Proof that a good reputation improves the bottom line

  A study, reported in the European Management Journal recently, examined the economic benefits of a company’s corporate reputation among a sample of UK listed firms.  It revealed a significant positive relationship between the company’s media reputation and the level of its trade accounts payable and the number of days of trade credit received.  This indicates that a favourable media reputation influences a supplier’s credit risk perception of a firm and helps the firm to use trade credit as a source of finance.  This means that a good corporate reputation (presumably through ethical business behaviours, fair treatment and transparency) is regarded as a valuable intangible asset which can lead to competitive advantage and a stronger performance.

Social purpose is business critical

The “Social Business” journal has recently reported on the rise of social purpose driven business models.  This is where business institutions recognise their shared humanity and a role in wider society.  It reports that in designing and creating solutions that address education, sustainability, poverty etc, businesses have found that they can also reap rewards in terms of profits, knowledge or talent.  Social value and economic value can go hand in hand. 

This is backed up by the rise in “social intrapreneurship”where a person in a large organisations takes the direct initiative for innovation which addresses social and environmental issues.  The Doughty Centre at Cranfield University has summarised the necessary internal environment or “ecosytstem” to foster social innovation using the acronym DARE which stands for:

• Dialogue
• Autonomy
• Risk taking
• Experimentation 

These elements are seen as being key to attracting top talent and to sustainability in business.  Basically business needs to understand that social and environmental impacts are business critical.

Executive pay threatens trust in business

With the pay of FTSE 100 chief executives now 160 times that of the average full-time UK worker, finally it looks like leaders in business recognise the potential problem. Well at least 52% of companies surveyed by the High Pay Centre see "anger over senior levels of executive pay" as a threat to public trust. The Institute of Directors' commissioned the survey which also showed that 48% of firms agreed, or strongly agreed, that falling trust was an important threat to the success of their company. This surely means that declining levels of trust and damage to reputation should be firmly on the board's agenda with the risk committee monitoring carefully.

However, it is difficult to see what measures can really be taken to counter the specific threat to trust of high levels of executive pay without significant restructuring of the whole of business. The likes of the Ecology Building Society can be held up as an example with the Chief Executive's pay linked to 5 times the lowest paid worker but substantive change has surely got to come from shareholders? Last year shareholders of many firms questioned the remuneration proposals of their top executives. What is needed now is a continuing and concerted effort by shareholders to challenge, question and defeat remuneration proposals over the forthcoming years striving for more equity and fairness across the workplace. Any risk to trust and reputation has a direct impact on the potential returns of their investments. Let's hope we have another revolting shareholder spring,but one with a bit more bite.

Zero hours mean zero skills and value erosion

This week it was reported that there are now c 700,000 people on zero hours contracts. There are some big brand names responsible for this unfair treatment of workers including JD Wetherspoons, Burger King, Domino Pizzas, Sports Direct and McDonalds. Big chunks of the hotel, catering,education and care sectors use zero hours contracts which is said to have helped create the flexible workplace which has in turn helped the UK improve its economy and get out of recession.

However, this short-termism has an impact on the UK's long-term ability to compete.  Workers on zero hours contracts are less likely to build up useful skills and employers are less likely to invest in their training-creating workers with low skills, lower productivity, lower morale and less loyalty.

The key reason for treating employees fairly ie ethically, is because it is good for business eg through the "value creation cycle" where if employees believe they have a good deal from a firm (compared to alternatives) they are more likely to put more effort and loyalty into their roles than otherwise would be the case, their behaviour results in better performance, allowing the firm to improve the value proposition to customers, who then buy more, leading to growth in sales and profits etc etc. It's called "positive reciprocity" and benefits the economy long-term. We need highly skilled, highly motivated and highly productive workers to compete in today's and tomorrow's global economy.With many of the young on zero hours contracts, instead we are creating cultures of "negative reciprocity" fuelling the erosion of trust and growth in cynicism from our future generations.

The cost of conflicts-of-interest

Yesterday the FCA fined Aviva Investors £17.6 bn for systems and controls failings that meant it failed to manage conflicts-of-interest fairly.  This is a new topic for this blog and it is perhaps worthwhile just to quote directly from the FCA's spokeswoman to explain why conflicts-of-interest is important.

" Ensuring that conflicts-of-interest are properly managed is central to the relationship of trust that exist between asset management and their customers. It is also a fundamental regulatory requirement.....not doing so risks customers' interests being overlooked in favour of commercial of personal interests".

This is another example of the legacy issue where today's leaders are sorting out and paying for the unethical behaviours of predecessors when they should really be freed up to focus on rebuilding reputation and regaining the trust of stakeholders.

It’s not so bright treating rent-to-buy customers unfairly

Is there a responsibility to protect vulnerable customers from potentially misleading terms and conditions?  There certainly was in the pay day loan market where regulation was introduced to stop companies exploiting the poorest members of society.  Now the All-Party Parliamentary Group on Debt and Personal Finance has written to the Financial Conduct Authority about rent-to-own (RTO) retailers such as BrightHouse ‘cashing in’ on consumers’ difficulties.  The Group make 20 recommendations to be used as a new blueprint for the sector.  Key proposals include: 

• a ban on warranties and insurance
• an investigation into the mis-selling of insurance
• safeguards to prevent customers losing essential items for which they have already made substantial payments
• transparency about the total cost of RTO agreements

One of the business benefits of ethical conduct is it reduces the risk/cost of regulatory action. Yet again it really isn't too bright in the long-term to treat customers unfairly.

How can consumers trust relentless innovation?

Brand and product managers have always liked launching new products, it's what they do and this is particularly prevalent now in the technology sector.This potential confusion is often dressed up as enhanced choice for consumers.  The reality of this “enhancement”  may however be somewhat different with the plethora of products, services and pricing packages from financial services, energy and technology companies to name a few, creating confusion, unease and pressure on consumers. 

Findings from the 2015 Edelman Trust Barometer shows that 51% of the “informed public” consulted believe that innovation in business is now too fast, with just 19% saying it is about right and 28% saying it is too slow.  When asked "what they believe to be the key drivers of change", enhanced consumer choice did not predominate as can be seen below:

• 70% technology
•  66% business growth targets
•  54% greed/money
•  35% personal ambition
• 30% improving people’s lives 
• 24% making the world a better place. 

As has been demonstrated in this blog, business needs to build trust with its stakeholders.  Constant innovation may not help in this task as it is in danger of generating more confusion, uncertainty, and unease and because people do not believe it is actually for their benefit. However, to build up the aspect of "trust in innovation" the Edelman survey also revealed that transparency and third party validation were vital. So if business wants to continue to innovate and build trust they need to develop their credentials by having the results of their developments publicly reviewed and partner with more respected third parties such as universities.

Integrity and engagement are key trust-building opportunities

This year's Edelman Trust monitor once again looks at key areas in building trust.  The 5 areas relate to organisational integrity, enagagement, products and services, purpose and operations. The Trust monitor summary however emphasises the first two as the major trust-building opportunities for business and it is useful to summarise their key attributes:

Integrity

• has ethical business practices
• takes responsible actions to address an issues or crisis
• has transparent and open business practices

Engagement

• listens to customers' needs and feedback
• treats employees well
• places customers ahead of profits
• communicates frequently and honestly about the state of business

 The difficulty with maximising these trust-building opportunities is that they probably mean changing organisational culture which is long-term and it's clearly tempting to take the easy option and just tinker with products, services and operations. However, if leaders are in it for the long -game (see yesterday's blog on stewardship) then there are more chances of these trust building opportunities being realised, but possibly without them getting the direct, attributable credit -quite a personal leadership conundrum.

Everyday business ethics: building trust, boosting value

Is stewardship the answer to the poor conduct of big business?

Trust depends on the perception of fairness i.e. the equity of social exchange, so it is inevitable that trust in big business will have been further eroded by the continuing negative media coverage on tax avoidance this month.  It culminated last week with the Public Accounts Committee castigating the big accountancy firm (PwC) for its role in advising clients on tax avoidance; recommending that ministers should consider banning PwC from big government contracts as a way of influencing its behaviour. This week the “unethical news” is about the big bank HSBC on the same theme of helping clients with tax avoidance (evasion?)

The problem for current leadership is that a lot of what’s damaging reputations now goes back to their predecessors’ decision making.  Perhaps today’s leaders need some training in the ethos of stewardship, putting much more emphasis on the ethical legacy of their businesses in the longer term.  The 2015 Edelman Trust monitor shows that family businesses are the most trusted type of business (where passing on a viable firm to the next generation is stressed).  Our current leaders need to consider their successors, putting in place the business model which will best support the ongoing improvement in organisational reputations and trust for future generations.