‘Perhaps the most important lesson is that trust is not only an indicator of success; it is, more significantly, one of the ingredients that make success — for a business or for a government — possible.’ This quote originally stems from a publication of the Organisation for Economic Co-operation and Development and confirms the results of a study conducted in Liechtenstein on the importance of institutional trust. In the following article, H.S.H. Prince Michael of Liechtenstein discusses the interdependence of trust in state institutions and economic success and sets the context for the foundation and trust sector.
Via this link you can access the original article published in Trusts & Trustees' July edition, the leading international journal on trust law and practice of Oxford Academic.
The importance of trust
Trust is a fundamental human need and forms the essential basis for successful interpersonal interactions. Mutual trust creates a sense of safety, strengthens bonds between people, promotes open communication, increases willingness to cooperate, and can even boost innovativeness. Having trust creates an environment in which everyone can concentrate on the essentials without wasting energy on side issues. This reduces the need for constant, time-consuming, and cost-intensive risk–benefit analyses. Trust also makes it possible to delegate decisions in the confidence that the other party is acting in one's best interests.
However, trust is always put to the test and must therefore be proven time and again. You may have experienced this yourself, for example, when a service provider, business partner, or friend behaves out of character, acting in ways that may surprise or disappoint you. The trust you built together may then be shaken, until that service provider, business partner, or friend regains your trust again through a variety of actions.
Trust in public institutions
In terms of economic competition, trust is the most important currency to remain competitive in the long term. This can be in terms of general cooperation, but also when it comes to competition between private individuals, for example within the labour market. Trust also has a crucial role to play when it comes to the competition between companies, industries and business locations. It is no coincidence that reputation management is a key competitive factor, especially when promoting business locations. Reputation encourages trust, success builds on trust, and trust leads to success.
In the competition between business locations, trust in political institutions such as governments, parliaments, courts, professional associations, the police, and other authorities, etc., and in their representatives, plays an important role. This is because trust in institutions is fundamental to a functioning community and economy, and the resulting stability impacts the attractiveness of a business location.
In 2019, to mark the 300th anniversary of the Principality of Liechtenstein, the Liechtenstein Foundation for Economic Governance and Public Law (SOUS) conducted a study entitled Institutional trust as a success factor. The study examined the importance of institutional trust as a key factor of a country's success and came to the following conclusions (among others):
- the closer politics and state institutions are to the people, and the greater the understanding of democratic processes is in society, the more positive is the assessment of political players and state institutions
- mutual institutional trust, for example between citizens and the administration, lowers compliance costs, reduces the need for monitoring by the authorities, and eases the bureaucratic efforts of citizens and companies when implementing political regulatory objectives
- conversely, a vicious circle arises when mistrust on one side leads to mistrust on the other, for example when a state imposes increasing regulations and documentation requirements on its citizens, thereby complicating public affairs
In general, the study shows — as it can also be seen in comparable studies by the Organization for Economic Co-operation and Development (OECD) — that in the democratic world, those countries with a high level of trust in institutions are highly decentralized and have built their communities on the principles of direct democracy.
Economic governance and the rule of law
State voyeurism, often glossed over as ‘transparency’, plus the urge for increased control and surveillance, has been on the rise for years. These approaches are nothing other than proof of a lack of trust on the part of institutions in their economic players and citizens. Governments often like to defend this approach using individual fallibility (eg, tax evasion), which can only be stopped if entire sectors of the economy, or society as a whole, are held to account.
However, increasing levels of monitoring, controls, and so-called transparency are leading to ever greater complexity in laws and regulations, ever greater accountability obligations for citizens (in a reversal of the accountability principle), and constantly rising compliance and regulatory costs for businesses. The result is that the trust of citizens and businesses in state institutions and their representatives is being eroded. The fallible behaviour of individuals cannot be stopped, but the jungle of regulations and controls only encourages arbitrariness in the interpretation of laws and regulations. The more opaque and complex the laws, the more room for interpretation there is.
In the medium term, both economic governance and the rule of law will suffer. Both are important basic principles for a functioning society and economy in which innovation, growth, prosperity and resilience can thrive. Increasing regulation, centralization, and harmonization of the economy — the foundations of which are developed at a higher, supranational level — increasingly restricts the freedom of economic players, takes little account of regional circumstances and differences, and ultimately diminishes property rights and legal certainty. In addition, the increasing complexity and sometimes contradictory nature of laws and regulations undermine the principles of the rule of law because they restrict the individual’s right to self-determination, challenge legal equality, and make it more difficult for citizens to understand and comply with laws and regulations.
Legal uncertainty strains public trust
Positive economic and social development therefore requires the state to focus as much as possible on its core tasks: ensuring internal and external security, guaranteeing fundamental rights, and providing legal equality and certainty. Legal certainty means that laws and ordinances are interpreted logically and not technocratically or even arbitrarily. Laws cannot cover all eventualities, and when in doubt, attempts to interpret laws or ordinances in favour of one side over another are questionable in terms of the rule of law. It fosters legal uncertainty and strains citizens’ trust. This is particularly evident in the tax laws of many countries. It is becoming increasingly difficult for individuals and companies to submit their tax returns correctly, and much is becoming a matter of interpretation by the tax authorities. This scope for interpretation can encourage state arbitrariness.
Another trend that has been observed for many years is the fact that international and supranational organizations — in their efforts to reshape the global economy and society — are increasingly encroaching on the sovereignty of states. However, these organizations are neither accountable nor have they been created and legitimized by the people. And yet regulations are being made within a legal vacuum and adopted as globally binding. Governments and parliaments are then called upon to adopt these provisions regardless of national particularities or practicability.
A parliament should never be measured by how many laws it has passed in a legislative period, or by how closely it complies with international standards, but by how it handles the legislative process and promotes the efficiency and proximity of administrative activities to citizens. That is what good public governance should be about.
What does this have to do with the trust business?
Foundations and trusts ensure the long term preservation of family and entrepreneurial assets and values. In many cases, when structuring assets via foundations and trusts, more than one generation of beneficiaries is taken into account. This long-term orientation naturally requires a stable and constitutional environment that provides legal and planning security and guarantees property rights.
The long-term preservation of wealth can be said to be in the interests of the general public. History shows that the prosperity of society as a whole has mainly developed where the economic freedom of the individual has been promoted and private capital has been utilized. Long-term family businesses have played and continue to play an important role in this. They create jobs, align with consumer needs, develop existing infrastructure, pay taxes and duties, or support community projects from which the populace subsequently benefits. However, this also requires an environment of trust and stability, an environment in which assets are respected and long-term structuring options with the help of legal entities are not reduced or blocked by excessive regulation.
The players in the foundation and trust sector have an important role to play in this regard. They can promote the understanding of the importance of foundations and trusts and the necessity of long-term asset structures by actively engaging in public relations and lobbying. In this context, professional associations such as the Society of Trust and Estate Practitioners (STEP) are very important for the business. In their position as lobbyists, they can present and argue the importance of long-term wealth preservation. They must also show to political decision makers, governmental authorities, and supranational organizations how decisions on harmonizing and standardizing rules can detrimentally affect the trust business industry. Exaggerated regulations can decrease efficiency. Disclosure requirements should be limited to those regulations that genuinely support the fight against anti-money-laundering, and not just serve to bureaucratize or serve public voyeurism. It may even be necessary for professional associations to take legal action if authorities pass unlawful or unconstitutional laws.
Filippo Noseda, a contributor to this journal, recently intervened before the Council of Europe and the European Union (EU) data protection authorities in connection with the introduction of the OECD’s Common Reporting Standard and the EU’s Beneficial Ownership Registers. Furthermore, Mr Noseda brings these important issues to the public. I fully agree when he says that it is time to have a balanced discussion about transparency, privacy and data protection. It is also time to discuss the necessity of asset structures for preserving private and entrepreneurial wealth in the long-term, not only for the benefit of future generations but also for overall welfare. Acceptance of these issues within society and politics can be strengthened if their positive and negative sides are discussed openly. This helps to overcome old prejudices.
Closing remarks
As the SOUS study mentioned at the beginning of this article shows, a stable and predictable political environment with a high level of trust among citizens in state institutions is an important prerequisite for a country’s economic and social success. A high level of trust in institutions is not only an indicator of economic success and political stability, but also the decisive precondition for it. This can be seen in both Switzerland and Liechtenstein.
A key challenge is to manage and preserve asset structures globally, in line with their long-term purpose, despite the large number and sometimes contradictory nature of regulations and despite economic risks and political uncertainties. Regardless of all the changes in the economic and political arena, clients must be able to trust that their asset structures can fulfil their long-term goals.
Therefore, an important task of professional associations such as STEP is to lobby for the understanding of the need for asset structures, but also to scrutinize legislative consultations for planning and legal certainty, to question the efficiency of legislation and, where necessary and appropriate, to bring constitutional actions. As already mentioned before, reputation promotes trust, success builds on trust, and trust leads to success. Professional associations can exert influence here through legitimate interest representation.