How Companies can Earn the License to Lead

Written by Richard Edelman

Over the past five years, the topic of corporate behavior has continued to be headline news around the world. The result has been a global crisis for the institution of business: a lack of trust among stakeholders.

In the period following the recession of 2008-9 trust in the private sector collapsed. Many companies central to the global economy went bankrupt. Hat in hand, GM, Citigroup, AIG, RBS, Chrysler and a host of others went to government seeking bailouts.  Other top multinationals were ensnared by operating failures – Toyota and the brake scandal, BP and the Gulf oil spill.

This was acutely felt in the Edelman Trust Barometer’s U.S. data.  According to the Barometer, business in the U.S. reached its peak trust level in 2007 at more than 50 percent.  By 2009, the trust level for business was in the mid-30s.  Trust in financial services was 70 percent in 2007; it was 28 percent in 2012, from third place among all industries to dead last. CEOs were the fourth most trusted source of information in 2007 – now they’re second from the bottom of ten.

Any number of companies could easily serve as the current embodiment of these negative trends including JPMorgan Chase and Goldman Sachs.

The collapse of Trust in business initially led to a new reliance on government.  Congress passed legislation such as Dodd-Frank to rein in financial services companies. Government bailouts proved successful, particularly in the car business.

Then government became paralyzed and beset by its own crises. The events of last summer were surreal — the near default of the United States followed by a credit rating downgrade, the near bankruptcy of Greece and Portugal followed by the EU’s inability to produce a stability package.

When government does act in periods of instability like today, it often behaves unpredictably.   Examples of this are President Obama’s blocking of the Keystone pipeline; Prime Minister Angela Merkel banning nuclear power in Germany a week after the Fukushima disaster in Japan; and Argentina’s President Christina Fernandez de Kirchner nationalizing the Repsol YPF business.

According to the 2012 Trust data, government is now ranked as the least trusted institution in the U.S. for the first time. Government officials are the least trusted spokespeople.  More than half of Americans believe government officials incapable of telling the truth on difficult issues. The gap between expectation and performance for government in the U.S. is 50 points.  That’s true across the world; in 17 of the 25 countries surveyed, government is the least-trusted institution. Despite this cynicism, however, half of Trust respondents in the U.S. still want government to regulate business more closely, as protection against unethical behavior.

All of these weaknesses are exemplified by the communications imbroglio following the nuclear disaster in Japan.  Fukushima is a watershed – the end of an era.  All traditional institutions failed at once.

First, the owners of the nuclear reactor, TEPCO and the Japanese Government, initially assured local residents and the world beyond that all was well.  Japanese media dutifully reported this line, often quoting Japan’s mainstream NGOs.  Japan Inc. made its stand.  Then – reports began surfacing in social media, especially on Facebook and Twitter, calling into question the safety of the area.  One person truth squads such as Man from Chernobyl emerged as more credible than institutions based on first-person testimony.  Global media accused the government of a cover-up.  Late last year, Japan’s official agencies finally acknowledged that damage at the Daiichi reactor was much worse than first reported – six months after international experts made the same assessment.   A collective failure to tell the truth was exposed, enabled by a system that has as its central premise the need to maintain control, even at the risk of loss of credibility.  The result?  Japan in over one year fell to the second-lowest ranked country in Trust in the world, ahead only of Russia, a remarkable reversal from the prior decade.

Today, the expectation of change is everywhere – most notably in the Occupy Wall Street movement.  We’re also seeing an unparalleled dispersion of authority, enabled by new technologies, and reinforced by the conviction that peers are more likely to tell you the truth than traditional information sources.   The longstanding pyramid of authority is being upended.  The top of the pyramid – classic elites such as Wall Street, government officials and CEOs – is least trusted.  The bottom is now on top.  Evidence of this is everywhere – from the protests on Facebook against Bank of America’s debit card fees – to the Arab Spring.

Consumers are creators of content, the new experts in a continuing conversation.  Peer recommendation is the number one basis of purchase.  The infinite capability of search makes us all deep experts in any narrow field at any given time.   We are now in a stakeholder not a shareholder world and brand and corporate reputations are inextricably linked.  Skepticism is rampant – the average person needs to hear, see or read a story in five different places to achieve belief.

So, given this set of circumstances and new context how do we restore Trust in business?

Historically, the objective of business has been the License to Operate, the freedom to pursue traditional goals of innovation, marketing products, and generating profit.  License to Operate worked well for many decades, especially in the recent era of widespread deregulation.  This world view was rewarded by Wall Street, enabled by smart lawyers, and reinforced by PR departments controlling information with conventional one-way, top-down communications.

Then, in 2008, business failed at self-governance.  License to Operate was and is no longer enough.

Today, business must move beyond License to Operate to a new approach – the License to Lead.  The License to Lead means business must gain the informed consent of constituents, provide value beyond its traditional performance objectives, and be held accountable through a new level of transparency.  License to Lead is, in fact, the opportunity to trust again – but this time, it’s trust subject to verification.

These are the four key principles for companies to earn License to Lead.

First, business should substitute principles-based leadership for rules-based leadership. Rather than driving the car next to the guard rail, business needs to operate in the center of the lane – to tune out the high-priced lawyers or brilliant financiers who advise hugging the guard rail to make a bit more money.  There’s more to gain from a motivated workforce and confident customer base that far outweighs any benefit derived from operating at the edge.

Second, companies must lead by taking on the issues of our time. By this I mean the issues that are central to business and its stakeholders, about which employees are passionate, that resonate with suppliers and partners, and that customers understand are important, too.

The firestorm around fracking shows what can happen when business doesn’t lead. There have been dozens of stories on pollution of sub-surface aquifers, even earthquakes attributed to fracking, leading to legislation banning fracking in many states and countries such as France.

Third, business must embrace radical transparency. Radical transparency means going public with important benchmarks and reporting on them, warts and all. It requires relinquishing control of information and engaging in genuine two-way communication.

Lastly, business has to prioritize its stakeholders differently. It has to invert the traditional power pyramid and let the voices of the “regular people” be properly heard.

Business must recognize that employees should be the first, not the last, to get information. Employees in mid- to lower levels of the organization are more credible than the chief executive – and they are out there communicating already.  Progressive corporations can serve their own best interests by supporting the process, encouraging informed engagement with Twitter or Facebook because that’s where discussions are taking place.

Indeed it’s a greater risk for companies to stay the course on License to Operate than to implement the new model of License of Lead. It is time for business to dare greatly. This is the way to restoring Trust.


About the author: Richard Edelman is the president and CEO of the world’s largest independent public relations firm with wholly-owned offices in 53 cities and more than 3,600 employees worldwide.