Overcoming Public Attitudes About Business in the Post-Financial Crisis Era
(this post is the first in a three-part series by Jonathan Low, a co-founder and partner of Predictiv LLC, a firm that specializes in providing business leaders with strategic insights on how to better measure, manage and improve the performance of their organizations. The series is debuting on Dim Bulb).
"My Administration is the only thing between you and the pitchforks."
U.S. President Barack Obama felt compelled to speak these words to the leading U.S. bank CEOs at a White House gathering to which they had been summoned on April 9, 2009. Driven by public anger at the financial crisis, the President employed a metaphor invoking images of "peasants with pitchforks" rising up to demand better treatment. That Iranian students, indigenous Peruvians and Somali pirates feel similarly inspired to take violent actions affecting global businesses reinforces the point.
Based on recent polling data, it is would seem that his uncharacteristic use of alarmist imagery was not misplaced. According to the 2009 Edelman Trust Barometer, 49% -- or fewer than half of the people surveyed in an annual assessment of US attitudes -- support an independently functioning free market. This would not be considered a remarkable finding in much of the world, where social democratic agendas have held sway for much of the post-World War II era. In the strongest bastion of free market policy, it is a revolutionary turn of events because US citizens have in the post-war era displayed faith in their own ability "to get rich" without help from the government. Neither has demonization of the wealthy been a successful political tactic in the US; many people hoped -– and even assumed -– that they would be wealthy some day.
If companies do not address the negative perceptions about them now, lingering mistrust will cloud their interactions with customers, investors, the press and voters for the forseeable future. Reputations take years to build, but a moment to destroy.
Global loss of trust in business
Survey results suggest widespread disillusionment with businesses and business leaders. These attitudes are especially noteworthy given the businesses investment in brand-building and consumer loyalty programs over the preceding decade, roughly estimated to be in the trillion dollar range:
- Trust in business across twenty countries is down 62% from 2008, according to Fortune magazine
- In 13 of 15 industries analyzed, trust has been lost according to the Better Business Bureau
- According to the Edelman Trust Barometer, only 17% of those surveyed trust CEOs, while a slightly better 29% trust information provided by CEOs
- A miniscule 13% of those surveyed in the same Edelman study trust in advertising
- 88% of those surveyed in a Harris Interactive poll state that corporate reputation is "Not Good" or "Terrible."
Trust and reputation are intangibles; frequently taken for granted and not accounted for on traditional balance sheets or income statements. And yet, research suggests that as much as 50 percent of a company's market value may be attributed to them.
This change in attitudes about trust and reputation has affected business-to-business relationships and has also influenced the factors determining corporate reputation. In Barron's magazine’s annual "Most Respected Companies" survey of institutional investors and Fortune’s "Most Admired Companies" survey the attributes that contribute to a company’s reputation have changed since the financial crisis.
The numbers reflect the credibility business has lost with institutional investors since the beginning of the financial crisis. Each factor suggests a loss of confidence in executives and the financial statements they have produced: among them; doubts about the "Iconic CEO" model personified by Jack Welch of GE.
Conversely, there is a growing conviction that organizational effectiveness and strategy execution are keys to sustainable business success; more convincing than theoretical themes like synergy. Revenue and profit disappeared from the survey results because investors simply do not believe the numbers being provided.
Innovation, deemed a leading reputational factor in 2008, disappears in 2009. Among likely reasons for this is a growing fatigue with innovation as a differentiator since virtually every company in the world claims to be innovative, with little evidence to support the assertion, while innovative financial instruments are credited with much recent wealth destruction.
This matters because judgments influencing customer purchase decisions to investment portfolio allocation are based on a range of data, much of it related to perceptions of trust and reputation. When mistrust dominates public thinking, people are less willing to spend until their concerns have been alleviated.
Changing fundamentals of business reputation
Surveys of the general population provide a context for the decline in trust and the increase in reputational risk for business, but surveys of corporate customers, employees, investors, lenders, alliance partners and suppliers all show an increased focus on the importance of ethics, values and other traditional characteristics of business reputation.
The following surveys from two US companies conducted in late 2008 or early 2009 illustrate this point. They reflect stakeholder attitudes about the most important components of company reputation for each organization:
Ethics Service
Trustworthiness Staff
Performance Quality of care
Collaboration Outcomes
Service/The client experience Facilities/Technology
This message is reinforced by broader results from 2009 surveys conducted by the Reputation Institute which emphazise quality, treatment of employees, trust, transparency and financial prospects.
Outward-facing factors that reinforce positive connections have achieved primacy. Client service is explicit but "performance," "collaboration," "quality of care," "outcomes" suggest that perception of value delivered is required for survival in the present and sustainable growth in the future. There is also an implicit realization that the power in the complex dance between server and served has returned to the consumer.
Reputations that have been damaged will only be restored by a more assertive, trust-based approach to how companies define and deliver on their promises.
The helplessness felt by stakeholders in the face of the financial collapse has created a perception that business has treated its stakeholders unfairly and that those outside the corporate boundary need to regain a greater measure of control in the transactions they may be contemplating; a mortgage, a new car, a knee replacement or a bag of groceries.
Distrust in executives or experts, coupled with shaken faith in financial statements and projections in particular has led to a "down-sizing" of the circle from which individuals are willing to trust advice. This is beneficial to the extent it promotes awareness ("an educated consumer is our best customer"), strengthening each link of the value chain, but it also weakens a company's ability to frame the purchase decision.
Transparency and dialogue; new imperatives for corporate disclosure
The loss of trust and increase in reputational risk for corporations contributes to a trend that began during the dotcom boom for greater transparency. Complementing that trend is the increasing assertiveness of NGOs, investment professionals and others outside the corporate boundary who are demanding both greater "permeability" and more of a dialogue-driven rather than management-driven discussion of corporate issues.
New technologies and the pervasive nature of their use -- from cell phones to PDAs to the variety of social media -- have also reinforced the trend towards more rather than less disclosure. With internet access approaching population saturation rates, habits and expectations have changed. This makes it harder for companies to avoid unpleasant issues – and made it harder to correct misperceptions.
The chart below illustrates salient aspects of this development:
Trends in Disclosure
Common Practice Emerging Trend
Communications
One Way Communication Multi-Stakeholder Dialogue
Single Company Progress Report Industry Benchmarking
Public Relations Corporate Governance
Voluntary Reporting Mandatory Reporting
Standards
Verification as an Option Third Party Assurance
Inputs and Outputs Models and Strategy
Ad Hoc Standards Global Standards
Corporate Boundary Definition Dialogue-Set Definition
The comparison between the two columns highlights the contrast between the traditional "out-bound" form of communication and the emerging demand for stakeholder input regarding what information is deemed sufficient by those outside the corporation. Similarly, the historic approach to standards, in which corporations decided to which standards they would adhere based on their own perception of what was in their best interest is giving way to a new model through which customers, investors and others are asserting their interest in comparable metrics on a grander, often global scale.
Many corporations will view these trends as an intrusion on their free market decision-making rights or a diminution of their prerogatives. A more enlightened view might be that corporations now have the opportunity to engage with stakeholders on a broader set of principles. Recent experience suggests that returns to transparency outweigh returns to secrecy. The opportunity to re-engage through fuller disclosure may well contribute significantly to future growth.
Social media and reputation; a new relationship
For corporate communications specialists and reputation-minders in the post financial crisis universe, distrust and dialogue converge most forcefully on the internet and specifically in the realm of social media. Social media comprise a loosely defined collection of blogs of all sizes and interests, and cyber-space gathering spots such as Facebook, MySpace, Alibaba, Craigslist. Newspapers, radio and television have seen their revenues plunge as advertisers follow their customers to the web. As information consumers have moved to the web to gather news, opinion and data, the influence of bloggers and other commentators has increased.
The numbers around social media impact are compelling. Internet penetration has reached approximately 75% in the US, somewhat less in Europe and far less in Asia. However, 48% of the total population in the US, 36% of the population in Europe and 11% of the population in Asia access social media (corresponding totals for internet and social media access in South America are considerably lower).
Recent research from Burson Marstellar reports that in the US alone, there are now 20 million bloggers, some 2 million of whom are paid something for their efforts and almost 500 thousand of whom blog full time for a living. To put that in perspective, more people in the US make their living as bloggers than as computer programmers or firemen.
This means that a growing though not yet dominant element of the population is forming its views based on sources which are not traditionally filtered or necessarily expert. In addition, the demographics on social media participation are shifting: in the US, 52% are women and 45% men. Women over age 40 are the fastest growing segment.
Analysis of blog coverage by Predictiv LLC correlated on a daily basis with company stock price performance, the DJIA performance and traditional media coverage has showed that blogs have a quantifiable impact on financial performance. Blog coverage contributed measurably to both the daily price and quarterly stock price performance. However, the analysis suggests that traditional media coverage drives blog messaging, not vice versa, and that mainstream coverage has a greater impact on market value than do blogs. Corporate executives must be sure they understand the impact of social media on their businesses and not just migrate blindly to the web.
Implications and conclusions
Distrust and disillusionment in the wake of the financial crisis is pervasive among business stakeholders. Companies that neglect to address this head-on, will face reduced acceptance in the marketplace and a longer recovery.
To regain trust, businesses must be more transparent and willing to engage rather than simply transmit their own point of view. The fundamentals of business reputation will continue to evolve, but more emphasis than ever before must be placed on the desires -– both actual and perceived -– of those outside the corporate boundary. The onus is on business to demonstrate that they are working to earn the confidence of those whose interests they claim to serve.
Essay two in this three-part series will run tomorrow, entitled Public Actions; Private Realities
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