Trust, Reputation and Brand Begin Abroad

By Dean Krehmeyer

A common link in many recent high profile product safety recalls—from toys to toothpaste—is the complex role of overseas subcontractors. As reported in a Supply & Demand Chain Executive survey, firms expect to increase their portion of total spend with foreign suppliers by 46 percent over the next three years. The increasing significance of foreign suppliers raises a challenging question for today’s executives; specifically, as outsourcing to foreign suppliers grows, who will be responsible for protecting the firm’s intangible assets—trust, brand and reputation—which now have global reach?

According to a recent study by Thomson Financial, 89 percent of institutional investors view corporate responsibility as a primary or secondary influence in their portfolio decisions. Furthermore, a 2007 survey of investors conducted for Pepperdine University (See October 2007 Investor Relations Newsletter) found that “fully 76% of respondents would either ‘definitely’ or ‘probably’ sell off their shares in a company that engaged in unethical, albeit legal, behavior.” We should expect these issues to only increase in their importance.

Despite these significant numbers, however, the Thomson Financial study also reports that almost two-thirds of investor relations officers (IROs) believe their boards are failing to focus on shareholders’ social responsibility concerns.

Managing the Trust Gap
The product recalls of 2007 highlight the “expectation” gap between the responsibility that investors, customers, and other stakeholders attribute to leading global corporations and the actual ability of those corporations to control intangible assets like trust and reputation at the sub-contractor level. The current degree of disconnect is extremely high, with Integrity Interactive reporting that less than a quarter of Global 2000 companies include suppliers explicitly in their code of ethics policies.

Given the scope of the challenge, changing the nature of supplier relationships will require a team effort of executives from multiple areas led by, but certainly not limited to, supply chain executives.

IROs in particular, have important roles to play with both external and internal stakeholders. In the current landscape of business—where many activist groups that focus on customer safety and supply chain issues are challenging the firm’s status as the “go-to” communications resource for stakeholders—IROs can be leaders in reestablishing their company’s trusted voice to investors and customers.

With their externally-focused experience, IROs will be asked to lead efforts within the company to make the business case for reframing trust and reputation throughout the extended organization as brand builders, and not just risk areas to be managed. In particular, the IROs experience and ability in reading potential market reactions to their company from investors, customers and activists is invaluable.

From Outsourcing Manufacturing to Insourcing Trust
The challenge this expectation gap presents – outsourcing manufacturing while at the same time insourcing trust – presents a unique opportunity for companies to differentiate themselves in the marketplace. Managers can enhance firm value and reduce risk by investing in their subcontractors in ways that create shared benefits of trust, brand and ethical decision-making. Firms with suppliers who lead in terms of these intangible assets may be better positioned to effectively communicate and deliver on creating long-term success.
 

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Dean Krehmeyer is Executive Director of the Business Roundtable Institute for Corporate Ethics. He can be reached at director@corporate-ethics.org.