Q22- $8.3 Trillion: Cost to Americans of Disinvestment in Trust?

My last two blog posts were about the importance of trust. Let me use financial data to further illustrate this.

Below is a graphical way of disaggregating the market value of a corporation.

The average market-to-book ratio has hovered around 5 since 2000 (I use Yahoo Finance data across more than 200 industry groups). This means that book value contributes only about 20% of market value. Or, intangibles (the pink area in the diagram) — which are mostly the scope of knowledge management — account for about 80% of market value. In other words, intangibles (what accountants almost always do not measure) contribute more than tangibles (what accountants measure) to value creation! This fact is one of the powerful arguments for KM. I have stressed this in my previous blogs (for example, check out “F2- Intangibles: More Essential for Value Creation”)

As of yesterday, March 30, 2009, according to Yahoo Finance, the average market-to-book ratio went down to about 2. Contribution of intangibles to market values went down from 80% to about 50%.

What was lost during the last few months of the global financial crisis? Book value or the tangible assets were basically the same. The skills of employees were basically the same. The processes and structures, the vision and strategy, and the leadership in the corporation hardly change in a few months.

What changed was the trust of the public, and specifically of the buyers and sellers of stocks. Their expections of a corporation’s future income had decreased. What was lost was how stockholders and stock buyers perceive a corporation: its reputation, brand, trust (the text in red in the diagram). They have ceased to trust the corporation. In KM language, the corporation lost stakeholder capital.

According to some estimates, Americans and others who own stocks lost $8.3 trillion as a result of the Wall Street meltdown. Its repercussions around the world resulted to total global losses of at least $50 trillion, according to the Asian Development Bank.

And all because people withdrew their trust!

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A Value Driver behind Relationship Capital

My last blog post was about bridging leaders.

A town mayor who is a bridging leader is better able to bring various conflicted social groups in his town to talk and decide together. Why?

Some communities of practice (CoP) prosper and grow, but others do not. Why?

Early this year, Facebook backed off when millions of its users opposed its proposed new Terms of Service. Why?

The purchase order has not yet been received, but an urgent phone call from the president of a company to another fellow Rotarian president of the supplier company is enough for the latter to give instructions to his people to ship the goods immediately. Why?

A customer buys from Amazon.com and discloses her credit card number to the company. Why?

The technical qualifications of two competing consultants were practically equal, so the client chose the consultant they had worked with before. Why?

An ugly rumor sent the stock price of a company down 15% in one day, yet its tangible assets today are basically the same as yesterday’s. Why?

The answer is TRUST. Trust is a fundamental value driver behind all forms of relationship capital. Relationship capital and trust are both intangible yet they produce tangible benefits and outcomes.

Trust underlies the worst fears and threats to our planetary society. Trust underlies the efficient operation — or the threat of collapse — of the global knowledge economy. Trust is so important that we NEED to develop a new science and technology to understand and manage it. Our daunting global problems belie humankind’s ignorance of how to effectively work with this important factor.

The Philippines is a nation threatened by many societal divides: ethnic/upland-vs.-mainstream/lowland, Christian-vs.-Muslim, rich-vs.-poor, communist-vs.-free market, insurgents-vs.-government, Manila-vs.-provinces, etc. At the same time personal relationships are important to the common Filipino. These are some reasons why bridging societal divides and bridging leadership are active and growing development discourses in the Philippines. That is also why scientific research on relationships and social capital is also well-developed here.

The late Filipino psychologist Dr. Virgilio Enriquez developed an ordinal scale of Filipino social interaction, which of course is based on increasing (or deeper) levels of trust:

We really do need to develop a new science and technology of TRUST. What is your opinion on this?

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