Companies that have built lasting reputations have done so on various foundations: they may have excellent products or services, iconic brands, unique experiences, or reputable management. These foundations can be maintained though financial struggles and can even carry companies through scandal.
By contrast, companies that choose financial performance may be well regarded, but their reputation is tied only to their returns, and when those fail, the company is abandoned. Witness the respect granted to technology and financial firms during the booming 1990’s, and how quickly that respect evaporated after many of the innovators went bust.
When a company’s financial performance takes a downturn, as happens to every firm at times, the mediocre economic performance is cause for criticism, but the critics do not stop there. Once a company is in doubt, people begin to question its reputation, good judgment, and ethical behavior. Audits and financial investigations expose incidents of poor risk management, irresponsible investment, negligence, and stunning incompetence. The scandals mount, and people flee the firm: customers, investors, partners, and employees do not wish to be associated with the firm and cease to interact with it.
This is often done with great melodrama because public opinion favors the extremes: hero or villain, with no middle ground. A single scandal may be aggrandized to portray a firm as a villain, or dismissed as a minor misstep of an otherwise heroic firm. It may seem superficial, but it is not inconsequential: people choose to buy from, work for, and invest in one firm or another based on reputation. A good reputation can sustain a firm, a bad one can sink it.
Negative public image can lead some firms to atone and change their ways, but many are (rightly) skeptical that it is a temporary measure. A scandal might compel a firm to apologize and take actions to appear more ethical and socially responsible, but this is often short-lived and, as soon as the economic conditions improve or the spotlight of public attention moves elsewhere, it’s back to business as usual.
A firm may change its behaviors, but not its values: if a business leader places primary value on profit maximization and is skeptical about ethics, he may do what is necessary to appear to be ethical without actually becoming ethical, so long as it seems to contribute to profitability. Ultimately, values will drive behaviors, and if the values of a person or group of people are deficient, they will not and cannot long maintain a façade of ethics.
Society’s expectations of a firm evolve over time. During the industrial revolution, firms were seen as the means to achieve economic goals – wealth and prosperity for its investors. In the twentieth century, this perspective shifted to consider the firm as a necessity to the livelihood of the people who worked for it – the wealth and prosperity of its employees. The fall of socialist regimes in the late twentieth century confirmed the superior efficiency or the market economy and the role of private enterprise in not only creating wealth, but in achieving social progress. Naturally, this led to the assumption that the former method had been the correct one, and the consequences have been unsatisfactory: a strong of economic crises, each worse than the previous one.
As such, it is necessary not merely to return to the old perspective, but to question: what is the purpose of a company? Is it merely to profit its investors? Is it merely to profit its employees?
The first purpose of any business is to deliver value to its customers – it is the method of its survival as an organization. A company succeeds only by creating a product or service that they are willing to buy – it is financially sustained only if it is continuously successful in serving that purpose. The ethical dimensions of a firm must therefore be derived from that purpose.
There is also the notion that companies exist within a society: everyone who interacts with a firm is part of a society, which has a culture and shared values. The firm cannot stand aloof of these values. In terms of economics, a firm survives or fails because its purpose and values are aligned with those of a society. If it makes a product that delivers adequate value for the price demanded, and does so in a manner that does not destroy more value than it creates, it survives. If it does so more effectively or efficiently than its competitors, it succeeds.
As such, a company must be remarkable for its success in its mission, not merely short-term financial performance. Its reputation is an amalgam of what other people think of it, and each group of people have their own ideas about the qualities a firm must demonstrate. Shareholders, customers, employees, partners, competitors, regulators, and society at large each have different values that are sometimes in conflict. To persevere, the business must pursue the values that are most critical to its survival and its success.