Trust and Predictability

While the goal of earning a profit serves the interests of investors, its investors tend to prioritize short-term profit over the long-term sustainability of the firm.   Every investor has a horizon, be it a date or a target price at which he will cash out and walk away, and will insist the firm be managed to reach this target at all costs.

But the investors are only one faction whose interests must be served by the firm.  There are many others (customers, employees, suppliers, and others) that have a more long-term interest in the firm, and upon whose trust the firm depends for its long-term sustainability,   Managing solely toward the short-term interests of investors can alienate these stakeholders, who become disinterested and reluctant to interact with it.

The firm, like any other organization, has a stated purpose (its mission), a set of supporting values, and practices that align to both.   These are communicated outside the firm to set expectations, thus enticing outsiders to contribute to or, in some cases, directly interact with the firm and even to become part of it.    Where these expectations are met, trust is earned, and the firm thrives.   Where they are not met, trust is broken and the firm finds itself without the resources and support it needs to sustain itself.

It can therefore be said that a firm can only work properly if it earns the respect, trust, and cooperation of external parties.  And it can only do that by communicating its intent clearly and acting in a manner that is predictable and relevant to its stated intentions.  

As such, its behavior becomes routinized and predictable – and this is necessary to earn trust and gain engagement.  Where a firm is inconstant or erratic, there is uncertainty of what the result of an interaction will be.   There is uncertainty as to whether engaging with the firm will in fact deliver the value stakeholders seek to gain by investing their time, effort, and money in the firm.   And consequently they will seek opportunities to invest with a different one, which is more trustworthy and predictable.

Granted, there are many misunderstandings: any stakeholder may bring his own expectations to the table, ignoring the intent that the firm has communicated.   If this seems to happen often for a given firm, it’s likely that the core problem is not the misperception of the stakeholders but its own misrepresentation of value that has led others to have “inaccurate” expectations – they may be inaccurate to what the firm wants them to believe, but accurate to what the firm has led them to believe, intentionally or unintentionally.

Ultimately, the legitimacy of respected institutions arises from a clear and unambiguous statement of its values and a correlation of its behavior to those values over the course of time.   A firm that is consistent in its behavior will gain the support of the stakeholders it needs to survive, provided that its values are shared by those stakeholders.   A firm that is inconsistent will falter and invariably fail – and this is of little concern to the investors so long as the failure occurs after they have cashed out.