One year after the onset of the global economic crisis, the most pressing ethical leadership challenges all revolve around the core issues of trust and short-termism. While the 2009 Mid-Year Edelman Trust Barometer recently reported an uptick in trust in business among global "opinion elites" following on the heels of some potential indicators of an economic recovery, other surveys measuring trust levels among the general public are less positive.

For example, a Harris Poll from June found that 58% of the American public believes that no financial institutions – i.e., banks, accounting firms, life insurance companies, financial planning firms, health insurers, investment firms, mortgage companies, Wall Street or credit card companies – are honest and trustworthy. Distrust across all of these financial institutions is even higher (64%) among those earning $35,000 or less per year.

And, things are likely get worse in the coming months. As Fitch Rating reports, $166 billion in U.S. adjustable rate mortgage (ARM) loans are yet to be recast, an event that will increase monthly payments for individual borrowers by an average of 63%, and in turn, probably further damage public confidence in the financial sector.

If the global economic crisis has taught us anything, it is that we need to become more adept at building and managing trust in business. Trust, considered over time, is not only about confidence – it is also about the likelihood that such confidence will endure. For example, high trust and short-termism in the era of easy credit led to the poor assessments of risk and over leveraging that resulted in the destruction of trillions of dollars worth of market capital and staggering numbers of lost jobs and foreclosures.

Short-termism

Short-termism is antagonistic to the endurance of trust. While there are multiple causes of the global economic crisis – such as: failures to assess risk; fraud; and credit rating agency breakdowns – short-termism is certainly among the main contributors to the meltdown.

As Washington Post columnist Steven Pearlstein recently wrote, the prevalence of short-termism has not changed much since the financial meltdown. "The securities, the trading and investment strategies, the financing techniques, the technology, the fee structures and the culture in which they operate – are all designed to work together to maximize short-term results," says Pearlstein, "And, in such a self-reinforcing system, it is very difficult to change any one feature without changing all the rest."

Short-termism – the excessive focus of some corporate leaders, investors, and analysts on short-term, quarterly earnings and a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation – has been a problem for some time and not just in the financial sector.

A 2005 study by John Graham, Campbell Harvey and Shivaram Rajgopal found that 80% of financial executives said they would decrease discretionary spending for areas such as research and development, advertising, maintenance and hiring in order to meet Wall Street’s quarterly earnings expectations for their firm. These real actions can short-circuit a company’s long-term strategy and destroy value.

Misguided targets

Meeting targets is, of course, important in business. But if a company’s performance on paper is enabled by decisions that impede the company’s ability to be competitive in the future, such as failing to upgrade factory equipment or to make critical hires, this performance will obviously not be sustainable.

One indicator of company strategies aimed at the long-term, is the extent to which they are building environmental sustainability into the DNA of their business practices. Sustainability goes hand-in-glove with long-term strategy. Climate change is a critical social issue for the foreseeable future and regulations are likely to be a moving target as science progresses and knowledge about emerging issues like climate justice become more of a public concern.

As Ram Nidumolu, C.K. Prahalad, and M.R. Rangaswami argue in the September 2009 issue of the Harvard Business Review, simply meeting the baseline environmental requirements is not an ideal strategy, especially for global companies. Baselines will differ by region, even as they continue to change, and the most efficient way to manage in this environment is to make the highest standard, not the baseline, your default touchstone across product lines, supply chains and regions.

Moreover, developing a sustainability mindset can often lead to increased innovation in the form of new or improved green products, services or business models. For example, Eaton Corporation’s hydraulics division – which has a long history in oil & gas, agricultural, wood and amusement machinery – is now a leader in creating fuel saving hybrid power solutions for commercial vehicles. Like Eaton Corporation, Wal-Mart and GE have well-developed and integrated environmental strategies because they believe this is good business for today and for tomorrow.

Issues for academics

Trust and short-termism are not only challenges for business leaders, they are also key issues for academics who study business. A recent report from my Institute and the Arthur W. Page Society, The Dynamics of Public Trust in Business—Emerging Opportunities for Leaders, indicates that the dynamics of public trust in business remain a largely uncharted territory in need of exploration and mapping. For example, business leaders do not know which drivers are most likely to affect trust in their companies with respect to various stakeholders, nor do they know which trust configurations matter most to their sector.

There are also many unanswered questions about the dynamics of short-termism. For example, designing compensation for corporate executives and asset managers that achieve long-term strategic and value-creation goals remains elusive.

If we are going to have a positive impact on either of these pressing corporate ethics challenges, it is critical that business leaders and academics join forces in building our knowledge base in these areas and in developing real solutions that create value and improve practice.