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Putting a value on values

Have investors cottoned on to the importance of ethical business behaviour?

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You can’t buy a good reputation, but if you lose it, the cost to your business might be more than you ever imagined. Just ask media tycoon Rupert Murdoch or the executives at oil giant BP.

In May, Murdoch was accused of “willful blindness” and described as “not a fit person” to lead a major international company by a parliamentary committee over phone hacking at his UK newspaper publishers News International (NI). As a result of the scandal one of the newspapers involved, the News of the World, closed, and News Corp, NI’s parent company, had to abandon its takeover of broadcaster BSkyB.

Back in April 2010, BP accidentally unleashed the largest offshore oil spill in US history following an explosion on a rig in the Gulf of Mexico that killed 11 workers and injured 17 more. Investors voted with their feet. By the end of June 2010, £67 billion had been wiped off BP’s value and it had to cancel its shareholder dividends for that year.

Both scandals highlight the importance of reputation, especially for companies at the top of their game. Shareholders, regulators, politicians and the public increasingly want business to be more transparent, which makes it harder for companies to get away with a lax attitude towards social concerns such as ethics, health and safety, the environment or child labour.

A survey by the Economist Intelligence Unit in 2005 found reputational risk to be the highest priority for senior risk executives (52 percent) above regulatory risk (41 percent) and human capital risk such as skills shortages (41 percent).

“Reputation is everything and it is extremely important to the value and profitability of any company, particularly in a punishing operating environment,” says Nick Murray-Leslie, CEO of Chatsworth Communications, a public relations company that advises companies on reputational risk.

Economic pressures

Not all companies face the same kinds of risk. One that drills for oil faces different kinds of risks from a textile company manufacturing clothes in Bangladesh or a technology firm that stores confidential data.

“The kind of reputational risks that a company faces will depend on the sector in which it operates,” says Aldo Bonati, head of research at ECPI, a Milan-based provider of sustainability research, ratings and indices.

He highlights labour rights as a particular minefield for companies, especially in emerging markets where workers are less protected. “It is important that companies have a proper supply chain process,” he says, “especially if they’re large international companies with complex supply chains.”

Electronics giant Apple felt the reputational risk of its supply chain in January 2012 when around 150 workers at its Chinese components supplier Foxconn threatened to commit suicide by jumping from the factory roof in protest at their working conditions.

But it’s not just in the developing world where societal concerns can be a threat to business. Jim Woods, director of corporate sustainability events organiser Green Monday, identifies ‘social issues’ as a big challenge for businesses everywhere.

“Social risks are getting higher and higher because of the economic situation,” he says. He identifies rising fuel prices as a particular concern in the UK. In 2009, 18 percent of households were classified as living in fuel poverty, meaning they have to spend more than 10 percent of their household income to keep their home in ‘satisfactory’ condition.

But while this percentage is set to rise, utility companies are making huge profits. In February, Centrica, the owner of British Gas, announced profits of £2.5 billion. Two months later, Greenpeace activists staged a protest at its Windsor HQ and a handful managed to get inside the building.

Social unrest, Woods believes, is going to become a greater issue, and the notion of corporate social responsibility as “a few philanthropic things on the side” is dead. ‘Social business’ is the new catchphrase.

Investor concerns

Company executives may increasingly see the value of social business, but do institutional investors share their enthusiasm? Woods says investors haven’t yet grasped social business.

“Companies such as Unilever, Marks & Spencer and Kingfisher are leading their investors on the sustainability issue, not the other way round.”



Putting a value on values
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