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In Times of Corporate Troubles, Altruism Helps

Research shows that philanthropy is a valuable strategy when big companies like HSBC get into trouble.
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(Photo: chrisdorney/Shutterstock)

(Photo: chrisdorney/Shutterstock)

In a development that's likely to surprise no one, another bank was caught acting out of turn. This time it was London’s HSBC, the second largest bank in the world, which has been accused of helping clients avoid hundreds of millions of pounds worth of taxes. They are now facing charges in the United States, France, Belgium, and Argentina.

Quickly after the news broke, HSBC conceited that it was "accountable for past control failures," but quickly clarified that it has now "fundamentally changed.” It will be interesting to see in the coming weeks if the bank tries to bolster, or at least promote, its “Sustainability” initiative, an investment program designed to address “the direct and indirect impact we have on the environment and investing in the communities we serve.”

In other words, companies see more encouraging results when their philanthropy arises in response to scandal than when it comes in the form of genuine altruism.

Whether it’s banks or oil companies, big corporations rolling out sweeping do-gooder public relations campaigns in response to a scandal seems to be a textbook play. We’ve seen it so often that one could reasonably assume that the average citizen sees straight through these image-buffing PR efforts, right? As it turns out, research shows that undertaking outreach initiatives—specifically ones geared toward the public and not just shareholders—are an effective, if not tangible, way to rebuild trust after a scandal.

Examining more than 10,000 press releases from companies who intentionally misrepresented their numbers, Stanford Graduate School of Business professor Ed deHaan and colleagues found that fence-mending efforts from large public corporations directed at “softer” constituencies—which include employees, customers, and local communities, as opposed to the traditionally valuable players like investors and creditors—is incredibly important to rebuilding “reputation capital.”

In addition, deHann found that when companies undertake “reputation-building actions” in the absence of controversy, they see almost no—if not a negative—return. But, when firms make these types of announcements in a “post-restatement period”—that is, the period of time following a controversy—they see “positive abnormal returns.” In other words, companies see more encouraging results when their philanthropy arises in response to scandal than when it comes in the form of genuine altruism.

Those positive returns, on average, take the form of a two percent increase in share prices. And, unsurprisingly, deHann found that investors were more likely to rally behind a tarnished firm that puts forth major reputation-enhancing actions. 

Seeing is believing, it seems. No matter how surface-level these damage control efforts may appear, they're doing the trick.