Brand risk: social licence to operate, ‘corporate virtue signalling’ and brand assets

Susheela peres da costa, head of advisory

15 July 2019

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One of the key recommendations of the Hayne Royal Commission and the APRA Inquiry into CBA was that organisations needed to strengthen ethical culture; the corporate values and norms addressing what an organisation and its leaders should do – not just what they can do.

These recommendations implicitly recognise that business does not optimise solely for shareholder value. Most business is not run by a spreadsheet, but by humans exercising fallible judgement under evolving conditions, using imperfect information. Given this elasticity, there is no reason to quarantine ethical considerations from decision-making.

Companies can evidence ethical responsibility in two ways. The first is accepting greater responsibility for their own negative externalities (e.g. safety of workers, recyclability of packaging). The second is to contribute capital to community interests. This includes philanthropic donations, but also other forms of corporate capital. Corporate volunteering programs deploy human capital. Pro bono work deploys intellectual capital.

In recent high-profile examples, Nike and Gillette used their brand capital in advertising campaigns to support progress on issues of race and gender respectively. Domestically, examples include many companies’ expressions of support for the Uluru Statement from the Heart and for the campaign for marriage equality.

While this has recently been criticised as ‘virtue signalling’, it is both legitimate and often valuable for companies to use brand capital (the company’s institutional credibility) for strategic objectives – such as improved goodwill among target stakeholders. To listed companies trying to earn (or rebuild) diminished community trust, we note the value in acting – and being seen to act – on behalf of community stakeholders.

However, the costs and risks of such a strategy cannot be ignored. Regardless of whether the issue is support for Indigenous reconciliation, opposition to the banning of plastic bags, or aspirations for gender equality, some stakeholders will welcome while others will decry the stance. This month, Australian companies were reported as trying to dissociate their brands from negative social media comments made by Israel Folau. However, they also attracted criticism from supporters of the rugby player’s stance.

The polarisation of public discourse is a growing risk to brands, and companies’ first impulse may be to shy away from the public sphere. This would not be in their interests, nor those of their investors, for many reasons.

First, companies’ brand capital is earned and grown as an asset like any other, and the right to deploy it for legitimate corporate purposes should not be constrained. It would be inconsistent to view this as acceptable for some assets, such as financial capital paid for access to lawmakers (‘political donations’) but unacceptable for others, such as brand capital used to grow goodwill among stakeholders (‘corporate social responsibility’). Stakeholders include current and future employees, customers, and communities – whose withdrawal of social licence can be costly (as seen from the Hayne Royal Commission).

Second, current levels of stakeholder scrutiny mean a low profile is unlikely to prevail, and certainly beyond the company’s control; it is preferable to be proactive and prepared when the spotlight arrives. Since 2014 Regnan has encouraged company boards to establish principles to guide public positions, and subject these to appropriate oversight – calibration with risk appetite; monitoring; and control over any public position that the company may be seen as supporting, whether via membership fees, sponsorship or even (increasingly) placement of paid advertising. Vigilance is particularly important for high-value brands and companies whose activities or industries mean a higher risk of finding themselves in politicised crossfire. Public scrutiny means the safety of the sidelines can no longer be guaranteed.

Finally, ceding the public square, on issues deemed contentious or political, inappropriately subordinates director judgement to the whims of the squeakiest wheels. Climate change, as an example, has long been a matter of scientific consensus, and climate action was originally supported across the political divide. Its subsequent politicisation was arbitrary, at best. At worst, false conflicts are alleged to be confected (see Exxon) by those with interests in denial, doubt and delay.

While companies’ social responsibility stances may indeed aim to signal virtue, it is not apparent that the alternative is to be preferred. As can be seen from the politicisation of climate policy, it is in the interests of neither corporates, their shareholders, nor the community for reasonable, responsible institutional voices to abandon the public sphere.