TRUST

Editors’ note: This article was first printed by California Management Review, in summer 2007 (vol. 49, no. 4), and appears here with a few minor alterations. NPQ thanks California Management Review and the University of California for their kind permission. The Nonprofit Quarterly reprinted it in its winter 2015 edition, “When the Show Must Go On: Nonprofits & Adversity.”


Nonprofit scholars and managers generally recognize that nonprofits need the public’s trust for legitimacy, for effectiveness, and for non-financial as well as financial support. Yet, a complete literature search uncovers no operational or managerial definition of the public’s trust in these organizations. This article offers a conceptualization of the “public trust” that is applicable to nonprofit organizations, touches on what relationship marketing theory says about restoring that trust once corrective action has been taken, and identifies the managerial actions that might impair that trust. It also offers an operational guide in tabular form on the meaning, management, and marketing of the public trust in nonprofit organizations.

This article argues that the public’s positive or negative experiences in core transactions with an organization may be the principal bases for the impairment or improvement of the public trust. It identifies five core nonprofit-public transactions:

  • Contracting, particularly for charitable services;
  • Soliciting and receiving charitable contributions;
  • Exercising custody over assets for the benefit of society;
  • Employing the organization’s social capital for the public’s benefit; and
  • Promising mission commitment and adherence.

These transactions distinguish nonprofits from firms. Breakdowns in these transactions are likely to be significant enough to have meaningful consequences and reverberate throughout the organizational structure.

The impact of an impairment of the public’s trust in one or more of these transactions may spill over and impair the trust in the organization as a whole. In the same way, a relationship message to cure the effects of a transactional impairment might have a positive spillover to the organization. Thus, the greatest favorable impact will be achieved when the concepts and messages apply positively to both the transaction and the organization.

At least six antecedents or conditions can modify the favorable impact of any relationship marketing message (including the most contrite) by a nonprofit organization:

  • The organization’s exposure and depth of involvement in the transaction;
  • The content, channel, and method of message transmittal;
  • The nature of the market in which the organization operates;
  • The organization’s goodwill and the cost-benefit of restoration;
  • The nature and depth of the damage and continued public risk; and
  • The properties of the product or service suffering trust impairment.

 

Concepts of the Public Trust in the Nonprofit Organization

The literature on trust, social capital, and nonprofit or voluntary organizations primarily views the nonprofit as an incubator of trust for its own internal cohesion. This draws from organizational theory.1 Another approach views the nonprofit as fostering trust for the benefit of civil society.2 The present article examines the nonprofit not as an incubator or creator of trust, but as being functionally dependent upon the public’s trust for fulfilling its mission. This calls for a different logic.

The relationship between the nonprofit and the public can be framed as the reciprocity of expectations. Piotr Sztompka phrases it as a wager that the other party will perform as expected.3 Diego Gambetta expresses it as the expectation or probability that the other party will perform.4 This article posits the nonprofit-public relationship leading to mutual expectations as follows:

  • Nonprofits are chartered to perform the public services in their missions;
  • In exchange for these services, the public promises tax benefits and makes donations to nonprofits;
  • Violations of public expectations, based on the nonprofit’s promise in its mission and for which the tax benefits are given, may cause the loss of public trust;
  • The nonprofit management desires to restore that trust, saving the core relationship and its benefits—particularly tax exemption;
  • To do this, the nonprofit managers will take corrective measures and craft a restorative message to the public; and,
  • In so doing, relationship marketing concepts should be considered.

Another way of describing this relationship is principal-agent, where the nonprofit (the agent) serves a public purpose—the public being the principal—in exchange for tax benefits.5 In principal-agent relationships, there is the question of whether the principal (the public) can trust the agent (the nonprofit) to act on its behalf as promised. The operative trusts are trust of specific performance as agreed and custodial trust over the assets the public invested in and which are held by the nonprofit so that it may perform as agreed in its mission.

In agency theory, an agent is hired partly because the principal needs to rely on the discretion of the agent if information is asymmetric—the agent has superior or timelier information. If so, trust also relates to the confidence the principal places in the agent’s intelligence and discretionary choices—that is, given the competing exigencies, the nonprofit management will make the “right” decision on behalf of the public it serves. As Mark Granovetter notes, trust is the confidence that others will do the right thing even with incentives to the contrary.6

Kenneth Arrow’s concept of trust in nonprofits is grounded in a concept of congruence of interest—A can trust B because A and B have a similar interest, purpose, or orientation.7 Thus, individuals create organizations and become clients to assure that their preferences are attended to and not subordinated. Put another way, the asymmetry in the information between the producer and the client and the need for the client to rely on the producer lead to the creation and perpetuation of a relationship with a nonprofit organization unburdened by profit needs or, as Avner Ben-Ner and Theresa Van Hoomissen note, by the control of outsiders.8 This type of relationship implies a trust based on performance—that is, producing the good containing the particular attributes when the content cannot be readily or reasonably verified by the user.

The public’s trust in an organization reflects the organization’s projection of itself. This includes its cognitive image9 or its social capital (shared goals, norms, values, and networks).10 Social capital can project itself as a nonprofit’s sociological brand.11 In their study of relationship marketing, Robert Morgan and Shelby Hunt found a positive correlation between shared values, communication, and trust.12 This provides empirical support to Arrow’s “common interest.” Trust is dependent in part on the success with which shared values and common interests are projected or communicated. As noted in the Westminster Dictionary of Christian Ethics, “In the broad sense, trust is the expectation that the other will act in accord with his or her presentation of self; in the narrow sense, it is the expectation that the other will act morally.”13

Social capital trust connects to identity trust. A trusts B because A and B share a common identity (and all that implies in terms of goals, norms, values, experiences, and expectations) or because A identifies him- or herself with an organization or purpose that B trusts.14 Therefore, identity trust points to the element of trust in nonprofits that is not necessarily utilitarian or calculating but is what the organization represents as itself. The product of this relationship is its contribution to identity, including prestige, social standing, and identity from affiliation.

George Akerlof and Rachel Kranton link identity with the sociological content of an organization and how it projects itself.15 They argue that individuals choose schools congruent with their identities, and schools in turn modify identities to reflect and represent the schools’ sociological content. This implies that the social capital that an organization projects induces the public to enter into certain relationships with it, i.e., become a student or member. Depending upon the strength of the ties16 and the amount of organizational control, conformity, and personal acculturation,17 individual members incorporate and reflect the organization’s social capital (values, rules, norms, goals) and are transformed into signals (representatives) of the organization’s content.

Trust in social capital and its reflection in the identities of those exposed to it take on special relevance for nonprofits that are membership groups—including religious or faith groups and fraternal associations. Their members choose them and their members reflect them. This signals trustworthiness.18 Thus, identity through symbols, mannerisms, names, badges, and uniforms may reflect the underlying social capital and the trust it merits.

Trust in a mission derives from a shared interest expressed between the organization’s mission and a public need, unlike a contract in which the interest of one party is compensation and the other is performance. Russell Hardin refers to this as encapsulated trust—A trusts B because B encapsulates A’s needs.19 The public may trust an organization because the organization declares that its exclusive purpose or mission is to serve a need the public wishes served. Several organizations may encapsulate the same mission, but they may use different social capital in doing so. Thus, trust in the mission is conceptually different from trust in the social capital or trust in contracts.

Based on the above, seven concepts of the public trust are relevant to the nonprofit-public relationship and to this article:

  • Expectation-performance trust, as in a contract;
  • Custodial trust over assets;
  • Decision-making or discretionary trust;
  • Trust arising from asymmetric information;
  • Trust related to social capital;
  • Trust related to mission; and
  • Identity trust, incorporated here as a signal of the organization’s social capital.

 

Concepts of a Restorative Message Applicable to a Nonprofit

Scholarship shows that relationship marketing—based on social exchange where the rewards are not always pecuniary—applies to nonprofit organizations.20 Accordingly, the nonprofit literature emphasizes gaining, maintaining, and restoring public trust through ethical codes, transparency, and accountability.21

Regina Herzlinger sees the public’s trust in nonprofits as restorable by the quality of information and oversight rendered.22 Richard Petty, John Cacioppo, and David Schumann suggest that the quality of the information (rather than the messenger) may be important.23 The nonprofit literature focuses on the Internal Revenue Service’s Form 990 (which is the annual report of nonprofits analogous in detail and spirit to the Form 10-K of public firms), to which the spirit (but not the letter) of Sarbanes-Oxley has always applied.

In their work on relationship marketing, Morgan and Hunt find that enduring relationships are based on a bilateral and utilitarian commitment (each party has a need the other can satisfy and each can rely on the other).24 Thus, relationship marketing implies that the restoration of the public’s trust is facilitated by a demonstrated mutual need and performance reliability valuable to both parties.

Further, James Faircloth finds that the responsiveness of the public to marketing messages by nonprofits is influenced by “brand personality,” “brand image,” and “brand awareness.”25 Beverly Venable et al. find that, in charitable giving, integrity is an important aspect of “brand personality.”26 These studies imply that the restorative message of Morgan and Hunt may be strengthened by an organization’s invoking its brand personality (social capital) and its integrity (if any is left after the impairment) in addition to its mission as it encapsulates a need of society.

In sum, relationship marketing theory and research imply that a message to restore the public’s trust in the nonprofit through bilateral need and utility (particularly per Morgan and Hunt) may state: why and how the organization serves a continued valuable public need; why the organization needs the support of the public to serve that need; why the public’s trust is needed by the organization to satisfy that public need; and the organization’s capacity, integrity, history, and readiness to meet its promises.

 

Five Core Transactions (Relationships) as Bases of the Public Trust

A trust relationship is neither unconditional nor risk free.27 It contains the risk and uncertainty that expectations will not always be fully met. Gambetta28 and Niklas Luhmann29 see trust as important when the parties feel at risk, vulnerable, and uncertain—i.e., when one party knows that it is possible to be disappointed by another and that the situation could be avoided but proceeds nevertheless.30 Accordingly, trust is consequential in nontrivial, core transactions subject to risks of impairment.

Following are the five core transactional relationships, each containing one or more of the six trusts to which the organization is exposed. A transaction is described, then the types of trusts implicit in it are discussed, followed by the types of managerial actions that could impair the trust, and, finally, by what relationship marketing implies are the concepts to be included in a message to restore the public’s trust.

  1. Contracting

The two most important earnings transactions for nonprofits are (1) program-related revenues, such as government contracts and tuition or hospital fees for individuals (which account for 72 percent of all revenues of 501(c)(3)s, the largest group of nonprofits); and (2) donations or contributions (accounting for another 22 percent).31

A performance contract is an agreement between two (or more) parties in which one (the principal) expects a specific performance from the other (the agent) for compensation. Contracts establish the promises, terms, expectations, and remedies of voluntary relationships.32 The research on performance contracting with nonprofits argues that contracts with them tend to be less specified and so require more trust.33

In general, contracts require some level of trust.34 Eli Bukspan writes, “Trust is the notion underlying the fulfillment of promises and expectations in a contract;” and, “The concept of trust is latent in every contract.”35 Some trust is important even in a specified contract, because:

  • It is impossible to completely foresee all future relevant occurrences affecting performance or to fully anticipate changes in the expectations or capabilities of the parties;
  • Contracts always have implied meanings subject to various enforceable interpretations;
  • Enforceable contracts, except in the case of real estate, do not have to be written, and parties are subject to different recollections;
  • By its principal-agent nature, contracts are ways in which people invest discretionary powers in others, partly because of lack of information or capability; and
  • The parties to a contract are frequently in nonequivalent power positions.

In performance contracting, the connection between the two parties is based on expectations of specific performance as promised—i.e., trust is connected to performance and expectations.36 Hence, trust may be impaired when an operating unit of the organization fails to perform as it contracted, and the affected cannot be fully compensated for the failure. From this perspective, the nonprofit’s message to restore trust must demonstrate an improved reliability—a capability to meet or exceed the specific needs of the public; and if for some reason it fails, the public can recover its cost.

Contracts with strong charitable contents are different from other contracts because the full organizational cost may not be covered even by the contracting party (such as the government, as mandated by state and federal requirements for nonprofit acute care hospitals for the indigent)37—and therefore must be subsidized by other revenues such as gifts and donations; or because prices cannot be charged to those who benefit; or because the outcome is for the public’s welfare. These contracts, as cited earlier, may also be less specified. It follows that the choice of a nonprofit as a contractor is not merely because the contract is unspecified but also because the nonprofit’s social capital and mission are specified and the organization is expected (trusted) to honor them in the contracting relationship.

Thus, in social contracting, trust can be impaired by performance below expectations; by performance inconsistent with the mission; by poor discretionary decisions because of being unspecified; and by withholding or misrepresenting the social capital (the values, networks, goals, and norms of the nonprofit) that may have induced the contract relationship.

Given the contract performance impairment, a restorative message in an ordinary performance contract based on relationship marketing may emphasize improvements in the ability to perform and meet expectations connected to the specific public needs. However, with a charitable contract, the nonprofit has two audiences—the other party to the contract and the beneficiary public. It needs the former for financial support and the latter for involvement and acceptance. To the latter it needs to emphasize a mutual, encapsulated commitment to its mission and the congruence of its social capital (its brand offering) with the public need. To the other party to the contract it also needs to emphasize its ability and willingness to perform under the contract and to make the right discretionary choices, consistent with the contract terms and objectives.

2. Soliciting and Receiving Charitable Contributions

The Financial Accounting Standard Board’s (FASB) Statement of Financial Accounting Standards No. 116 (June 1993) requires that nonprofits distinguish between unrestricted, restricted, and temporarily restricted gifts. This distinction is significant in understanding the public’s trust in nonprofits from the perspective of giving, the ways that trust can be impaired through slight changes in solicitation marketing, and the nature of the restorative message that might apply.

Studying charitable donations, Cagla Okten and Burton Weisbrod found that donors respond to the perceived cost, called the “price effect,” which dampens their desire to donate, and to the information contained in the solicitation, called the “information effect,” which increases donations.38 Faircloth found that the organization’s brand, as information, can be effective in eliciting donations.39

This implies that trust in making donations is based (partly at least) on representation—how the organization represents itself to the public in its purpose (mission) and social capital (brand). With a donation, a donor expects no quid pro quo, only the satisfaction that the donation is used for the purpose given.40 With a contract, the motive is to get something specific in return. Hence, the principal in a contract has an incentive to be sure of the organization’s ability to perform and to assess the cost of performance—including the cost of performance failure and the cost of verifying actual performance.

In general, a donor does not seek—and the organization may or may not make—a promise of specific performance. The donor relies on a broad promise, has little incentive to check, and often does not. The organization is under no obligation to report details as to how the individual contribution was used. Thus, trust that induces this transaction relies upon the organization’s representation of its purpose (mission) and social capital—the organization’s commitment, beliefs, values, and norms, particularly as communicated through the fundraising solicitations.

This trust may be impaired operationally by performance inconsistent with the organization’s mission or social capital—the donor’s inducement for giving. Through the solicitation process, trust impairment may occur because of the misrepresentation of the mission or social capital or specifically by deception. In the case of deception, the issue is not only the impairment of public trust but also the commission of an unlawful act, in which case a restorative message will not suffice.

In Madigan v. Telemarketing Associates, Inc., the U.S. Supreme Court affirmed the rights of states to bring action against deceptive fundraising.41 Deception includes misrepresentation of the mission, the purpose of the solicitation, its tax deductibility, the amount that will be used for the program purpose for which solicitation is being made, and the connection between the fundraising agency and the organization for which it is collecting.

The Distinction between Unrestricted and Restricted Donations as Trust Transactions

When donors make a gift, unless they specify a purpose for which the gift is to be used, they are presumed by law and accounting procedures (FASB 116) to be making a gift to the general fund of the organization—i.e., an unrestricted gift. The use of the gift is at management’s discretion. In this case, trust is vested in that discretion. The donor is saying, in effect, “I trust that you will make the best decision about how this donation is to be used in fulfilling your mission, which I support.” This kind of trust is highly permissive. It is impaired by acts such as embezzlement, spending on prohibited purposes such as politics, and unresponsiveness to public needs consistent with the organization’s mission.

Thus, the meaning of trust for a donor to the general, unrestricted fund of an organization is based substantially on the confidence that his or her contribution will be used for a general purpose that the organization represents in its mission. “I give to you because you supply blood to the sick, help communities, provide communications between our service people and their families, help the victims of disasters—any disaster—and I want to help in your effort as you see fit.” This is distinctly different from “I give because you represent yourself to be helping the victims of this particular earthquake and I want to help them too.” The first is general-fund, unrestricted giving, and the money is used at the broad discretion of the organization within the scope of its mission. The second is a restricted gift—to the specific event mentioned—and must be treated so legally and in the organization’s accounting statements.

In the case of a gift to the general fund, trust is impaired by discretionary decisions that are deemed bad due to misuse of funds or violation of mission or social capital representation by the organization (or its representative). This type of trust is not necessarily built on a forward-looking statement—what the organization plans to do with the donation. The donor is relying mostly (but not necessarily exclusively) on backward-looking statements of what the organization has done in the past. Thus, this kind of trust is based on the organization’s established goodwill, past performance, personality, integrity, and image (brand and social capital).

In the case of a restricted gift, the donor states the purposes for which the gift is to be used. The donor may restrict use until some time has elapsed or an event has occurred (a temporary restriction). In either case, the donations are allocated to specific funds for accounting, legal, and operating purposes. The organization’s discretionary powers are confined to these purposes. Trust is impaired by management’s use of the funds for other purposes even if within the organization’s mission. Thus, the more specific the purpose, the more trust depends upon the donor’s confidence that the organization can and will meet the donor’s request—i.e., trust that the organization will perform specifically as promised.

This trust is forward looking and relies on foresight. It relies on the ability to anticipate and provide for contingencies. It is impaired by the inability to do so or by going contrary to the donor’s stipulation even if within the mission of the organization or even if foresight was wrong. Permanent restrictions cannot be removed or modified by discretion of management. Only the donor, its representative, or a court through a cy pres decision (one that permits the nonprofit as custodian to vacate a donor restriction) can do so, as explained in Section 413 of the Uniform Trust Code as applied across states.

Failing such authorization, the restoration of this kind of public trust may require that the donations be returned with a simple message: “We can’t meet the terms you specify, but we have other use for the money and seek your permission to do so. If you prefer, we shall return the funds.” The restorative message in restricted giving impairment must almost always give the donor (or the donor’s representative) the option to recall the contribution, and appeal to the donor or representative to give the organization the permission to use the funds to fulfill a public need in its mission. Such a message is necessary, but only technically sufficient.

The Case of Disasters and the American Red Cross

Following the Katrina disaster, in 2005, the American Red Cross (ARC) heard objections from the public and from state attorneys general for misdirecting donations given for specific disaster relief in their respective states.

During a disaster, nonprofits make appeals for donations. However, many donors do not specify a purpose for which the donations should be directed. Yet, the donor may be presuming to be making a gift restricted to the specific disaster victims. A conflict arises because, by terms of FASB 116 cited above, the organization is not normally required to consider the gift as restricted unless the donor specifies. It has the incentive to consider it a general fund gift because that gives the organization the broadest discretion, including fun