Risk and responsibility cannot be outsourced
May 24 2013 10:00 PM

Protesters holding up portraits of missing relatives believed to have died in the  Rana Plaza building collapse in Savar, on the outskirts of Dhaka,  during a demonstration in the Bangladeshi capital yesterday.  The Rana Plaza collapse displayed the failure of corporate social responsibility (CSR)  and the concept of industry self-regulation. For some companies, however, Rana Plaza emerged as something else: an unexpected and serious credibility issue. Scores of well-known retailers found their names next to press pictures of dead people being pulled from the site.

By Oliver Stelling/Dubai

It’s the biggest catchphrase in the compliance industry: risk management. Companies use risk assessment and risk management as a means to identify potential hazards and harms, determine the right course of action and limit financial exposure. Risk assessment provides the objective metric to help the decision-making process. Just what exactly constitutes risk?

The Bangladesh garment factory collapse might provide some new answers. The tragedy, the third to affect the nation’s multi-billion dollar garment industry in recent months, caused the death of 1,127 workers and brought immeasurable pain to survivors and their families. The event shook the world as it put a spotlight on the real cost of our addiction to cheap clothing.

The Rana Plaza collapse reminded us who we are. It displayed the failure of corporate social responsibility (CSR)  and the concept of industry self-regulation. And it removed the last excuse for not feeling personally responsible, to whatever small degree.

For some companies, however, Rana Plaza emerged as something else: an unexpected and serious credibility issue. Scores of well-known retailers found their names next to press pictures of dead people being pulled from the site.

Benetton, recognised for its social activism and high corporate values initially denied it had any suppliers in the collapsed factory. That was until photos emerged showing garments with the Group’s label that were found in the debris. When Benetton acknowledged the facts the damage, measured in public attention and outrage, was done.  

Other retailers such as Australia’s Big W are facing angry consumers on their Facebook page who demand to get assurances about the company’s stance on wages and worker safety.

Most companies focus their risk management efforts on the four well-established factors Legal, Operational, Hazard and Investment. To manage these CEOs commonly turn to their legal counsel, management consultants, accountants and investment bankers. But traditional advisory firms do not address the potential risk and reward associated with corporate reputation. In the 21st century this marks a shortfall in any risk mitigation strategy.

Today’s public demands the highest standards for corporate citizenship and values corporate reputation higher than ever.

According to a 2010 study by Prophet, a strategic brand and marketing consultancy, consumers are two times more likely to purchase, four times more likely to pay more for, and close to 15 times more likely to recommend products and services from a company with a leading reputation versus companies with failing reputations, reinforcing the role reputation plays in business results.

Benetton and all other international retailers quoted in every single media article on the Bangladesh disaster realise the impact this has on their corporate reputation. The building collapse has shown that low wages and safety records at a contractor thousands of miles away can become a humanitarian, political and corporate crisis in just a heartbeat.

The traditional approach to risk management overlooks the power of the public and that does not serve the purpose any longer. What is needed is more than just remote assistance in navigating complex operational risk environments but the most senior counsel on reputation management and brand stewardship that helps corporations capitalise on the opportunities inherent in periods of rapid change and turbulence.

If the public holds the key to failure or success then companies need to come up with ways to fully leverage the power of the public and invest in their own reputational advantage.

That requires a rethink of the role of communications. Communications consultants have been saying this for years: if you run a fairly large and successful business without consulting your communications advisers on a regular basis you are gambling.

What modern corporations need are advisers who take the 5th seat at the boardroom table and will watch over corporate reputations, with veto power if needed.

Maintaining a competitive reputational advantage requires an evidence-based understanding of those who influence the fortunes of a business, including the public at large.  Communications consultants call that stakeholder mapping and they take care of it before reaching out to anyone.

The better advisers go one step further. Understanding that effective communications models and reputational management require a holistic, channel neutral and multidisciplinary approach they will take a close look at all touch points across all audiences, and all channels that are being utilised in the process, with a special emphasis on new media.

The relationship among operations, strategy, reputation, communications and value is complex but research proves a real correlation between them. Reputation equity is reflected in a company’s premium value, plus latent value.

High premium values indicate investors have confidence in the company’s future performance. A company’s reputation for delivering growth, attracting top talent, and avoiding ethical mishaps can account for much of the 30-70% gap between the book value of most companies and their market capitalisations. Companies with higher reputation equity have proven more resilient to business threats and recover from crises more efficiently.

Corporate success requires a pragmatic and effective approach to risk management that includes a clear-cut strategy to protect the company’s reputation from damage. Ignoring the public opinion in the age of Twitter and Facebook can prove extraordinarily costly and undermine the very foundation of former and future success. Corporate strategy should be rooted in practicality and be based on real insights into all factors that determine the reputational equity of a company or an organisation.

That includes the company we keep. Globally operating or sourcing companies need to revisit their web of contracts and relationships and ensure best practice compliance.

Companies that accept bad business practices of their partners are as guilty as their partners – either legally or “just” in the court of public opinion.

While the rubble was being cleared and more victims found in the collapsed building near Dhaka, regulators and fashion labels in the West were beginning to react.

The European Union, Bangladesh’s largest export market, issued a strongly worded warning that Bangladesh might lose its unrestricted access to the EU states, putting at risk exports worth of 8bn euros in 2011 and potentially dealing a lethal blow to the livelihood of millions.

Similarly the United States, the country’s second largest export market, is reviewing the preferential trade status granted to Bangladesh.  

Western retailers, under fire from human rights and labour groups for disrespecting worker safety and allowing their contractors to pay wages as low as 24 cents a day are now reconsidering their sourcing from Bangladesh.

Irish retailer Primark announced it will be paying compensation to victims of the disaster, and 14 international clothing retailers have committed to a safety accord for garment factories in the country. While that is the right thing to do it won’t bring back anyone whose life is lost.

We can learn an important lesson from Bangladesh: risk and corporate responsibility cannot be outsourced.

The good news is the tools for assessing and influencing corporate strategy from a reputational point of view exist and corporate reputation can be a strong driver and motivator to fix what’s wrong. Inviting communications advisers to take the fifth seat might just prove to be the best strategic move.

*Oliver Stelling is head of Strategic Consulting at Hill+Knowlton Strategies.

 

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