Goverance, Ethics and Social Engagment: Reputation Investment

The more I drill down into social media the more the construction of social standing comes into view. I’ve written about Board of Director’s assigning the task establishing codes of ethics to the organizational leadership - so as to install structures, rules, and attitudes that live up to legislative demands and create a culture of both compliance and creativity. The concern being the intent of the information flows that reach an alert public should reflect those that boost the effect on their charge’s “reputation” and dampen others that would damage.

Economists have typically assumed that the firm was the price giver and customers anonymously voted with their dollars for their choice. It was Albert O. Hirschman that began an alternative discussion by making the point that lapse in corporate performance whether it arises from the product’s quality or the social status of the organization could under go recuperation from such lapses, if elasticity of its product met certain conditions and management was attuned and talented enough in their response.

In his words it would take both inert and alert stakeholders for management to achieve this feat of recuperation. It would take the alert stakeholder to inform management of the lapses and the inert stakeholder to continue their support of the organization by buying and defending its product or maintaining their membership while the recuperation took place. The argument I’m making here is that to the degree a firm and its leadership invest in a reputation strategy – early formed and consistently implemented through a strategic effort will demonstrate its success, in part, depended on the organization’s reputation that forestalls widespread stakeholder exit. Exit is defined as the point at which customers and others abandon the product, service, or organization in favor of a competitor.

In his work “Exit, Voice, and Loyalty Professor Hirschman introduces the social concepts of inert and alert customers to his behavioral economics – his concern was not so sociological but that it was the only way he could explain our economic system with some sense of realty. In his words the firm falls behind (or gets ahead) does so "for a good reason"; the concept - central to his book - of a random and more or less easily "repairable lapse" has been alien to [economic] reasoning.

In this context, the corporate strategic conversation is the method by which the firm’s customers and others or organizational members dialogue with both their views, increasingly of recent, satisfaction (co-value creation) and dissatisfaction (legal action, trolling and sniping) directly with management, to some other authority to which management is subordinated, or through general protest addressed to anyone who cares to listen (governments agencies, bloggshpere and social networking).

It is important to relate to these flows from both the internal dialogue – the board taking in information into their deliberations and the public holding them responsible for the conduct they authorize. Much like the mythic "Council of the Elites" in the time of Zeus. In recent cases such Enron, WorldCom and others rarely, if ever, did a member of a company’s board of directors, even an independent director with no ties to the company, who has long been touted as the panacea for corporate governance reform, identify the wrongdoers at an early stage. Rather, many board members, if not active or indirect participants in the scandal, passively went along with the wrongdoing, were blind to it, resisted its uncovering, or intervened only when disaster had already struck their firm.

The outside advisers of the scandal-ridden firms performed no better. Investment bankers, stock analysts, accountants, and lawyers, as well as corporate service professionals such as proxy and publicity firms, did little to detect problems or call executives to account for questionable transactions.

A study in depth of all reported cases of corporate fraud in companies with more than 750 million dollars in assets between 1996 and 2004 found that fraud detection does not rely on one single mechanism, but on a wide range of, often improbable, actors. Only 6% of the frauds are revealed by the SEC and 14% by the auditors. More important monitors are media (14%), industry regulators (16%), and employees (19%). Before S-OX, only 35% of the cases were discovered by actors with an explicit mandate. After S-OX, the performance of mandated actors improved, but still account for only slightly more than 50% of the cases.

Generalizing from these results on the identity and incentives of fraud detectors, we arrive at what might be called a paradox of whistle blowing: those with the weakest incentives to blow the whistle (e.g. employees) are most active, while those with the strongest incentives to act (e.g. short-sellers) are surprisingly less frequent actors. So from the standpoint of the public at large it is the employee exposing issues to the public in any way possible that has had the greatest impact

I’ve provided examples of both what a corporate character and individual statements could hold for organizational leaders and staff as guidance to those that use social networking as a means for building relationships in these new social environments. In each case, the core element was the importance of reputation and ethical behavior.

Before continuing the discussion of the framework that can be applied to the social network discussion, I should explain what is meant by the term ethics. There are times within this series of post that it will be used in both a technical and at other times non-technical form depending on the context. The technical form is concerned with the question of how we are to lead our lives; morality (prudently), or the evaluation of actions as good or evil. In the non-technical, however, ethics means something different – specifically, the rules and standards that are used to judge individuals’ actions.

The area where the greatest opportunity for confusion is in the status of the ‘corporation’ and its board of directors:

1. The “self-interest” perspective holds that, beyond following universal moral rules that apply to everyone in nearly all situations, individuals and groups are obligated only to advocate on behalf of the stockholders of the firm.

2. The “corporate responsibility” perspective, however, argues that the corporation holds is a duty to enhance society in general but specifically those societies that they engage.

In the development of this argument it is always situated within the context of the interplay of and between leaders, stakeholders and others framed by cultural engagement. The fact is that leaders create culture and in turn it defines the leader. Even the reputation of comparable leaders both closely associated or those who might be competitors have a bearing on the formation of cultural responses.

Culture arises out of the process by which people are forming, sustaining, battling and transforming the objects as they give meaning to those objects. People in organizations invest their settings and their conflicts with meaning and then come to understand them accordingly – people act out and realize their ideas. Action, perception, and sense-making is created and recreated through symbolic interaction, whatever becomes real for individuals influence the way in which they see things – for good or ill; and hence, the making of future meaningful constructions is limited by what has already been given meaning – put even stronger – people create reality which then, in turn, has the effect of creating people.

According to the American Heritage Dictionary ‘reputation’ is the general estimation in which one is held by the public. Yet how does such a definition apply to both individual leaders, engaging in social media, and the companies they lead, engaging in co-creation of value embedded in products? Who constitutes `the public' and what is being estimated by that public? What tactics should that public expect as the minimal level of protection against those that demonstrate “bad faith”?

These are the type of questions that a strategic oriented reputation conversation should engage. In the following post, my aim is to spell out a framework for just such a conversation. In those posts my aim is describe some of the thinking that leaders and his/her stakeholder community should wrestle: which begins with the general conception of morality, the aim to reduce or eliminate evil through reciprocity.

The strategic conversation ought to be engaged regardless of the corporate view to determine the perspective that will command the organizations acts. This conclusion comes directly from the valuation rules implicit in the notion of rational agency as such; that is a preference for good over evil, more good over less good, and less evil over more of it. The dilemma the leader of this undertaking faces is to think beyond their cultural creation - to a space of near neutrality. This is one of the reasons that I think acquiring the assistance of someone from outside the culture offers the best possibilities for success