Monday, June 8, 2009

“If the rest of the country knew what we were being paid, there would be tumbrels in the streets and heads carried around on pikes.”

TO BE NOTED: From the FT:

Business too must look to its reputation

By Michael Skapinker

Published: June 8 2009 20:35 | Last updated: June 8 2009 20:35

The political turmoil in Britain is worrying business leaders, who have warned that it is a distraction from the serious economic problems that the country faces. In the middle of a downturn, Gordon Brown’s government is tearing itself apart.

I suspect that many business people are secretly relieved. The Labour government’s deep unpopularity and the uproar over parliamentary expenses have diverted public fury away from bankers’ pensions and how much executives earn.

But there are striking parallels between the UK’s political meltdown and what has happened to business. In both cases, it goes beyond mere reputational damage. British parliamentary politics and business are in danger of losing their popular legitimacy.

The political damage from the expenses scandal is clear. But business has suffered its own damage, and not just in the UK.

Only 17 per cent of Americans now trust what company chief executives say, according to the Trust Barometer compiled by Edelman, the public relations company. Only 38 per cent of Americans say they trust business to do what is right. Fewer than half now believe that the free market should be allowed to function independently.

It is the same elsewhere. An FT/Harris poll in April asked people how their perceptions of managers had changed since the economic crisis began. In Germany, 75 per cent said their perceptions of managers had worsened. In France, the figure was 71 per cent. In the UK, it was 67 per cent.

An article in the most recent issue of the McKinsey Quarterly advises companies on how to salvage their reputations. Three McKinsey consultants suggest companies go beyond the traditional stakeholders – consumers, employees, shareholders and regulators – to indirect ones, such as non-governmental organisations and the media. They point out that online networks are now more important.

“Organisations need to enhance their listening skills so that they are sufficiently aware of emerging issues; to reinvigorate their understanding of, and relationships with, critical stakeholders; and to go beyond traditional PR by activating a network of supporters who can influence key constituencies,” the McKinsey consultants say.

Companies should engage in public dialogue. They should not allow “single-issue interest groups to control the conversation”. They should insist on “a more complete dialogue that raises awareness of the difficult trade-offs they face”.

This is all sensible but it strikes me as yesterday’s advice. Yes, companies need to understand what campaigning groups are up to. Bloggers can inflict damage and companies need to know what they are saying. But NGOs and bloggers have not been responsible for the ructions of recent months, either in politics or in business. In both cases, it is the broader public that has expressed its rage.

Few UK voters had any idea members of parliament were claiming taxpayers’ money to tend to their duck ponds. They did not know their representatives were designating a house as a second home so that they could use parliamentary expenses to pay off the mortgage, then telling the Inland Revenue the same house was their first home so they could escape capital gains tax when they sold it.

By the same token, while people knew all too well that bankers received fat bonuses, they had no idea they could carry on receiving them when their company had been saved from collapse by the taxpayer, as happened in the case of AIG, the US insurance group.

It took Sir Fred Goodwin’s departure as chief executive of the Royal Bank of Scotlandfor people to discover that his pension had been pumped up by allowing him to add 20 years to his actual service with the company. The bank had also agreed to pay the tax on his pension.

David Freud, a former investment banker, once told his deputy: “If the rest of the country knew what we were being paid, there would be tumbrels in the streets and heads carried around on pikes.”

It has not come to that, although Sir Fred’s house and car have been vandalised and someone wrote a letter threatening to execute AIG staff with piano wire.

I imagine most people condemn this sort of thing but the anger is real enough. It comes both from a sense that basic rules of fairness have been violated and from the discovery of a secret world of perks and pay that most people had not realised existed.

There is another discipline that companies – and politicians – need to add to making contacts with activists and monitoring bloggers. It is to look at their practices and constantly ask: how would we feel if this came out? Because the chances are that, in today’s climate, it will."

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