Trust Enabled Corporate Governance

The complete article is available at http://trustenablement.com/local/Trust_Enabled_Corporate_Governance-post.pdf

27^th McMaster World Congress

Enhancing Corporate Governance

Hamilton, Ontario, Canada

January 25-27, 2006

Alex Todd

President & CEO, Trust Enabling Strategies

16 Rosewell Ave., Toronto, Ontario CANADA M4R 1Z7

http://www.trustenablement.com
Tel. +1 416.487.1497, Fax. +1 416.487.9646
AlexTodd@TrustEnablement.com

This paper is suitable for either oral or poster presentation.

Biographical Notes

Alex Todd is Founder and CEO of Trust Enabling Strategies; a management-consulting firm that specializes in improving business performance by defining business processes that build stakeholder trust and confidence.

Mr. Todd's Trust Enablement^TM methods derive from his thought-leadership work that contributed one of the ‘deeper plays' to IBM's Enterprise of the Future Initiative, a strategic innovation process with a two to fiver year horizon for defining innovative services in support of the company's Business On Demand strategy.

Mr. Todd holds a Bachelor of Commerce Degree from the University of Toronto and is an IBM Certified Consultant [[i]].

This paper introduces the Trust Enablement^TM approach to corporate governance, as a natural and harmonizing counterbalance to prevailing risk management practices.

Recent attempts to restore confidence in capital markets have been based largely on risk management practices that place greater emphasis on protecting organizations from further erosion of trust than on establishing higher levels of trust and confidence. Efforts focused on proactively building trust yield better results than recent risk management reactions to mistrust.  A complementary, offensive trust and confidence-building strategy is therefore proposed as more effective for reducing director and officer liability exposures and enhancing business value than a prevailing defensive, risk management strategy.

Comparative examples of current governance practices and proposed initiatives when mapped to the Trust Enablement^TM model reveal a deficiency in trust and confidence-building governance mechanisms.  Trust Enablement^TM, therefore, serves as a novel framework for defining Corporate Trust Enabling^TM Polices that govern reliance by key corporate stakeholders.

Keywords: trust, risk management, corporate governance, governance mechanisms, comparative governance practices, Trust Enablement^TM Framework, Trust Enabling^TM Policies, Directors and Officers (D&O) liability, confidence in capital markets, implications of Sarbanes-Oxley (SOX) Act

The purpose of this paper is to propose a novel mechanism for restoring balance in corporate governance, and more broadly management practices, between protecting corporate assets and building corporate value, namely Corporate Trust Enablement^TM Policies.  Regulatory interventions and our business leaders' recent, highly publicized inability to protect relying parties from malfeasance have brought into question the validity of generally accepted best practices, based on risk management conventions.  Innovative strategies are, therefore, needed to successfully counterbalance[[ii]] controls-oriented, reactive solutions that derive from risk management thinking and serve to confine and conceal business activity, with trust-oriented solutions.  The latter empower businesses to proactively and openly collaborate[[iii]] with shareholders, and other stakeholders, to enhance the intrinsic value of the corporation[[iv]].

Summary of content:

1)      Good corporate governance is defined by its ability to build trust with shareholders[[v]];

2)      Trust is good for business, while low levels of trust are harmful;

3)      Trust for business is tangible; both the conditions for trust and outcomes of trust are measurable;

4)      Trust Enablement^TM provides a framework to establish and maintain trust within, and at the frontiers of, a corporate structure;

5)      Trust Enablement^TM is consistent with fiduciary law and agency theory, as they apply to corporate governance;

6)      Trust Enablement^TM complements and counterbalances prevailing risk management practices in corporate governance, by emphasizing the value of building trust, beyond protecting from a loss of trust;

7)      Trust Enablement^TM is directly supported by analysis of how a failure on the ‘demand-side' of capital markets contributed to recent corporate governance scandals, indicating that an improved system of intermediaries is required to establish required levels of trust and confidence;

8)      Directors and Officers Liability and Indemnity insurance providers are starting to recognize the value of good corporate governance for reducing liability exposures.  The future may lie in providing greater incentives for businesses to build higher levels of trust with shareholders and other stakeholders;

9)      Corporations should make specific and tangible commitments to rebuilding shareholder trust and confidence;

10)  Trust Enablement^TM provides the framework for enhanced management commitment to shareholder (and even stakeholder) trust and confidence.  A cohesive, enterprise-wide suite of Corporate Trust Enabling^TM Policies can be directly implemented into business processes and management practices, making trust objectives tangible and practical, beyond simply being desirable.

2.      Good Corporate Governance

Good corporate governance[[vi]] is all about trust[[vii]]; shareholders must trust that the board of directors will exercise their fiduciary duties of care and loyalty[[viii]] to the corporation when monitoring, ratifying and sanctioning (reward and punishment)[[ix]] management (the agents of shareholders) decisions.  As well, directors must trust that corporate officers are managing the affairs of the corporation competently and with integrity[[x]].  Investor confidence in capital markets depends on the soundness of this chain of trust.  The sole measure, and the definition for 'good corporate governance'[[xi]], should be the level of trust and confidence shareholder have in the board's effectiveness to establish and maintain this chain of trust.  Recent evidence suggests that good corporate governance is correlated positively with financial performance[[xii]].

The implications of public mistrust in capital markets can be catastrophic for national and global economies[[xiii]], and the long-term trend is alarming[[xiv]] Large corporations are currently the least trusted institutions worldwide and their leaders even less so[[xv]]. Although public trust is returning in the wake of high profile corporate scandals over the past few years, the levels remain low, and some have argued that returning to previous levels of trust may no longer be sufficient[[xvi]].  Trust provides real economic benefits: it reduces transaction costs[[xvii]]; and is required for the efficient functioning of capital markets[[xviii]].  The evidence in support of the value of trust to both individual businesses[[xix]] and the economy[[xx]] is compelling, and institutions (large corporations in particular) play a significant role in the United States and similar Western societies[[xxi]].

By contrast, externalities that introduce restrictions, such as laws, regulations and other controls, in response to breaches of trust, increase transaction costs, and more significantly, contribute to a self-reinforcing propagation of mistrust[[xxii]].  An organic property of trust is that trusting begets trust[[xxiii]] in a virtuous spiral of ever-increasing trust[[xxiv]].

Although most would agree that trust is a virtue, consensus is only starting to emerge around how trust is established and maintained and the conditions required to achieve specific trust objectives.  Earlier definitions[[xxv]] for trust have revolved around trust between individuals, assuming that people trust each other because of personal dispositions, which is accurate[[xxvi]].  However, recent research reveals that trust has a far more primitive and elemental role as a precondition for communication itself; analogous to a carrier wave delivering information[[xxvii]].  This view of trust makes it possible to describe trust in general terms, outside any specific context, and then apply its properties universally and consistently back to any context.

An abstract notion of trust, as a law of nature, implies that a person, acting as a relying party, should be able to trust information regardless of whether or not he/she trusts the source of the information; to trust the information despite its source[[xxviii]].  Although counterintuitive initially, it is, in fact, commonly observed; witness the volume of purchases made from unknown online vendors on eBay. Buyers establish trust not through relationships with sellers, but by relying on eBay's suite of services to help them attain the levels of confidence they need to accept the vendors' offers and promises, and put themselves at risk by purchasing something they cannot see, feel or otherwise experience personally.  This scenario is not dissimilar to how individuals make decisions about investing in the stock market, by putting their money at risk based on the representations of issuers' and intermediaries' about the merits of buying or selling the security, and almost always relying on multiple sources of trust (as in the absence of trusted sources[[xxix]] it would be blind faith, not trust).  Our legal system works similarly by relying on the corroboration of witnesses to establish trust in the assertions of the defence and the prosecution.

This paper therefore defines trust as a subjective condition that allows an entity (a person) to take a consequential action as a result of accepting some (subjective) level of uncertainty:

Trust = Acceptable Uncertainty

When a person is totally uncertain, it is impossible for them to trust.  Conversely, when a person has absolute trust, they are certain (or have no uncertainty).  However absolute trust is only a theoretical notion.  In the real world one cannot even trust one's own thoughts and actions at all times, let alone information from others.  Trust can therefore only be measured by the behaviour of the relying party.  If they act on the information, they either trust it or feel sufficiently protected from any loss or damage that might result from such reliance.

Another significant property of trust is that it is always contextual: 'A' relies on 'B' for 'C'.  For example, shareholders 'A' rely on (or trust) directors 'B' to exercise their fiduciary duties of care and loyalty when monitoring, ratifying and sanctioning corporate management 'C'.  Ideally, every investor would individually establish the level of trust he/she requires in the motivations and abilities of every manager running the corporation.  However, this is clearly impractical, if not impossible.  The same is true for directors.  Similarly, investors cannot know and trust the motivations and abilities of every director charged with safeguarding and enhancing the value of their capital individually; and every director cannot know and trust the motivations and abilities of every manager to increase value[[xxx]].

To resolve this issue of trust at a distance, legislators have used two legal instruments: fiduciary law and contract law.  Fiduciary law is founded on a requirement to trust.  Contract law is founded on a premise of mistrust[[xxxi]].  Fiduciary law applies to the relationship between directors and corporations. directors owe a duty of loyalty and care to optimize the long-term value of the corporation for shareholders, in effect making directors a source of trust for shareholders.  Although it is possible for directors to contract out of their duty of care responsibilities, such as incompetence and imprudence, Sarbanes-Oxley legislation has recently strengthened the fiduciary obligations of audit committees in particular[[xxxii]][[xxxiii]].  Both fiduciary (for duty of loyalty) and contract law (for duty of care), govern the accountability of corporate officers.  This means that shareholders should trust all directors and officers for their loyalty to optimize long-term shareholder value and trust directors on the audit committee for their duty of care over the accurate reporting of historical financial results.  In other words, for the corporate system to work, shareholders are expected to trust corporate directors and management to increase the value of their shares over time.

If the viability of the corporate system is founded on shareholders trusting their boards of directors to build value, what conditions should support that trust?  Is trust based strictly on the law, or are there other factors that contribute to shareholders being able to establish and maintain trust in their boards of directors?  If other factors contribute to sustaining required levels of trust, what are they? And what levels of trust do shareholders need under varying circumstances? The answers to these questions drive the requirements for "good corporate governance".

A generalized framework for trust can help to guide the development of a blueprint for good corporate governance.  The Trust Enablement^TM Framework, being introduced in this paper, defines conditions for trust according to two overriding objectives, to:

1.                  Establish a required level of trust in information; and

2.                  Ensure (protect from a loss or deficiency of) the required trust.

The conditions for trust are further subdivided according to the relative time horizon of the trust objective, namely whether the conditions build or maintain trust within a fairly short timeframe or over a longer period of time, to:

1a.       Establish fast trust (usually suggests a lower level of trust);

1b.       Establish high trust (usually takes longer);

2a.       Ensure trust associated with a transaction; and

2b.       Ensure trust over a longer period of time (spanning numerous transactions).

Finally, the Framework defines conditions required to overcome residual deficiencies in trust by addressing the requirement to:

A.                 Compel a relying party to take a desired consequential action before they have attained the level of trust they would otherwise require; and

B.                 Empower the relying party to choose their preferred conditions for trust. 

The framework, represented in tabular form in [Table 1], shows how these conditions contribute to attaining specific trust objectives.

Each condition for trust is used to invoke a specific desired response, as outlined in [Table 2].

The objective of good corporate governance (as defined in Section 2, above) is to attain and maintain the required:

·                    volume of shares purchased and held by investors;

·                    liquidity for securities (velocity of transaction cycles, from discovery, to negotiation and order, to fulfillment, ending with settlement and compliance); and

·                    rate of growth in the value of shares.

Investors must trust the board of directors to monitor, ratify and sanction management decisions by exercising care in the execution of their duties and loyalty in guiding the activities of the corporation.  The Trust Enablement^TM Framework can be used to examine how that trust is established and maintained.

How do investors establish trust and confidence in how well the board of directors executes its fiduciary duties of care and loyalty?  There are two parts to the answer:

1.                  Directors must be loyal and exercise care when executing their duties; and

2.                  Shareholders must have evidence of the Boards' loyalty and care.

The Trust Enablement^TM Framework in [Table 3] outlines, in general terms, the mechanisms that contribute to establishing and ensuring trust in the board's effectiveness executing its fiduciary duties.

More specifically, the Trust Enablement^TM Framework provides additional perspective to an Agency Theory framework[[xxxiv]], as depicted in [Table 4].

[Table 4] illustrates how trust in corporate governance, relies on a cascade of dependencies, each reliant on mechanisms that both establish and ensure trust.  Although the actual mechanisms vary by stratum within the chain of trust and the nature of the information being relied upon, the more narrowly scoped and widely accepted Agency Theory supports the principles introduced by the Trust Enablement^TM Framework.  Both an Agency-Theory Framework and the Trust Enablement^TM Framework are congruent with each other and can be applied consistently to establish and maintain an integral chain of trust and confidence by distant relying parties.  Although [Table 4] only depicts trust dependencies going in one direction, from shareholder to management, the Trust Enablement^TM Framework can also represent the trust dependencies that flow in the opposite direction.  For example, management is expected to rely on the board of directors for advice and guidance.  This trust dynamic is relevant, but is beyond the scope of this paper.

The same frameworks are useful for assessing the extent to which existing corporate governance practices contribute to attaining these trust objectives.  [Table 5] applies the Trust Enablement^TM Framework to assess the Corporate Governance Principles of Pfizer Inc. [[xxxv]]

The Trust Enablement^TM Assessment in [Table 5] highlights the expectation of Pfizer's Board of Directors that shareholders should rely almost exclusively on corporate management as their source of trust in the efficacy with which Directors' and management execute their fiduciary duties.  It also illustrates how Pfizer's Corporate Governance Principles give considerably higher priority to control (as evidenced by an emphasis on ensuring trust)[[xxxvi]] posture of the Board.  This approach would be most appropriate where reliance is based on nominal levels of trust, such as when outsourcing call-centre services to low cost, offshore providers that use junior staff.

[Table 6] provides a Director's perspective, namely how a Director is expected to rely on information to make decisions that are aligned with shareholders' interests.  It highlights Pfizer's Board of Directors heavy reliance on management and other board members as their primary sources of trust in the efficacy with which management executes their fiduciary and contractual duties.  It also illustrates how Pfizer's Corporate Governance Principles give management considerable control over the agenda, the information being relied upon, and decision-making, which suggests a prevailing risk management culture[[xxxvii]]in the Company[[xxxviii]][[xxxix]].

If, in fact, good corporate governance is all about optimizing around trust, then Boards of Directors should do more to proactively take initiatives to building shareholder, if not stakeholder[[xl]], trust and confidence.  Examples of such prospective initiatives, beyond the provisions of Sarbanes-Oxley legislation, are presented in [Table 7][[xli]].

The mechanisms proposed in the example are oriented around establishing higher levels of trust, by strengthening the effectiveness of the so-called 'demand-side'[[xlii]], which consist of various intermediaries that act as monitors and gatekeepers[[xliii]].  Others have advocated increasing the role of intermediaries with fiduciary duties to relying parties, and a move away from contractual obligations that presume mistrust[[xliv]], as a way to spark an iterative process of building higher levels of trust.

Best practices for establishing trust fall short of the above recommendations.  Although it stands to reason that increasing shareholder (and other stakeholder) trust[[xlv]] and confidence should improve shareholder attraction and retention rates, and enhance market performance, underwriters of Directors and Officers (D&O) Liability and Indemnification Insurance have yet to equate strong intermediary monitoring systems to their metaphoric equivalent of monitored home alarm systems, by offering a discounted pricing structure for higher levels of shareholder trust and confidence.  This is, despite evidence that correlates distrust with market volatility[[xlvi]] and trust with improved business and share value performance.  Even, so called, progressive insurance companies that take an individual, ‘financial risk' or ‘quality of corporate governance' rather than a ‘portfolio risk' approach[[xlvii]] give Boards of Directors and corporate officers few incentives to exceed regulatory standards.  [Table 8] provides an overview of the factors for establishing trust (rather than ensuring trust, as the objective is to examine counterbalancing mechanisms to prevailing risk management approaches and corresponding control-oriented solutions) that D&O Liability Insurance companies assess when pricing premiums[[xlviii]].

The example in [Table 8] shows how regulatory compliance practices for establishing shareholder trust limit shareholder reliance almost exclusively to information provided by corporate management, and therefore may not be sufficient for building required levels of trust in corporate governance practices.  Directors themselves, however, are encouraged to use multiple sources of trust to assist with their monitoring and ratification activities.  Even so, the practice is somewhat haphazard, based on discretionary needs, rather than being systemized in policies and procedures.  One exception to this is the formalized use of external auditors to attest to the accuracy of the corporation's historical financial performance.

Shareholder trust and confidence could further be improved, and the corporation's D&O liability exposures could be reduced with a documented and integrated:

1.      Commitment to shareholder (and other stakeholder) trust and confidence that addresses relevant (if not all) aspects of the corporation's business;

2.      Commitment to treating all shareholders (and other stakeholders) fairly, according to strategic business priorities and market realities, which is disclosed to all relying parties[[xlix]];

3.      Management understanding and commitment to being attentive to the trust threshold requirements of shareholders (and other stakeholders) with respect to information they need to rely on to contribute their resources in support of the corporation's business objectives;

4.      Management understanding of how the relative dynamics of trust and risk affect their business performance;

5.      Management strategy for protecting from a loss or deficiency of trust;

6.      Disclosure of motivations that drive the behaviour of its directors and officers (and perhaps even other key internal and external stakeholders);

7.      Strategy for aligning motivations between and among shareholders (and more broadly even key internal and external stakeholders);

8.      Ability to deliver expected value to shareholders (and stakeholders);

9.      Strategy for transferring risk away from shareholders (and other key stakeholders);

10.  Strategy for establishing and re-establishing required levels of trust with shareholders (and other key stakeholders);

11.  Commitment to empowering shareholders (and other key stakeholders) with the ability to choose the mechanisms and sources of trust that allow them to attain and maintain the levels of trust and confidence they require to commit their resources in support of the corporations business objectives; and

12.  Program that reviews and optimizes resource availability and allocation, in order to continuously improve overall levels of trust with shareholders (and other stakeholders).

Enterprise-wide Corporate Trust Enabling^TM Policies can form the basis for such documentation[[l]].  Founded on the Trust Enablement^TM Framework, each policy statement has a specific desired outcome and can be implemented with corresponding mechanisms and business processes that explicitly satisfy each trust objective[[li]].  [Table 9] lists prospective high-level policy statements for each element of the Framework[[lii]].

Today, shareholders are the primary stakeholders of corporations.  However, this is a much-debated subject.  Although, increasingly legislation, the courts, public opinion, and best practices are revaluing the relative role of shareholders and other stakeholders, the obvious, and by some accounts the only legal[[liii]] place to start implementing Trust Enabling^TM practices is with shareholders.  Still, since trust reduces transaction costs, yields improved business performance, and stimulates economic growth and prosperity, a compelling legal defence could be constructed to support a Board's approval of Trust Enabling^TM initiatives for all key stakeholders, despite a prevailing ‘shareholder primacy' bias[[liv]].

10.    Conclusions

Trust is an in inherent requirement for good corporate governance and improved business performance, with broad economic and societal implications.  Current approaches for addressing corporate governance and business improvement have been based primarily on a premise of mistrust and controls-oriented risk management practices, which reinforce mistrust and promote reactivity, increasing transaction costs.

This paper demonstrates how a structured approach, and specifically the Trust Enablement^TM Framework that the paper introduces, can be useful for improving upon existing corporate governance best practices by directing management toward a balance between ensuring trust, the focus of today's solutions, and establishing higher levels of trust that improve business performance.

Shareholder (and even stakeholder) trust and confidence objectives can now be achieved by developing enterprise-wide Corporate Trust Enabling^TM Policies, based on the Trust Enablement^TM Framework.  Due to its 'systems thinking' approach[[lv]] and focus on specific business outcomes, resulting policies can be readily implemented within business processes and management practices, which not only reduce liability exposures, but also improve business performance.

Business leaders should adopt, as a new strategic priority, the imperative of balancing the need to protect corporate assets with the requirement to continually build intrinsic value in their corporations.  In Marshal McLuhan's foreshadowing of the 'Global Village', "where everything affects everything all the time"[[lvi]], reputation[[lvii]] instantly becomes universal reality, in which either fear of terror or confidence in the value of collaboration[[lviii]] will define culture and root the sources of ultimate power.

[i] Todd, A. (2005) "Biography for Alex Todd", Trust Enabling Strategies web site, http://trustenablement.com/organization.html#AlexToddBio.

[ii] Note: A dynamic balance of opposing forces is a law of nature and should also govern business. See [Detailed Note 1].

[iii] Note:  A distinction should be made between the terms ‘collaboration' and ‘cooperation'.  The former is used in this document to represent the higher standard, while recognizing that often the nature of the relationship be based on cooperation, rather than collaboration.  For a comparative discussion on the nature of the two terms see http://en.wikipedia.org/wiki/Collaboration#Differentiating_coordination.2C_cooperation.2C_collaboration_.26_teamwork.

[iv] Frankel, T. (1999) "Trusting and Non-Trusting:  Comparing Benefits, Cost and Risk", Boston University School of Law, Working Paper Series, Law & Economics, Working Paper No. 99-12.

("Focus on risk reduces interest in, and valuation of, other aspects of trusting relationships, such as benefits. Focus on individuals - micro economic considerations - reduces attention to the macro aspects of trusting and its effects on systems, such as the financial system and its benefits to the economy ... I reject this risk-centered, individualistic approach and deal with relationships of trust or distrust, whether personal, impersonal, among people, institutions, and in society.  I reject the unrealistic (irrational) fear of trusting others, most of the assumptions on which fear-theories are based, and their application to business relationships; and I reject the belief that markets forces and a restricted contract law are sufficient to support successful financial systems.")

[v] Note:  There is some debate about whether this is true for all shareholder or only the loyal, controlling shareholders, because they are the only investors who truly care about the company's welfare.  Minority shareholders tend to buy securities for speculative, opportunistic purposes, buying and selling them based on price momentum alone.  It is believed that they place little, if any reliance on the fiduciary duties of directors and officers.  For simplicity reasons, this paper does not explicitly distinguish between different types of shareholders.  However, the author's philosophy is that corporations should engage different types of stakeholders according to the corporation's relative need for their resources and then the reliance profile (or trust threshold requirements) of each stakeholder type.  This approach alleviates the need to distinguish between types of shareholders within this document.

Reichheld, F. F. (2001) "The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value", Harvard Business School Press, pp. 159-160.

("Most [loyalty leaders] believe they would find it very difficult to pursue their loyalty-based strategies as public companies....  Publicly owned loyalty leaders tend to have one or several core owners with a pronounced vested interest in the company's long-term success....  When he and his associates believe that other investors are undervaluing the company, they buy shares and stabilize the price...  The key to pursuing a consistent loyalty-based strategy even without a strong core shareholder is to communicate the company's philosophy to shareholders and get them to buy in....  It's [Ben Edwards'] investors are now largely self-selected....  There are four principle ways to [free management to pursue a long-term strategy]:  1. Educate current investors; 2. Shift the investor mix toward institutions that avoid investment churn; 3. Attracting the right kind of core owner; 4. Going private.")

[vi] Note:  See [Detailed Note 2] for a definition of ‘corporate governance'.

[vii] Wikipedia, http://en.wikipedia.org/wiki/Corporate_governance#Definition.

("Corporate governance is the key mechanism through which this trust is maintained across all stakeholders.").

Wikipedia, at http://en.wikipedia.org/wiki/Governance#Corporate_governance.

("...provide the means by which each individual part of the organisation can trust that the other parts each make their contribution to the mutual benefit of the organisation and that none gain unfairly at the expense of others....")

[viii] Smith, J.H. (Summer 2003) "The Shareholder vs. Stakeholder Debate", MIT Sloan Management Review, vol. 44, No. 4.

("Jay Lorsch states that two principles for the nexus of directors' legal responsibilities:  a duty of care and a duty of loyalty.).

[ix] Martin, R., and Bailie, J. (La Sapiniere, September 5 to 7, 2003, draft June 10, 2003) "Background Paper on ‘Confidence Control and Compensation in the Modern Corporation'".

[x] Ibid.

[xi] Note:  To clarify, as the reader will discern from the discussion on trust, the statement does not use the term ‘trust' in the sense of a relationship between individuals, but instead as trust and confidence in the implicit and explicit promises or obligations of the respective parties.

[xii] "Article at a Glance:  Better boards in Thailand", The McKinsey Quarterly, http://www.mckinseyquarterly.com.

("Companies [listed on the stock exchange in Thailand] with strong corporate governance practices have higher market valuations.")

Thompson, M. (June 4, 2001) "Better Corporate Governance Pays Off for Large Companies in Emerging Markets", http://www.socialfunds.com.

("In examining the 100 largest companies in emerging markets, researchers found a strong correlation between corporate governance and financial performance ratios.").

The Financial Express (May 5, 2003) "Corporate Governance and Performance - Expectations and Realities", The Financial Express, Corporate Governance Press Coverage, http://www.mckinsey.com.

("Institutional investors are willing to pay a premium for well-governed companies.").

Bauer, B., and Guenser, N. (April 2003) "Good Corporate Governance pays off!", ABP Investments, http://www.deminor.org/.

("Portfolios of companies with high corporate governance standards perform better than companies with worse standards.  Investors value well-governed companies significantly higher.")

(2001, 2003) "Striking a New Balance" and "Institutional Investor Preferences: 2003 Second Quarter Results", Working Council for CFOs, PeopleSoft Presentation materials.

("While investors penalize poor transparency ... they reward good corporate governance efforts. [measured by "Opacity Discount" and "Corporate Governance e Premium"]).

Wikipedia at http://en.wikipedia.org/wiki/Corporate_governance

("In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia).

Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms', Antunovich et al found that those ‘most admired' had an average return of 125%, whilst the 'least admired' firms returned 80%. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns.

On the other hand, research into the relationship between specific corporate governance controls and firm performance has been mixed and often weak.")

[xiii] Ip, G. (July 17, 2002) "Greenspan Gives Hopeful Outlook for Economy Despite Stock Swoon:  Fed Chairman Warns That Loss of Trust Caused by ‘Infectious Greed' Could Undercut Recovery", Wall Street Journal Online, Page One.

("Breakdowns in corporate governance could undermine the trust necessary for efficient markets ... That prospect, he [Alan Greenspan] said, threatened to "significantly erode" the economy's impressive gains in productivity.")

The New York Times (July 17, 2002) "Dr. Greenspan's Prescription", The New York Times On The Web.

("The American economy "depends critically on trust," Mr. Greenspan declared. Investors who lack confidence in the system will be reluctant to buy stocks.")

Rich J. (2002) "Golin/Harris Trust Survey", Golin/Harris International.

("An America that is cynical or sceptical about business generally is a serious problem - more serious than any specific business scandal.  Corporate misdeeds-or even perceptions of wrongdoing-cause direct and collateral damage to business as a whole, not only to specific industries,")

Accenture (2004) "The business of trust", white paper referencing the World Economic Forum.

("Business today also needs the trust and confidence of society to operate successfully.  Without this, governments are likely to regulate to limit companies' freedom of action, which may in turn constrain the entrepreneurial spirit.... Yet one consequence of declining trust is that business has lost its advocates - few people now seem willing to put the positive case for business - and the legitimacy of business seems to have been eroded in the eyes of the general public. Business is no longer seen as the wealth-generating engine for the whole of society.")

Miller, D. (November 2002) "Voice of the People Survey", World Economic Forum, conducted by Environics.

("Unless traditional institutions regenerate public trust, people will continue to search for new ways forward. The real cost of inaction may be greater system instability and a growing mandate for NGOs and new political parties.")

Rhoads, C., (June 7, 2002 ) "Long-Term Economic Effects Of Sept. 11 May Be More Costly", Wall Street Journal.

("In response to the terror attacks, the insurance industry has increased risk premiums ... could hinder the real-time supply-chain management that many firms have developed in recent years, encouraging them to carry more inventories ... Developing countries, in particular, could suffer because they likely wouldn't be included in these new trading arrangements ... the boost in recent months in defense spending by governments, particularly the U.S., and private spending on security measures could soon amount to a drag on the economy ... The report estimated that doubling private security spending reduces potential output by 0.6 percentage points after five years, and lowers productivity by 0.8 percentage points in that time.")

McKenna, B. (June 28, 2002) "Bush Fears Return to Recession", The Globe and Mail.

("'I'm concerned about the economic impact of the fact that there are some corporate leaders who have not upheld their responsibility,' Mr. Bush said ... economists caution that a deepening crisis of confidence gripping financial markets is likely to cool prospects for months to come.  ‘Even without another big scandal, it could take six months to a year to get out from under this cloud,' said Peter Morici, an economist at the University of Maryland in College Park, Md.  ... ‘Weak investor confidence, and in turn declining stock valuations, will impede the economic recovery,' agreed economist James Glenn of Economy.com Inc. in West Chester, Pa.").

Ezekiel, Z. (2005) "Rebuilding Trust in Canadian Institutions", The Conference Board of Canada.

("A prolonged and widespread failure of trust in public and private sector institutions has the potential to affect economic growth and corporate success in Canada.  Trust is the ‘glue' that holds the economy together.  In the absence of trust, investors hesitate, capital markets falter, employees withhold commitment, suppliers grow wary and communities become reluctant to grant companies their ‘social licence to operate.'")

("Regardless of the academic and methodological debates, it is evident that public and private sector leaders take seriously the issue of public trust. Many of them fear that lack of public trust impedes their organizations' functioning. Examples of this concern abound: Trust was chosen as the theme of the 2003 annual meeting of the World Economic Forum in Davos, Switzerland. Canadian private sector executives feel that public distrust interferes with their ability to do their jobs.")

Luaszewski, J. E. (2002) "American Business Faces a Crisis of Trust", Golin/Harris International.

("'An America that is cynical or skeptical about business generally is a serious problem- more serious than any specific business scandal,' said Rich Jernstedt, CEO, Golin/Harris International. ‘Corporate misdeeds-or even perceptions of wrongdoing-cause direct and collateral damage to business as a whole, not only to specific industries.")

Leonhardt, D. (July 17, 2002) "Is Uncertainty the Only Thing That Is Certain?", The New York Times.

("A barrage of corporate scandals, combined with a 37 percent drop in the broad stock market since the beginning of 2000, has caused a questioning of the country's economic and financial future.")

[xiv] Accenture (2004) "The business of trust", white paper referencing the World Economic Forum.

("Business has a particularly big challenge on its hands if it is to reverse this trend and recapture public trust.  Failure to do so could cause long-term damage both to business and wider society, far beyond the US.")

 ("If this trend continues, it will help fuel the backlash against business and reinforce the actions of anti-globalization activists; and it is likely to result in more rules and regulations.  It is therefore imperative that business leaders act now to start rebuilding trust.")

Luaszewski, J. E. (2002) "American Business Faces a Crisis of Trust", Golin/Harris International.

("The erosion of trust indicated in the research is a call to action. And it must be heard loud and clear.'")

Fukuyama, F. (1996) "Trust:  The social virtues and the creation of prosperity", pp. 321, Free Press Paperbacks.

(Fukuyama sounds an alarm about economic consequences of a decline in American social capital, saying, "Once social capital has been spent, it may take centuries to replenish, if it can be replenished at all.")

("Robert Putnam has compiled data that point to a striking decline in sociability in the United States.  Since the 1950s, membership in voluntary associations has dropped." "Communities of shared values, whose members are willing to subordinate their private interests for the sake of larger goals of the community as such, have become rarer.  And it is these moral communities alone that can generate the kind of social capital that is critical to organizational efficiency.")

Rich J. (2002) "Golin/Harris Trust Survey", Golin/Harris International.

("The erosion of trust indicated in the research is a call to action. And it must be heard loud and clear.'")

Simons, R., Mintzberg, H., and Basu, K, (2002) "Memo to: CEOs", Fast Company, pp. 117.

(Business -- and capitalism -- are at a crossroads. Newspaper headlines today suggest a gathering crisis, one of performance, values, and confidence. It's time for CEOs to rally around a new set of business truths. It's time for an agenda that restores faith in business, trust in business leaders, and hope in the future.")

[xv] Ezekiel, Z. (2005) "Rebuilding Trust in Canadian Organizations", The Conference Board of Canada.

(A cautionary note:  "In other words, to determine individuals' propensity to trust, it is more useful to measure what they have tended to do rather than what they profess to think.")

Note:  Lack of trust appears to be significant and widespread. See [Detailed Note 3].

[xvi] Ezekiel, Z. (2005) "Rebuilding Trust in Canadian Institutions", The Conference Board of Canada.

("In 2002, a majority of Canadians polled by the Centre for Ethical Orientation agreed that trust is in decline. This survey found that ‘8 in 10 . . . Canadians agree distrust is growing,' while 87 per cent ‘agree people are less trusting than in the past.'  Since then improvement, if any, has been slight. In 2004, a relatively optimistic survey suggested that public trust had rebounded somewhat from 2002, but it also noted that ‘companies and governments cannot be cheered by simply returning to [what were previously] historically low levels of trust.'")

Accenture (2004) "The business of trust", white paper referencing the World Economic Forum.

("Such a decline could never be good news, but it is particularly worrying today because new ways of doing business depend on high trust levels.")

[xvii] Fukuyama, F. (1996) "Trust:  The social virtues and the creation of prosperity", pp. 151, Free Press Paperbacks.

("Now trust has a very important pragmatic value, if nothing else.  Trust is an important lubricant of a social system. It is extremely efficient and it saves a lot of trouble to have a fair degree of reliance on other people's word." - quoted of Nobel laureate Kenneth Arrow")

Ibid., pp. 321.

("People who do not trust one another will end up cooperation only under a system of formal rules and regulations, which have to be negotiated, agreed to, litigated, and enforced, sometimes by coercive means.  This legal apparatus, serving as a substituted for trust, entails what economists call ‘transaction costs.'")

Cai, R. (Defended on May 5th, 2004) "Trust and Transaction Costs in Industrial Districts", Major Paper submitted to the faculty of the Virginia Polytechnic Institute and State University.

("In general, trust helps reduce these transaction costs and the input of transaction costs will in turn, changes the perception of trustee's trustworthiness.")

Shirley, Mary M., "Institutions and Development", The Ronald Coase Institute, May 2004.

("[For economic development] encourage trade by promoting trust & lowering transaction costs....  Trust correlates with growth & development.")

Moore, C., and de Bruin, A.(June 2004) "A Transaction Cost Approach to Understanding Ethical Behaviour", World Congress of Social Economics, Albertville, France.

("The presence of trust and an ethical mindset can substantially lower TCs [transaction costs]. Organizations may achieve TC economisation by applying trusting and ethical behaviours at both the firm and societal level.")

("Trust is just as crucial at the broader societal level as it is at the micro level of conducting business. Lower levels of generalized trust and morality in a society increase the TCs [transaction costs] of conducting business for all entrepreneurs in such a society.")

[xviii] Ip, G. (July 17, 2002) "Greenspan Gives Hopeful Outlook for Economy Despite Stock Swoon:  Fed Chairman Warns That Loss of Trust Caused by ‘Infectious Greed' Could Undercut Recovery", Wall Street Journal Online, Page One.

("Breakdowns in corporate governance could undermine the trust necessary for efficient markets...")

Ezekiel, Z. (2005) "Rebuilding Trust in Canadian Institutions", The Conference Board of Canada.

("Trust is the ‘glue' that holds the economy together.  In the absence of trust, investors hesitate, capital markets falter,...")

[xix] Yankelovich (2004) "State of Consumer Trust".

("Trust increases retention, boosts spending, enables premium pricing and provides a lasting competitive advantage.")

Note: The evidence is compelling that increased levels of trust are good for business in general, and specifically contribute to improving share value, investment, growth, revenue, price, profitability, business effectiveness, productivity, change and agility, innovation and entrepreneurship, efficiency, cost savings, sustainability, employee retention, stakeholder engagement, living values and good citizenship, and collecting private information.  However, a culture of trust must be rooted in at the top, in corporate governance, in order for trust initiatives to have any hope of success and yield sustainable business benefits.  See itemized benefits in [Detailed Note 4]

[xx] Keser, C., Leland, J., Shchat, J., and Juang, H. (2002) "Trust, the Internet, and the Digital Divide", IBM Research Report.

(Knack and Keefer (1997) "found that a very measure of how trusting inhabitants of different countries are is a significant explanatory variable in regression of average annual growth rates in per capita income from 1980 to 1992.  Moreover, the impact is large - a 10% increase in the measure of trust translates into a .8% increase in economic growth - a sizable increment given world average growth rates of 1% to 3% in the latter half of the 20th century.")

Ip, G. (July 17, 2002) "Greenspan Gives Hopeful Outlook for Economy Despite Stock Swoon:  Fed Chairman Warns That Loss of Trust Caused by ‘Infectious Greed' Could Undercut Recovery", Wall Street Journal Online, Page One.

("threatened to "significantly erode" the economy's impressive gains in productivity.")

McKenna, B. (June 28, 2002) "Bush Fears Return to Recession", The Globe and Mail.

("'I'm concerned about the economic impact of the fact that there are some corporate leaders who have not upheld their responsibility,' Mr. Bush said ... economists caution that a deepening crisis of confidence gripping financial markets is likely to cool prospects for months to come.  ‘Even without another big scandal, it could take six months to a year to get out from under this cloud,' said Peter Morici, an economist at the University of Maryland in College Park, Md.  ... ‘Weak investor confidence, and in turn declining stock valuations, will impede the economic recovery,' agreed economist James Glenn of Economy.com Inc. in West Chester, Pa.").

[xxi] Frankel, T. (1999) "Trusting and Non-Trusting:  Comparing Benefits, Cost and Risk", Boston University School of Law, Working Paper Series, Law & Economics, Working Paper No. 99-12.

(Americans have created a system which reduces the costs of trusting and maximizes its benefits. I believe that what makes America so successful is the method it has developed for resolving the conflict between necessary trusting on

the one hand, and its culture and disadvantages of personal trusting on the other hand.

Americans have developed an extraordinary degree of trusting in their institutions. In fact, this trust embraces both business and political norms and institutions. Cynical as they are on the interpersonal level, Americans revere their constitution and trust their banks, mutual funds, and insurance companies. This trusting relationship is the foundation of American capitalism.)

("Americans have expanded institutions to introduce trusting among total strangers located far apart. One institution uses intermediaries to ensure the performance of promises and sometimes the resolution of conflicts among the trading partners. The beauty of this arrangement is that the intermediaries' interests to execute the transactions no matter who wins or loses strengthens impersonal trusting.")

Fukuyama, F. (1996) "Trust:  The social virtues and the creation of prosperity", pp. 321, Free Press Paperbacks.

(Societies with a high degree of generalized trust and, consequently, a strong propensity for spontaneous sociability, such as Americans' rich network of voluntary associations and community structures to which individuals have subordinated their narrow interests, have private sector firms that are significantly larger than familistic societies that provide no basis of trusting unrelated people.  "There is a relationship between high-trust societies with plentiful social capital - Germany, Japan, and the United States - and the ability to create large, private business organizations.")

[xxii] Martin, R. L., Archer, M. A., and Brill, L., "Why do People and Organizations Produce the Opposite of What they Intend?", paper commissioned by The Walkerton Inquiry.

("Mistrust and cover-up breed more draconian formal fixes, which breed still more mistrust and cover-up and so on.")

Frankel, T. (1999) "Trusting and Non-Trusting:  Comparing Benefits, Cost and Risk", Boston University School of Law, Working Paper Series, Law & Economics, Working Paper No. 99-12.

("trusting is crucial and benefits all parties, while mistrust is corrosive, and disadvantages all.")

Riegelsberger, J. (June 27, 2005 - Online version July 12, 2005) "Trust in Mediated Interactions", University College London, dissertation submission - Doctor of Philosophy, University of London.

("Adopting legalistic mechanisms may not only fail to restore trust, but may lead to an escalating spiral of formality and distance that increases distrust." {Sitkin & Roth, 1993, p. 385}.")

[xxiii] Zak, P. J., Kurban, R., and Matzner, W. T. (2004), "The Neurology of Trust", New York Academy of Sciences.

("We show that receipt of a signal of trust is associated with a higher level of peripheral oxytocin than that in subjects receiving a random monetary transfer of the same average amount. Oxytocin levels were also related to trustworthy behavior (sharing a greater proportion of the monetary gains). We conclude that oxytocin may be part of the human physiology that motivates cooperation.")

[xxiv] Knack, S., and Zak, P. J. (2002) "Building Trust: Public Policy, Interpersonal Trust, and Economic Development", Forthcoming Supreme Court Economic Review.

"(Zak & Knack (2001) demonstrate that interpersonal trust has a considerable effect on economic growth as trust affects the transactions costs associated with investment.1 Their analysis shows that if trust is su±ciently low, so little investment will be undertaken that economic growth is unachievable, resulting in a low-trust poverty trap. Even in a growing economy, interpersonal trust is a powerful economic stimulant: a 15 percentage point increase in the proportion of people who report that others in their country are trustworthy raises per capita output growth by 1% for every year thereafter. Further, economic growth initiates a virtuous circle as income gains enhance interpersonal trust.")

Govier, T. (2004) "Additional excerpts from "Trust, Precarious Treasure", Harvard University, http://cyber.law.harvard.edu/trusting/govier2.html.

("A fascinating and distinctive aspect of social capital is that unlike other forms of capital, when it is used, the supply tends to increase rather than diminish: "The more two people display trust towards one another, the greater their mutual confidence." Social capital is intensely sensitive to virtuous circles (trust builds on trust) and vicious circles (distrust builds on distrust). In a rosy spiral, or virtuous circle, there is a benign equilibrium: we find high levels of cooperation, trust, reciprocity, civic engagement, and collective well being. In a vicious circle there is a stagnant equilibrium: defection, distrust, shirking, isolation, exploitation, and disorder.")

[xxv] See [Detailed Note 5] for definitions of trust.

[xxvi] Van Lee, R.; Fabish, L.; and McGaw, N.(2004) "The Value of Corporate Values", Strategy + Business, 2004 Booz Alen Hamilton and Aspen Institute global study on values-based leadership.

("The CEO's tone really matters. Eighty-five percent of the respondents say their companies rely on explicit CEO support to reinforce values, and 77 percent say such support is one of the "most effective" practices for reinforcing the company's ability to act on its values. It is considered the most effective practice among respondents in all regions, industries, and company sizes.")

Luaszewski, J. E., (2002) "American Business Faces a Crisis of Trust", Golin/Harris International,.

("When asked, ‘What are the most critical actions that companies you don't trust should do to earn your trust this year?" 94% of survey respondents said be open and honest in business practices.")

[xxvii] Gerck, E. (2002) "Trust as Qualified Reliance", COOK Report on Internet. 

("In summary, the answer needed to solve the fundamental problem of Internet communications is trust. Not trust as blind faith, compliance, belief, or ignorance, but trust as qualified reliance on information through open-loop control.  Trust is that which provides meaning to information.")  For explanation see [Detailed Note 6].

[xxviii] Ezekiel, Z. (2005) "Rebuilding Trust in Canadian Organizations", The Conference Board of Canada.

("Independent trust intermediaries-such as external auditors, the media, financial analysts, non-governmental organizations (NGOs), and monitoring or watchdog institutions-play a critical role in making trust possible by providing impartial, informed insight into the trustworthiness of organizations. But there are indications that the public is losing confidence in these traditional sources of information and verification.")

Cai, R. (Defended on May 5th, 2004) "Trust and Transaction Costs in Industrial Districts", Major Paper submitted to the faculty of the Virginia Polytechnic Institute and State University

("Trust might have some negative effects including functional lock-in effects, cognitive lock-in effects and political lock-in effects. The paper suggests using local institutions as intermediaries to build up communication channels connecting insiders and outsiders, and thus to mitigates the negative effects.")

[xxix] Note:  The terms "sources of trust" and "trusted sources" are synonymous.  The author prefers the former in order to distinguish between ‘sources of information' and ‘sources of trust'.  For example, a corporation releasing its financial statements is primarily a ‘source of information' (not necessarily a good ‘source of trust'), while the auditor who provides an opinion about the financial statements is primarily a ‘source of trust'.

[xxx] Note:  Shareholder value is measured by the combined effect of capital appreciation of the shares and dividend yield.

[xxxi] Frankel, T. (1999) "Trusting and Non-Trusting:  Comparing Benefits, Cost and Risk", Boston University School of Law, Working Paper Series, Law & Economics, Working Paper No. 99-12.

("It is the world of people who are alone mistrusting others, laboring on the verge of paranoia. The approach outlined above is familiar to lawyers; for it serves as the foundation of contract law. In the past twenty years scholars of renown have advocated an ever-expanding application of contract to business institutions (and others as well), such as corporations, financial markets, and financial institutions. While our law offers two models, trust and contract, the balance between these two models is shifting as contract erodes trust's legal protections. Legal literature, concerned with risk from trusting, seeks to build the security systems and acquire fire arms that would lock the parties in fortified citadels. Judicial protection from the risks of trusting is minimized, encouraging individualism, and independence.")

[xxxii]  Strategic Management Systems Inc. (September 2003) Review of Sarbanes-Oxley:  Corporate Auditing, Accountability, Responsibility and Transparency Act 2002", Strategic Management Systems Inc.

("The fiduciary duties of Board members reflect the expectation of the stakeholder regarding oversight of corporate management. This fiduciary responsibility follows the "duty of care" principle that requires Board members to exercise due diligence and care of carrying out their corporate responsibilities. The Sarbanes-Oxley Act moves to define these obligations in fairly specific terms. Because of the nature of the problems to which the Act responded, the focal point for many of the delineated responsibilities lies with the Audit Committee of the Board.')

[xxxiii] Frankel, T. (1999) "Trusting and Non-Trusting:  Comparing Benefits, Cost and Risk", Boston University School of Law, Working Paper Series, Law & Economics, Working Paper No. 99-12.

("Corporate statutes have been amended recently to allow waiver of breaches of the duty of care by management (directors and officers) under fiduciary law (such as incompetence and imprudence)

but not the duty of loyalty (such as conflict of interests transactions).")

[xxxiv] Moldoveanu M., and Martin R. (February 2, 2001), "Agency Theory and the Design of Efficient Governance Mechanisms", Prepared for the Joint Committee on Corporate Governance.

[xxxv] The Conference Board (2005) "Corporate Governance Handbook 2005: Developments in Best Practices, Compliance, and Legal Standards".

[xxxvi] See comparative illustration of Trust Enablement^TM vs. Risk Management  in [Detailed Note 7].

[xxxvii] Note:  The Pfizer Assessment is only one, randomly selected, example and should not be generalized.  Additional assessments for corporate governance practices by other corporations in a variety of industries would help to define the current state, while a comparative assessment between best practices, as defined by organizations, such as the OECD, The Business Round Table, and The Conference Board, would help provide additional insight into future corporate governance practices.  Although a variety of corporate governance benchmarking services currently monitor such practices, it would also be instructive to assess the criteria currently being applied from a Trust Enablement^TM perspective, in order to gain a better understanding of their relative emphasis on building trust versus protecting from a loss of trust.

[xxxviii] Martin, R. and Bailie, J. (September 5 to 7, 2003, draft June 10, 2003)  "Background Paper on ‘Confidence Control and Compensation in the Modern Corporation'", La Sapiniere.

("It seems to us a teaching to be derived from corporate events of the past few years is that detailed rules and liability provisions, no matter how far-reaching, are inadequate to control an environment in which executive management is heedless of fiduciary obligations and motivated by self-enrichment.  In the last resort, only a corporate culture in which such conduct is simply unacceptable can prevent its occurrence.  In well-run corporations, this is taken for granted.  But compliance with various regulatory initiatives does not ensure this outcome.")

[xxxix] Note:  Also noteworthy is the absence of terminology, such as ‘trust', ‘transparency', ‘values' and ‘honesty' in Pfizer's Corporate Governance Principles, although reference is made to ‘ethics' standards.

Callahan, D. (2004) "The Cheating Culture", Harcourt Books, pp. 282-285.

("A 2001 study found ethics programs tended to rely too heavily on asking people to do the right thing and disregarded the imact of organizational culture on people's behaviour.  The authors of this study insisted that ethics programs would remain ineffective until companies developed the means to integrate ethical values into daily routines.....")

[xl] Note:  A tug of war is being waged between the those who believe that corporations should be governed to maximize shareholder value versus those who believe that the only honest and efficient way to build value is by focusing on engaging the resources of key stakeholders to contribute to the value creation efforts of the organization.  The following excerpt represents an example of the latter perspective.

Simons, R., Mintzberg, H., and Basu, K, (2002) "Memo to: CEOs", Fast Company, pp. 117.

("Of course, there is a half-truth in this mantra: Shareholders' interests are significant. The capital markets do need to work, and for that, shareholders need a fair return on their investment. But there is a larger truth to this half-truth: Maximizing shareholder value at the expense of all of the other stakeholders is bad for business and bad for capitalism. It drives a wedge between those who create the economic value -- the employees -- and those who harvest its benefits. Customers, too, recognize the cynicism of a company that only sees them as dollar signs. That may be one reason why the American Customer Satisfaction Index has declined steadily in almost every industry since the mid-1990s. "Maximize shareholder value" may be the job description that CEOs automatically recite -- but it is profoundly misguided.")

[xli] Macey, J. R. (2003) "A Pox on Both Your Houses: Enron, Sarbanes-Oxley and the Debate Concerning the Relative Efficacy of Mandatory versus Enabling Rule", Washington University Law Quarterly, vol. 81:329.

[xlii] Strouse, J. (July 7, 2002) "Capitalism Depends on Character", New York Times.

("Someone has to stand behind the fundamental accuracy of a company's financial statements in a legally responsible way, but derelict auditors, executives and boards of directors have defaulted, either by design or inexcusable ignorance. A second tier of guardians -- Wall Street analysts, rating agencies, the Securities and Exchange Commission -- failed to issue warnings of corporate deceit.")

[xliii] Note: The reader may find the diagram in [Figure 2] illustrative of the dynamics that existed between the principle organizations and the intermediaries in the Enron and related scandals.  The reader is cautioned that this diagram is from an unknown source and has not been validated.  It is provided only to illustrate the complexity of the relationships that exist in the securities industry.

[xliv] Frankel

[xlv] Armour, S. (February 5, 2002)"Employees' new motto: Trust no one", USA Today, published by Council of Public Relations Firms.

("More workers are suing employers for claims that basically amount to a breach of trust.")

[xlvi] Liesman, S. (July 18, 2002) "The strange Disconnect Between The Stock Market and Economy", Wall Street Journal.

("Most economists will tell you that the current disconnect between stocks and the economy is - at least in the post-war era - historic....  The Market at the moment is doing its own thing for its own reasons.  And not many - or even any - of those reasons concern the direction of the economy.  Accounting scandals and corporate corruption, the war on terrorism - all provide sound reasons for what many say is a rethink of the multiple that investors will pay for future earnings.  Part of what we're watching is the painful recalibration of risk.")

[xlvii] Alwis, A., Kremerman, V., and Shi, J. (Winter 2005) "D&O Reinsurance Pricing - A Financial Market Approach", Casualty Actuarial Society Forum.

[xlviii] Note: The author had access to additional material that was confidential to one insurance company that takes a ‘quality of corporate governance' approach and could therefore not display it in the table, however the inclusion of that information would not change the results of the analysis.

[xlix] DelCreo Inc., "Successful Security, Risk and Control Programs from DelCreo, Inc.", an Enterprise Risk Management Company, DelCreo eZine, http://www.delcreo.com.

(Johnson & Johnson has publicly made available their prioritized list of key stakeholders: • First responsibility is to those who use company products • Next come its employees • Next, the communities in which the employees live and work • The final responsibility is to the stockholders")

[l] Knack, S., and Zak, P. J. (2002) "Building Trust: Public Policy, Interpersonal Trust, and Economic Development", Forthcoming Supreme Court Economic Review.

("We set out in this paper to ask how amenable trust levels are to policy intervention. Our analysis shows that trust can be raised directly by increasing communication and education, and indirectly by strengthening formal institutions that enforce contracts and by reducing income inequality. Among the policies that impact these factors, only education, redistributive transfers, and freedom satisfy the efficiency criterion which compares the cost of policies with the benefits citizens receive in terms of higher living standards. Further, our analysis suggests that good policy initiates a virtuous circle: policies that raise trust efficiently, improve living standards, raise civil liberties, enhance institutions, and reduce corruption, further raising trust. Trust, democracy, and the rule of law are thus the foundation of abiding prosperity.")

[li] Note:  See Benefits of Corporate Trust Enabling^TM Policies in [Detailed Note 8]

[lii] Note:  See proposed Meta-Policies that provide context for Corporate Trust Enabling^TM Policies in [Detailed Note 9].

[liii] Bakan, J., (2004) "The Corporation", Penguin Canada, pp. 177.

("The way in which corporate laws are currently constructed requires directors and officers to justify any socially responsible actions under the guise of, or the aim, of either short-term or long-term shareholder wealth maximization.... Corporations do give donations and other kinds of support for causes that do not appear to be directly related to the activities of the corporation, because Philanthropy legislation in the United States has carved out this limited role for corporation.  The corporation can be considered a form of institutionalized self-interest in the sense that the best-interest principle, as it is being interpreted by the courts and by corporate decision makers, is clearly one in which wealth of shareholders is paramount, ignoring all other constituencies.")

[liv] Smith, J.H., (Summer 2003) "The Shareholder vs. Stakeholder Debate", MIT Sloan Management Review, vol. 44, No. 4.

("According to Balir, ‘We have a director primacy model in this country, not a shareholder primacy model.'")

[lv] Shugart,I (2002) "A Foundation for Developing Risk Management Learning Strategies", Canadian Centre for Management Development, CCMD Round Table on Risk Management.

("Systems approaches encourage people to view the world from a broad perspective that includes structures, patterns and processes of a system - the system dynamics - as opposed to just the events themselves. This broad view helps to identify the root cause behind a risk and where to work to address it.  When we fail to grasp the systemic source of problems, we are often left dealing with symptoms rather than the underlying causes. A systems approach is fundamentally different from traditional forms of analysis, which involve the separation of the subject into individual pieces for study. In contrast, systems thinking focuses on how the thing being studied interacts with the other parts of the system by expanding the view to take into account larger and larger numbers of interactions. This can result in strikingly different conclusions than those generated by traditional analyses, especially when what is being studied is dynamically complex.")

[lvi] Wikipedia, http://en.wikipedia.org/wiki/Global_village

[lvii] Greenspan, A. (May 8, 2003) "Remarks by Chairman Alan Greenspan", 2003 Conference on Bank Structure and Competition.

("Reputation and trust were particularly valued assets in freewheeling nineteenth-century America. Throughout much of that century, laissez-faire reigned and caveat emptor was the prevailing prescription for guarding against the wide-open trading practices of those years. A reputation for honest dealings was thus a particularly valued asset. Even those inclined to be less than scrupulous in their private dealings were forced to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.")

[lviii] Todd, A. (2005) "Trust Enabled^TM Supply Networks:  Uncovering the trust-building secrets of highly collaborative supply chains", presented at Innovative Collaboration for Competitive Advantage Third Annual Symposium on Supply Chain management, http://trustenablement.com/local/Trust_Enabled_Supply_Networks-whitepaper.pdf.