All social actors, simply by existing, are exposed to reputational risks. Whether fair or not, this classification of risk is irrelevant in shaping how it is perceived by the surrounding community.
The different risks can be framed within three interconnected verticals: environmental, social and governance risks. ESG is now the umbrella term that systematizes these major pillars of corporate and organizational practice, as well as an advanced system of accountability towards the community. I say systematizes because organizational reputation has always been grounded in ESG parameters.
It is the creation of value, and its sharing, that positions organizations within the environment that enables them to create and distribute that value across the community or, if you prefer, among their stakeholders.
The emergence of this systematization derives above all from the intensity of communication, particularly bidirectional communication, which often takes place with little or no intermediation.
The hyperconnectivity of a truly global society has created critical and unavoidable pressure for companies to share their purpose and the different targets they have achieved, which are now scrutinized by the community at large and by specific segments of their stakeholders.
This reality has “forced” regulators to establish increasingly demanding procedures for ESG reporting. Initially treated as a lateral issue, ESG reporting is now integrated into companies’ annual reports, particularly those exposed to capital markets, but increasingly also in other organizations.
Given organizations’ natural tendency to overstate their ESG-related actions, the certification of these practices by third-party entities has become increasingly relevant. Among these poor practices, one of the most frequent is so-called “greenwashing”, making it essential for rating agency divisions such as MSCI (including MSCI ESG Ratings / formerly Sustainalytics), S&P Global (S&P Global ESG Scores) and ISS ESG (Institutional Shareholder Services) to emerge, certifying organizations’ frameworks across different sectors using global methodologies.
It is interesting to observe how the market, organizations, particularly companies, and regulators react to crisis situations involving matters that fall within the ESG framework.
Depending on the pillar in which the crisis develops — and which intensely affects the reputation of the entities involved, such crises have dictated the death, rebirth and realignment of strategic priorities and of the practices through which value is created and delivered to different stakeholders.
The mortality rate of large global and national organizations and brands has often been rooted in the ESG pillar with the least community visibility: Governance. Unlike crises of environmental and social origin, where the construction of a sustained reputation, although not preventing short- or medium-term damage, has allowed organizations to regenerate, Governance issues (particularly in terms of ethics and compliance) open a gap between companies and their most direct stakeholders, namely investors and clients, which is often irreparable, permanently breaking the bond of trust that allowed them to operate.
Companies such as BP, Volkswagen, Exxon Mobil, Merck, Inditex, Nestlé, Apple, Nike, Adidas or Caixa Geral de Depósitos are examples of organizations that, despite having been affected by global or national crises involving the environment, health, modern slavery (people) or governance, redirected their strategy and, supported by a strong reputation, recovered their activity and overcame those difficult moments.
Others, however, succumbed and disappeared as brands or companies. Illustrative examples include Purdue Pharma, a key player in the opioid crisis in the United States, mainly due to OxyContin; Enron; Pescanova; BES; Portugal Telecom; Parmalat; Wirecard; WorldCom; Lehman Brothers; Arthur Andersen; Bear Stearns; Credit Suisse; Merrill Lynch; and other sector champions that ended up on the wrong side of history.
In contexts of reputational crisis, regardless of which of the three ESG pillars caused it, we witness a kind of organizational Darwinism. This takes the form of a selection process based on legitimacy and trust, in which organizations survive not only because of their efficiency, but because of their ability to mobilize reputational capital and implement deep strategic realignments that restore their fit with the institutional environment.
Today, leaders are permanently challenged to maintain and increase the reputational capital of the organizations in which they are involved. They are called upon to prevent or, when that is not possible, navigate crisis scenarios and act strategically to neutralize or mitigate the risks each situation entails. The Advanced Program in Strategic Communication from Porto Business School, was designed with a holistic vision, equipping leaders with the knowledge and tools needed to take advantage of a multipolarized context and the risks it presents.
Article by Armandino Geraldes, CEO da BA&N Communications Consultancy and faculty member of the Advanced Program in Strategic Communication.