Reputation, Crisis, and Social Impact

The Economist recently did a study with the intent of answering an important question: when a company has a crisis, is it just a fire alarm or does it impact shareholder value? It’s an intriguing question. Corporations embroiled in scandal take a short term beating on social media and have to field calls from upset customers and shareholders, but is it just a PR issue or are the ramifications deeper?

The conclusion was this: “The evidence shows that these episodes were deeply injurious to the companies’ financial health, with the median firm losing 30% of its value since its crisis, when compared with a basket of its peers.”

Those are high stakes. Of course the goal for any company should be to minimize the chance of scandal through effective management, good business and process management, etc., but sometimes crises can arise under circumstances partially or completely out of a company’s control. Tech companies sometimes refer to this as an instance of the Law of Big Numbers: even if something bad has only a 1 in 1,000,000 chance of happening, if you have millions of customers the likelihood of that bad thing happening at least once approaches certainty.

Companies come up with operational and communications plans for dealing with these issues, but the resilience of a brand to scandal can have a lot to do with its reputation to begin with.

Take two examples from the last year.

In April, 2017, a passenger was dragged off a United Airlines flight, sustaining injuries and precipitating one of the corporate crises studied for the Economist piece. While the Economist didn’t provide its underlying data, a quick analysis comparing United to a basket of peers (in this case American and Delta) show’s United underperforming by 17.6% in the year since the crisis, a little over half the average in Economist study. And at the time, #BoycottUnited was trending on social media.

On the other hand, consider the recent video showing two black men being arrested at a Starbucks while waiting for their friends to arrive. While no two corporate crises are precisely alike, this is closer to the United incident than the other crises that were studied in that it involves customers (incidentally all people of color) being abused by law enforcement without any reasonable justification. But so far, unlike United, Starbucks stock has taken little if any damage. Why is that?

One possibility is that Starbucks has had a defter hand in responding to the crisis. This is certainly true. The company took responsibility, apologized, and the CEO has plans to meet with people who were arrested. It has also announced plans for unconscious bias training at 8,000 stores. United tried to bluster its way through with references to its policies. But apologies don’t tell the whole story — even in the face of effusive apologies from CEO Mark Zuckerberg, Facebook stock took a 15% pounding in the wake of Cambridge Analytica.

Another possibility is that Starbucks’ product is just too difficult to boycott. A good, convenient cup of coffee and place to sit and work can be hard to find. But United is one of only four major US air carriers and boycotting it can mean cutting off entire destinations or potentially having to take much more expensive or less convenient flights. Whenever a huge brand is subjected to a call for boycott, pundits talk about the difficulty of leaving their service. It happened with United. It happened with Uber. And it’s happening with Facebook. Surely Starbucks can’t be that much harder to quit than these other ubiquitous products and services?

So what’s left? With over 87% of American consumers saying they consider a company’s social impact when making a purchase, perhaps impact is something to consider. Unlike United or Facebook, Starbucks wears its heart on its sleeve when it comes to impact. Both with good governance and supply chain programs (health insurance, fair trade) and more innovative programs in everything from voter registration to hiring refugees, Starbucks is seen as a good company that generally does the right thing. That gives them enormous credibility when they apologize for making a mistake. According to Edelman, more than 48% of people who are motivated by cause will go so far as to defend brands they love against critics.

While United, Facebook, and many other companies in the Economist study also do social impact, few have it so front and center. Starbucks has social impact in the primary navigation of its website. It has displays and information in every one of its stores. It even features impact in its own media outlet, the Starbucks Channel. It has truly positioned itself as an impact brand and engaged its customers around that. In a time of crisis, that pays dividends.