Arguably a company’s reputation is one of its most important assets when it comes to managing investor and public perception. As more and more corporate bribery and corruption scandals continue to unfold, understanding reputational risk – its drivers and ways in which to mitigate these – is critical to safeguarding your organisation’s reputation.
This blog post, part of the Insights series from the Ethical Alliance Resource Centre, looks at the intrinsic links between ethical conduct, reputation and shareholder accountability, all crucial drivers to a business’ bottom line.
The complexities of modern supply chains mean that reputational risk can no longer be viewed only as a result of traditional non-compliance or illegal acts. Displaying unethical behaviour or ‘condoning’ unethical acts by third parties can also constitute a reputational risk event and undermine investor confidence.
What is the cost?
Allegations of misconduct, even when indirect, can prove to be a costly reputational event as evident in the case of FIFA and its sponsors. In 2015 the Building and Wood Workers’ International (BWI) Union alleged that FIFA had failed to identify and prevent systematic human rights violations in the construction of venues and infrastructure to support the 2022 World Cup in Qatar. This has resulted in the already scandal-plaqued association coming under significant and ongoing fire. These allegations, since widely publicised, encompass issues of what is now commonly referred to as “responsible business conduct” that transcend traditional legal compliance and take into account ‘soft’ laws and shareholder expectations as well.
This case also highlights the potential for an organisation’s reputation to be “tainted” by the misconduct of third parties, with some of FIFA’s sponsors also coming under increased scrutiny. These corporate sponsors, who were not directly causing or contributing to adverse human rights impacts were nevertheless directly linked through their sponsorship, and are expected to assume a level of responsibility to ensure human rights violations are prevented and mitigated.
For FIFA, human rights and corruption scandals have presented ‘costly’ challenges to signing up new sponsors and meeting revenue targets. Since 2015, FIFA has managed to add only one main sponsor, Wanda Group Co. in March 2016 – far off its targets for corporate sponsorship revenue and 27 new partners for the next World Cup game in 2018. It was reported that FIFA had forecasted a £67 million deficit for 2015 due to the loss of sponsorship as well as substantial legal fees.
Allegations of unethical conduct can affect more than your reputation
As our recent whitepaper suggests, socially responsible investment is rapidly growing more sophisticated and mainstream, with investors today becoming more savvy than ever before through the use of new tools that facilitate more granular retrieval of information about companies’ performance on social compliance issues. As such, companies engaging in misconduct are increasingly finding themselves under the spotlight, both from potential investors and the media.
On June 22nd, it was reported that Ericsson was facing lacklustre share performance with a 20 percent drop in share price in 2016, amidst allegations of bribery in countries such as Greece, Romania and China. With investors today increasingly demanding transparency and accountability in business practices, Ericsson had to provide shareholders with information about its anti-corruption program and demonstrate commitment to anti-corruption goals. Sasja Beslik, the head of responsible investment at Nordea Bank AB, one of Ericsson’s investors, commented: “All in all, it was informative, but let’s hope there won’t be more closet cases we’re not aware about; There are “a lot of moving parts regarding China, Greece and the SEC investigation that make it difficult to understand how these systems function in practice. The picture is still blurry and we need more validation.”
In yet another recent ongoing investigation, Lotte Group has shelved what may have been the world’s biggest initial public offering so far this year at $4.5 billion for its hotel group following broadening investigations into possible bribery, slush funds and embezzlement. All of Lotte’s eight listed units fell in Seoul trading on June 13th, losing a combined 1.1 trillion Won (estimated USD$ 967,087,000) in market value. The shares fell because of the probe, according to Kookhee Han, an analyst at NH Investment & Securities Co.
Along with investors’ demands for increasing corporate transparency, it is also critical for organisations to understand the realities of shareholder accountability. It was reported on July 22nd that Wal-Mart and its Board of Directors had escaped a lawsuit for suspected bribery, one that was filed by its shareholders, alleging that Wal-Mart’s Board of Directors had permitted and then covered up pervasive bribery at its Mexico subsidiary, Wal-Mart de Mexico. While the shareholders were not successful in their lawsuit, this example signals an emerging dimension of stakeholder accountability, where a company can face repercussions of hurt investor confidence and also risk being taken to task by investors for alleged or actual misconduct.
These high-profile cases illustrate how large organisations are not immune to reputational damage as a result of their own misconduct, or that of their third party business partners. This paints an important lesson that no organisation can take their reputation for granted, as this can undermine investor and client trust and ultimately affect the bottom line. With the likelihood of reputational risk being amplified by other enterprise and external risks, organisations need to proactively manage these risks in a coordinated and timely fashion.
Protecting your reputation, the cornerstone of every organisation’s business, remains a business imperative and board priority which can be achieved by an ethical culture that drives responsible business conduct.
By Dawn Ng, ethiXbase
Other recommended reading:
Learn what it means in practice for an organisation to respect human rights, and translate this into responsible business conduct and ultimately protect your reputation.
Master an understanding of existing and future supply chain risks, around issues on migrancy, human trafficking and modern day slavery; and learn strategies to mitigate regulatory and reputational risks.