Redesigning institutions (to rebuild trust)

A Magna Carta for the next industrial revolution

Redesigning institutions (to rebuild trust)

Eight hundred years ago this month, a group of rebel English barons went to war to resolve their grievances with King John’s monarchy. At the heart of the dispute was a loss of trust in John’s leadership and England’s civic institutions.

The resultant Magna Carta peace treaty was hardly a blueprint for an egalitarian society. But it planted the early seeds of the rights and freedoms that would later be incorporated into democratic society. And, by forcing an absolute monarch to acknowledge his accountability to his subjects, the Magna Carta became an enduring symbol of how trust sits at the heart of a fully functioning society.

Fast forward eight hundred years and we find ourselves in an age where the symbolism of the Magna Carta is more powerful than ever. The trust we once had in the private and public institutions that play such a dominant role in modern life has been eroded by years of financial scandals, business and government corruption, mismanagement of consumer data and wildly disproportionate levels of executive pay, to name just a few issues in the public eye. At the same time, in a digital age where people have access to information like never before and feel emboldened to challenge authority like never before, the need for trust in business and society is greater than ever. What’s needed is nothing less than a new, more effective, Magna Carta for the Digital Age.

What do we mean by Trust?

To have a fully functioning society the populace must trust its leaders, be they in government or in business. But how is trust created and how does it become embedded in the design of institutions within the political, economic and financial system?

Trust, admittedly, is a somewhat abstract concept so let’s consider how it works in marriage as an example of a personal relationship, which we pretty much all agree can’t function properly without trust. In marriage, trust is built through the following elements (which can change over time through mutual consent and external circumstances):

  • a mutual agreement on values, goals and ambitions, in compliance with the law and broad social norms regarding fairness and ethics
  • the behaviour that supports that agreement, including an understanding of the implications of non-compliance
  • an openness and honesty between partners

When we apply these elements to the broader civic context we can see that trust is created through rules and behaviours that ensure legitimacy, effectiveness and transparency – the three design elements or foundations of a trustworthy institution - as the chart below explains.

These three pillars of trust in institutions are constantly being challenged as even a part-time follower of global business news can attest. The challenges arise not just from the breakdown or misalignment of these design elements but the struggle to accommodate the interests of multiple stakeholders. Take the legitimacy of an institution’s constitution for example. An organisation might be criticised for its lack of environmentally sound practices even though it complies with national laws. The company might argue that it’s focusing on maximising shareholder value even while the state, the wider public – and increasingly shareholders themselves – demand it takes into account wider interests. Management remuneration is another hot button issue – it may be based on what an organisation sees as objective, performance-based criteria, yet be seen as inappropriate by others based on the notion of fair income distribution between management, employees and the general public.

The effectiveness of an institution´s organisational design also faces challenges. For example, in recent years many healthcare institutions have struggled to deliver effective services due to severe financial pressures and administrative inefficiencies, as well as dealing with new technologies, new competitors and changing consumer demands. In another example, lack of oversight and accountability within institutions contributed to the breakdown of the banking system during the financial crisis.

Then there’s the thorny issue of transparency. Take for instance the case of a multinational corporation that complies with the various mandatory country-by-country reporting requirements for tax. It may be unclear to those outside the organisation how the profits that it reports relate to the taxes that it pays in different jurisdictions. The challenge for companies is to consider what additional disclosures might be appropriate to ensure that the information provided isn’t misinterpreted or misunderstood.

Megatrends and the design transformation

The challenges that institutions face in demonstrating their trustworthiness will only get more complicated as global megatrends continue to shape our future.

Technological advances, climate change and resource scarcity, urbanisation, demographic changes and shifts in global economic power are transforming the world around us. This in turn affects the design of institutions as history has shown us time and time again. Consider the rise of the corporation as an institution in the 19th century. This was directly linked to the need to collect huge amounts of capital to fund necessary investments in transportation and information systems following the invention of the steam engine and the telegraph. That’s how the railroad and telegraph companies grew in North America. The rise of cities along with the creation of unions and new political parties were also a consequence of this first industrial revolution.

Today we’re on the verge of another industrial revolution. We’re moving from a world dominated by the physical movement of people and goods to one where there’s a constant dance between digital and physical value creation. The institutions that protect property rights, privacy ownership and other vital societal norms are under enormous strain because there’s no longer clear agreement on what legitimacy, effectiveness and transparency mean.

Take for example how digital entrants disrupted the publishing business and the behaviour of readers. That transformation is so profound that the legitimacy of such institutions can’t be understood in the context of the existing value system. We need to go back to the drawing board and ask what set of rights these digital disruptors should have – and what set of rights their readers should have.

The list of issues that are challenging our understanding of trust in the digital age is both mindboggling and extensive. They include cyber security, ownership of digital behaviour and algorithmic decision-making to name just a few. What they all have in common is that they will bring the very foundations of trust in these institutions under increased scrutiny.

The ramifications of these digital changes go far beyond individual institutions: they affect the entire body of political, financial and economic systems upon which nations are built. The concept of capitalism, for example, is based on ownership of physical assets. But intellectual property doesn’t require capital – hence start-ups can compete against huge corporations as is already happening in parts of the so-called sharing economy. In this way the digital age is disrupting the accepted rules of competition that have underpinned the capitalist system for so long.

What’s required: A Magna Carta for the new (digital) age

In essence, institutions must ensure their legitimacy, effectiveness and transparency not only as perceived today by their stakeholders, but as those perceptions evolve alongside transformations in the physical world.

In an era of digital disruption it’s not just the established institutions that we have to look at. We also have to consider what new institutions need to be created. For example, as personal data increasingly becomes a form of digital currency and as cyber attacks grow at a rapid pace, should we have an international identity management institution that can verify a person’s legitimacy without disclosing who they are? Could this help in areas like national security, payments systems or enforcement of property rights?

All of these challenges lead us to believe that it’s time to re-examine the fundamentals: what institutions we need; how they are to be legitimised; what makes for the most effective institutions; and what types of transparency need to be created.

This brings us back to the Magna Carta and the barons’ attempt to make King John accountable in his dealings with England’s nobility. Today, the need for a bold new charter is more apparent than ever in the digital relationships between institutions and their stakeholders. Existing value systems can’t be used to navigate these waters: it’s clear that institutions must evolve with their stakeholders in areas like cyber security, privacy and tax.

As a constituent of the legal, economic and financial system, not only as auditors but as tax and legal advisers – and as an institution that has put trust at the centre of its organisational purpose - PwC is part of the debate. Not only in thinking about solutions to build trust in terms of compliance, performance and transparency, but helping to frame the fundamental issues that society as a whole will be grappling with into the future.

In the coming months we’ll delve deeper into the challenges to trust that our digital age will throw up, and how society and business can build and shape the institutions to ensure that trust is maintained.