Placating stakeholders could drive a stake through corporate reputation

Corporate America has an expectation problem and needs a better way to manage it.

Abortion rights. Voting rights. Gay rights. Gun rights. Climate change. Communities. Black Lives Matter. The #MeToo movement. All important issues for our society to grapple with. All in the headlines and on the minds of many Americans.

Companies that a generation ago were simply in the business of creating or selling products or services for customers who needed them, paying their workers and making a profit for their owners are expected in this era of environmental stewardship, social justice and dutiful governance to articulate positions, engage in advocacy and factor these social issues into their business decisions.

And they’ve walked right into it, showing once again how the road to hell is paved with good intentions. When companies began talking about stakeholder capitalism, signing onto pledges elevating stakeholders to equality with shareholders and competing to elevate their ESG rankings, they opened a Pandora’s box. They created an expectation that stakeholders — not corporate leaders — would help define what is mission-critical for a business.

Stakeholders and shareholders are intrinsically aligned, argued the signatories of the 2019 Business Roundtable pledge that redefined the purpose of a corporation as promoting "an economy that serves all Americans. For example, the leadership of Disney, initially thinking it could stay out of the discussion about so-called “Don’t Say Gay” legislation, found itself with an outraged employee base at a time of workforce scarcity. That’s an issue that affects shareholder interests directly, and the company recognized the need to respond. Coca-Cola initially hoped to avoid engagement when the legislature in Georgia, its home state, passed a law limiting voting rights. Its stakeholders — employees and consumers — clearly expected more and when their disappointment posed an economic threat to shareholder interests, the company responded.

Now, with the likelihood of Roe v. Wade being overturned, national companies with operations in states that outlaw abortion are going to be in the spotlight. How should they react? Should they reserve for costly litigation from “private right of action” by vigilante groups?

What will the big social issues be a year from now? When issues collide, as in the Russian war on Ukraine, will last year’s environmental issues give way to social priorities? How does a company in the energy sector prioritize the need to invest in alternative energy against the need for short-term energy independence? Will stakeholders now give banks a pass if they finance fossil-fuel drilling projects?

The Observe, Orient, Decide, Act loop of corporate strategic planning is too slow for our 24-hour news cycle and weaponized social media environment.

The strategic impact is too great to hand crisis management over to marketing.

Companies need a risk governance and management upgrade. Companies need to be able to recognize changing facts on the ground, assess corporate values and capabilities, and decide on a response in real time. And they need to talk publicly about that process as part of their strategy for managing stakeholder expectations, because building confidence in the process will build confidence in the outcomes. That’s the nature of reputation risk management in the 21^st century.

Companies need an enterprise-wide mechanism for gathering intelligence, on an ongoing basis, about the expectations of all their stakeholder groups, including employees, customers, community leaders, investors and regulators. They need to be able to assess whether they are geared up to meet those expectations or whether there are gaps. They need to calculate the potential cost of disappointing any given segment and the benefits of either meeting or managing expectations. They need insurance for those costs.

Companies also need to recognize that meeting stakeholder interests with a robust authenticated process has a benefit for shareholders as well — and shareholders know it. A recent analysis by Steel City Re found that companies with strong processes in place to manage these risks see their stock price outperform their peers. But when they communicate publicly about that process, their “reputation premium” doubles.

So telling that story — signaling with ESG insurance, reputation insurance or other methods that strategic defenses against disappointed stakeholders and reputational damage have been validated by third-parties and are strong — needs to be a core element of a modern reputation governance and risk management program.

Planning for next year’s reputational challenge is a useful thing to do but will always be imperfect. Being able to know it when you see it, having a clear sense of what stakeholders expect, recognizing that shareholders also benefit by meeting those expectations and that they will reward the company for doing it well — is a good beginning.

Nir Kossovsky is CEO of Steel City Re, which provides parametric reputation risk insurances and advisory services using a risk management framework informed by behavioral economics. Denise Williamee is Steel City Re’s vice president of corporate services.