What price reputation the risks to reputation

WHAT PRICE REPUTATION:
An investigation into corporate reputation management in the FTSE250
 
4. THE RISKS TO REPUTATION

“Companies need to prepare for risk well in advance, not merely react to it”.
FTSE250 CEO
The Risks To Reputation
Our discussions with CEOs and communications leaders took place before the full impact of COVID-19 reached Europe. The continuing uncertainty over the fall-out from the pandemic has not displaced these threats, so much as amplified them. As one interviewee presciently identified:

“Uncertainty is now the norm”.

The unknown unknowns cannot be planned for, but our research shows that companies can both identify the known risks to reputation and instil the capacity to manage what’s manageable within them. The following core risks were raised in our interviews:

  • Public scrutiny of behaviour. 62% of interviews mentioned that public perception of business can now be as much about how a company behaves as about the returns it makes. The role of business in society is being redefined as the public becomes increasingly sceptical of companies focusing purely on profits, with this direction of travel apparently supercharged by the outbreak of COVID-19. Companies’ response to the challenges and opportunities of the pandemic are being benchmarked against a new set of social expectations. Those without a clearly communicated – and authentic – social purpose will struggle. Beware purpose washing.
    “There’s no point in doing good stuff in your company if no one knows you’re doing it. But equally there’s no point telling people about things that you don’t really believe in. You have to be genuine as otherwise you will be found out”.
    “What’s our purpose and why do we exist? It’s now about money and meaning. Our stakeholders no longer want to just know about our profits, they want to know what behaviours drove those profits.”
    FTSE250 CEO
  • Plummeting trust in big business. Public faith in authority, be that government, the media, NGOs or big business was at an all time low before COVID-19, with 56% of respondents in a recent survey3 saying that capitalism does more harm that good. Companies need to demonstrate that they can be trusted rather than assume their reputation holds good. Publicly listed organisations providing public services are particularly affected.
    “The way to counter social activism is to build trust across broad stakeholders. You have to be out in the wider community and looking in people’s eyes and convincing them to trust you”.
    FTSE250 Head of Corporate Communications
The Risks to Reputation
  • Geopolitical risks. 71% of interviewees from international companies referenced the following key risks:
      › Potential trade wars. The integration of global supply chains means companies are seldom in end to end control of their business. Turbulence can follow from the first Tweeted hint of potential tariffs or trade wars.
      › Brexit’s continuing impact is a risk, particularly for businesses that import and/or export to the EU. Issues around border controls, shelf life of products, agreement on standards and the use of foreign nationals in the workforce are seen as issues for many years to come
      › Human rights records. Companies looking to broaden their global footprint are increasingly concerned about expanding into countries with dubious reputations, irrespective of potential profit to be made.

      “We identified a potentially lucrative income stream from an emerging market but in the end decided not to do business in that country because of its stance on human rights issues. Our guiding compass has to be moral not just financial. We have since introduced a series of robust ‘red lines’ across the business to make sure we try to do the right thing, irrespective of the pull of revenue and profits. But it’s not easy and sometimes feels counterintuitive to reject income.”
      FTSE250 CEO
  • The likelihood of reputational damage from chairmen, CEOs and their leadership teams has increased significantly. Their personal standing is now inextricably linked with that of their organisations. ‘Chairman contamination contagion’ is also on the increase amongst companies that share a chairman with another organisation, as negative fallout from one firm can seep into the other company via association.
    “The reputation of the chair, independent directors and the board in general tends to send strong signals about reputation. Causality is an issue as reputable firms seek out and/or attract the better directors”.
    FTSE250 CEO
  • Regulation, particularly corporate governance, is upping the premium on effectively managing reputation for investors:
      › ESG (Environmental, Social & Governance criteria) is becoming a common assessment marker for institutional investors, as increasing numbers of funds only invest in companies with demonstratable, solid ESG credentials. It’s also important to retail investors as growing numbers of high net worth individuals have high ethical requirements for investing their money. It also impacts ability to raise finance as credit rating agencies, such as Moody’s, now analyse companies’ ESG criteria
      › MiFID II. New rules affecting access to investment research means that brokers are more likely to contact companies directly for information. Many will be looking for less traditional information to include in their research, including non-financial KPIs.
      › UK Corporate Governance Code places greater emphasis on establishing a corporate culture aligned with the company purpose and business strategy, which promotes integrity and values diversity. Boards have increased responsibility for engagement with stakeholders, including employees

      “In a world where investment decisions are increasingly algorithm-driven, active managers are differentiating themselves by incorporating analysis of non-financial drivers. If you strip out your communications function you are less able to communicate these non-financial messages and therefore less accessible to capital markets.”
      FTSE250 Communications & IR Director
  • Employee issues are becoming tougher to manage:
      › Employee activism. Under 30s and millennials are far more likely to share their views with the wider world than previous generations. They are comfortable challenging their employers or going public with their grievances on social media sites that have the power to drive the news agenda. Boards need to give serious thought to how they communicate their firms’ values with this specific demographic.
      › Misconduct issues. CEOs are now more likely to be blamed for misconduct problems on their watch. One rogue employee’s misdemeanours can travel around the world at great speed, and CEOs have been forced to resign over the inappropriate actions of an individual staff member or themselves.
      › Fierce competition to recruit and retain talent particularly amongst millennials and generation X who make up around 70% of the UK workforce. These employees can be more concerned with what companies stand for than previous generations.
      › Drive for diversity. Whilst the FTSE250 has made tangible progress increasing diversity, continued scrutiny ensures the gap between companies working hard to improve gender equality in their leadership teams and those companies that are doing very little has never been more obvious.
      › Mental health of employees. According to the UK government4, one in four employees in the UK will have a mental health issue at some point. The legal requirement for organisations to actively help staff means those found lacking are facing increasing reputational risk.

      “I oversee social performance, which includes worker welfare and human rights on a corporate level. It could equally sit with the human resources, company secretariat or legal functions but it’s been given to me as the CEO wanted it to sit with reputation”.
      FTSE250 Corporate Affairs Director
  • The media, particularly online, is intensifying reputational issues:
      › Crises are now amplified in real time. The 24/7 news cycle means the media reports on many more stories and are on the constant look out for more news. Technological disruption has created customers and shareholders who ‘want it now’.
      › ‘Negative’ UK media. Several interviewees commented on how negative the UK media can be when it comes to reporting on businesses.
      › Fake news. The proliferation of fake news means that companies can no longer ignore falsehoods and must actively defend or mitigate fake news. Several FTSE250 companies are creating dedicated ‘rebuttal’ teams in their press offices as a result.
The reputational pivot of ‘people, purpose and values’ has been thrust into the spotlight by COVID-19. While some commentators see this signalling the coming of age of the human resources (HR) director it could equally point to enhanced recognition for communications leaders. Expertise should be at a premium for those able to attune CEOs to the changing external tenor of expectations, whilst ensuring comprehensively joined-up stakeholder communication.

3Edelman Trust Barometer 2020, www.edelman.com
4Health & Safety Report, www.hse.gov.uk