Why does reputation matter?: Legislators and regulators
As a reputation consultant, often I am brought into a boardroom or committee where not everyone is on the same page about how much reputation matters. Sometimes even my direct client is interested in measuring reputation not because they see it as a priority but because their boss asked for it. Scepticism abounds. This series is for you sceptics and for the people who need to convince them. In each blog, I will be explaining how reputation impacts the relationship that you have with one key stakeholder group: employees, investors, consumers, regulators, and so on. Each of these provides compelling reasons to care about the reputation of your organisation; taken together it would be disastrous to ignore.
Last time we focused on investors, today we are taking a look at the way that corporate reputation influences legislation and regulation…
Cast your mind back to September 2019. John McDonnell – then Shadow Chancellor – was having lunch with the Financial Times. Brexit was in the offing, parliament was tearing itself asunder over the potential economic fallout from a precipitate exit from the European Union. What was McDonnell’s priority?
The shadow chancellor said that one of his first moves on entering the Treasury would be to explore ways to crack down on extravagant payments to bankers and others in the financial services sector. He said he would launch a consultation looking at options ranging from increasing shareholder power to restrictions on the size of bonuses… “It’s become part of the culture and it is so separate and distinct and isolated from the rest of the real-world economy and that’s why people are so offended by it.”
This quote provides a fascinating insight into the way in which policy is made – and how reputation can play a major part in that process. Banks are unpopular. They were never exactly popular heroes but the Great Financial Crisis crystallised a general disdain into vitriolic blame. The distasteful stereotypes of the yuppie era suddenly didn’t seem so distant; now they were literally destroying our economy. The banks saw that reflected in survey data and in the tone of their interactions with the public. Even their own customers did not seem to like them very much.
But churn in bank customers happens at a glacial pace. Reforms to increase competition in the sector have mostly persuaded individuals to open more accounts – rather than leaving their old bank. Even where executives can see a decline in consumer accounts it is happening at a speed that means they will be well on their way to another job before crisis-point is reached. So if it isn’t about getting your custom, why should the financial sector care at all about reputation? There are two main reasons: the first is that is sucks to be disliked. This should not be underestimated as a motivator and we’ll come back to it another day. For today, though, let us turn to the second reason: that banking’s poor reputation is the leading factor in major regulatory changes within the industry.
Let’s go back to McDonnell’s pronouncement above. His rationale for increased regulation of the way bankers are paid was not market failure, not efficiency or even equality. He wanted to tell firms how to pay their staff not because it would incentivise good behaviour, not even because of the cash that could be raised – but because the status quo was offensive.
That was reasoning that he was totally happy, nay enthusiastic, to share – partly because this was a popular position to take. McDonnell’s party may have lost the 2019 General Election but 32% of the British public did vote for their manifesto, and polling generally showed a high level of support for their policies that was undermined by dislike of the Party’s leadership. Polling by Populus for the Legatum Institute found high levels of support for increased regulation and public ownership. For example, 64% of British public think that the government needs to do more to regulate business. No matter the economic case, these demands are harder to resist when individual firms, or whole sectors allow bad reputation to persist.
The energy and water industries have also seen what a simmering poor reputation can do when caught in the political crosswinds. These big utilities did a pretty poor job of communicating in the wake of the 2008 recession. Prices were rising and a growing list of policies was being funded via levies added to customer bills. Focus groups cited rising utility prices as a big worry and all of the political parties wanted to show they were helping families to ‘manage the cost of living’ because though the Great Financial Crisis had finished, no one felt any better off. Key to the 2015 election was who the voters would blame for that: Labour and the bankers, or Tory austerity. At Labour Party Conference in 2013, Ed Miliband announced a new policy to freeze energy prices. It was an emblematic policy that polled incredibly well.
In the end, the British public decided that they couldn’t trust Miliband with the economy – but two years talking about rip-off utility bills had left their mark. Miliband had successfully taken an unpopular industry and rebranded it a predator. When I was conducting focus groups on this topic it was common for the public to believe that energy companies were making up to ten times the profits that they were – and when we showed them the real figures, they still thought that it was too much. Energy companies, in particular, had lost the battle to show that they were producers rather than predators.
That is why when Theresa May was fighting to reinvent herself as the Prime Minister who stood up for the middle classes who were ‘Just About Managing’ the freeze was reinvented as a ‘price cap’ because, the Prime Minister told us, "The energy market punishes loyalty with higher prices, and the most loyal customers are often those with lower incomes, the elderly, people with lower qualifications and people who rent their homes.” In the first year of operation, the new cap impacted around 11 million customers saving them between £75 and £100 on their dual fuel bills over the year – and 8 energy suppliers went bust and collapsed. By the end of the year, Labour was back with a manifesto that included a partial nationalisation of utility companies.
This is not simply meant to be a rehash of the woes of utility companies over the past decade. Lessons can be learned here about the importance of reputation. There are multiple pressures on a family’s budget – food, clothes, housing to name but a few – Miliband happened to be more familiar with the energy markets but he also knew they were a weak target. It was easier to pick on Centrica than Sainsbury’s. Having a poor reputation makes you more likely to be singled out either as a sector or a firm.
This doesn’t mean that only the pantomime villains in the City should be worried. Political and regulatory trends come and go – and so do the risks for your sector. Who would have predicted the creation of an additional regulator to govern charity fundraising, for example? This was brought about by waves of scandal hitting the third sector and now impacts all fundraising carried out by charitable institutions and third party fundraisers in the UK.
Or how about shifts in topic? After years of focus on sugar and childhood obesity, Ben Elliot, the ‘Government’s waste tsar’, went on the BBC’s Today Programme this time last year to announce that “The Government [is asking business to] pledge to commit to reducing [their] food waste by half by 2030.….If organisations [don’t] do it then we will advise Government to make it a mandatory thing…..We need to do some pretty serious things now to change our behaviour.” This is the name and shame school of negotiation and it trades on reputation. You can’t shame your opponent if you have a weaker reputation than them. This dynamic is crucial in M&A and it is crucial in public diplomacy.
The reputation game is also shaping the way in which the government responds to the current pandemic. As the government commits billions upon billions of pounds to bailing out companies across the economy, it turns out there are some limits. These limits are partly ideological but they are hugely impacted by sector and firm reputation. It is no surprise that public polling by Populus found that airlines were considered the sector that had reacted the worst to Covid-19.
At the start of April Secretary of State for Transport, Grant Shapps told the Today programme: "It can't be right ... that in the good times the shareholders benefit and in the bad times the taxpayer pays. A lot of the large airlines have shareholders who will also be expected by the public to put their hands in their pockets." There are many ways that Shapps could have couched this view. He could have mentioned environmental harm, or employment, or definitions of key industries, but he didn’t. It was enough to invoke the idea that airlines have put shareholders before the public interest. And in these days of stakeholder capital, that is a serious reputational slur.
What you can see from this slew of examples is that reputation affects your relationship with legislators and regulators in several key ways: firstly, these decisionmakers are human. They do not hold and process information with perfect objectivity. Therefore their attention and, ultimately, actions will be swayed by coverage of bad behaviour and poor reputation. Secondly, organisations or sectors with a flawed reputation are less capable of defending themselves or putting across a counter-narrative than those with a strong reputation – you are less likely to even get in to speak to the relevant decisionmakers and the media will discount your objections no matter how valid. Finally, legislators and regulators face inevitable political pressures and it is easier and therefore more likely for them to tackle targets that are the focus of more general disapproval.
The lesson is clear: reputation matters for this group of stakeholders as much as any other – and ignoring that could mean rising costs of business, the loss of a right of reply or even the revocation of your license to operate.
Find the whole of this series here
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