Home > Nanotechnology Columns > Project on Emerging Nanotechnologies > Nanotechnology and the Trust Gap
Over the past decade, a number of high profile business scandals—from Enron to WorldCom to Tyco—have raised eyebrows, and raised the bar, in terms of public expectations regarding business ethics. The erosion of trust was the focus of a recent issue of the McKinsey Quarterly (2007, Number 2), which contains a number of articles that explore the trust gap between industry and consumers. When industry is trying to introduce a new technology, like nanotechnology, this trust gap has large strategic implications. It would be great if nanotechnology could ride a growing wave of consumer confidence, to profitable Initial Public Offerings (IPOs) and expanding market share. But, right now a trust deficit could undermine billions of dollars of corporate and government investment in nanotechnology both here and abroad.
April 20th, 2008
Nanotechnology and the Trust Gap
Over the past decade, a number of high profile business scandals—from Enron to WorldCom to Tyco—have raised eyebrows, and raised the bar, in terms of public expectations regarding business ethics. Trust in business is in the cellar and continuing to decline. Surveys done in 2002 indicated that the 38 percent of the public trusted business to do the right thing. Now that number is down to 28 percent. Shady deals by industry and government have become gist for the Hollywood film mill, giving us box-office hits like Michael Moore's Sicko (health care), Syriana (oil), The Constant Gardener (pharmaceuticals), and Blood Diamonds (jewelry).
The erosion of trust was the focus of a recent issue of the McKinsey Quarterly (2007, Number 2), which contains a number of articles that explore the trust gap between industry and consumers. That gap is large and it is growing. Only 48 percent of consumers surveyed believed that corporations make a "generally" or "somewhat positive" contribution to the public good. The research showed that executives tend to over-estimate their company's contributions to the public good compared with how they are perceived by consumers and that they have a very limited understanding of what is actually on the mind of consumers. Shareholder returns and long-term profitability, once the baseline measures of corporate performance, no longer meet the publics' desire to see industry give something back to society.
When industry is trying to introduce a new technology, like nanotechnology, this trust gap has large strategic implications. There are few things that are likely to challenge consumer trust in business more than the introduction of new technologies, especially if these technologies promise transformative and potentially disruptive changes—and especially if the risks and the benefits are far from sorted out. It would be great if nanotechnology could ride a growing wave of consumer confidence, to profitable Initial Public Offerings (IPOs) and expanding market share. But, right now a trust deficit could undermine billions of dollars of corporate and government investment in nanotechnology both here and abroad.
Two sectors - food and healthcare - are likely to be especially affected. Both are experiencing investments in nanotechnology in a big way, and are expecting large returns on their down payments. The German-based consultant firm Helmut Kaiser has estimated that nanotech will impact one quarter of the food packaging market, now worth about $100 billion, within the next decade. Much of this gain will be due to the development of multi-functional, intelligent packaging that has the potential to improve food safety and quality. This sounds great from a stockholder perspective, but a European Union committee studying emerging risks recently warned of a "lack of knowledge about the environmental and health effects of using nano-sized particles in food products and packaging." Some of these risks may be real, but some will be directly tied to public perceptions. As we learned from genetically engineered foods, perceptual risks can have real impacts on consumer confidence and long-term profits. Consumers buying food and beverages are especially prone to changing their purchasing behavior when confronted by questionable corporate behavior.
The health care sector faces a similar balancing act between risk, benefits, and public trust. In May, the U.S.-based market research company The Freedonia Group, Inc. released a new study called Nanotechnology in Healthcare, stating that U.S. demand for nanotechnology medical products will grow more than 17 percent annually to $53 billion in 2011 and over $110 billion in 2016. But consumers have grown tired of big-pharma profits, a flood of over-hyped drugs, and questions about drug safety.
In both the case of food and healthcare, a weak and under-resourced Food and Drug Administration (FDA) will do little to shore up consumer confidence. A recent study by a former FDA deputy commission indicated that the FDA is "not nano ready." Surveys done by the Project on Emerging Nanotechnologies show that the public trusts the FDA more than business, but not much more (50 percent of adults surveyed in a national poll conducted by Hart Research in September 2006 had "no" or "very little" confidence in companies to maximize benefits and minimize risks associated with scientific and technological advancements; about 40 percent gave the FDA a "no confidence" vote).
The good news is that surveys and focus groups have shown a high degree of consistency in terms of what it takes to increase public confidence in companies involved with nanotechnologies: (1) disclosure and transparency concerning the risk and benefits of nanotechnologies; (2) more pre-market testing of products; and (3) testing done by trusted, third party entities. In fact, when a group of 20 environmental and labor groups criticized a recent attempt by Dupont Corporation and Environmental Defense to develop a risk management framework for nanotechnology it was largely on the grounds of lack of transparency and inclusion, not on the basis of the framework itself.
As more and more nano-based consumer products flow into the marketplace, media and non-governmental organization (NGO) scrutiny will increase. For example, Consumer Reports published a lengthy piece on nanotech in their July 2007 issue, which called for the labeling of products with nanotechnology. Industry has a year or two to close the trust gap before shareholder value starts to head south.
Firms may see the growing sociopolitical volatility around nanotechnology as a threat, or they may use it as an opportunity to enhance reputation, build brand equity, and open new markets. To succeed, however, any company investing in nanotech must get to know their customers much better, going beyond the usual focus on product preferences and pricing to probe the social values that buyers respect. A key variable for consumers will be how companies handle this new technology in a socially and environmentally responsible manner.
Companies need to be prepared to go beyond the legal requirements to protect workers, consumers, and the environment in order to earn the publics' trust. Since there are presently no federal regulatory requirements governing nanotechnologies, this means that pursuing voluntary programs such as the one recently announced by the Environmental Protection Agency (EPA) or the Department for Environment, Food, and Rural Affairs (DEFRA) in the United Kingdom. Companies may need to seriously consider labeling and undertaking more aggressive outreach to their consumer base by focusing on the benefits and possible risks or uncertainties around nanotech.
If firms do not live up to public expectations, consumers are likely to take out their dissatisfaction on corporations by switching brands. They will shop on the no-nano side of the aisle, especially if the benefits of the nano-based products are marginal or poorly documented. Overall, 50 percent of U.S. consumers have switched brands for social reasons, and four out of ten have recommended that others take similar actions.
Over the next few years, the social contract between business and the public around nanotechnologies will be defined. Strategic bets will be won and lost on how well nanotech businesses can accurately gauge and respond to stakeholder concerns and do so in a timely manner. Ultimately, creating more trust will create more value, allowing companies and society to capitalize on the billions of dollars being invested worldwide in nanotech research and development.