Many decisions are made on the basis of careful research and considerations about a variety of issues. Not all these deliberations will necessarily turn out to be correct. That in itself does not place question marks over the leadership’s execution of its responsibilities in terms of the Companies Act to act with due care, skill and diligence or the King IV Report Principle 1 that they should lead ethically and effectively.
Trust
An entity, which has been run and managed in such a way as to build a reputation for ethics, integrity and reliability, will likely have a growing group of loyal customers and other stakeholders, based on trust.
The size of the entity concerned has no bearing on whether or not it is trusted. That is based entirely on the entity’s consistent, trust-centred behaviour towards all its stakeholders.
What if things go wrong?
There will be times when a decision turns out to be wrong resulting in a service or product not being delivered on time or otherwise being deficient. The reasons may be beyond the control of management. However, such an event may have the potential to negatively impact stakeholders’ trust.
The cause may be the result of a strategic decision by management to change the nature or make-up of a service or product. For example, by reducing the size or contents of a product without any communication to consumers so as to increase profit margins or to avoid a price increase. This, of course, is a completely different proposition as it is inherently dishonest and lacking in transparency and integrity, questioning the moral mindset of management. Another example would be price-fixing and collusion. Some years ago, this was evident in the construction and food processing industries.
A third example could be a deliberate decision to undertake activities without recognising the potential of damage to the environment; getting environmentalists, conservationists (some of whom may be customers) up in arms, and let’s not forget the reach and impact of social media.
What are the consequences?
In all examples there is a real likelihood of a loss of trust resulting in customers abandoning the entity. In the second set of examples, where there is real or perceived dishonest behaviour on the part of management there are likely to be fines/penalties (which there were in the cases of the construction and food processing industries). However, the real damage may well be the loss of trust – which for a smaller business could be fatal.
In the former case where the problem arose through a situation that was either not anticipated or due to a change of circumstances, the loss of trust is still possible but appropriate remedial action may avoid the destruction of trust.
Finally, in the last example, how the entity responds to the situation will determine the long-term consequences.
Can fairness make a difference?
Having said that, where an entity responds by treating customers fairly, putting right the problem as a matter of moral rectitude, trust is likely to be retained and may even be enhanced. This, of course, requires swift and transparent communication so that stakeholders are aware of the circumstances of both the issue and the entity’s response to it.
Consider the Autumn 1982 response of Johnson & Johnson to the deaths of seven people in Chicago who had taken its market leading, over-the-counter painkiller, Tylenol.
Throughout the crisis thousands of stories ran in U.S. newspapers together with hundreds of hours of national and local television coverage. A major potential trust breakdown for Johnson & Johnson, bearing in mind that Tylenol was the market leading paracetamol in the US and a substantial contributor to J&J’s revenue and profits. After the crisis, J&J said that over 90 percent of the American population had heard the story within the first week of the crisis.
J&J, however, did not have a crisis management plan, unthinkable today, or is it? Do you have anything like it?
So, the company’s Chairman, James Burke, went back to the company’s founding credo. This saw the business as having a moral responsibility to society beyond sales and profit. He formed a seven-member strategy team with two tasks: how do we protect people and how do we save this product and our reputation?
First of all, they alerted consumers via all available channels of communication not to consume any type of Tylenol product. They halted production and advertising and ordered a nationwide withdrawal of the product. This cost the company millions of dollars, however, it received credit for putting public safety above profit.
The cornerstone of J&J’s recovery, in priority order, was: People, Environment, Property and only then Finance. They restored trust by behaving fairly to the most important people, their stakeholders. J&J’s Tylenol, accordingly, ultimately re-gained its market share.
This is an example where fairness retained trust. There is even the possibility, as occurred in this case, of the enhancement of trust when, after the event, it is seen that the promise of fairness has been honoured in full.
So, all in all, treating all stakeholders fairly is a moral approach to business which enhances relationships. Even in personal relationships, responding with fairness when trust is at risk, can save the relationship.
“In conclusion, it is clear to me that Trust and fairness in the workplace are connected as they are in all of life. Trust defines how we as humans relate to one to another, while fairness is a practical mechanism for maximising the benefits of trust. The two work together, and we need them both to operate consistently at the heart of workplace activity. In other words, ‘Trustworthy Fairness’ provides a foundation for building meaningful and productive workplace life” (Jonathan Rens).
For additional reading:
The Companies Act, Act 71 of 2008, is downloadable from the University of Pretoria’s “Laws of South Africa” website – find it under “Companies and Close Corporations” and see particularly the sections that deal with standards of directors’ conduct.
Read the King IV Report including the Glossary and Principle 1 here.
See also How “Did Johnson and Johnson’s Corporate Responsibility Policy Pay Off in 1982?” on Investopedia.
The article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.
