The Hindu Business Line : Corporate reputation

Compared to corporate governance, corporate reputation has taken the back seat, though the latter is a more sophisticated framework. If many companies or groups are household names, it is because of the reputation built up over the years by hard work and scrupulous practice of ethics. Corporate reputation is created when a corporate is responsible to all its stakeholders.

Unlike corporate governance, which aims at maximisation of shareholder wealth, corporate reputation aims at maximisation of interest of the general public, customer, employee, retiree, retailer, distributor, supplier, franchise, licencee, shareholder, potential investor, and the financial analyst, besides meeting the requirements of government regulatory bodies, local communities and environmental protection.

To satisfy such a large number of stakeholders is a challenging task for corporates.Despite the many regulatory authorities, one small section of corporates has a negative reputation for fraud, cheating, tax evasion, and misinformation. This section does not hesitate to compromise the interests of stakeholders for reaping profits.

Reputation crucial for growth

However, a good number of companies strive for a good reputation. After all, why is it that reputation is so crucial for the growth and stability of the company? Consumers gravitate to corporates with a positive reputation for product and service quality. There is always a premium on the stock values of companies with strong reputation.

Moreover, unlike good corporate governance, corporate reputation has positive correlation with investment flows, employee morale, better government and community support. These could be helpful to companies having subsidiaries abroad.

Corporates need to become model citizens. Today corporates are judged on their treatment of environment, involvement in community work and so on. But their vision must be long term. For this, they need to set up in-house systems to monitor the shortcomings and remove them. Setting up committees for audit, grievances, quality control, surveillance and ethics would be useful. Importantly, these bodies should be independent of the management.

Damage repair

Companies that acknowledge their failures and promise to try hard can repair their reputation much more quickly than those that deny their faults. Many companies and financial institutions concealed their limitations and faults in transgressing the accounting practices and using inappropriate accounting procedures to cover up losses and bad debts. US-64 and Enron are examples of transgress of accounting practices to conceal the actual position.

Instead of hiding their shortcomings and weaknesses, Indian companies, should correct these faults as otherwise competition will wipe them out.

Though corporate governance can makea company more profitable for shareholders, it overlooks a number of parameters, which are essential to building brand equity, and reputation. Corporates will have to achieve this in their own interest and that of the nation.

(The author is a former Economic Adviser to SEBI.)