Trust: The place where public relations and economic literacy meet
After Oxfam, one of UK’s biggest nonprofit organizations, was accused of covering up claims that its workers had prostituted survivors of a deadly earthquake in Haiti, more than 1,200 donors canceled their payments to the charity. After Cambridge Analytica, a data firm hired by President Trump’s 2016 election campaign, gained access to more than 50 million Facebook users’ private information and allegedly influenced their vote, Facebook’s shares fell more than 8 percent. And after Elon Musk, Tesla’s CEO, tweeted he was considering taking the company private, the SEC filed a lawsuit that forced both Tesla and Musk to pay a $20 million fine and he had to relinquish his role as chairman of the board. All these examples show that there is a strong connection between an organization’s reputation and its financial stability.
Poor decision-making, lack of ethics and misinformation not only affect the way an organization is perceived, but can also have grave consequences for its bottom line.
The loss of trust among a company’s key stakeholders often translates into poor sales, little investment, lack of supplies, lawsuits and even bankruptcy. Thus, maintaining an honest and healthy relationship with customers, donors, investors, employees and suppliers is essential for any business success. But trust is a virtue that cannot be bought or sold in the market: it can only be earned. In a polarized world where human connection is increasingly fragile, leadership skills like collaboration and effective communication are critical to earning people’s trust.
This is when the practice of public relations must step into the room.
To effectively communicate with an organization’s key stakeholders and ensure long-term trust relationships, public relations practitioners should be able to speak their language, understand their needs, recognize possible threats and opportunities, and articulate a strategic and well-informed approach. This implies having certain level of economic literacy and business knowledge that will enable PR professionals to make assertive decisions that align with their organization’s business goals.
In times of reputational crisis, PR practitioners should not only be fully aware of the cause of the crisis but should also anticipate the consequences this crisis might have in the future. This includes foreseeing the financial impact of the crisis and devising a strategic plan to communicate with key stakeholders. For example, last week the gas and power company PG&E announced it would file bankruptcy after facing billions of dollars in liability claims from two years of wildfires in California. PG&E’s public relations team must understand what “bankruptcy” means from a legal and financial perspective, determine which stakeholders might be affected from this decision, and design a communications plan to help the company overcome this financial challenge without losing people’s trust.
In the case of publicly traded companies, one potential negative consequence from a reputational crisis is a drop in their stock price. At times, this drop might be sparked or intensified by outspoken short sellers in the stock market, which is why public relations practitioners who specialize in investor relations (IR) should be fully aware of the dynamics of public markets.
For example, in 2012 William Ackman (head of the hedge fund Pershing Square Capital Management) gave a 342-slide presentation at the Sohn Conference where he accused Herbalife of being a pyramid scheme destined to fail. Ackman’s hedge fund was involved in short-selling: betting that a company’s stock price will fall by borrowing shares and selling them in the market with the plan of buying back these shares at a lower price and returning them to the investor they were initially borrowed from. The difference between the price at which the shares were sold and the price at which they were purchased represents the short seller’s profit (or loss). This economic interest means that short sellers like Ackman are often incentivized to expose negative information about companies to intensify the drop in their stock price. As a result of Ackman’s accusations, the FTC launched an investigation that found Herbalife guilty of “engaging in deceptive and unlawful acts.” Consequently, the FTC fined Herbalife $20 million and placed new restrictions on the company’s sales.
After Herbalife’s reputational crisis, the company developed a communications strategy to recover the trust of its investors, employees and distributors. In 2015, Herbalife hired a PR firm that specializes in crisis management —Sard Verbinnen— to restore its reputation by promoting the benefits of Herbalife’s products, maintaining stakeholder confidence and exposing the truth behind the tactics and the motivation behind Ackman’s actions. To expose this truth and efficiently communicate with key stakeholders, Herbalife’s PR team required a high level of economic literacy and business knowledge.
Bankruptcy and short-selling are not the only examples of the financial challenges PR practitioners must be ready to fight. Local and global changes in the economy (supply and demand, monetary and fiscal policies, and trading regulations) might also have a negative impact on a company’s reputation. For example, the trade tensions with the U.S. and the slowdown of the economy in China have led to a decline in sales, which has affected several American companies. For instance, Apple reported a revenue slump caused by the drop in iPhone sales, which caused a 7 percent decline in the company’s shares. Apple’s PR team should continuously monitor fluctuations in the market, drops in sales and loss of share value in order to design an effective strategy to communicate with investors, consumers and employees.
Reputational crises are a threat to the trust relationships between organizations and their key stakeholders. Any type of accident, public scandal, lawsuit, or external change has a direct impact on a company’s financial welfare. Public relations professionals should be able to anticipate any possible threats, foresee their impact, and design a well-informed public relations plan that protects the company’s interests. And understanding how the economy works is an essential part of this endeavor.