Marshalling Reputation to Minimize Problematic Business Conduct

Notwithstanding the attention corporate reputation gets as a concept, why it is valued, what it requires, and what is incompatible with a good reputation are given surprisingly short shrift. Institutional investors are increasingly pressuring companies to care about more than short-term profits, and indeed, to care about their social purpose, which is often at least arguably related to long-term profitability.  There is a more general movement encouraging corporations to take into account corporate social responsibility and ESG (environmental, sustainability, and governance) concerns. There are also forces, notably after the 2008 financial crisis, pushing companies to take ethics and culture more into consideration.  Why couldn’t these forces also discourage business models and practices that depend on a party’s lack of choice, lack of capacity, or lack of information? In a recent article, I build on my prior work to further define the practices to be discouraged.

My article first considers why corporations care about their reputations, what a good reputation requires, and what the differences are between having a good reputation and avoiding a bad one.

Why reputation is valued turns out not to be straightforward. First – reputation for what? There are many possible dimensions, some of which relate more to pure business considerations, others to compliance (and, going further, ethics and even good corporate citizenship), and still others to both (or neither).  Clearly, one thing that’s meant is avoiding legal or other scandal. But what else? Does a corporation need to have a good culture, which presumably involves doing more than the law requires? Does a corporation need to be thought to go beyond a cost-benefit approach to compliance with the law?

And what of the effects? Do better reputations impress customers and prompt them to buy more or pay higher prices? Do they make it easier to hire higher-quality employees? Do they enable companies to weather potential scandals? Do they minimize regulatory intrusion or lawsuits? All of these effects have been considered, with varying quantities of evidence offered to support one or more of them.

The concept of corporate reputation seems to have an odd discontinuity.  There is a considerable focus on the avoidance of adverse reputational events, as they are sometimes called, but also a focus on the good citizenship/CSR/ESG complex of concerns.  What yields an adverse reputational event has changed over time – it seems fair to say that some of the conduct now considered sexual harassment might not have been nearly so problematic some time ago.  And expectations for what good corporate citizenship requires companies to do have changed as well.  Surveys of investor concerns now routinely include these sorts of matters, and the number of shareholder proposals relating to them is increasing as well.   If, as seems the case, reputation increasingly requires both the avoidance of adverse reputational events and fealty to some of the CSR-type above and beyond concerns, and if there are bottom line effects of reputation, the result would seem to be a significant convergence of profit maximization and corporate social responsibility.

My argument has one final step.  What about the middle ground between avoiding negative reputational events and going above and beyond? Problematic business practices would seem to fall within that middle ground.  I argue that reputation should, and can, encompass such practices.  But how should the concept be defined? Many examples can be given. The key is that they involve some type of taking advantage – that is, deviations from idealized transactions between fully informed and competent parties who are freely transacting.  The following quote, from William Cohan in Money and Power: How Goldman Sachs Came to Rule the World, is telling: “An [investor in collateralized debt obligations] told the [Financial Times] that IKB [a German bank that invested in CDOs, including in Abacus, the deal that made John Paulson a great deal of money] was known to be a patsy. ‘IKB had an army of PhD types to look at CDO deals and analyze them,’ he said. But Wall Street knew that they didn’t get it. When you saw them turn up at conferences there was always a pack of bankers following them.”  IKB should (and did) suffer a reputational as well as financial price for its gullibility, but I argue that their sellers should too.

This post comes to us from Professor Claire A. Hill at the University of Minnesota Law School. It is based on her recent article, “Marshalling Reputation to Minimize Problematic Business Conduct,” available here.