Once again, I am deeply grateful to my friends and colleagues who have offered such passionate responses to my prior blog post In Corporations We Trust. In that post, as in the previous one entitled Is Trust Necessary?, I suggested that politicians and business professionals need not worry about a lack of trust between nations or organizations if verification controls are in place to monitor the activities of the parties.
Nevertheless, I also suggested that the existence of trust can be extremely beneficial, and that trust itself represents a valuable asset that is increasingly recognized by accounting and metrics organizations like the International Integrated Reporting Council (IIRC) and the Global Reporting Initiative (GRI). In fact, I noted that these organizations have directly inserted the concept of trust into their core frameworks and paradigms.
So why the passionate response from my readers? Apparently, many are skeptical that any one can place a value on trust. Although they agree that trust represents a conceptual corporate asset, they cannot see how any one could ever assign a monetary value to it. And yet, despite their skepticism, the equity markets are already doing so.
Imagine, if you will, two nearly identical companies that compete directly with each other for a single customer segment with a single product. But let’s imagine that Company A is deeply trusted to treat customers in a respectful manner, while Company B is sorely mistrusted because of a history of rude service.
Even if Company B revamps its service function, if customers remain distrustful of the firm, its equity market value would likely languish behind the comparative value of Company A. Thus, Company A’s premium value would be attributable to the value of an intangible asset called Trust.
Of course, one might argue that Company A might become so blindly committed to this asset called Trust that it might fail to pursue beneficial opportunities to roll back or outsource its customer service function. In that case, the equity market value of Company A might fall below the comparative value of Company B.
Even under such circumstances, though, trust would possess a value. Instead of representing an intangible asset of Company A, it would represent an intangible liability of Company A. And its value would be equal to the premium value of Company B’s stock in comparison to Company A’s.
In other words, to the extent that the existence of trust (or mistrust) affects the future financial performance of any corporation, it will likewise affect the current valuation of that corporation. And thus, such trust can be modeled as an asset or liability with a specific financial value.
Does that mean that the Financial Accounting Standards Board (FASB) in the United States, or the International Accounting Standards Board (IASB) in other nations, will ever permit Trust to be recorded in the formal audited financial statements as an asset or liability? Quite possibly not; after all, those accounting regulators tend to respond conservatively to any proposal that involves significant changes to the traditional accounting model.
But just as investment analysts routinely transform the traditional definition of Operating Cash Flow to the contemporary definition of Free Cash Flow, they might indeed be willing to adopt transformational definitions of assets and liabilities as well. And when they do so, trust will represent a meaningful off-balance sheet asset or liability, similar to other off-balance sheet items that can immensely impact the value of a corporation.
Furthermore, who’s to say that the conservatism of FASB and the IASB will last forever? After all, American corporations can now record an asset named Goodwill on their formal audited financial statements. Is it so far-fetched to believe that they might eventually be permitted to record an asset named Trust as well?