October 21, 2014

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Improving Your Trust Quotient: Corporate Legitimacy Challenges in a Global Economy

Despite the challenges there is much corporations can do to improve their trust quotient among stakeholders and consumers.

Dorothee_baumann-pauly

By Dorothée Baumann-Pauly

Part of the Managing Corporate Legitimacy series

Managing corporate legitimacy means managing public perception. Traditionally, corporate communication and marketing functions are concerned with creating a public image of the corporation that is widely acceptable. In a global economy, however, managing public expectations and shaping public perceptions through traditional tools like PR and marketing has become a challenge for many corporations. Here are some of the reasons:

Difficult Tradeoffs as Number of Corporate Stakeholders Grows

The number of corporate stakeholders is growing. Their demands are highly diverse and sometimes even conflicting.Pluralism of public expectations means that corporations need to make difficult trade-offs.

Corporations can respond to some stakeholder demands but not to all. Whatever response corporations choose, it may satisfy some stakeholders but most likely provoke others. For example, the interest of human rights NGOs that demand investing in establishing international labor standards in the corporation’s global supply chains and the interest of shareholders in short-term wins may Trustnot be reconcilable.

Corporate Transparency is Growing

Corporations can no longer hide. Transparency over corporate conduct, even in the most remote regions of our planet, is growing. Networked civil society groups can publish critical news about corporate conduct through the internet within seconds. Access to the internet has empowered local advocacy groups.

For example, the ongoing allegations of poor working conditions at Foxconn, an Apple supplier, were triggered by a report from SACOM (Students and Scholars Against Corporate Misbehavior), a Hong Kong-based advocacy group.

Reporting Criteria Standards are Rising

New reporting criteria require a higher quality of transparency. Credible reporting on the social and environmental impact of business is based on benchmarks and metrics for core business processes.

The latest version of reporting guidelines from the Global Reporting Initiative, the G4 Sustainability Reporting Guidelines, ask corporations to base reporting on key performance indicators that measure the material issues for their business.

How to define what is material for each company still needs to be clarified; but given the ongoing evolution of reporting requirements in the past years, narratives about pilot projects will no longer do the job.

Consumers Want Corporate Responsibility

Irresponsible corporate conduct makes headlines. Consumers globally are increasingly sensitive to poor corporate conduct. They expect corporations to operate responsibly and respect social and environmental standards.

According to the 2013 Nielsen Global Consumer Survey, 50% of consumers say they are willing to pay more for goods and services from socially responsible companies. While there might still be a disconnect between what consumers say in surveys and what they CSR-shoppingindeed purchase, the survey’s findings highlight that the public is, at least in principle, interested in the way how businesses operate.

Influence of Social Media High

Social media are increasingly influential. Through dialogue on social media platforms like Facebook or Twitter, public perception about corporations forms and evolves. Corporations eager to please critical stakeholders deal with moving targets and media channels they cannot easily control.

Trust in Corporations Low

Public trust in corporations is low - but it is higher than trust in governments. The 2014 Edelman Trust Barometer shows a historic gap between trust in government and trust in corporations. The public's confidence that corporations can provide public goods better than governments further increases the pressure on companies to perform in line with public expectations. This is no easy task given that civil society organizations will always enjoy a trust bonus. Thus, in terms of managing perceptions, the David versus Goliath metaphor is reversed.

Traditional PR and marketing instruments focus on manipulation. In a global economy with pluralistic norms and world views, higher levels of transparency over corporate conduct, and increasingly sensitive consumers that are digitally connected, manipulation will most likely not be successful.

What Can Corporations Do?

In light of these challenges, what can corporations do to manage corporate legitimacy?

Managing corporate legitimacy in a global business context requires that corporations 1) embed themselves in the societal context in which they operate and 2) align core business procedures with their commitments to respect social and environmental standards.

Stay In Touch with Social Expectations

Staying in touch with societal expectations is the precondition for any meaningful materiality assessment. Without regular interactions with critical stakeholders, corporations will have insufficient insights about what is expected from them.

From my research I know that there are corporations that take pride in the recycled paper that they introduced in their offices while the real environmental issues of their business occur in very different places.

Stakeholder Dialogues Need to be Real Conversations

To bridge good corporate intentions with actual public concerns, many CSR-business-dialoguecorporations today entertain what they call “stakeholder dialogues”. Very few of these events, however, are real dialogues. The participants are hand-selected friends of the company, the agenda is defined by the corporation, and the purpose of the meeting often does not go beyond approving a pre-defined corporate action plan.

However, as long as the agenda-setting power stays with the corporation, corporations will benefit little from such interactions. To effectively manage corporate legitimacy and reputational risks through stakeholder dialogues, corporations have to run the risk of controversial conversations. Only then may the interactions with critical stakeholder send early warning signals for emerging societal issues that are best addressed proactively.

Embed CSR at All Levels

Aligning organizational structures and procedures with a principled corporate commitment to responsible business conduct ensures that societal concerns are addressed on a routine-basis. Corporate commitments are typically made by corporate leaders and leadership support is critical for managing change.

Yet to trickle down the vision of a leader, middle management needs to ensure that the vision is actionable at all levels of the corporation. Therefore, to embed commitment to responsible business conduct at all levels and in all regions, leaders need to reflect on their business models and design corporate policies and procedures in a way that sets core business processes on auto-pilot.

Managing corporate legitimacy has become more complex in global societies with multi-faceted interests and expectations. Understanding societal expectations requires exposure and systems that can adequately process these expectations.

About the Author:

Dr. Dorothée Baumann-Pauly is a business ethics scholar and human rights advocate. She received her PhD in Economics from the University of Zürich. In her scholarly work she links the interdisciplinary academic discourse on global governance with the practical implementation challenges of corporations as political actors. She currently teaches at HEC Lausanne and works with the Center for Business and Human Rights at Stern School of Business, New York University.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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