For years, corporations measured their achievements in terms of financial performance and focused on management decisions necessary to improve operations to achieve those results.
CEOs and other top executives today are moving toward an evolving business model that includes non-financial factors that are also driving the bottom line in significant ways. These factors come under the umbrella of a corporation’s reputation. The most recent and high-profile example of a reputation crisis must be Mattel’s major product recall, which ensued after the $5.7 billion toymaker discovered that lead paint had been used in several toys manufactured in China. Similarly, $6.9 billion Gap Inc. discovered that a supplier in India was not only using child laborers, but doing so under unacceptable working conditions. Companies accused of engaging in practices that have a negative impact on the environment are also subject to reputation management issues.
By the time that these incidents make page-one news, they typically become a crisis communications problem. CEOs then turn to their corporate communications and legal staffs to deal with the problem. At this stage, the issue becomes a damage control effort to limit the impact on the company’s reputation, market cap, and bottom line—on the date this column was submitted, Mattel’s stock had plummeted 31 percent from an April high of $29.65 to a frightening Halloween eve close of $20.47, and the company’s third-quarter profit had fallen from the prior-year period.
Wal-Mart has become a classic case study in how reputation factors can impact a growth strategy. News coverage on Wal-Mart’s affect on local businesses impedes the company’s effort to expand into new communities. Stories about how the nation’s largest retailer treats its employees have made some shoppers uncomfortable, leading some to take their business elsewhere. Wal-Mart’s stock price has languished for the past several years. New York’s Communications Consulting Worldwide, a firm that studies the effect of non-financial factors such as reputation, calculates that if Wal-Mart had a reputation like its rival Target Corp., its stock price would be 8.4 percent higher, thus adding $16 billion to its market cap. Wal-Mart is now engaged in a substantial reputation management effort resulting in The Wall Street Journal labeling Wal-Mart’s CEO Lee Scott as “the de facto Chief Reputation Officer.”
Over the past several years, a new acronym has entered the corporate management lexicon: CSR, or “corporate social responsibility.” As Compliance Week has covered extensively over the last few years, CSR—also known as sustainability—is the spot where profit meets the common good and where shareholder value is created at the same time that long-term environmental and/or social objectives are met.
This intersection of social, environmental, and profit objectives has been given a boost by investment funds that select companies based on their CSR practices. Boston-based Ceres, an organization founded in 1989, has become a leading network of investors, environmental groups, and other public interest organizations that work with companies to address sustainability challenges such as global climate change. Ceres also directs the Investor Network on Climate Risk, which is comprised of over 50 institutional investors who together manage more the $4 trillion in assets. And the group’s impact has been profound. In a speech before the World Economic Forum in Davos, Switzerland, last January, Ceres President Mindy Lubber said, “If you told me a year ago that the CEOs of ten corporate giants such as Alcoa, GE, BP, Duke Power, and others would be calling for mandatory curbs on greenhouse gas emissions, I would have said, ‘yeah, right.’ But a headline in the Washington Post last week read, ‘CEOs Urge Bush to Limit Greenhouse Gas Emissions.’ Now, we’re talking.”
An effort—the Global Reporting Initiative—is underway to create a common framework for sustainability reporting. The vision of the GRI is to provide a comparable framework for reporting on corporate economic, environmental, and social performance such as we have today in financial reporting. Reporting guidelines for specific sectors can be found at globalreporting.org, and Compliance Week hosts a searchable database of sustainability reports for subscribers (just go to www.complianceweek.com and select
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