March 16, 2022

Why does communication fail so often in “ESG crises”?

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If you take a closer look at recent communication crises, you will notice that companies often get into trouble when the root of the problem is hidden behind the abbreviation ESG. Let’s call it an “ESG crisis” for short.

Environmental issues, Social aspects and responsible corporate Governance seem to create a special explosive that can destroy reputations and careers in a very short time. The communications handling of product or process crises, on the other hand, is usually more successful. It is more professional, and the reverberations often seem quieter and shorter-lived. My perception may be subjectively coloured, but I’d like to support my thesis with some examples.

A typical litigation crisis would be a successful cyber-attack in which customer data was stolen. In terms of potential, certainly a significant crisis. On the one hand, the entire business process is disrupted; on the other hand, personal data entrusted to the company can fall into criminals’ possession.

The damage to the trust of customers and employees will be enormous because they are personally affected. Nevertheless, the public forgets and forgives such mistakes relatively quickly. There are many examples of this and the list will certainly grow in the coming months and years. Instances include Tegut, Mediamarkt and Saturn, Thalia or the Thuringia Accident Insurance Fund, all of which were hit.

Does this ring alarm bells for you? Does it leave a bad taste in your mouth? Not for me, at any rate, and I find the explanation in the crisis management. The obvious failure to prevent unauthorised data access was not swept under the carpet in any of these cases. And it couldn’t have been! This was ensured by the regulation alone (here: GDPR) and the crisis manuals ideally prepared for this purpose.

Companies MUST inform and communicate about this. The same applies to most product recalls, from inedible food (Food and Feed Code) to entire motor vehicles (Product Safety Act). Here, the framework for public communication is set.

The situation is different for ESG crises. For the most part, there is no legal requirement for communications handling in the case of non-compliance with climate targets. Or in the case of discrimination against job applicants, sexual harassment in the workplace and the mishandling of insider information. Conversely, this means that it is solely in the hands of the respective company (the top management to be precise) to decide how to proceed in crisis situations.

Does the company go on the offensive and thus voluntarily go public, or does it go for a cover-up? Since ESG crises usually also involve ethical and moral lapses, the people affected are unfortunately strongly inclined to the latter. Who wants to be reprimanded in public for moral failures, especially if he or she is ultimately responsible for it in a managerial position?

As a consequence, the recommendations of crisis experts for transparent, sovereign handling are often rejected. And the ESG crises take their course. In some cases, the calculation may work out and the case remains under wraps. But in times of extremely fast, networked and also “social” media, this bet is risky, because sooner or later publication is to be expected. And then the original crisis is magnified in the public spotlight. The original problem is compounded by the wrong way of dealing with it. Stakeholders are misled by the company’s top management through too little or no information. And that usually weighs more heavily than the actual misconduct.

A media company can be taken as a current example: Axel Springer. The personal misconduct of a senior employee could have been countered relatively easily with consistent action in line with the company’s own ESG principles. (Sexual) harassment or coercion of employees is a thick red line. But by trying to shift this line, i.e. by relativising, covering up and sitting it out, the individual crisis developed into a full-blown, still ongoing corporate crisis.

Internal and external doubts about integrity and corporate culture are likely to have grown strongly. Instead of the senior executive, the CEO has been caught in the crosshairs and has to explain himself, apologise and undergo ESG training. The company then “passed on” the problem to the publishers’ association. The board’s authority as association chair was publicly questioned.

However, the reaction of shareholders could be even more serious. Private equity firms listed on US stock exchanges quickly find themselves in need of explanation when their portfolio companies flout ESG standards with impunity. So it is no coincidence that this problem from the centre of Berlin, which was initially thought to be manageable, has also been taken up on the other side of the Atlantic by leading US media: New York Times, Washington Post, Bloomberg. Thus the maximum escalation has been reached, although the actual cause of the crisis lies far away in Germany.

It remains to be seen how this specific case will turn out. But the lessons for all other companies are obvious and much more important: companies must approach ESG crises with the same systematic approach as all other corporate crises. For this to happen, the issue of ESG – and of compliance, which is often underestimated compared to the issue of crises – must be given the necessary priority – in terms of content and personnel. Companies that dismiss ESG as a fig leaf, a fad or a climate issue are already programming the next communications disaster.

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