Corporate reputation and business performance

During 2022, we saw both new factors and ongoing issues impacting corporate reputations, as the world entered a period of economic instability, and organisations faced increasing stakeholder pressure to step up on ESG. So how has reputation impacted business performance, and what lessons can be learnt going into 2023?

The state of corporate reputation in 2022 is an inventory of how organisations responded to the climactic events that shook the world. With hyper-connected stakeholders directing intense scrutiny at firms’ behaviour, and wielding the triple-threat of social media, boycotts and popular protest, reputation’s direct impact on business performance was magnified far beyond previous levels.

With the fallout of the pandemic lingering, 2022 added extreme weather events and devastating reporting that the 1.5C global warming limit will be missed. The COP27 conference spotlighted climate concerns, with governments struggling to balance environmental cost against financial. The cost-of-living crisis brought social issues to the fore, while strikes and executive pay highlighted corporate governance. ESG was everywhere.

Intensifying each issue was Putin’s war on Ukraine. With the Western world united in condemnation, the speed with which businesses boycotted Russia was monitored in real time. The resulting energy crisis also shone a stark light on corporate behaviour, with soaring profits reported as people struggled to pay their bills.

Among all stakeholders, from shareholders to customers, suppliers, employees, shareholders, NGOs and government, there was an expectation for organisations to respond to seismic events. These issues remain unresolved, and as 2023 arrives, businesses need to understand the associated reputational risk, and manage its impact on company performance.

Reputational lesson: Growing importance of ESG

This was the year a demonstrable ESG policy went from nice to have to absolute necessity. The myriad issues falling under environmental, social and governance headings took it far beyond the realm of corporate social responsibility.

These topics are now so fundamental that corporate leaders are required to perform against ESG targets to earn their bonuses. According to PwC research, E, S or G metrics are now linked to executive remuneration, incentive plans or bonus schemes by 90% of the FTSE 100.

But few – if any – businesses have hit peak ESG. The criteria are too broad, and too swiftly evolving. To manage reputational risk, organisations must recognise where they are failing, and be transparent about how they’re going to fix it. The cultural, organisational and operational changes needed to win at ESG are immense, but stakeholders are ready to reward progress as much as perfection.

Reputational lesson: Sustainability and COP27

In November, COP27 November highlighted the sustainability issues with the strongest pull among stakeholders, and corporations seeking to boost their climate credentials were quick to attach themselves to the key themes of the conference.

A microcosm of this behaviour was demonstrated by the financial sector. Reporting by Penta on the key issues for banking stakeholders leading up to COP27 shows the impact, positive or negative, for banks around specific COP concerns. Barclays, for example, achieved a reputational boost by partnering on the Property Week Climate Crisis Challenge. NatWest also drew positive reporting for its commitment to fund $100bn of sustainability projects by 2025.

Conversely, Goldman Sachs faced a swathe of negative sentiment around its continued investment in fossil fuels, despite environmental pledges. These sector-specific examples are a warning to all corporate communications teams of how climate issues trigger significant reputational risk.

Reputational lesson: Conflict in Ukraine

Putin’s war whipped up a reputational maelstrom for companies doing business with and in Russia. How they reacted in the weeks following the invasion set a new bar for reputational risk.

The FMCG sector proffers a salutary lesson. Russia’s aggression towards its neighbour unleashed waves of popular protest, stakeholder activism and boycotts of companies that failed to punish the country for its unjustified military action. Analysis by Penta of the reputations of consumer goods companies in the wake of the crisis shows reputational credit spiralling for those slow to halt operations in Russia.

Meanwhile, as NGOs, consumers and politicians demanded sanctions, Heineken and AB InBev’s immediate withdrawal from the country catalysed a wave of positive visibility. Redemption was also available for those less quick to exit – humanitarian missions and support for local employees allowed FMCG firms including Nestlé and Danone to reburnish their reputations.

Reputational lesson: Cost-of-living crisis

The energy emergency – sparked by the pandemic and compounded by the war in Ukraine, rising prices and increase of the energy price cap – is a searing example of how the cost-of-living crisis impacted corporate reputation. When uncertainty in the market pushed wholesale gas and electricity prices to unforeseen levels, and Russian fossil fuel supplies were cut off, household energy costs skyrocketed.

As smaller suppliers went under, unable to offer credit to cover increased wholesale costs, the energy giants inherited their customers. With families pushed into fuel poverty, sentiment towards the big players, the government and regulators plunged. The reputational damage was extensive. Only EDF made moves to salvage its brand, calling for a VAT windfall on energy companies, and starting initiatives to help vulnerable customers.

Higher prices pushed up energy company profits, with Bloomberg predicting £170bn in excess profits over the next two years, while winter energy bills triple. Shell posted record revenues in 2022, with Centrica seeing its first half profits rise to £1.34bn, up from £262m the previous year.

While such announcements offered cold comfort to those unable to heat their homes, Centrica did pledge 10% of its profits to help vulnerable customers during the crisis, with CEO Chris O’Shea saying he planned to voluntarily cap profits to manage household bills. It remains to be seen whether this is sufficient to deflect further reputational damage.

Reputational lesson: Executive pay

Executive remuneration weighed against the falling value of workers’ wages caused further unrest among stakeholders. The Financial Times reported that a 2022 ‘bonus bonanza’ increased the pay of FTSE 100 CEO’s by almost a quarter, despite boards being advised to rein in executive reward as the cost-of-living crisis bit.

Penta’s analysis shows the negative visibility of executive pay growing in 2022. The analysis flags critical reporting around Deloitte’s increase of CEO pay to an average £3.6m; and the rejection by JP Morgan’s shareholders of chairman and CEO Jamie Dimon’s bonus. This type of negative sentiment translates directly into reputational risk for organisations deaf to stakeholder criticism.

Conclusion

The slings and arrows of 2022 have been tough on corporate reputations in general, and particularly devastating for some. When an organisation’s reputation suffers, shareholders won’t invest, customers don’t purchase its products and services, it can’t attract or retain talent, communities refuse it licence to operate, NGOs campaign against it, and regulators over-scrutinise it.

Without stakeholder buy-in, organisations can’t function. It is fair to say, therefore, that reputation management is a vital driver of business performance. And 2022 has shown that to build a strong reputation, corporate behaviour around stakeholder priorities must be transparent, timely, and long-term. It takes more than a slick advertising campaign to build or repair a company’s reputation. Whitewashing and greenwashing are out –authenticity is in.

Organisations looking to reduce the reputation risk associated with global crises must recognise that corporate reputation is no longer an intangible asset. Reputation intelligence solutions have the power to quantity and directly connect corporate behaviours to reputation scores, allowing organisations to track and mitigate the impact of reputation on business performance.

alva is pleased to share that we are now Penta Group, the world’s first comprehensive stakeholders’ solution firm. Stay in touch with us by following us on LinkedIn and on Twitter @pentagrp.