November 11, 2020 • Jason Dressel
The following article was first posted by Financial Executive International in November 2020.
Corporate executives tend to be students of history. But new research shows they might need to go back to school when it comes to their own organizations.
That’s according to a recent report that compares sentiments of C-suite executives, investors and consumers about problematic incidents from companies’ pasts. History Factory asked respondents specifically about instances of racial injustice, financial improprieties, sex or gender discrimination, support for potentially divisive social or political causes and environmental negligence that could be found in a company’s history.
It’s not that executives are unaware that problematic instances from the past could be lurking; 76 percent of executives know something in their corporate pasts might conflict with today’s ethics and standards. But just 26 percent of C-suite respondents said they were very prepared if – or when – those issues come to light.
The survey also found significant disconnects when comparing the views of C-suite executives with investors and consumers. These findings and others in the report should serve as a wakeup call to executives, particularly those responsible for the company’s financial performance and risk management. Combining their financial perspective with these new insights about how the past can come back to haunt an organization can be powerful; doing so can empower chief financial officers to become stronger corporate influencers.
Sixty-four percent of C-suite executives and 66 percent of investors surveyed said discoveries of past financial improprieties would have a significant impact on investment considerations. It was an interesting point of agreement among two groups that largely disagreed on other types of discoveries – with investors more attuned to past support for a potentially divisive social or political cause and C-suite respondents more focused on issues of racial injustice and sex or gender discrimination.
And investors certainly aren’t afraid to change their investment strategy when faced with a problematic discovery. Sixty percent said they would place specific contingencies on any deal after such a discovery and 29 percent said they would dismiss an investment entirely. A similar percentage, 32 percent, surveyed said they were very or somewhat unlikely to regain confidence in a company from an investment perspective after a troubling past action emerges.
It’s clear from these findings that executives shouldn’t figure that the past is the past – and that troubling discoveries, particularly given today’s rapidly shifting societal norms and standards, are of particular concern to investors. These findings make even more sense given the growth in ESG investing over the past decade or so.
Both C-suite executives and consumers were asked about how the discovery of past financial improprieties affect customer perceptions. Fifty-two percent of C-suite executives said they were concerned, compared with just 34 percent of consumers. A wider, but similar split appeared regarding racial injustice, which 72 percent of C-suite respondents picked compared with just 38 percent of consumers.
Consumers, when compared with C-suite respondents, were more focused on environmental negligence and discoveries that a company had supported a potentially divisive social or political cause. The most likely explanation for these differences is that consumers see financial improprieties and racial injustices as commonplace in corporate histories or at least not relevant to their day-to-day lives.
Still, consumers are more fickle than executives think they are. Seventy percent of C-suite executives said consumers are likely or very likely to regain trust in a company, compared with just 56 percent of consumers. In other words, while the type of past discovery that can be most damaging depends on who’s answering the question, a problematic discovery’s effect on a company’s financial performance and potential are quite real.
Armed with these new insights illustrating how a problematic discovery can hurt a company – notably regarding shareholder value – CFOs are in position to sound the alarm before it’s too late. Of course, the next question out of other executives’ mouths will be – so what do we do now?
Companies, especially ones that have operated for decades or more, must assess their own histories. It’s one thing to know that some problematic incidents could be lurking. It’s quite another to get a full handle on them.
Such an assessment requires looking at a few categories of possible problem areas – labor and workforce, financial and industrial, environmental and geopolitical, human rights and health. Another important step is to learn whatever you can from archived assets, including internal and external communications and corporate oral histories. Did company leadership know about what was happening? Was the action immoral or illegal? Was the incident isolated or part of a pattern?
Action steps after the assessment will necessarily vary depending on what’s discovered. But for any executive, particularly CFOs weighing how far to get involved, it is important to remember the following about truly understanding their own pasts:
To be forewarned is to be forearmed.
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