Companies Bank on Trust

This is the second of two articles on corporate reputation and social responsibility.

By Andrzej S Zwaniecki
Staff Writer

Washington - When the heads of major U.S. financial companies testified before a congressional committee in February 2009, angry lawmakers did not pull punches. The executives of major banks and investment houses, whose practices contributed to the worst recession in decades, continued to enjoy fat bonuses and lavish benefits while their companies were receiving government help.

"America doesn't trust you anymore," said Massachusetts Representative Michael Capuano, a Democratic member of the committee, in response to executives' excuses.

Reports of excessive executive compensation, greed, irresponsible risk-taking and a lack of transparency amounted to the greatest challenge to financial companies' credibility in years. Since 2007, the public trust in banks had declined dramatically in the developed world and emerging markets, according to Edelman, an international public relations firm. (In 2009, public trust in banks in major economies was at historic lows.)

WAKE-UP CALL FOR CORPORATIONS

The public trust always has been essential to some businesses such as banks, food companies and drug makers. Several pharmaceutical companies learned about the high cost of losing that trust when, in the 2000s, they marketed medicines while knowing about their potentially harmful side effects. Those companies saw their sales plummet and outlays for settlements of lawsuits reach billions of dollars.

But public revulsion at the excesses of the financial industry has been a wake-up call to companies in all sectors. The Business Roundtable, an association of chief executives of major U.S. corporations, has called for "vigorous" exploration of the public trust, which it called a "relatively uncharted territory." The group's interest in the public perception of corporate America came as a result of its own 2009 study, indicating that general distrust of business hurts all companies.

Showing some concern for customers or social problems will not be enough, according to analysts. Declarations of good intentions may improve corporate public relations, but will not make companies more credible unless they really "mean what they say," said Leslie Gaines-Ross, chief reputation strategist at Weber Shandwick, an international public relations firm. The public cannot be fooled for a long time in the era of instant worldwide access to information, she said.

Yet, governments of some developing nations are so desperate for foreign investment and jobs that sometimes they "look the other way" when it comes to the behavior of multinational companies, according to John Mahon, a business professor at the University of Maine. That is why developed countries' governments and nongovernmental groups encourage multinationals to practice corporate social responsibility and act accordingly. When they do not, they do so at their peril, Mahon said.

Increasingly, especially in emerging markets, the public holds multinationals to the same or higher standards of corporate behavior than it does local companies and reacts strongly to any hint of perceived profiting by foreign firms at local populations' expense, analysts say. For example, in China, some multinationals have had to defend themselves against allegations of bribery, lax protection of Chinese consumers or "exporting" pollution, according to Douglas Dew of the Beijing office of Burson-Marsteller, an international public relations firm.

What has often made companies blind to the value of public trust has been a focus on short-term financial results, according to David Frishkorn, vice president for compliance at Comverse Technology. That, plus a corporate culture of insularity, makes companies reluctant to invest in building credibility until a government intervenes on behalf of consumers or others. Today, for example, financial companies must be more transparent and more attentive to consumer interests because Congress imposed stricter requirements on banks and other financial institutions as part of the 2010 Dodd-Frank financial reform law.

Frishkorn believes, however, that the most effective driver of corporate trustworthiness is not the government but an organizational culture. Companies are unlikely to enjoy full benefits of the public trust unless they make integrity, transparency and credibility part of their "corporate DNAs" - their missions and values, he said. By doing that, he said, corporate leaders can turn risks into opportunities. For example, in the late 2000s, beverage company PepsiCo faced accusations of contributing to water shortages in India. In response, it stepped up efforts to reduce water usage in its plants that led to water savings.

The full text of the 2009 Business Roundtable report ( http://www.awpagesociety.com/images/uploads/public_trust_in_business.pdf ) (PDF, 1.2MB) is available on the website of the Arthur W. Page Society and results of the 2011 Edelman survey ( http://www.edelman.com/trust/2011/ ) can be viewed on the Edelman website.

ENDS

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