A company's reputation is the key to its success
Everytime, I look for it in the library, it is issued. So after a month of running around, I got a chance to see the video - "The smartest guys in the room" - the story of Enron. And least to say - I was aghast, apalled by the complete lack of morals, ethics and unscrupulous behaviour. Roger Ebert in this link describes the story aptly http://rogerebert.suntimes.com/apps/pbcs.dll/article?AID=/20050428/REVIEWS/50413004/1001. The question that came to my mind after seeing the film is what people can do for money and least to say simply anything. I was shocked to see the confidence with which Kenneth Lay addressed the employees dismissing all reports of mishandling. A person on whom the entire company and world trusted was deceiveing them day in and out. More importantly if Corporate Governance is anything to talk about - lets look at who were on the board of Enron -
Norman P. Blake, Jr. (1994 - 2002), Interim Chairman of the Enron Board and formermember of the Enron Finance and Compensation Committees, has extensive corporate,Board and investment experience, including past service on the Board of General Electricand current service as Audit Committee Chairman of the Board of Owens Corning;
John H. Duncan (1985 - 2001), former Chairman of the Enron Executive Committee, hasextensive corporate and Board experience, including helping to found and manage Gulf andWestern Industries;
Herbert S. Winokur, Jr. (1985 - 2002), current Board member, former Chairman of theFinance Committee, and former member of the Powers Special Committee, holds twoadvanced degrees from Harvard University and has extensive corporate, Board andinvestment experience;
Dr. Robert K. Jaedicke (1985 - 2001), former Chairman of the Enron Audit and ComplianceCommittee, is Dean Emeritus of the Stanford Business School and a former accountingprofessor; and
Dr. Charles A. LeMaistre (1985 - 2001), former Chairman of the Enron CompensationCommittee, is former President of the M.D. Anderson Cancer Center, a large, well-respectedand complex medical facility in Texas.1
Robert H. Campbell is former Chairman of the Board and Chief Executive Officer ofSunoco, Inc., and current Board member at Hershey Foods, CIGNA, and the Pew CharitableTrusts;
Charles M. Elson is Director of the Center for Corporate Governance, University ofDelaware and a former member of the Board of Sunbeam Corporation; andMichael H. Sutton is the former Chief Accountant of the Securities and ExchangeCommission from 1995 to 1998.
So, the who's who of Corporate America were on the board of this company, yet as the Permanent Sub-committee
of Investigations, United States Government reports - they completely failed in their fiduciary duties, action to take control of High risk accounting, excessive compensation, lack of independence, Excessive undisclosed off the books activity. Its just beyond my personal belief how such reputed and educated people could allow themselves to be tarnished in this way taking down the company and its reputation down. Lets forget corporate social responsibility, company even misused employees pension funds to bloat the stocks. There has been huge debate and lot of write-up, but as an young management student am still trying to grapple with the enormity of the crime. In the following lines, I have described how a company needs to maintain reputation for its ongoing success.
A company’s reputation can be defined as the general opinion or social evaluation of the public or rather the stakeholders towards the organisation (Wikipedia.org 2006). A company’s reputation enables it to be more successful. In this essay, an attempt will be made to see how a company works with various stakeholders to build reputation – the issues, risk and constraints it faces. An analysis will then be done on how corporate social responsibility (CSR) impacts a company’s reputation and thereby its success. Views are presented on how an organisation may align CSR such that it offers competitive advantage and lead to sustainability. The essay will also review how good corporate governance practices can be effectively used to manage and maintain reputation. Finally, an evaluation will be done on some of the reliable measures of reputation.
Stakeholder theory says that the corporation should be run for the benefit of all ‘stakeholders’ not just the shareholders (Wikipedia.org 2006). Stakeholders of a company include any individual or group that can influence or is influenced from company’s practices. For example, many thousands of Indians living around the Bhopal plant can be considered having stake in Union Carbide as the company’s operation impacted their lives. Hence, the stakeholders of a company can be suppliers, consumers, employees, shareholders, financial community, government and media. For a company to be successful it must properly manage the relationships with all key stakeholders and consider their interests before making any decision.
Reputation building is a time consuming process and requires to be closely integrated with all functions of the company and involvement of top management. To start with a company requires being profitable and earning the respect of the shareholders by delivering better performance quarter on quarter. This profitability is achievable if a company has good products/service by which it continues to generate revenue and profit from new as well as existing customers. But it’s the employees who enable the company to achieve profitability. Hence, respectability can be considered the first building block to reputation. So, respect from customers first and then shareholders later. A respectable company attracts good and talented employees, more customers and investors to invest in the company. So, there is a kind of snowball effect that enables a company to earn more respect and hence reputation.
In a fiercely competitive marketplace profitability is achievable through more means than one. However, for a company to earn reputation it must be regarded as being reliable, credible, trustworthy and responsible for employees, customers, shareholders and financial markets (Wikipedia.org 2006). Reliability of the organisation is usually provided by the top management team. The CEO and board members play a key role by having ethical, legal, transparent practices in place that ensures the company acts with integrity and good faith. For every business there is a considerable amount of risk and the board and management often require assessing and strategising on that (BGSB 2006,24). However the board requires considering what impact their decision will have on the reputation of the organisation. For instance, an organization may axe jobs to reduce costs and improve profitability but it may bear the risk of low employee morale and failure to attract good talent thus tarnishing its reputation.
Often the company’s vision act as the guiding light that helps top management, employees in decision-making process and provides the image of reliability to most stakeholders. One of the top Indian IT companies, Infosys has the following vision
"To be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people."(Infosys.com 2006)
Listed on NASDAQ with annual revenues over $ 2 billion and employee strength of over 66,000, Infosys had used the compelling vision to guide all its action. Appearing in Forbes and TIMEs list of companies to watch out for, it has been voted many times as one of India’s most respected companies (Hindu.com 2006).
A sample of some of the accolades earned from the company website is provided below (Infosys.com 2006)
Stakeholder theory says that the corporation should be run for the benefit of all ‘stakeholders’ not just the shareholders (Wikipedia.org 2006). Stakeholders of a company include any individual or group that can influence or is influenced from company’s practices. For example, many thousands of Indians living around the Bhopal plant can be considered having stake in Union Carbide as the company’s operation impacted their lives. Hence, the stakeholders of a company can be suppliers, consumers, employees, shareholders, financial community, government and media. For a company to be successful it must properly manage the relationships with all key stakeholders and consider their interests before making any decision.
Reputation building is a time consuming process and requires to be closely integrated with all functions of the company and involvement of top management. To start with a company requires being profitable and earning the respect of the shareholders by delivering better performance quarter on quarter. This profitability is achievable if a company has good products/service by which it continues to generate revenue and profit from new as well as existing customers. But it’s the employees who enable the company to achieve profitability. Hence, respectability can be considered the first building block to reputation. So, respect from customers first and then shareholders later. A respectable company attracts good and talented employees, more customers and investors to invest in the company. So, there is a kind of snowball effect that enables a company to earn more respect and hence reputation.
In a fiercely competitive marketplace profitability is achievable through more means than one. However, for a company to earn reputation it must be regarded as being reliable, credible, trustworthy and responsible for employees, customers, shareholders and financial markets (Wikipedia.org 2006). Reliability of the organisation is usually provided by the top management team. The CEO and board members play a key role by having ethical, legal, transparent practices in place that ensures the company acts with integrity and good faith. For every business there is a considerable amount of risk and the board and management often require assessing and strategising on that (BGSB 2006,24). However the board requires considering what impact their decision will have on the reputation of the organisation. For instance, an organization may axe jobs to reduce costs and improve profitability but it may bear the risk of low employee morale and failure to attract good talent thus tarnishing its reputation.
Often the company’s vision act as the guiding light that helps top management, employees in decision-making process and provides the image of reliability to most stakeholders. One of the top Indian IT companies, Infosys has the following vision
"To be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people."(Infosys.com 2006)
Listed on NASDAQ with annual revenues over $ 2 billion and employee strength of over 66,000, Infosys had used the compelling vision to guide all its action. Appearing in Forbes and TIMEs list of companies to watch out for, it has been voted many times as one of India’s most respected companies (Hindu.com 2006).
A sample of some of the accolades earned from the company website is provided below (Infosys.com 2006)
“India’s Best Managed Company” by Business Today and A.T. Kearney (2005)
One of World’s Most Respected Companies in the Financial Times-PwC annual survey. (2004)
Ranked the Best Employer in India by Business Today-Hewitt in their annual survey. (2003)
Clearly its corporate governance practises and corporate social responsibility initiatives has helped it build a solid reputation and ensured continuous success. Every quarter, analysts use Infosys results and predictions as benchmark to assess other Indian companies. Chief Mentor and Chairman Mr Narayana Murthy inspire admiration because of his ethical approach and transparency, accountability that he has introduced in company management. In 2004, he was among top 10 people of TIME magazine “Global Tech Influential’s” list and its CEO Mr Nandan Nilekani rated among the world’s most respected business leaders in FT-PwC survey (Infosys.com 2006).
It is in this context, the role of CEO in building company’s reputation is considered. CEO being often the spokesperson of the organisation, CEO reputation contributes to organisational reputation. In Burson-Marsteller's 2003 Building CEO Capital™ survey revealed that 50% of a Company’s Reputation is linked to CEO Reputation (CEO Reputation 2006). The reason being the CEO is generally considered the organization’s public face and ethical compass.
On the other hand bad reputation can impact company’s success. One may take the example of Australia's Macquarie Bank. As detailed in Sydney Morning Herald, Macquarie’s share sky-rocketed to $41 in Sept, 2001 but one year later that decreased and investors lost around $4 billion in share market. The market went edgy when it made a risky investment over $5 billion dollars in Sydney airport. In one year, Macquarie’s Reputation Index ranking tumbled from 22.5 in 2001 to 44.5 in 2002 (Good Reputation Index 2006). Unethical practices can permanently damage a company's reputation as is the case of Enron and Arthur Anderson in the US and HIH in Australia. The failure and corrupt practices of these corporations has led to long-term loss of trust of American financial markets.
Responsibility follows from respectability, reliability. As a corporate citizen, the company has a role to play in the community in which it operates. Herein the companies’ social responsibility that is the social and environmental behaviours that impact the local and more distant community are considered (BGSB 2006). Companies now engage in triple bottom line reporting, that is, reporting on social, environmental and financial areas (BGSB 2006). Its in these socially responsible actions that a company earns reputation.
Top management is often caught between higher levels of 'corporate social responsibility' and investors applying pressure to maximize short-term profits. This can happen when social responsibility is considered as an add-on to the business idea and hence treated as an additional cost that depress the business results. However, if social responsibility and philanthropy can be perceived as arising from stakeholder responsibility then it has the power to push the dynamics of the business idea. This will help the organisation gain reputation and distinct competency in the competitive context and thus improve company's long-term business prospects. For example, philanthropic investments to improve education and local quality of life that will help the organisation gain reputation and distinct advantage (Harvard 2003,27).
Westpac bank, one of Australia’s leading banks has used the above framework of CSR to gain reputation and competitive advantage leading to sustainability. The company annually engages in dialogue with the employees on workplace practices and generate ideas for improvements. Each year, every employee of Westpac is entitled to a community volunteering day – a paid leave day so that they can participate in community activities (Mallenbaker.net 2006). Westpac also matches, dollar for dollar, staff fundraising or contributions to any tax-deductible charity. It engages in triple bottom line reporting and the only Australian bank to sign the Equator principles which manadate the bank to provide loans only to those projects that are developed in a socially responsible manner and according to sound environmental management practices (Westpac.com 2006). According to the Dow Jones Group Sustainability Index, Westpac is the global corporate sustainability leader in the banking sector (Mallenbaker.net 2006)
On the contrary, the case of James Hardie who had tried evading CSR by creating a separate foundation with insufficient funds to compensate victims of its deadly asbestos products business is a case of being unethical and illegal and hence considered as criminal. The corporation had put the drive for profits before the lives of its employees (Grenleft.org). This had badly damaged its reputation and hence its success.
A case in point is how company may have its reputation damaged when it fails to recognize its indirect stakeholders thus threatening its business and image. In 1995, Shell’s research team had identified that disposal of oil storage tank in the North Sea would be the least environmentally hazardous technique and was also approved by the United Kingdom and European government agencies (Schwarz and Gibbs 1999,27). However, international environmental group Greenpeace activists initiated a big protest accusing Shell of trying to damage the ocean environment. This led to intense press coverage and company was forced to reverse its strategy and explore other options. This may be the case of legal (approved by Government) but unethical practise that hampered company's reputation as it did not work in socially accountable way and engage in participation with the environmental groups before making a decision. However, in 1998, as a damage control measure, Shell released the first social responsibility report entitled Profits and Principles – does there have to be a Choice?(Schwarz and Gibbs 1999,28). This may be one of the ways that a company may hope to manage and maintain reputation when unexpected events threaten its existence.
As we may identify from the above argument and examples of Infosys, Macquarie bank, Westpac bank, James Hardie and Shell that company’s reputation is a combination of respectability, reliability and responsibility and requires careful balancing act with all the various stakeholders directly or indirectly through patience and diligence. In Australia and rest of World, various organisations have come with Good Reputation Index (Good Reporting Index 2006), Corporate-Social-Responsibility Index (CSR Index 2006), and Global reporting Index (Global Reporting Initiative 2006) to help organisations to comply and assess themselves on the various parameters affecting social responsibility and governance. Hence, a company requires addressing all potential conflicts and continuously working on enlightened self interest principles to gain reputation and success.
References:
Brisbane Graduate School of Business. (2006). Corporate Governance and Accountability – GSN 415 - Study Guide and Resource Book. Brisbane: QUT Publications.
Harvard (2003). Harvard Business Review on Corporate Responsibility. Boston: Harvard Business School Publishing Corporation.
Schwartz, P., Gibb, B. (1999). When Good Companies Do Bad Things – Responsibility and Risk in an Age of Globalization. New York: John Wiley & sons, Inc.
Infosys.com: Company Website. www.infosys.com/about/vision_and_mission.asp
(Accessed November 30, 2006)
Mallenbaker.net: Corporate Social Responsibility Website.
www.mallenbaker.net/csr/CSRfiles/page.php?Story_ID=821
(Accessed November 30, 2006)
Hindu.com: Newspaper Website. www.hindu.com/2004/11/23/stories/2004112303321700.htm
(Accessed November 30, 2006)
Wikipedia.org: Information Website. www.en.wikipedia.org/wiki/Reputation
www.en.wikipedia.org/wiki/Stakeholder_theory
(Accessed November 30, 2006)
Good Reputations Index www.smh.com.au/articles/2002/10/28/1035683351089.html
(Accessed November 30, 2006)
CSR Index
www.corporate-responsibility.com.au/about/corporate_social_responsibility/what_is_csr.asp
(Accessed November 30, 2006)
Global Reporting Initiative
www.globalreporting.org/ReportingFramework/AboutReportingFramework/
(Accessed November 30, 2006)
CEO Reputation www.ceogo.com/documents/Building_CEO_Capital_2003.pdf
(Accessed November 30, 2006)
Burson-marsteller www.burson-marsteller.com/pages/insights/pubs/articles/as-january2003
(Accessed November 30, 2006)
Westpac.com: Company Website www.westpac.com.au/internet/publish.nsf/Content/WICREV+Equator+principles
(Accessed November 30, 2006)
Greenleft.org www.greenleft.org.au/2004/598/31790
(Accessed November 30, 2006)
It is in this context, the role of CEO in building company’s reputation is considered. CEO being often the spokesperson of the organisation, CEO reputation contributes to organisational reputation. In Burson-Marsteller's 2003 Building CEO Capital™ survey revealed that 50% of a Company’s Reputation is linked to CEO Reputation (CEO Reputation 2006). The reason being the CEO is generally considered the organization’s public face and ethical compass.
On the other hand bad reputation can impact company’s success. One may take the example of Australia's Macquarie Bank. As detailed in Sydney Morning Herald, Macquarie’s share sky-rocketed to $41 in Sept, 2001 but one year later that decreased and investors lost around $4 billion in share market. The market went edgy when it made a risky investment over $5 billion dollars in Sydney airport. In one year, Macquarie’s Reputation Index ranking tumbled from 22.5 in 2001 to 44.5 in 2002 (Good Reputation Index 2006). Unethical practices can permanently damage a company's reputation as is the case of Enron and Arthur Anderson in the US and HIH in Australia. The failure and corrupt practices of these corporations has led to long-term loss of trust of American financial markets.
Responsibility follows from respectability, reliability. As a corporate citizen, the company has a role to play in the community in which it operates. Herein the companies’ social responsibility that is the social and environmental behaviours that impact the local and more distant community are considered (BGSB 2006). Companies now engage in triple bottom line reporting, that is, reporting on social, environmental and financial areas (BGSB 2006). Its in these socially responsible actions that a company earns reputation.
Top management is often caught between higher levels of 'corporate social responsibility' and investors applying pressure to maximize short-term profits. This can happen when social responsibility is considered as an add-on to the business idea and hence treated as an additional cost that depress the business results. However, if social responsibility and philanthropy can be perceived as arising from stakeholder responsibility then it has the power to push the dynamics of the business idea. This will help the organisation gain reputation and distinct competency in the competitive context and thus improve company's long-term business prospects. For example, philanthropic investments to improve education and local quality of life that will help the organisation gain reputation and distinct advantage (Harvard 2003,27).
Westpac bank, one of Australia’s leading banks has used the above framework of CSR to gain reputation and competitive advantage leading to sustainability. The company annually engages in dialogue with the employees on workplace practices and generate ideas for improvements. Each year, every employee of Westpac is entitled to a community volunteering day – a paid leave day so that they can participate in community activities (Mallenbaker.net 2006). Westpac also matches, dollar for dollar, staff fundraising or contributions to any tax-deductible charity. It engages in triple bottom line reporting and the only Australian bank to sign the Equator principles which manadate the bank to provide loans only to those projects that are developed in a socially responsible manner and according to sound environmental management practices (Westpac.com 2006). According to the Dow Jones Group Sustainability Index, Westpac is the global corporate sustainability leader in the banking sector (Mallenbaker.net 2006)
On the contrary, the case of James Hardie who had tried evading CSR by creating a separate foundation with insufficient funds to compensate victims of its deadly asbestos products business is a case of being unethical and illegal and hence considered as criminal. The corporation had put the drive for profits before the lives of its employees (Grenleft.org). This had badly damaged its reputation and hence its success.
A case in point is how company may have its reputation damaged when it fails to recognize its indirect stakeholders thus threatening its business and image. In 1995, Shell’s research team had identified that disposal of oil storage tank in the North Sea would be the least environmentally hazardous technique and was also approved by the United Kingdom and European government agencies (Schwarz and Gibbs 1999,27). However, international environmental group Greenpeace activists initiated a big protest accusing Shell of trying to damage the ocean environment. This led to intense press coverage and company was forced to reverse its strategy and explore other options. This may be the case of legal (approved by Government) but unethical practise that hampered company's reputation as it did not work in socially accountable way and engage in participation with the environmental groups before making a decision. However, in 1998, as a damage control measure, Shell released the first social responsibility report entitled Profits and Principles – does there have to be a Choice?(Schwarz and Gibbs 1999,28). This may be one of the ways that a company may hope to manage and maintain reputation when unexpected events threaten its existence.
As we may identify from the above argument and examples of Infosys, Macquarie bank, Westpac bank, James Hardie and Shell that company’s reputation is a combination of respectability, reliability and responsibility and requires careful balancing act with all the various stakeholders directly or indirectly through patience and diligence. In Australia and rest of World, various organisations have come with Good Reputation Index (Good Reporting Index 2006), Corporate-Social-Responsibility Index (CSR Index 2006), and Global reporting Index (Global Reporting Initiative 2006) to help organisations to comply and assess themselves on the various parameters affecting social responsibility and governance. Hence, a company requires addressing all potential conflicts and continuously working on enlightened self interest principles to gain reputation and success.
References:
Brisbane Graduate School of Business. (2006). Corporate Governance and Accountability – GSN 415 - Study Guide and Resource Book. Brisbane: QUT Publications.
Harvard (2003). Harvard Business Review on Corporate Responsibility. Boston: Harvard Business School Publishing Corporation.
Schwartz, P., Gibb, B. (1999). When Good Companies Do Bad Things – Responsibility and Risk in an Age of Globalization. New York: John Wiley & sons, Inc.
Infosys.com: Company Website. www.infosys.com/about/vision_and_mission.asp
(Accessed November 30, 2006)
Mallenbaker.net: Corporate Social Responsibility Website.
www.mallenbaker.net/csr/CSRfiles/page.php?Story_ID=821
(Accessed November 30, 2006)
Hindu.com: Newspaper Website. www.hindu.com/2004/11/23/stories/2004112303321700.htm
(Accessed November 30, 2006)
Wikipedia.org: Information Website. www.en.wikipedia.org/wiki/Reputation
www.en.wikipedia.org/wiki/Stakeholder_theory
(Accessed November 30, 2006)
Good Reputations Index www.smh.com.au/articles/2002/10/28/1035683351089.html
(Accessed November 30, 2006)
CSR Index
www.corporate-responsibility.com.au/about/corporate_social_responsibility/what_is_csr.asp
(Accessed November 30, 2006)
Global Reporting Initiative
www.globalreporting.org/ReportingFramework/AboutReportingFramework/
(Accessed November 30, 2006)
CEO Reputation www.ceogo.com/documents/Building_CEO_Capital_2003.pdf
(Accessed November 30, 2006)
Burson-marsteller www.burson-marsteller.com/pages/insights/pubs/articles/as-january2003
(Accessed November 30, 2006)
Westpac.com: Company Website www.westpac.com.au/internet/publish.nsf/Content/WICREV+Equator+principles
(Accessed November 30, 2006)
Greenleft.org www.greenleft.org.au/2004/598/31790
(Accessed November 30, 2006)
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