Financial professionals play a growing role in efforts to manage reputational risk and maintain brand value through ethical business practices.
The 2013 cyber attack on Target hit the company’s reputation, and cost millions in legal settlements and reimbursements to banks and partners. |
Pro-social campaigns are nothing new. Activists have been pushing against corporate waste, pollution, chicanery and worker exploitation for decades.
But recent years have seen a subtle shift as social concerns have grown and expanded and social media has boosted exponentially the ability of consumers and activists to connect with each other and spread information. Meanwhile, declining faith in institutions has eroded confidence in business leaders. The financial community in particular is under a spotlight.
“In the 10 years since the financial crisis, a light has been shone on the role of business in society, exposing the excesses of the past,” says Philippa Foster Back, director of the London-based Institute of Business Ethics (IBE). “Those in the boardroom have realized the importance of doing, and being seen to do, their business ethically.”
Critically, it’s no longer a job for the public relations department. The annual report is developing beyond a statement of the company’s financial position into more of a reflection on how it contributes to society. There’s a significant role the finance function plays in ethical business too.
Thus, in July, the world’s biggest food companies joined in an alliance promoting more ethical foods: healthier for the planet to make and healthier for consumers to eat. Notably, Paul Polman, CEO of alliance member Unilever, is a vigorous advocate for sustainable business practices. He is also a former CFO for another alliance member, Nestlé.
“It is not enough to talk about fairness, mutual benefit and care; boards are having to articulate what those values mean in practice for their organizations—whether that’s understanding the pressures on employees, paying suppliers promptly or being transparent about tax planning,” Back says. “The latter two are, of course, the responsibility of the chief financial officer and treasurer to deliver.”
Traditionally, sustainability and other such initiatives have fallen outside the jurisdiction of the CFO, according to a 2011 report by global consultancy Ernst & Young, “CFOs ran the numbers, letting others handle soft issues such as social responsibility and corporate citizenship.” But, the consultancy’s report continues, “those job silos are crumbling. Investors, business customers and other stakeholders have shown a growing desire to connect a company’s financial performance to its social and environmental impact.” Ratings agencies now evaluate these softer factors, EY notes, and “shareholder voting patterns provide convincing evidence” that investors are paying attention.
The shift in CFO mind-set started to take hold after the 2008 financial crisis, when many companies implemented enterprise risk management and began to quantify reputation risk for the first time, according to Anthony Johndrow, CEO of Reputation Economy Advisors in New York. But change comes slowly. As recently as 2012, in a report from the Accounting for Sustainability Project, a brainchild of Britain’s Prince Charles, UK CFOs were still quoted making comments such as, “It is difficult for accountants and engineers to deal with these nebulous things,” and, “If money goes out the door, I am interested. If it is a notional cost to society, I am not.”
According to Michael Fertik, founder of online reputation management platform Reputation.com, “reputational risk is eclipsing financial risk and catastrophe risk as the biggest threat to today’s corporations.” What’s more, responsibility for reputational risk management has become an enterprise-wide priority. The imperative to ensure a total-integrity customer experience, fully compliant with regulatory and risk management requirements, extends across every corporate function, including finance. Johndrow calls it “the monster that lives in your CFO’s spreadsheet.”
“The age of transparency should also not be underestimated,” Unilever’s Polman said in a 2016 interview. “There are many people now who don’t want to invest in companies that create a worse future for their grandchildren. They are able to see it by going to the internet, and they vote increasingly with their wallet.”
Fertik notes that four in five consumers use search engines when looking for information about a company. “Reviews showcased in search results and comments circulating on social media must be monitored, managed and acted on systematically for a company to thrive.” In March, Reputation.com launched the first social media platform for major corporates with multiple locations, enabling them to manage social channels more easily. Clients can monitor sentiment, refine their content strategy, act on comments and reviews, and publish posts at scale.
Add to this the fact that, while insurance is available to mitigate some of the financial impact, corporates are unable to transfer reputational risk to a third party. If a company suffers adverse publicity, it must largely resort to its own devices in addressing and repairing the ensuing reputational damage.
Software giant SAP Ariba, which has over 3.3 million buyers and suppliers on its network, is keenly aware that sustainability has moved to the heart of corporate risk agendas. The issue dominated the group’s annual SAP Ariba Live event in both the US and Europe this year, where company president Barry Padgett suggested that companies that incorporate sustainability into their procurement practices can expect their share value to rise over time. SAP Ariba is also partnering with Made in a Free World, a California-based organization to develop action against modern-day slavery, and global risks-analytics specialist Verisk Maplecroft, in developing greater transparency across supply chains.
Angela Cain, a senior solutions consultant at SAP Ariba, says that companies can now conduct supplier-risk assessments. “In future, we’ll be able to see what each supplier’s supplier is doing and check on ethical performance throughout the whole supply chain, while actively choosing those suppliers who share our ethical standards,” she says.
One development that has pushed reputation up the corporate agenda is cybersecurity. Yahoo, Anthem and Equifax are among companies to have suffered severe reputational and financial damage from breaches in recent years. The well-publicized, late 2013 attack on retail giant Target affected more than 41 million of the company’s customer payment-card accounts, and the company suffered a 20% to 30% drop in profit in the quarter following the breach, and while sales eventually recovered, James Burns, cyber product leader at insurer CFC Underwriting, said in an interview that “it wasn’t enough to recoup losses.”
Subsequent payouts by Target included US$10 million to settle a consumer class-action lawsuit, nearly US$40 million to US banks and credit unions for resulting losses, a US$18.5 million multistate settlement in May 2017 to resolve individual investigations by enforcement agencies and more than US$200 million credit cards that had to be reissued. Other retailers have had to review and update their reputation management policies; the sector was the top cyberattack target last year.
To underline the fact that reputational risk extends around the globe, major Australian financial-services company AMP recently announced a major remediation program that includes A$290 million (US$214.8 million) in customer compensation, and an investment of A$35 million annually over the next two years in risk-management controls and compliance systems, after a report found it guilty of treating customers poorly and deliberately misleading the country’s corporate regulator.
“AMP’s poor corporate governance and risk management has now materially impacted [its] reputation as a trusted financial adviser,” the report concluded.
