Trust... The Prelude to All Transactions

 | August 07,2010 02:11 pm IST

Transactions are the essence of business, the foundation of all economic activity. Transactions have to take place for any business to exist; the level of transactions and their magnitude determine its stature and success.

Transactions are built around Trust. Organizations do not buy or agree to buy based on opinions. They need something more to invest in a company or its products. That extra bit of equity is the deciding factor ultimately in going on with the transaction.


Trust in an organization is never built consciously. It just happens, through its culture, founding principles and consistency. Such organizations are the fortunate lots, who have the added equity of intangible trust.

Trust is always built along beliefs and faith. An organization that tries to achieve trust on itself by various stakeholders and customers is thus striving to achieve a strategic advantage over its competition.

So What is Trust?

Trust can be defined as "Firm reliance on the integrity, ability, or character of an entity or thing".

Trust transcends all legislations and thumb rules. It is a state of mind of mutual congruence. Trust is a fiduciary relationship that exists or that is expected in a deal. It is an implied and unstated confidence in something or someone. Trust is based on habits and not rational calculations. Trust is the confluence of moral virtues and habits.


Why Trust?

Trusting has always been man's panacea against his own weakness. When we do not know how to react, what to decide, how to conclude or how to interpret, we always seek wise counsel of a trusted person.


Trust could be an organization's biggest competitive advantage, in markets that are getting increasingly consolidated. More so, it can become a distinctive advantage. Trust is intangible, difficult to imitate and time consuming to build. The best thing an organization could do is to leverage and build on trust.


Trust has always been an USP in many industries, like gold and diamonds. Generations of buyers used to buy from the same jeweler, till Tanishq built trust into its brand by demonstrating quality by establishing standards and benchmarks. Now after most jewelers levitated to standard establishment and duplication, Tanishq is still the leader, because it was the first mover.

Trust - The Social Perspective

Trust is the rubric that decides the efficacy, nature and size of transactions in a society. Trust not only affects the transactions, but also the very foundations of economic prosperity and resource creation.

Trust among people comes from family values and the strength of the family as a unit, and its precedence over other the State, institutions and other social groups, both economic and non-economic. These in turn arise from the culture that has evolved in a region or a country.


A society characterized by high trust can create economic prosperity without the intervention of the State. It can create large organizations, due to social cohesion and compliance to group interests over personal priorities. Spontaneous trust, when coexisting with legal entitlements, reduces transaction costs. This makes business more viable and stable. Family is a priority that co-exists with other social groups.


In low trust societies, the orientation towards family cohesion is high, leading to development of small family owned businesses, which cannot grow. In such situations, as in China, the State has to intervene to encourage large corporations through subsidies or through outright ownership and control. In such societies, legal entailments can be high, leading to lack of innovation and growth. Transaction costs rise and industrial relations are strictly State policy controlled. Managerial reforms take longer to penetrate the traditional way of business, as a result of nepotism and cronyism.


Trust in a society is the outcome of the effect of its culture on its people. In Japan and Germany, a high level of dedication to work and loyalty to the organization has evolved, through the reciprocal actions of the employees and the management, aided in good strength by the overall social conditions that permit this to happen.

Thus, trust in a society makes economic sense. It promotes the economic growth of a society and the creation of social capital that is important for wealth creation through creating and developing large private organizations.