How companies manage risks to their reputation

BUSINESS leaders embrace corporate responsibility for a number of reasons. Lee Scott, the CEO of Wal-Mart, was converted to it by the aftermath of Hurricane Katrina (which showed his company's full potential to serve “not just our customers but our communities, our countries and even the world”). Others are lured by the glamour of making pledges at the Clinton Global Initiative. For some, though, it is public embarrassment and lawsuits that concentrate the mind.

Take Yahoo!, a technology company that ran into difficulties over the jailing of two Chinese dissidents after the company handed data on them to the Chinese authorities. In November Yahoo!'s chief executive, Jerry Yang, and its top lawyer had to listen to Tom Lantos, a congressman, denounce them as technology giants but moral pygmies. The following week Yahoo! reached an out-of-court settlement with the families of the jailed men.

Trouble seems to come in waves, pounding industry after industry, each time for a different reason. It has hit the oil business because of spills and explosions. Mining companies have come under attack for collusion with corrupt governments. Clothing companies have faced scandals over the use of sweatshop or child labour. The petfood industry was pilloried after cats were killed by tainted imports from China. Mattel and other makers had to recall millions of toys made in China on safety grounds.

Most of the rhetoric on CSR may be about doing the right thing and trumping competitors, but much of the reality is plain risk management. It involves limiting the damage to the brand and the bottom line that can be inflicted by a bad press and consumer boycotts, as well as dealing with the threat of legal action.

In America, the legal instrument of choice (as in the Yahoo! case) is the Alien Tort Claims Act, which allows companies to be taken to court in America for violating human rights abroad. Under international law only states can be held responsible for violating human rights, but allegations of complicity in state abuse can provide a hook for legal claims against companies. Even if it does not get as far as a trial, this can be embarrassing and costly for companies.

Three years ago Unocal, a Californian oil company, settled out of court (reportedly for some $30m) over allegations of complicity in abuses by government soldiers against villagers in Burma during the construction of a pipeline in the 1990s. However, the company denied any responsibility. Another oil company, Talisman Energy, discovered that being Canadian was no protection against a legal claim in the United States. It was facing a lawsuit by the Presbyterian Church of Sudan alleging complicity in genocide in Sudan, where Talisman had invested in the Greater Nile Oil Project—even though Talisman, under pressure from human-rights groups, had sold its stake back in 2002.

For the moment, though, the biggest problem many companies have to deal with is something that has sprung from rapid globalisation. It is the risks associated with managing supply chains that spread around the world, stretching deep into China, India and elsewhere. For some, this is a challenge on a grand scale: Nike's contractor network, for example, involves some 800,000 workers.

Firms can set standards of behaviour for suppliers, but they do not find it easy to enforce them. Unscrupulous suppliers may cheat, keeping two sets of records, one for show, one for real. Others, under intense pressure to keep costs low, may cut corners—allowing unpaid overtime, for example, or subcontracting work to other firms that escape scrutiny.

And on top of the need to guarantee labour standards and product safety across an extended network, a new demand is starting to emerge: companies have to consider the environmental “sustainability” of their suppliers too. So inspection regimes are set to intensify, at a time when audit fatigue has already become a problem for suppliers. Surveys suggest that a typical garment factory may expect to be inspected 25 times a year. Levi Strauss, Timberland and others in the industry are starting to collaborate on inspections to reduce the burden on suppliers.

Involvement in social programmes, especially in poor parts of the world, is an increasingly fashionable way for a company to burnish its brand and, with luck, protect itself from attack. Which self-respecting CEO these days wants to be caught doing nothing for Africa? But sometimes these programmes also have a clear business rationale. Anglo American, for example, says the $10m a year it spends on HIV testing and treatment in Africa is starting to pay for itself through reduced absenteeism and longer lives for skilled workers.

The big drugs companies, for their part, were greatly embarrassed by accusations of ignoring the needs of Africans dying from HIV/AIDS, so GlaxoSmithKline and others decided to make HIV drugs available for no profit. Merck has entered an innovative partnership to fight AIDS with the Bill & Melinda Gates Foundation and the government of Botswana, where the proportion of sufferers being treated is now the highest in Africa. Since 1987 Merck has also donated 1.8 billion tablets to treat river blindness, reaching more than 60m people a year in Africa, Latin America and the Middle East. All this helps to quieten the critics. The involvement in emerging markets may even prove a good investment in future growth.

Novo Nordisk, a Danish company that supplies a big share of the world's insulin, has written the “triple bottom line”—that is, striving to act in a financially, environmentally and socially responsible way—into its articles of association. It reckons that having the creed anchored so firmly is making it more alert to both risks and opportunities.

The big drugs companies, for their part, were greatly embarrassed by accusations of ignoring the needs of Africans dying from HIV/AIDS, so GlaxoSmithKline and others decided to make HIV drugs available for no profit. Merck has entered an innovative partnership to fight AIDS with the Bill & Melinda Gates Foundation and the government of Botswana, where the proportion of sufferers being treated is now the highest in Africa. Since 1987 Merck has also donated 1.8 billion tablets to treat river blindness, reaching more than 60m people a year in Africa, Latin America and the Middle East. All this helps to quieten the critics. The involvement in emerging markets may even prove a good investment in future growth.

Novo Nordisk, a Danish company that supplies a big share of the world's insulin, has written the “triple bottom line”—that is, striving to act in a financially, environmentally and socially responsible way—into its articles of association. It reckons that having the creed anchored so firmly is making it more alert to both risks and opportunities.

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