Topics:   Corporate Governance,Corporate Social Responsibility

Topics:   Corporate Governance,Corporate Social Responsibility

August 31, 2021

How Boards Can Help Build Trusted Companies

August 31, 2021

This is an abbreviated version of a more thorough Directorship magazine article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

In June, hedge fund manager Christopher James, with just 0.02 percent of company stock, convinced Exxon Mobil institutional investors to vote in three handpicked board members who will press the company to respond more directly and with greater speed to the strategic imperative of climate change. James’ victory is an example of moving from theory to action on the principle of stakeholder capitalism. This idea represents the foundation of trust against which companies and their boards are judged.

Corporate leaders have a responsibility to craft and implement strategy—that’s their job—but the board stands for the interests of the corporation as a whole, and thus is the place where the navigation between the outside and the inside is expected to take place. Boards are the linchpin between interested parties outside the corporation (investors, regulators, the public, nongovernmental organizations, government) and the leadership inside the corporation.

The board’s guidance to Nokia during its restructuring remains an enduring example of how a board must straddle both the internal dynamics of the company while being cognizant of the demands of the external world. In 2008, Nokia shut down a plant in Bochum, Germany, laying off 2,300 employees, shortly after announcing a 67 percent increase in profits. The outrage was so great that Nokia ended up paying 80,000 euro ($95,000) per employee to close the plant. Fast forward to 2011, when Nokia was facing losses for the first time in its history. The board knew that Nokia would have to restructure because it was being out competed in smartphones and was losing share to lower-cost phones from Asia. The scope was huge, affecting 18,000 employees spread across 13 countries. But the board was committed to avoiding the mistakes of 2008. It charged senior executives with the task of coming up with a way to better manage the impending layoffs.

The result was the Nokia Bridge program, which was essentially a bet on trust: Nokia asked employees to stay on at the company—some for as many as two years—while it managed the restructuring. In exchange, Nokia promised employees a soft landing. The Bridge program gave employees a choice of paths to a new future: find a new job at Nokia, find a new job outside Nokia, get funding to start a new business, train for something new, or receive financial support to do something else entirely.

The senior leaders who created the program insisted on obtaining board approval. They explained that during the restructuring they would prioritize the interests of employees over the company’s, and they intended to be transparent about the program and its aims. The bet paid off: 60 percent of affected employees knew their next step the day they left the firm. And Nokia didn’t suffer from the departures and disengagement that usually follow a layoff announcement. In fact, employees brought in 33 percent of revenues from new products, the same proportion they’d brought in before the layoffs were announced. Eventually Nokia’s program was adapted by the Finnish government as a best practice for managing layoffs.

Embracing the goal of building a trusted company—and regaining lost trust—provides a lens through which this kind of navigation and prioritization of interests can take place. Nokia’s shareholders expected actions that would shore up the company’s shaky foundations and return it to profitability, while Nokia’s employees expected job security. Managing trust is in the familiar terrain of managing relationships. What makes it complex in companies is that the interests of groups are unique and at times can conflict; these interests need to be understood, prioritized, and balanced.

We’ve developed a four-element framework that explains why people choose to trust: competence, motives, means (or fairness), and impact. It provides a structure for understanding the actions that need to be taken to build trust.

To read the full article and dive into this framework, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

Sandra J. Sucher is a professor of management practice and Shalene Gupta is a research assistant at Harvard Business School. Before Harvard, Gupta covered tech and diversity at Fortune. They are the coauthors of The Power of Trust: How Companies Build It, Lose It, Regain It (PublicAffairs, Hachette Book Group, 2021).


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Comments

Nir KossovskySeptember 07, 2021

The key to Nokia’s success was a board-supported family of options that appeared to meet the expectation of a diversity of employees. Stakeholder-centricity, rather than a one-size-fits-all corporate model, enabled Nokia to avoid a repeat of the reputational crisis of prior years. The generalizable lesson is that firms have a diversity of stakeholders with diverse and conflicting expectations, and that simply acknowledging those voices is an essential step in both reputation risk management and its oversight.