In the past year, leading business minds including Michael Porter and McKinsey & Co. have been extolling the virtues of multi-stakeholder value. A new report from Dalberg Global Development Advisors seems to throw us back in time.
According to the report, “the real social value comes overwhelmingly from what companies do through their core business, the skills and supply chains built up around them, and then the revenue that comes into government as a result of their profitability.”
The report goes on to suggest that “soft” concerns like CSR and “triple-bottom line” are diversions from value creation and should be dismissed unless they can be shown to “redound to the bottom line”.
This report is extremely shocking. Dalberg is a firm that claims to “raise living standards in developing countries.” Yet it almost parodies Milton Friedman, who believed that the sole responsibility of companies was to create wealth for investors. Period.
The public relations industry bears a large responsibility for the mistaken belief that reputation and CSR are “soft.” PR professionals often talk about such investments as ways to build “esteem,” “trust banks” or “do well by doing good.” To many executives, these sound like homilies, not business guidance. Investments in reputation do “redound” to the bottom line and do create differentiated value when they are strategically employed.
We must be able to show these, and we can.
It is correct that companies need to have a primary focus on profits. The issue, however, is how they achieve and deploy those profits.
We should accept that every program have bottom-line implications. That is the test of whether a program is strategic. The Dalberg report, however, seems ignorant of research that has consistently found that the company with the best reputation within an industry sector outperforms others on every financial measure.
Companies can certainly gain short-term profitability by cutting costs and retaining profits, but sustainable profitability comes from acquiring and retaining customers. We gain market share when we acquire a customer. Retaining a customer not only costs less, but it also drives up the customer-acquisition costs for competitors. We cannot acquire and retain customers without committed and engaged employees.
There is a strong correlation between employee and customer satisfaction, which together contribute to financial results. Profitability, then, is a proxy of the value created with and for employees and customers.
Moreover, the value of talent and capital is created and contained within industry sectors. Potential employees and investors make choices of where to join or invest within a sector; customers also make choices within these categories. So, as we build our reputation, we differentiate ourselves for employees, customers and investors and take value that might otherwise go to competitors. We not only make ourselves profitable, but we in fact make it more expensive for competitors to match our profitability.
This is why reputable companies are far more valuable. For example, Steel City Re found that between 2005-2008, the companies with the best reputations rewarded their shareholders with an 18-percent return compared with a 6-percent return for the general market.
In contrast to Dalberg, I would argue that not investing in reputation squanders shareholder value and also creates greater reputation risk.
Reputation is based on expectations of value, and risk occurs when experience falls below expectations. A company can think it is more profitable while losing its most talented employees. Customers will soon depart as well.
Most of the major airlines have become more profitable by cutting staff and collecting nearly $6 billion in ancillary fees on everything from bags to seats, while they have destroyed their perceived value with customers and their own employees.
Southwest, on the other hand, has resisted the customer-punitive excess fees in favor of culture, customer service and reputation building. As a result, it has the highest market cap in the airline industry and a return-on-sales more than double the industry average, despite having only 10 percent of market share.
Another example is Apple, whose focus has been on attracting the best talent, innovation and customer service. The company holds only 5 percent of the smartphone market, but makes 50 percent of the profits in the sector.
If PR professionals want to get CEOs and clients listening to them about the power of communications, they need to stop talking in PR jargon and begin talking about the impact of these things on financial value. When you start talking in these terms, business people will start to listen and they will understand why a report like that from Dalberg is so very wrong.
Elliot S. Schreiber, Ph.D. is clinical professor of marketing and executive director of the Center for Corporate Reputation Management, LeBow College of Business, Drexel University, Philadelphia. During his career, he has been in sales, corporate strategy, marketing and communications. He was CCO at Bayer, Pittsburgh, and CMO and CCO at Nortel, Toronto. He later was president of a strategy-consulting firm. He also heads his own consultancy, Brand and Reputation Management LLC. He holds a Ph.D. in Communication (1977) from Penn State.