Core 10: The Change Makers' Manual

Strategy & Organisational Change

B eing seen as a good corporate citizen is something companies often strive for. The and retain customers, talented employees, and investors alike. Such ideas help explain why ESG (environmental, social and governance) reporting is now firmly in the mainstream. It is also the reason why financial industry professionals tend to insist that corporate bad behaviour leads to a decline in share price and why marketing executives spend so much time worrying how thinking goes that a strong reputation can help attract consumers will respond to negative news stories involving their firm. The idea that irresponsible behaviour has a negative effect on reputation was famously noted by Berkshire Hathaway CEO

and investment legend Warren Buffett when he said: “It takes 20 years to build a reputation and five minutes to destroy it.” Now, in the age of social media, that timeline might be even shorter. And yet, the evidence that reputation is fragile is limited, as very few studies have measured reputation damage. So, is this idea really accurate? What if it isn’t – or at least, not all of the time? My colleagues Giulio Nardella, Stephen Brammer, and I set out to test the relationship between a company’s ‘irresponsible’ actions and its reputation. We found that it depends, to a large extent, on what that reputation is to start with. We tend to assume reputations are vulnerable, but what we found is that this isn’t always the case. We began our research by turning to Fortune magazine’s World’s

Most Admired Companies survey, which asks thousands of financial analysts, company executives, and directors to identify the firms in their sector with the strongest reputations. Apple has topped the ranking for 14 years in a row. We then compared the survey data with media reporting information on corporate social irresponsibility to identify where there had been any irresponsible events involving the ranked companies and tracked the effect in Fortune's annual ranking. For any negative news or scandals we found, we further looked to see if they had involved one of three key factors: if a firm was found culpable for irresponsible conduct by a court of law; if a non-complicit stakeholder group was harmed in some way – ie those that are defenceless and vulnerable, like children, the disabled or people from a low socioeconomic background; or if the effect of the event was otherwise undesirable. Contrary to the findings of previous studies, we found that irresponsible corporate conduct, on its own, did not lead to any damage to reputations. However, if one of the three factors was present then there was an impact, although this too varied. A court ruling against a company tended to be associated with negative changes in reputation, but harming a vulnerable group did not have a significant impact. In fact, undesirable media stories tended to be associated with a positive change to reputation. A good example is the litany of media stories exposing fashion brands and clothes retailers, such as Nike, Zara, Gap, and H&M, for using child labour in developing countries to make their products. These stories have been

appearing in the media since the late 1990s, but they seem to have no effect on their reputation. It may be that stakeholders find it difficult to attribute culpability to a company because they outsource the responsibility of the production of goods to suppliers overseas. Nike was recently accused of using slave labour, with its Chinese


“The evidence that reputation is fragile is limited”

1. Our research found irresponsible corporate conduct on its own did not lead to reputational damage. A court ruling against a company tended to adversely affect reputation, but harming a vulnerable group (eg using child labour) did not. 2. Developing a strong reputation may limit the damage from later scandals as stakeholders seem to give ‘the benefit of the doubt’ to firms they view favourably. 3. Firms seen as the least socially responsible suffer further damage following scandals, whether or not their culpability has been proved in court. 4. This reinforces the value of investing in gaining a positive reputation in the first place.

suppliers revealed to be colluding with the government to imprison and use Uyghurs – the oppressed Turkish-speaking minority who live in China’s far west – in their sweatshops against their will. But this again failed to impact Nike’s reputation, or the other firms caught up in the scandal. This may be partly explained by companies putting a lot of effort into more socially responsible actions after a scandal hits the headlines. Importantly though, the results varied by company, with much

hinging on existing perceptions of how socially ‘responsible’ the firm was to begin with. Apple may be the perennial leader in Fortune’s most admired company list, but it has been embroiled in plenty of controversies, such as the working conditions of its main iPhone manufacturer Foxconn that have led to many suicides. But, because of its strong past reputation, such scandals have failed to significantly take the shine off Apple’s brand. Stakeholders often seem to give firms ‘the benefit of the doubt’,

Warwick Business School | | Warwick Business School



Made with FlippingBook Learn more on our blog