioral scientists and social psychologists provide powerful new techniques such as brain imaging and agent modeling to discover how we make judgment of trust, yet in day-to-day operations we need some rules to temper our trust by sustained and disciplined ambivalence (Kraemer 2009).Exhibit 5.1 Checks Propositions from Interpersonal Trust theory against the three Case Situations that head this Chapter.Building Trust in the Initial Stages

Trust can build even at earlier stages of interpersonal relationships, and does not necessarily have to depend upon longer and relationships that are more frequent. It is more challenging to build trust during initial stakeholder-business executive relationships when several factors are significantly low such as interpersonal familiarity, perceived similarity of values and the length and frequency of interactions. Additionally, there could be several situational factors that can stimulate mistrust and/or distrust such as high risk, vulnerability, past damages sustained and past track record of questionable behaviors among certain business executives. The latter have been found to build mistrust (e.g., Doney and Cannon 1997; Nicholson, Compeau and Sethi 2001). As a situational-contextual phenomenon, sociologists have associated trust with situation-complexity and unfamiliarity (Williams 2001) that generate vulnerability and risk (Mayer, Davis and Schoorman 1993), which in turn, could nurture positive distrust one can shield against (Lewicki, McAllister and Bies 1998; Mechanic 1997). A typical buyer-seller or stakeholder-business executive exchange encounter is an interpersonal exchange of social and economic benefits. Trust occurs in the context of this exchange. Trust as an Expectation or Rational Prediction of Behavior

Research within management literature has focused on trust primarily in terms of rational prediction (Lewis and Weigert 1985: 969) wherein agents conceive distrust as a highly risky situation that must one must reduce or avoid by rational choices that predict distrust. Such predictive accounts of trust appear to eliminate what they say they describe (Becker 1996: 47), thus disregarding or removing core elements of trust (Flores and Solomon 1998; Lewis and Weigert 1985). Under this view, trust exists only in an uncertain and risky environment; that is, trust cannot exist in an environment of certainty (Bhattacharya, Devinney, and Pillutla 1998).

Trust is also defined as a generalized expectancy held by an individual that the word, promise, oral or written statement of another individual or group can be relied upon (Rotter 1980: 1). Trust is a set of expectations shared by all those involved in an exchange (Zucker 1986: 54). Trust is based on an individuals expectations that others will behave in ways that are helpful or at least not harmful (Gambetta 1988). Williams (2001: 378) defines trust as ones willingness to rely on anothers actions in a situation involving the risk of opportunism. In contrast, distrust entails the belief that a persons values or motives will lead one to approach all situations in an unacceptable way (Sitkin and Roth 1993: 373).

These definitions of trust imply behavioral expectations. For instance, Hosmer (1995) defines trust as one partys optimistic expectations of the behavior of another, when the party must make a decision about how to act under conditions of vulnerability and dependence. Mayor et al. (1995) define trust as the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control the other party. Zuckers (1986) definition of trust as a preconscious expectation suggests that vulnerability is only salient to trustors after a trustee has caused them harm. In reciprocal terms, distrust is understood as the expectation that others will not act in ones best interests, even engaging in potentially harmful behavior (Govier 1994).

Exhibit 5.2 checks propositions of interpersonal trust against levels of trust in the three case situations. Exhibit 5.3 checks interpersonal trust building capacities with case situations based on the theories of interpersonal trust.Institution-based Initial Trust LevelsInstitution-based trust means that one believes the necessary impersonal structures are in place to enable one to act in anticipation of a successful, future endeavor (Shapiro 1987; Zucker 1986). Zucker (1986) describes how certain specific institutional or social structures and arrangements generate trust. For instance, rational bureaucratic organizational forms could be trust-producing mechanisms for situations where the scale and scope of economic activity overwhelm interpersonal trust relations. Public auditing of firms, SEC regulations, FTC mandates and other government vigilance programs may increase customer trust in those companies. Institution-based trust researchers maintain that trust reflects the security one feels about a situation because of guarantees, safety nets, or other structures (Shapiro 1987; Zucker 1986). Thus, the safe and structured atmosphere of a classroom may enable students to develop high levels of initial trust (Lewis and Weigert 1985; Shapiro 1987); tough screening and high professional experience levels of new recruits may help senior employees to trust them implicitly.

Trusting intention at the beginning of a relationship may be high because of institution-based trust stimulators. Institution-based trust literature speaks of two such stimulators: situation normality and structural assurances. Situation-normality: defined as the belief that successful interaction is likely because the situation is normal (Garfinkel 1963) or customary (Baier 1986), or that everything is in proper order (Lewis and Weigert 1985). Structural assurances: defined as the socially learned belief that successful interaction is likely because of such structural safeguards or contextual conditions as promises, contracts, regulations, legal recourse, and guarantees are in place.

Both situation normality and structural assurances can affect trusting beliefs, and trusting intentions in the following manner:

Situation Normality Affect Trusting Beliefs and Trusting Intention: For instance, a patient who enters a clinic or a hospital environment may anticipate a successful visit with the doctor because of normal situations such as safe and adequate parking, clean and secure physical surroundings, professional credentials (as indicated by doctors certificates displayed prominently). Other subsequent experiences may also reinforce trusting beliefs and intentions such as keeping appointments, good customer service and fiduciary responsibility as reflected in the professional appearance of doctors and nurses, and the friendly, yet professional healthcare providing services. Similarly, stakeholders (e.g., customer, client, employee, supplier, creditor, and distributor) may believe that what they observe in the corporate or business environment is normal or more than customary, and which may help them feel comfortable enough to rapidly form trusting beliefs in, and a trusting intention toward, the firm. Situation normality also can relate to the stakeholders comfort with their roles in relation to the corporate or business executives roles in that setting (see Baier 1986).

Structural Assurances Affect Trusting Beliefs and Trusting Intention: Regulations regarding certification of health or business professionals, spot-checking of healthcare or business delivery facilities, and quality assurances should enable stakeholders to feel assured about their expectations regarding the doctor or the business firm (see Sitkin 1995). In addition, guarantees, promises, contracts and legal recourse should mitigate a stakeholders perceived risk involved in forming trusting intention (Zaheer, McEvily and Perrone 1999), and enable the stakeholder to believe that the trusted persons will make every effort to fulfill these contracts and promises, lest they should meet with social disapproval or legal action (Sitkin 1995). For instance, believing that various safeguards bound a healthcare delivery situation (e.g., screening procedures of doctors and nurses, board certification of doctors and nurses, Hippocratic oaths) enables one to believe that the individuals (e.g., doctors, nurses) in the situation are trustworthy. Further, belief in the very institution of healthcare at the national, state and local levels with all its reliability and authentication procedures will enable stakeholders believe in the persons that deliver healthcare within it. Additional structures (e.g., no discrimination, fairness of treatment) supporting fairness in the clinic or hospitals may generate further cognitive consistency and consonance that leads to trusting beliefs and intention. Typical structural assurances in the business world are GAAP and FASB, Sarbanes-Oxley Act of 2002, external auditors, forensic auditors when necessary, social audit, SEC vigilance, consumer advocacy watchdogs, better business bureau, various board certifications and professional associations, government audit, EPA compliance, and labor unions. Structural assurances should be more influential in initial relationships than in later, especially since information about the trusted person may not be complete when the relationship begins, making situational information quiet salient (McKnight, Cummings, and Chervany 1998: 479).

Trusting Beliefs Affect Trusting Intention: Several scholars have found a positive link between trusting beliefs and trusting intention (e.g., Dobing 1993; Mayer, Davis, and Schoorman 1995). Thus, if an employee believes that his/her boss is benevolent, competent, honest, and predictable, one is likely to form a trusting intention toward that person (see McKnight, Cummings, and Chervany 1998). In general, beliefs and intentions tend to stay consistent (Fishbein and Ajzen 1975; Ajzen 1988).

Exhibit 5.4 checks institutional trust building capacities with case situations based on propositions from the theories of institutional trust.Inter-organizational Trust and Investments Fang, Palmatier, Scheer and Li (2008) explore inter-organizational trust that can occur at three distinct organizational levels in an inter-firm collaboration: a) Inter-organizational trust between collaborating firms (say, A and B), b) Each firms (A or B) agency trust in its own representatives assigned to a collaborative entity (co-entity such as suppliers or distributors of A or B collaborating among themselves), and c) Trust among the representatives assigned to the entity (intra-entity). Inter-organizational and agency trust can motivate collaborating firms resource investments in the co-entity (e.g., suppliers, distributors), particularly in the context of a differentiating strategy. Intra-entity trust promotes coordination within the co-entity, while inter-organizational trust and a differentiating strategy can magnify that effect. Thus, managing and building trust at multiple levels between collaborating organizations is critical to the success of that collaboration.Inter-organizational trust affects and stimulates investments into one another. These investments could be in tangible and nonfungible assets such as manufacturing facilities, specialized machine equipment and tools, office buildings and corporate headquarters, as also in intangible assets such as employees who possess irreplaceable tacit knowledge, employees who are trusted representatives of the firm, and strategic technologies and patents. Inter-organizational trust increases relationship investments, communication, and reduces costs of opportunistic behavior (Selnes and Sallis 2003). Mutual trust functions as a safeguarding and controlling mechanism that enables information sharing and reduces the perceived risk of opportunism and conflict between collaborating firms (Lane, Salk and Lyles 2001). Conversely, lack of such trust can lead to suspicion and conflict (Bamford, Ernst and Fubini 2004) and may prevent future investments and even lead to the withdrawal of existing investments (Inkpen and Beamish 1997).Given our understanding of interorganizational trust in the context of social exchange and agency theories, and given the fact that they can foster benefits of communication, information sharing, and increased relational investments, we propose the following:

Table 5.3 summarizes the theories of trust and corresponding Propositions we have discussed thus far. Most of these theories and propositions deal with the initial stages of trust among relatively unfamiliar strangers. In general, as much as we can assume stakeholders to be unfamiliar with the business situation and the newly appointed business expert or executive, these theories can help in initiating and building trusting beliefs and intentions. In summary, in explaining the initial stages of trust, personality psychologists view trust as a personal psychological trait such as liking or as an individual difference (Deutsch 1960; Mellinger 1956). Others treating trust as a characteristic of interpersonal interactions, consider trust as an interpersonal attitude (Anderson and Dedrick 1990; Jones and George 1998) or as socially embedded expectations (Ross, Frommelt and Hazelwood 1987; Rotter 1971; 1980) and relationships (Morgan and Hint 1994). As an institutional phenomenon, organizational scholars have focused on developing initial levels of organizational trust among relative strangers (McKnight, Cummings and Chervany 1998) or building deeper levels of trust among long partnerships and relationships (Williams 2001). Finally, social psychologists define trust as an expectation about the behavior of others in transactions, focusing on the contextual factors that enhance or inhibit the development and maintenance of trust (Lewicki and Bunker 1996). Exhibit 5.3 checks propositions from institutional theories of trust against institutional trust building capacities under the three case situations Later Stages of Trust Development

Knowledge-based trust theories propose that trust develops over time as one accumulates trust-relevant knowledge through experience with the other person (Holmes 1991; Lewicki and Bunker 1995). Thus, time and interaction history can develop high levels of trust.

Typically, trust development is often conceived as ones experiential process of learning about the trustworthiness of others by interacting with them over time (Lewicki and Bunker 1996; Mayer et al., 1995; Ring and Van de Ven 1994). Stakeholders and business executives may relate to each other in multiple ways, in multiple encounters, and even multiple relationships within a given encounter. For instance, a stakeholder sees in the business expert an excellent specialist in the field that the stakeholder is interested in, a great diagnostician with a very high level of professionalism, a good work ethic, but less patient, less friendly, less compassionate, less communicative, and less listening. The stakeholders relationship with the business executive is a function of all these attributes and encounters, and consequently, the stakeholder may trust the executive on some domains (such as academic excellence, professionalism work-ethic, and business diagnostic skills), but distrust in other domains and encounters (e.g., communication, listening, respect, compassion or patience with stakeholders). That is, the stakeholder may feel comfortable to trust the executive on some counts, but feel inappropriate to trust in other aspects (Baier 1985; Govier 1994). That is, parties to a trust (distrust)-relationship can hold simultaneously different views of each other not always consistent and accurate. Continuous encounters with the executive may accumulate and interact to create a rich texture of experience that may be dominantly trusting, but with occasional distrusting moments. Within the stakeholder-executive relationship may occur many linkages (link multiplexity) depicting the richness of interpersonal relationships (Katzenstein 1996).

Social network literature assumes that multiplex relationships are simply (or unidimensionally) trusting in nature (Husted 1994; Ibarra 1995). That is, the stakeholder-business executive relationship or encounter should be based on multiple linkages: professional, academic, diagnostic, communication, confidentiality, compassionate caring, listening capacity, interaction capacity, gentle bedside manners, good follow-up, and the like. Both trust and distrust can exist within multiple relations (Lewicki, McAllister, and Bies 1998), but by and large, the higher the bandwidth (richness and scope of relationships) and the larger number of linkages, the higher are the chances of building trusting than distrusting relationships. The broader the experience of stakeholder-business executive relationships across multiple contexts and encounters, the broader the bandwidth; partners accumulate knowledge of each others strengths and weaknesses to generate interpersonal relationships of trust (or distrust). In this connection, skeptical or indifferent behavioral attitudes can undermine the potential for developing trusting relationships (Wicks, Berman, and Jones 1999).

However, earlier theories of trust confound distrust with mistrust; that is, trust and distrust were considered as polar opposites. We review both sets of theories: a) those that consider trust and distrust as polar opposites, b) and those that consider trust and distrust as complementary theories of trust.Trust and Distrust as Complementary Constructs Trust and distrust are reciprocal terms. Both trust and distrust are separate but linked dimensions. They are not polar opposites on a single continuum such that low trust means high distrust and high trust means low distrust. Trust and distrust both entail certain expectations, but whereas trust expectations anticipate beneficial conduct from others, distrust expectations anticipate injurious conduct (Lewicki, McAllister, and Bies 1998). Both involve movements toward certainty: trust concerning expectations of things hoped for and distrust concerning expectations of things feared. Hence, both states can coexist (Priester and Petty 1996); they are functional equivalents (Luhmann 1979).

Social network literature assumes that multiplex relationships are simply (or unidimensionally) trusting in nature (Husted 1994; Ibarra 1995). That is, the stakeholder-business executive relationship or encounter should be based on multiple linkages: professional, academic, diagnostic, communication, confidentiality, compassionate caring, listening capacity, interaction capacity, good follow-up, and the like. Both trust and distrust can exist within multiple relations (Lewicki, McAllister, and Bies 1998), but by and large, the higher the bandwidth (richness and scope of relationships) and the larger number of linkages, the higher are the chances of building trusting than distrusting relationships. The broader the experience of stakeholder-business executive relationships across multiple contexts and encounters, the broader the bandwidth; partners accumulate knowledge of each others strengths and weaknesses to generate interpersonal relationships of trust (or distrust). In this connection, skeptical or indifferent behavioral attitudes can undermine the potential for developing trusting relationships (Wicks, Berman, and Jones 1999).

Organizational Psychology Theory of Trust and Distrust: Institution-based trust means that one believes the necessary impersonal structures are in place to enable one to act in anticipation of a successful future endeavor (Shapiro 1987; Zucker 1986). Zucker (1986) describes how certain specific institutional or social structures and arrangements generate trust. Institution-based distrust means that one believes the necessary impersonal structures are not in place. For instance, rational bureaucratic organizational forms could be trust-producing mechanisms for situations where the scale and scope of economic activity overwhelm interpersonal trust relations. Public auditing of firms, SEC regulations, FTC mandates and other government vigilance programs may increase customer trust in those companies. Institution-based trust researchers maintain that trust reflects the security one feels about a situation because of guarantees, safety nets or other structures (Shapiro 1987; Zucker 1986). Thus, the safe and structured atmosphere of a classroom may enable students to develop high levels of initial trust (Lewis and Weigert 1985; Shapiro 1987). Tough screening and high professional experience levels of new recruits may help senior employees to trust then implicitly.

Trusting intention at the beginning of a relationship may be high because of institution-based trust stimulators. Institution-based trust literature speaks of two such stimulators: situation normality and structural assurances. Situation-normality: defined as the belief that successful interaction is likely because the situation is normal (Garfinkel 1963) or customary (Baier 1986), or that everything is in proper order (Lewis and Weigert 1985). Structural assurances: defined