In the new world order of corporate globalism corporations are seeking to ensure that trade, investment and their daily operations are unencumbered by regulations. They claim that self-regulation and corporate responsibility will ensure their operations are benign. However, all that restrains corporate activities in an absence of effective regulations is a concern for their reputation; in particular their reputation in the countries where they sell their goods.
Reputation is a powerful force and increasingly so. Since the late 1980s large numbers of people in affluent countries have been influenced by a company’s reputation for social and environmental responsibility in their purchases, investments and choice of employers. Several companies have felt the impact on their reputations, and consequently on their share value and their profits, of pressure group campaigns exposing their misdeeds.
Reputation management has therefore become an important part of doing business. But reputation management is often a public relations activity that has little to do with social responsibility. Instead, corporations spend much effort and money on creating the impression of responsibility. They gain credibility for their claims of responsibility through token reforms, codes of conduct and by aligning themselves with amenable environmental and human rights groups as well as specially created coalitions of such groups.
Reputation is increasingly important to the value of companies. In his book on Image Marketing, Joe Marconi noted that during the 1990s reputation took on such critical importance for large corporations in terms of their market share that it is now “of as much concern to their banks as their marketing plans and their business plans.”
A survey by Interbrand and Citibank found that 70% of the value of the top 100 British companies was attributed to goodwill in 1998 compared with 40% in 1988. “Reputation is now so important that the Turnbull Report, which forms part of the UK's corporate governance guidelines, advises companies to treat it in the same way as all other assets.”
Similarly the Chief Executive/Hill and Knowlton Corporate Watch survey of 1999 found that 94% of US CEOs in 10 industries agreed that a good reputation is “very important” to achieving a company’s strategic business objectives. CEOs claimed reputation had grown rapidly in importance over the previous 5 years and they expected that to continue.
In recent years the elements of a good corporate reputation have changed. Once reputation was built on reliability and quality of products. In the late 1980s many consumers became concerned with the company’s environmental record and social responsibility. In the past companies have earned a good community reputation through corporate philanthropy and cause-related marketing. In recent years surveys show that community and environmental responsibility affect corporate reputation. It is no longer enough to just give money to charities. A company needs to demonstrate that its business activities are responsible.
Also in the late 1980s consumer and environmental groups started incorporating consumer campaigns and boycotts into their campaign activities. And today the internet is increasing the ability of NGOs to attack corporate reputations when corporations act irresponsibly. What a company does in some remote part of the world is immediately relayed around the world via the Internet.
Reputation incorporates elements of trust, credibility, responsibility and accountability. But it is essentially about perceptions, as most people outside of a company’s management do not have full information. People’s perceptions of a company influence how they buy, sell, invest and who they work for. Marconi advises companies:
If the image of you that people take away is based on their perception of you and their perception is based upon what they know of you, it’s important that you manage and control that flow of information about you to the greatest degree possible… Remember that your goal is to control the flow of information about you and to do that you must provide information that clearly defines you. If you don’t someone else will and the odds that it will be someone who wishes you great success are not in your favor.
Increasingly companies, such as BP and Nike, are using the Internet to provide this information and profess a social conscience. The interest that companies have in displaying and advertising their social responsibility is in part because of "the rising interest among investors in the stocks of so-called socially responsible companies."
Reputation is also more generally tied to shareholder value and return. Those companies with the best corporate reputations are the ones that perform the best on regular economic measures such as shareholder return. Companies that have had crises of reputation, such as Exxon after the Valdez oil spill and Texaco after being accused of race discrimination, have seen the market value of their shares drop by billions of dollars.
John Budd from Selz/Seabolt Communications argues that increasingly “it is being recognized that financial performance correlates strongly with reputation… In this context investors are investing in tangibles (the corporate track record) buoyed by confidence in the company's prospects by their perception of the intangibles, (the so-called non-financial variables).”
In his book on Corporate Community Relations Edmund Burke suggests that when a company with a good reputation does make mistakes or have accidents they are more likely to be given the benefit of the doubt. Good reputation also helps build support for a company which is the subject of controversy. Writing in the Financial Times, David Brotzen said that a good reputation was like “credit in the bank” with the public and with “significant stakeholder groups".
Reputation is also important for attracting good employees and keeping them. "[B]right, young, mobile, intelligent staff… do not want to work for a company with a poor social reputation, as Shell found out to its cost in the wake of the Brent Spar fiasco." A survey of human resource executives found that a company’s reputation in the community had a major impact on hiring employees.
A good reputation also helps to promote employee loyalty. BP promotes progressive environmental policy because surveys show that that is what BP’s staff and customers want: “You need the will and the minds of the people inside a company to achieve anything.”
Reputation is especially important when a company’s products are similar in quality and price to competing companies or where it is difficult for consumers to differentiate between products. Corporate reputation matters most when consumers are least able to assess a product’s performance.
In the case of petrol, consumers are unable to differentiate between the quality of oil from various companies. So reputation has added significance. According to John Sawhill, President of The Nature Conservancy, who has known BP CEO John Browne for 20 years and has a seat on the BP America advisory board, “Browne sees BP’s position on climate change as a way to distinguish them from others in the industry.”
Reputation also provides competitive advantage by enabling companies to avoid competition on the basis of price. If reputation ensures that a product “is highly valued by its buyers” then consumers will be willing to pay a premium for it. It is the latter strategy that is used by Nike and this strategy requires careful reputation management. Its reputation for quality and innovation and its association with sporting stars helps Nike to fend off rivals and copy-cat footwear manufacturers who offer similar products at much lower prices.