20 January 2003
What alternatives exist for firms when they find themselves in a situation where they must apologize for some actions or results?
Business schools often study the impact of a healthy corporate reputation on a company’s progress. In a large part of today’s competitive environment (mainly in the services sector, which pursues strategies of fostering customer loyalty and which undergoes big changes in technology) intangible assets are of extreme importance, in what they represent for the balance sheet and for their influence on customer loyalty, on maintaining existing shareholders, or in attracting and retaining the best talent. As a result, efficient handling of factors that condition the value of these intangibles is crucial to being able to compete.
By means of practical cases, analysis is made of the alternatives presented to, and the options chosen by companies, whenever they face circumstances that could require them to say “sorry,” due to some event that could adversely affect their image. The cause of the adverse event may be due to their activity or to its influence on suppliers or on the end consumer, to whom they do not sell directly (NIKE and children working for their suppliers in Asia is a case in point). Sometimes, they even find themselves affected by something done by an influential competitor. This can happen in a maritime disaster involving oil tankers, which affects all other petroleum firms. Other examples of companies saying sorry are Johnson & Johnson (the Tylenol affair), Coca-Cola (its Belgian bottling plant), or the Perrier water case.
[*D Where the effect of the event is extensive, it must be expected that social agents – NGOs and the media – will pose questions and expect action *]
Logically, the ideal response is different if the negative event affects only a limited group of stakeholders. In this case, it is usually easier to apologize and offer compensation for damages that may be limited. However, this same limitation of the number of victims, who possess scant negotiating power, may provoke a haughty response from the company. The firm could prefer to overlook damages following a cold-blooded cost-benefit analysis. Choosing an option depends on the values proclaimed by the company and on the internalization in its corporate culture.
Where the effect of the event is extensive, it must be expected that social agents – NGOs and the media – will pose questions and expect action. In such circumstances, the firm is faced with several options:
a) keep quiet and wait to see if the storm subsides, counting on the capacity for forgetfulness of a society bombarded constantly with bad news.
b) report that the matter is being studied then wait till it is forgotten.
c) report that you are going to study the matter, determine responsibilities and act accordingly - which, in many cases, is the same as counting on the matter being forgotten.
d) undertake certain actions –decided on a cost basis – to palliate the damage to some degree; (simultaneously, explanations are often given of innocence, with denunciations of external responsibilities).
e) act decisively – without waiting for a detailed analysis of possible indirect costs – striving to check the negative consequences and communicating clearly the state of affairs of actions undertaken, results obtained and measures adopted to avoid a repeat of the problem.
Once the firm has selected one of the above alternatives, the dynamics of the process that can be unleashed are unpredictable, in some cases requiring a different solution be adopted.
If the message (or lack of message) issued by the company is widely transmitted, yet the public feels it has suffered damage, been unjustly compensated and perceives deceit or dubious intentions, it is likely that perception of the firm’s legitimacy will oblige the company to incur greater expenses than if it had acted decisively from the beginning. Obviously, these investments do not preclude the possibility of a loss of reputation, with the consequent negative effect mentioned at the beginning of this article.
In light of all this, what conclusions can we draw?
Nowadays, social demands on a company’s responsibility constitute a factor that increasingly conditions the options a company considers. For this reason, applying solely legalistic criteria when choosing among options – limiting yourself strictly to requirements of the established rules – can lead to reduced profitability in the long term, when one takes into account stakeholder response. Limiting yourself to complying with current legislation, and explaining the terms of such fulfilment, offers no guarantee of satisfying the expectations of society at large.
If the company feels it wants to maximize its long-term benefits to maintain the legitimacy of its identity, its response to adverse events has to be e); a “decisive” response. The risk involved in cutting back on some actions when responding is far too high. In addition, if your competitors are in a healthy position, they may take advantage of these ambiguities to reinforce their reputation.