The value of doing good: Can ethics help brands make money?

Hamish Pringle is strategic advisor at 23red, former IPA director general, and has had five successful business books published. With an agency career spanning 26 years, he’s worked on more than 50 brands.

It’s interesting that in the news coverage of two leisure industry disasters – Thomas Cook and Alton Towers – it’s very hard to find the names of the in-house legal counsel or the law firms who advised the two companies. The chief executives have been high profile, for good (Merlin Entertainments/Alton Towers) and bad (Thomas Cook), but the lawyers have stayed pretty much hidden. I’m not sure that’s fair.

Alton Towers boss Nick Varney after the Smiler crash

The instinctive reaction of most decent business leaders would be to do the right thing for someone harmed accidentally by their company. However their in-house legal team’s advice, no doubt reinforced by their external law firm, is to batten down the hatches and weather the storm.

As Steve Dunne, CEO of Brighter Group, wrote in Travel Weekly:

“Lawyers live in a very black and white world. In my experience their advice in a crisis has often been to tell the client to: 'say nothing, express nothing that could be construed as admitting liability in any way; and don’t, if you can avoid it, speak to the media'. As legal advice it is faultless, a textbook strategy. However from a reputational point of view it is reckless advice and the worst PR strategy you could possibly deploy.”

One can see where the lawyers are coming from. They’re determined to minimise the company’s exposure to potential financial risk, but their error is in taking too narrow a view of where that risk might come from. They seem to think mainly in terms of the threat from individual or class action litigants, even though these sums of money are usually in the low millions – the largest UK award is currently £23million.

Company or brand reputation may come into their calculations, but it would appear they consider the negative impact to be small enough to be ignored. This despite the fact that social media can spread bad news like wildfire, and that the damage can adversely affect their share price, costing the company far more.

Abchurch Communications has carried out a telling analysis which makes this point powerfully. It compared the share prices of Merlin Entertainments, owners of Alton Towers, and Thomas Cook Group, and as the chart below shows, there’s a significant difference in performance. Both have under-performed their sector, as might be expected following their respective crises, but Merlin has fared rather better.

Source: Morningstar Company Intelligence

As Abchurch wrote in their blog:

“However, the different strategies employed by the two Companies led to wildly differing outcomes, not only in public perception, but also to their share price. Thomas Cook, as stated previously, refused to apologise, failed to contact the family, and only handed over (half) of the compensation they received to charity when it became untenable for it to hold onto it in its entirety. Clearly, an omnishambles of epic proportions.

Compared to this Merlin appeared to handle its own disaster, a crash on one of its rollercoaster’s, with as much tact as was possible in the circumstances, save for the initial delay in calling the ambulance. The park did its utmost to appear open to investigators, apologised to the victims immediately and unreservedly, and its CEO Nick Varney immediately gave interviews outlining what the Group would be doing to improve safety across the board.”

Bill Bernbach said: “A principal is only a principle if it costs you money.” However we’re now living in an era where not having principles can cost a company more. When faced with a crisis, the best advice for lawyers, not just CEOs and CMOs, is to grasp the nettle, take the pain, apologise, pay up, and then move on.

Another big player in the travel industry has learned that confronting an uncomfortable truth, even a highly personal one, can turn things around.

Challenged by a faltering performance in the face of EasyJet’s success, Ryanair’s cantankerous CEO, Michael O’Leary, has had an extraordinary character makeover. He’s gone from nasty to nice almost overnight, and been rewarded for it. In its full-year results declared in May there was lots of positive news including passenger numbers up 11 per cent with load factors having risen from 83 per cent to 88 per cent. O’Leary confessed in an interview with Bloomberg:

“If I’d only known that being nice to customers was going to be so good for my business I would have done it years ago. Everybody loves a converted sinner…we have learned humility, which when you’re Irish that’s a tough lesson to learn -- humility doesn’t come easy to us -- and that we have to keep learning and listening to our customers.”

There’s a wider context to these stock market verdicts on positive company ethics which the legal world should be more aware of. Eurosif is the leading non-for-profit pan-European sustainable and responsible investment (SRI) membership organisation, whose mission is to promote sustainability through European financial markets. Eurosif’s latest report was published in November 2014. It’s dense and technical, but the key finding is that increasing proportions of investment decisions are taking into account ethical and sustainability factors.

Indeed so-called ‘impact investing’ is the fastest growing strategy, registering an increase of 132 per cent between 2011 and 2013 [source]. Impact investing refers to investments "made into companies, organisations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return".

This professional approach to investment is being spread into the wider public. Launched in 2008 as National Ethical Investment Week, this event was rebranded in 2014 with the more consumer-friendly title ‘Good Money Week’. It will take place in October and its objective is to raise awareness of sustainable, responsible, and ethical finance to help people make good money choices. Their campaign shows people how it’s possible to have a positive impact on the environment and society without sacrificing financial performance.

In their 2013 book ‘The New Brand Spirit’, co-authors Christian Conrad and Marjorie Thompson cite Marks & Spencer research which indicates that only 10 per cent of UK consumers are really enthusiastic about sustainability – so called 'Green Crusaders'.

Some 35 per cent are willing to be green if it does not cost them anything, while 35 per cent are 'Defeatist' with a 'what can I do – it doesn’t make any difference' attitude. The remaining 20 per cent are hostile, and absolutely not interested. So there’s a core target market of about 10 per cent with a further 35 per cent being clearly susceptible to a sustainability positioning. This is a big segment to go for, and those companies and brands that grab the opportunity are on a rising tide.

Arguably the market sectors that have been regarded as less than ethical could provide the biggest opportunities. For example the financial services industry, where its CSR leader, the Co-operative, has stumbled badly, though it has been profiled as one of the top three in its class (ethical banks) byMove Your Money.

Netherlands-based online Triodos Bank came in at number one with the Charity Bank in second. These are still small operations – Triodos has just over 600,000 accounts spread over five countries – but with the 2013 regulations requiring account switching to be easier, it’s likely the ethical financial segment will grow.

Meanwhile, there are some existing players who don’t make the most of the good things they do. For example it’s little known that 1 per cent of Lloyds Bank's annual profits go to the Lloyds Foundation. This annual donation was enshrined in the bank’s financial structure and only recently had to be supplemented by a special arrangement due to the torrid times it’s been through and the lack of profits.

Nevertheless, the amount of money distributed to 272 small and medium sized charities from July 2014 to June 2015 amounted to £14,060,558. Perhaps if more Lloyd’s customers knew about this the brand’s reputation would be helped?

Hamish Pringle is strategic advisor to 23 Red. He tweets @hamishpringle

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