Reputational spirals


19-04-2021
spiral_ ever decreasing circles

Public criticism during crises can prompt innovation in environmental, social and governance (ESG) practices, but many firms instead get caught in a downward spiral, says Nareuporn Piyasinchai, a PhD candidate in the Strategy & International Business subject group at Cambridge Judge Business School.

Nareuporn Piyasinchai writes:

Public criticism can prompt companies to positively reform their environmental, social and governance (ESG) practices. Yet during times of global crises, such criticism can also trap firms in a downward ESG spiral, wherein negative reputations can constrain access to the very resources needed for reform. In this way, crises often make it hard for companies in a reputational hole to stop digging, and this holds important implications for firms around the world, particularly their need to actively manage corporate reputation during times of global crisis.

Our study of 4,738 companies across 76 countries over a 12-year period beginning with the 2007-2009 financial crisis finds that companies often diverge in their ESG practices following crises, resulting in both virtuous and vicious cycles. The paper, which I co-authored with Matthew Grimes, Reader in Organisational Theory & Information Systems at Cambridge Judge, won the Best Paper Award last November at the annual PhD Sustainability Academy co-hosted by the Ivey Business School and the Alliance for Research on Corporate Sustainability.

The research shows that crises have long-lasting effects not only on firms’ reputations but also their capacity to innovate even after the crisis has subsided. This suggests that improvements in corporate communication and reporting, and building trust and strong relationship with key stakeholders particularly during crises, is as important as firms’ efforts to invest in sustainability practices.

Crises are clearly beneficial to many firms, which take stock in the old saying to “never let a good crisis go to waste” by implementing policies that are popular with both customers and public opinion. Starbucks, which became the target of labour disputes during the global financial crisis, reformed its business model with a focus on community involvement and introduced new personalised initiatives such as My Starbucks Ideas and My Starbucks Signature to further such engagement.

Yet about 35% of our sample firms exposed to extensive public criticism during the financial crisis are not able to pursue sustainability innovation after the crisis, even if motivated to do so, often because their unfavourable reputations constrain their strategies. It is harder for them to gain new partners and suppliers. They also do not realise profits from their investments because stakeholders may perceive their efforts as greenwashing and scrutinise their practices even more.

For instance, some consumer companies were extensively criticised on child labour and human trafficking in their supply chain during the financial crisis. After the crisis waned, those firms introduced several new measures to tackle these problems, but such efforts led to intensified scrutiny and lawsuits by stakeholders alleging the organisations’ cover-up of continued involvement in child labour even after the crisis. Some firms are racing to the bottom, whereas others are racing to the top in their pursuits of sustainability innovation.

As we say in the study: “Although firms that were less extensively criticised during the crisis are able to learn from that criticism in ways that prompt ongoing sustainability-related innovation, those firms that are more extensively criticised during the crisis are reputationally constrained such that they learn to consistently compromise their sustainability practices when faced with ESG incidents following the crisis.” Yet our findings and model have a glimmer of hope for companies trapped in such a vicious downward spiral: keep engaging in sustainability innovation, because while extremely challenging it’s not impossible for firms to break such a cycle through many years (perhaps more than a decade) of investment in ESG practices. Technologically, this is usually possible, but what is absolutely required is passion to act and change the existing ways of doing things.

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