Home Archive December 2009 When a scandal hits the fan
When a scandal hits the fan
Friday, 11 December 2009 14:40

When a corporation’s relationship with a stakeholder group breaks down, how can it set about repairing the damage and restoring trust? David Benady reports:

The Balearic island of Ibiza is famed for all-night raves and the beautiful coves which are home to some of Europe’s prettiest beaches.

But the man who rented an apartment on the island belonging to German businessman Michael Bohndorf in 2006 was not a holidaymaker looking for a base to go clubbing or sample the local beauty spots. His was an altogether darker purpose. Hired by the investor relations department of Deutsche Bank, he was on a mission to gather information on Bohndorf, an active and critical shareholder in the German bank.

This was just one tit-bit from ‘The Deutsche Bank spy scandal’ which continued to thrill the financial press throughout the summer of 2009 and threw the venerable institution onto the back foot. Head of investor relations Wolfram Schmitt and head of security in Germany Rafael Schenz were dismissed and prosecutors launched an immediate investigation. And although they subsequently cleared senior management of any knowledge or involvement in the spying, the words of public commentators are strewn across the internet like scars.

The Wall Street Journal described the bank subsequently “trying to explain the affair to uneasy clients and regulators”. Influential blogger Dick Johnson said: “The messy consequences are sad... [and] the reputational consequences, from a corporate and personal standpoint, are obvious.” Even Spiegel Online described the affair as “sordid”.

The need to address stakeholder uneasiness is far from rare. Accounting irregularities, contaminated petrol, a salmonella outbreak and allegations of corruption are just some of the other crisis situations that have hit major corporations over recent years.

But when the dust settles on such a reputational misfortune, the delicate task of rebuilding battered relationships with the organisation’s stakeholders begins. Shell has spent the past five years attempting to get back into its investors’ good books after grossly overstating its known oil reserves. BAE Systems has made gargantuan efforts to persuade governments, regulators and shareholders of its ethical purity after facing a string of corruption allegations over the past ten years.

Clearly, mending fences with stakeholders after a breakdown of trust is a long and arduous task. Much depends on how effectively a company deals with a crisis at the time it unfolds. If the organisation manages to successfully fend off allegations or deals with them in an appropriate and reasonable way, a line can be drawn under the situation. The organisation’s corporate reputation may survive intact or even be enhanced.

As Jonathan Hemus, director of crisis management consultancy Insignia Communications, says: “If you have a strong reputation for being a highly trusted company, a potential outcome of a crisis is that the incident is seen to be an aberration. If you deal with it in a way people would expect from your organisation, it can actually reinforce that trusted image.”

He points to Tesco’s prompt response to the petrol contamination crisis in 2007 and its offer to pay for any damage done to people’s cars by faulty fuel bought at its forecourts. Hemus says this offer, made through full-page ads in national papers, actually enhanced the supermarket chain’s reputation for trust and customer service. A contrary example was Cadbury’s salmonella poisoning scandal in 2006, where for six months the brand owner covered up the discovery that the bug had entered its chocolate production line. This had an immediately deleterious effect on the brand’s trusted reputation, though the damage was temporary and Cadbury’s good name does not appear to have suffered in the long-term.

Hemus adds: “If you go into a situation with a strong reputation, the damage is likely to be greater than for organisations without a reputation for integrity. It is like the emperor’s new clothes, you have created this wonderful image which is revealed to be false.”

While some companies are caught out by malfeasance on the part of employees or directors, others can be the subject of false allegations and may have to fight to put the record straight. Marks & Spencer won a high profile libel case against ITV’s World in Action programme in 1998 over allegations that it used child labour to make its clothes. The retailer has gone on to make its social and ethical policy a centrepiece of its brand and marketing strategy.

Some corporations are taking strategies learned with one group of stakeholders and applying to them to other groups.

Oil giant Shell has spent much of the past two decades targeting influential groups as it has sought to rebuild trust following a range of criticisms about its environmental policies and business ethics. But the biggest crisis the company has ever faced was the revelation in 2004 that it had vastly overstated its proven oil and gas reserves. The scandal wiped millions from the company’s share price and led to the exit of chief executive Sir Philip Watts.

Since then the oil giant has put much effort into rebuilding relationships with investors and regulators to repair the deep scars to its reputation left by the scandal. It has paid damages of some £250 million to investors following legal action and has reassured shareholders and regulators that the over-statement of reserves was a thing of the past.

According to former Shell brand marketer Paddy Briggs, the original stimulus for the company to start engaging with stakeholders was the trouble arising from the Brent Spar and Nigeria crises of the 1990s. “The primary emphasis of this engagement was what Shell called ‘Special Publics’ – those individuals or groups the company thought would be essential in restoring the corporation’s reputation,” he says. These include the financial community, governments, NGOs, academics and the media. “The idea was that only a small number of powerful, influential people could actually facilitate Shell’s commercial progress and ambitions. A targeted effort on these people would be more effective than a scatter-gun communications exercise. One or two high-level briefings to investors and their advisors would be far more effective than a global ad campaign,” he explains. He believes this strategy has been pursued restore faith in the company following the reserves scandal.

Indeed, a Shell spokeswoman says head of media relations Stuart Bruseth was tasked with rebuilding the company’s reputation with the media after the crisis, while the job of keeping analysts and investors on side fell to the investor relations department. None of these would comment to Communicate.

Andrew Caesar-Gordon, managing director of media training company Electric Airwaves, says that a serious corporate crisis can force a company to give stakeholders something they had long been demanding. In the case of Shell, he points to the decision to scrap the company’s dual listing structure in the UK and Holland, which some commentators believed was a root cause of the reserves scandal. “The dual listing seemed anachronistic. It became something Shell offered up to get out of the reputation hole they were in. They said yes, we have listened to shareholders, what can we do to assuage for this misdemeanour? We will give you what you have always wanted, a single structure.”

Depending on the scale and gravity of a crisis, a company can struggle to overcome allegations of unethical practices and repair its reputation and relations with certain stakeholders.

Arms manufacturer BAE Systems has been dogged for years by allegations of corruption in winning contracts. In October, the Serious Fraud Office said it would ask the Attorney General to prosecute BAE for alleged bribery over dealings in Tanzania, the Czech Republic, Romania and South Africa.

The move comes after the SFO and BAE failed to agree on what the firm should admit or the fine it would pay. But a trial could be a harsh blow for the company as it comes after a hard-fought battle by BAE to re-build its reputation. The firm has distanced itself from the lax ethical standards of the past and has put in place a new senior management team. Clearly, the firm will struggle to win over the support of anti-arms trade NGOs. But it has put extensive efforts into rebuilding its relationships with investors, regulators and business partners.

BAE took the step of hiring former Lord Chief Justice Lord Woolf to carry out an investigation into its practices. BAE pledged to put in place Woolf’s 23 recommendations to address institutional failings. These include assessing the ethical and reputational risks surrounding every contract. The company also claims it is strengthening its anti-corruption policies and establishing a code of conduct on how to do business. It has embarked on a massive programme of ethical education of its staff. The strategy is being managed by the arms company’s group communications director Charlotte Lambkin, formerly of PR agency Bell Pottinger. She declined to comment to Communicate.

The company has targeted different stakeholder groups and lists its activities in its annual Corporate Social Responsibility Report. It has run focus groups with employees to help construct its ethical code of conduct. It has held 18 corporate level meetings with Trades Unions in the UK. For shareholders, it has held 169 one-to-one meetings and 46 group meetings for investors to meet senior management and the investor relations team. The company appears to be firing on all cylinders to slough off perceptions of unethical behaviour, though should any of the allegations go to court, it may undermine much of this work and stir up some of the old doubts about the company’s propriety. Alternatively, it may give BAE a chance to show how it has changed.

While most rebuilding exercises concern relations with customers, Governments and investors, improving the perceptions of employees can be vital in undoing damage wrought by a scandal.
Andy Rowlands, a director at Burson-Marsteller points to the Royal Mail industrial dispute this autumn as an example of how trust between two sides can break down. He believes the war of words conducted by management and the union showed the extent of the collapse of trust. Radical action is required to repair the situation.

“The way the industrial action was played out in the national arena with [the management taking out] adverts in the national press – is that really the way to communicate with employees? There seems to have been a breakdown of trust with the workforce. You need to look at the business and how it is run and wonder if the cause of the breakdown is really to do with people’s personalities.”
He says it will be essential for Royal Mail to patch up relations with staff in the short-term and make sure it delivers a first-class service over Christmas to improve customer relations.
After cases of corruption or underhand behaviour, most companies spend a lot of time trying to lay the blame on previous management regimes. But problems that lead to a crisis may be due to institutional failings that are hard to root out and managers can have a fight on their hands to change the way a business works. Getting across the message of change is vital. As Andy Rowlands says: “It is important you don’t stop communicating.”

Mending fences
Andrew Caesar-Gordon, MD of media training company Electric Airwaves says the most important initial step to rebuilding a relationship after a scandal or breakdown of trust is to establish the facts. “If the allegation is incorrect, correct it. If it is true, you must listen to your stakeholders’ complaints, which can be quite painful, holding up your hands and saying you got it wrong.”
He gives a seven-step guide to handling a crisis and ensuring it does no lasting damage to stakeholder relations.
• Issue identification – what critical issues could arise through testing strengths and weaknesses and possible system failures?
• Issue prioritisation – what could cause most damage to the organisation’s reputation?
• Issue tracking – monitor those key issues to identify which are becoming more important and are being reported in the press. It could be someone else’s issue you are dragged into.
• Issue analysis - assess what could be done to mitigate them
• Plan your options - change and then communicate your policies, behaviours and products, or change audience perception of the issue.
• Action programme - do it. Don’t allow an issue to escalate. An issue ignored is a crisis invited.
• Evaluation – how did you do? Are there new issues to be classified?