The market is in a depressing downward spiral. A staggering
wave of corporate bad news has hit the headlines. Masses of
investors, in a near-frenzy, are suddenly questioning
traditional, age-old assumptions: stocks, in the long run, are
better investments…or so we’ve been told. Have we not been
repeatedly told that all we ought to do in a market downturn
is sit tight and weather it? And yet, this time around, the rules
seem a bit different. Market downturns have typically been
sparked by unexpected political events and unforeseen turns
in the financial markets. However, the current market
downturn is heavily greased by apparent large-scale
misrepresentation of corporate performance information.
There are three converging forces at the root of this
dilemma:

The chasm between firms’ capabilities and market
expectations: As businesses grow through mergers and acquisitions,
the pressure to maintain high earnings increases with similar haste.
Nevertheless, the resources required for a large firm to maintain the
same percent earnings growth is far greater than the smaller firm. A
study done for Newsweek of the twenty biggest mergers of 2000
shows that a majority of buying companies saw their stock drop in the
subsequent twelve months. Another study concludes that of the $9
trillion in U.S. and European merger deals between 1996 and 2000,
roughly $5.8 trillion either failed to create or, in some cases, actually destroyed economic wealth. And still, market expectations do not let up. Wall Street continues to form earnings expectations to be met, a demand on which the survival of large firms hinges.

The high-tech paradox: The more we embed technology into
relationships, business processes, and transactions, the more distance
we create between stakeholders. Therefore, the possibility of
accidental or deliberate misrepresentation, enabled by the lack of
transparency in information flow, creates a real threat for the
stakeholders.

The never-ending search for a sustainable competitive
advantage: Every competitive advantage eventually becomes an
expectation, thereby creating a pressure to raise customer
satisfaction without inhibiting earnings increases…a challenging
contradiction!

These three forces relentlessly haunt businesses. Those
that cannot stand the heat in Wall Street tend to find ways to
(mis)represent their future by taking advantage of
information asymmetry between corporations and individual
stakeholders. It seems we have simply forgotten that trust is
the critical element in all of commerce.

The Current View of the Marketplace: Buyers and
sellers handle goods and services in efficient, high-tech
marketplaces. In order to hasten the wheels of commerce, we
have streamlined supply chains, relentlessly improved
customer satisfaction levels, significantly cut costs by
harnessing powerful technologies, empowered customers,
redesigned business processes, challenged existing business
models, and so on. In many cases, this has resulted in greater
customer value. Ostensibly, the system works flawlessly, but
every so often, the wheels come off. It is only then that we
discover that breaking the code of trust in the marketplace
can also fuel a company’s meteoric rise in the stock market.

A New View of the Marketplace: With all our attention
focused on powerful technologies, value propositions, and
“delighting” customers, we seem to have forgotten what is
really being bought and sold in the marketplace: promises and
expectations. What is being sold is a promise. What is being
bought is an expectation. Don’t we get it? Markets for goods
and services will function seamlessly and effectively only if
the foundational markets for promises and expectations are
designed and managed with that intent: to function seamlessly
and effectively.

All said and done, the crucial element of success in
business is trust and the formula for profitable market
performance has not changed over the ages. It comes down to
a business building and maintaining trust in its customers,
earning the confidence of its investors. The bond of trust,
especially in the depersonalized age of high technology, is
very fragile. If that trust is broken, no matter who is to blame,
the underlying relationship is destroyed. This leads to lost
sales, lower profits, and, worst of all, missed opportunities.
Repeatedly broken corporate promises breed skepticism in
the minds of investors, deteriorating the reputation of the
firm. So long as investors allow their expectations to be
inflated by market hype beyond a reasonable level, the
markets are ripe for a breakdown, not just in the market
systems or operations or processes, but in the very fabric of
trust that sustains the market.

It is time to rebuild the foundations of the markets that
have long been neglected.We have built the most powerful
market engine in the history of the world, but have
increasingly separated the establishment of trust from the
tangible components of a marketplace. All our resources and
efforts have been spent realizing the latter. No amount of
government regulation, industry self-regulation, or investor
education will set right the foundation.We need to get at the
very lifeblood of commerce—which is information flow—
and learn to manage its integrity in a transparent and effective
manner. Only time can fix the broken web of trust. But,
integrity in creating, managing and leveraging information
can accelerate that process.

Dr. Paul Prabhaker is Professor of Marketing at Stuart Graduate School
of Business, Illinois Inst. of Technology, with a Ph.D. in Business
Administration and a master's degree in Econometrics from the
University of Rochester (NY). He also has an MBA from IIM Calcutta
and a B.Tech (Mech) from IIT Madras.