Good Deeds Help Repair Reputation & Balance Sheet
Yes, it is true. Companies can repair their reputations and mend the bottom line by doing good. A study by Ed deHaan of Stanford Graduate School of Business with Shivaram Rajgopal and Jivas Chakravarthy of Emory University Goizueta Business School found that it matters when companies reach out to “softer” shareholders (customers, employees) to recover their reputations — that is, beyond the expected traditional financially-driven investors and creditors. (The researchers examined 10,000+ press releases from companies prior to and after they restated accounting reports.) The research found that it helps share price when companies recovering from a crisis such as restating earnings communicate reputation-repair initiatives such as helping veterans, disaster relief victims, local communities and even employees. Why? As the Stanford University business newsletter said,
“Because shareholders aren’t the only people who may head for the exits at a company caught in financial dishonesty. At a company that makes durable equipment, such as cars or construction gear, customers may worry about the company’s willingness to make good on warranties or commitments to provide service and spare parts. At companies with specialized workforces, such as biotech firms, employees may be the ones to run away. At companies with high-profile presence in many locations, local community leaders may pull their support due to concerns about integrity.”
We all expect reputation-recoverers to fire executives tarnished by the scandal, rejigger the board, change auditors, tighten governance oversight, set up task forces, adjust compliance regulations and revisit compensation including the CEO’s. These actions go far with the investment community, as they should. Yet in the researchers’ study, they found that 51% of the reputation-repair activities undertaken by companies post-restatement crisis were aimed at other “softer” audiences — and of the 51%, 24% were directed at local communities, 21% at customers and 6% at employees.
The results, please? “The researchers estimate that announcements of reputation-repair actions lifted share prices, on average, 2%. Also, investors tended to react more strongly to earnings announcements of firms that took the most reputation-enhancing actions, an indication that shareholders were ready to believe what the companies were saying.” A double win.
The research results make it clear that companies on the path to recovery can actually help themselves. They need to prioritize who they are going to reach out to and not just focus on capital investors. It is understood that post-crisis, leadership will be distracted and resources limited. However, companies whose reputations have been tarnished need to rebuild their credibility and show that they will fulfill their commitments. The research shows that certain repair-efforts are not just for show, they matter.