Reputation matters -- but which part?

Reputation matters -- but which part?

While I have previously railed on the obsession with share price as an accurate indicator of company health, I have come to terms that my position is like renouncing English as the emerging language of global commerce. So I have embraced share price as something people care about.

And if you care about share price, there is finally hard data showing you should also care about environmental and social issues that impact operations. Freshfields Bruckhaus Deringer, a U.K. law firm, recently conducted an analysis of 78 publicly traded companies that endured “global reputational crises.” Freshfields mapped share performance for the year following different events.

What the study found is that “behavioral events,” such as a rogue trader, have a big effect in the short-term, but minimal impact in the long haul. On the other hand, operational events, such as a supply chain breakdown, product recall, or environmental issue, have a profound long-term impact. One year after an “operational event,” share prices were down an average of 25 percent for the companies studied.

Moreover, if senior executives did not return their company share price to pre-crisis levels within six months, their attrition rate was nearly double the relevant industry norm. 

It is common these days to link sustainability and shared value to innovation and growth. I firmly believe such “offensive” moves are the key to resiliency and success for businesses. But that does not mean we should ignore defense either. Defense provides the foundation on which innovation can flourish. Good defense depends on paying attention to the right things, and the Freshfields study sheds some light on where to focus.

I have spoken with leaders at companies and at times been posed a very frank question paired with a quizzical look: How much does this stuff -- environment, social, stakeholders -- really matter to our reputation? This study is proof that this stuff matters, that you can’t talk your way out of situations after the fact, and that a minor investment on the front-end can avoid significant headaches one year on.

I had the good fortune to discuss this issue with a mining company in 2007. They were considering transmission lines in an ecologically rich corridor in the Southern Hemisphere, and had run the numbers on the cost of a shutdown due to potential protests. The cost to move the transmission line was a fraction of the potential lost outputdue to local protests, so they moved the transmission lines. Simple.

I interpreted an equally simple message from this study. Reputation matters, and operations and stewardship matter most.

Photo of electronic stock prices provided by Bianda Ahman Hisham via Shutterstock.