For all the talk of putting stakeholders first, companies seem incapable of meeting their expectations. A conveyor belt of corporate crises has been the regrettable result

Oscar Wilde was a renowned optimist. “One can survive everything nowadays,” he once said, “except death.” Corporate communications folk, pay heed. Staple it as a motto on your office door. Burn it onto your brain. You’ll need it.

Optimism is a powerful impulse. It’s what pushed many unlucky PRs to keep turning up to the office during 2012: the belief that things might get better. Vodafone, HSBC, Fujitsu, BP and Barclays are just some of the big brands to find their names in the headlines for the wrong reasons over the past 12 months.

Crises, like forest fires, are often difficult to predict. By their nature, they can strike at any time. Often external political events are the match that ignites them. Consider the UK newspaper News of the World – a brand that became so toxic News International closed it – and the Leveson inquiry into the activities of the press. At other times, it’s the company’s own stupidity. Ikea’s decision to airbrush out the women from its Saudi catalogue, for example.

Forest fires aren’t beyond forecasting, though. A dry summer, strong winds, barbeque season, and you suddenly have yourself an inferno. The same is true for the business world. “Hardy perennials” is the term used by Peter Roberts, head of issues and crisis management at communications firm Bell Pottinger, for the kinds of crises that appear year after year. Apple’s problem with labour standards among its Chinese suppliers fits that bill. Another comes from forestry company Asia Pulp & Paper, regularly featured in Ethical Corporation, which stands accused of logging endangered tree species in Indonesia’s rainforest. Factory standards, deforestation, biodiversity: all of them reputational tinderboxes.

Campaigners and cameras

So what is there to learn from these reputation scandals? And what can companies do to keep themselves out of a reputational storm?

First things first. Concentrate on what you can do. “Worry about are the things over which you have control,” advises Nelson Switzer, leader on sustainable business at professional services firm PwC Canada. The rest, by definition, will have to look after themselves.

Second, keep a close eye on your stakeholders. Many of the risk issues facing the private sector differ radically from industry to industry, and even company to company. The one commonality is what your stakeholders think, argues Switzer. “Reputational risks or issues for you as an organisation or a sector are a direct reflection of the stakeholders that are interested in what you are doing,” he says.

When it comes to corporate campaigns, there are two stakeholders that jump immediately to mind. Top of the list come activist non-profits, and 2012 was a busy year for the company-bashing wing of civil society.

Zara (for its use of hazardous chemicals), Cairn Energy (for its proposed Arctic drilling) and Hancock Coal (for a proposed mega-mine in Queensland’s Galilee Basin) fell foul of Greenpeace’s guerrilla tactics. Vale (for its carbon emissions) and Samsung (for link to destructive tin mining in Indonesia) were among the scalps to which Friends of the Earth can lay claim. 

Say what you like about activist NGOs, but they are at least consistent. Campaign groups, like companies, have their mission statements and stated objectives. So for Survival International, it’s indigenous communities. For the Fair Labour Association, it’s all about workers’ rights in factories. For UK Uncut, it’s corporate taxes.

Some drill down even further. At industry level, you have the likes of BankTrack, PharmaWatch or MiningWatch monitoring their eponymous sectors. A select number of companies even enjoy their own dedicated watchdogs, such as McDonald’s (McSpotlight), Coca-Cola (Killer Coke) and Barrick Gold (Protest Barrick).

Some campaigners’ agendas are wider than others. Greenpeace counts deforestation, over-fishing, climate change, nuclear power, arms-making, toxic pollution and mega agri-business among its target areas. War on Want goes wider still, focusing on the “root causes of global poverty, inequality and injustice”. Oxfam, likewise, looks at poverty in the round.

However wide the scope of these groups, 2012 proved another truth about NGO consistency: they’ll strike where the chance of success is highest. In practice, that often translates to the opportunity for the loudest noise. Enter the second chief stakeholder: the media. The mainstream press likes nothing better than a big brand name or high-profile event on which to hang its stories.

NGOs are wise to what so-called “pegs” work and what don’t. Let’s return to Apple. Behind the campaign was a group called China Labour Watch. It’s concerned with highlighting worker abuses in Chinese factories. That’s admirable and necessary. China’s manufacturing bonanza has come at huge human cost.

Of the many thousands of factories in China, however, why choose the 10 that supply Apple? Clearly, the stratospheric success of the iPhone manufacturer – it officially surpassed Microsoft to become the largest ever US company just a few weeks later – played no small part.

Likewise, high-profile calendar events play to the news agenda, too. The Olympics provided 2012’s exemplar. The appearance of Dow Chemical among the main sponsor list gave a perfect hook for survivors of the 1984 Bhopal gas tragedy to remind the world of their plight. Companies’ annual general meetings play a similar role. It’s no coincidence that Arctic drilling became a topical issue when Shell’s shareholders gathered to meet in May. Low-cost flight operator RyanAir allegedly changed the location for its AGM this year to keep protestors at bay.

Playing to an audience

Neither campaign NGOs nor the media pull all the strings. Both are acutely aware that they have audiences to satisfy. For the dozens of reputation stories that hit the headlines this year, there were thousands that didn’t even merit a mention. Why? Because they failed to resonate with the public at large.

So what is it that is getting under the public’s skin? The list of big reputational crises in 2012 shows that none of the big issues have gone away: labour issues, especially in the supply chain; environmental pollution; harm to communities or consumers; human rights abuses; and ethical misconduct and general malfeasance. Think of it as an inverted version of the 10 principles of the Global Compact.

Things change, of course. Corporate tax has now found its way firmly onto the agenda. Google, Vodafone, Starbucks are just some of the companies to find their fiscal affairs under the microscope. Executive remuneration also seems to be riling the public in a way it hasn’t before, as the chief executives of Barclays, Aviva, Citigroup and WPP discovered.

These issues demonstrate that the “we are the 99%” rallying call of the Occupy Movement has taken root. Hence the growing public anger towards corporations and their leaders for supposedly “personalising profits and socialising losses”. This sentiment isn’t about to go away. As long as the global recession bites and the “common man” feels the pinch, “the financial propriety of large organisations will continue to be a subject of interest”, says Bell Pottinger’s Roberts.

This same logic carries over into particular sector risks too. The events of 2012 prove that the legacy of the financial crisis continues to be felt. Banks remain public enemy number one. Look at the Libor scandal. The public apoplexy over what was a fairly technical and obtuse piece of wrongdoing – albeit an egregious one – can only be understood in the context of an industry scorned. Banks seems unrepentant, and that irks.

Trends to trip up on

The recession is the macro-story of the year. But it’s not the only one. There are other global trends that are influencing public opinion and feeding anti-corporate campaigns. Some are business-led. The increasing feasibility of extracting unconventional gas – shale gas – for example, effectively ends environmentalists’ hopes of a fossil-fuel-free future any time soon. They won’t lie down quietly, as Friends of the Earth’s “unconventional and unwanted” campaign goes to prove.

That said, the energy-at-any-cost argument no longer holds the power it once did. Memories of the Gulf of Mexico spill, coupled with the Fukushima Daiichi nuclear disaster of 2011, have put energy safety front of mind. The enormous $4.5bn fine dealt out to BP for the Deepwater Horizon disaster will ensure it stays there.

As for climate change, 2012 saw our warming planet slip down the political agenda. High unemployment figures, not high temperatures, are concentrating government minds. Yet extreme weather events, like the drought in the US Midwest and Hurricane Sandy, are serving to lodge the issue in the public consciousness.

The coal industry is the big bogeyman as far as climate change is concerned. It’s mostly a western phenomenon to be sure. US-based coal-fired power producers such as Duke Energy and Southern Company are the ones that campaigners are gunning for. Developing world coal giants China National Coal Group and India Coal continue to operate without undue flak.

What has definitely changed is the emerging focus on “dirty energy” financiers. Rainforest Action Network’s decision in May to rename of Bank of America as “Bank of Coal” illustrates this shift perfectly. “To be seen as a bank or an investor financing projects and business that threaten climate has always been a reputation risk,” says BankTrack spokesman Johan Frijns. “But I am sure it will get a lot worse in the years to come.”

Another macro business trend feeding into corporate reputation risk is the focus on emerging markets. This isn’t new. The Bric countries of Brazil, Russia, India and China have long been in vogue. Others, such as Turkey, Chile, Indonesia and South Africa, are also hardly new destinations. But the search for new markets and competitive advantage is pushing companies to search out pastures new.

This is landing many firms in hot water. “A lot of companies fail to realise the issues and complexities of these emerging markets,” says Melvin Galpion, head of business intelligence at risk analyst firm Kroll Advisory Solutions. Corruption and bribery are two obvious red flag areas awaiting the uninitiated or unprepared. Wal-Mart’s run-in with authorities in Mexico is emblematic. The US retail giant stands accused of bribing government officials to gain operating permits. “Most people don’t pay much attention to where the differences are in these emerging markets,” says Galpion. Even if they do, the risks are still large. Try getting data on customers or even business partners in Liberia or Korea, Galpion suggests. “It’s incredibly difficult.” 

The ever-extending hand of globalisation presents other reputation risks for companies. Of those, land use and resource sovereignty are perhaps the most significant. Agri-businesses and extractive firms are especially vulnerable to attack. Nowhere is this clearer than in the heated debate around free, prior and informed consent. Fail to win over host communities and multimillion-dollar investments can grind to a halt, as Newmont found out with its Minas Conga Project in Peru.

Engaging stakeholders

This catalogue of crises leaves many lessons. Many revolve around effective risk management. A recent how-to guide by the Doughty Centre for Corporate Responsibility on impact identification and management enumerates the key steps a responsible company should take: map your stakeholders, track trends, clarify material issues, establish an action plan and communicate.

Nothing too novel there, perhaps. But saying it and doing it are two different things. To return to the point made by PwC’s Switzer, reputation management all comes down to understanding stakeholders’ perceptions. That will only come from listening. Stakeholder engagement is very much in vogue within management circles these days, but how many companies really do it well? Too few. At least, so the litany of reputational crises would suggest.

Engagement efforts are all too often tokenistic, says Jon Samuel, head of social performance at UK-listed mining firm AngloAmerican. “A lot of companies are doing engagement when they have audits, for example, or they’ll have an annual meeting where people can come to the town hall and say their piece. But they don’t really have a mechanism for getting into depth.”

In contrast, AngloAmerican has developed a rolling engagement approach with mechanisms for regular dialogue and feedback. Guided by its internal impact measure system, called Seat, it carries out in-depth stakeholder assessments for all its projects every three years. “If you’re genuinely interested in what people have to say, then you’re more likely to pick up their agenda,” Samuel says.

With that in mind, the company called a halt to its Quellaveco project for more than a year. That gave it the time and space to enter a meaningful dialogue with its local stakeholders. The tactic appears to be working. While many of its competitors in Peru are finding their projects under siege, AngloAmerican’s social licence remains intact.

This could, of course, change. As Oscar Wilde’s quote ends, “one can live down anything, except a good reputation”. 

Top ten sustainability megaforces

Corporate reputation can hinge on how companies deal with the big challenges. Every business of every size will need to address the following ten sustainability-related issues, according to professional services firm KPMG.

1) Climate change: Predictions of annual output losses from climate change range between 1-5% per year depending on action taken by policymakers.

2) Energy and fuel: fossil fuel markets are likely to become more volatile and unpredictable because of higher global energy demand and supply uncertainties, among other factors.

3) Material resource scarcity: business is likely to face increasing trade restrictions and intense global competition for a wide range of material resources as demand from emerging countries increases.

4) Water scarcity: it is predicted that by 2030, the global demand for freshwater will exceed supply by 40%.

5) Population growth: global population is predicted to be 8.4 billion by 2032
in a moderate growth scenario.

6) Wealth: the global middle class is predicted to grow 172% between 2010 and 2030.

7) Urbanisation: by 2030 all developing regions including Asia and Africa are expected to have the majority of their inhabitants living in urban areas.

8) Food security: in the next two decades the global food production system will come under increasing pressure from (eg) population growth, water scarcity and deforestation.

9) Ecosystem decline: the decline in ecosystems is making natural resources scarcer, more expensive and less diverse, among other impacts.

10) Deforestation: as forest areas continue to decline, companies may find themselves under increasing pressure from customers to prove that their products are sustainable.

Source: Expect the Unexpected: Building business value in a changing world, KPMG, February 2012.