The reputational risk of tax avoidance

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The reputational risk of tax avoidance

Category: Accounting

Subcategory: Business

Level: University

Pages: 4

Words: 1100

Reputation Risk of Tax Avoidance
Understanding corporate reputation
Corporate reputation is a generalized term that denotes the stakeholders’ collective formal or informal opinion of an organization with results from predictive factors that populate the reputation score. It is informed by insights into the market behavior and focused on measurable outcomes. The predictive factors include environmental, social and financial impact assessments that are conducted over a given period. It is notable that each stakeholder designation (as an assessor) will assign different ratings for each of the predictive factors. Another notable aspect is that reputation shares a close relationship with the image since the two concepts have a bilateral and dynamic relationship since the reputation is typically projected into the image. That is to say that corporate reputation is an interpretation of predictive factors that are influenced by the organization’s projection of its image as presented by symbolism, communication, and behavior (Burke, Martin & Cooper, 2016, 33-36). This awareness is guided by the belief that protecting corporate reputation relies on strengthening relationships with stakeholders and increasing trust to include actively working to align public and government interests, attract investment, deepen relationships with clients, and engage personnel. Galvanized by the concept of business value, companies are keen on improving their corporate reputation by generating a captivating narrative that captures its direction, culture, and vision. Additionally, it comprises engaging the stakeholders based on a clear map that aligns the stakeholders with the corporation, linking with a range of audiences through financial communication, personnel engagement, executive positioning, business-2-business channels, and media relations (Carroll, 2015, 567-569). As a result, it can be accepted the corporate reputation is the most critical asset for a company since it links expectations for the future with performance reported in the past.
Defining reputation risk
Organizations are increasingly becoming aware of the importance of their reputation. That is because those with good reputations can attract more customers and even better personnel. For instance, tax avoidance can be interpreted as a lack of support for community activities. In essence, a strong positive reputation is considered as a source of value since it allows them to charge premium prices and convinces their clients to be more loyal. This loyalty translates into speculations about higher market value, price-earnings, sustained earnings, growth, market value, and lower capital cost. Besides that, in an economy where as much as three-quarters of market value is realized from intangible assets such as goodwill, intellectual capital, and brand equity, organizations are particularly vulnerable to reputation damage. Despite this awareness, some organizations have been unable to effectively manage their reputations in general and the associated risks in particular. In fact, they tend to focus on presenting countermeasures once the reputation has been damaged. This is contrary to the concept of risk management. Rather, it is crisis management since it is a reactive method (Frandsen & Johansen, 2017, 29-30). As such, there is a need for organizations to understand the concept of reputation risk, focusing on risk management instead of crisis management.
Determining reputation risk
Reputation risk is any threat that the company faces from the social perspective. In fact, there are three sources of reputation risks. The first source is when an organization’s true character is less than its reputation so that there is a risk for it to perform below expectations. The second source is the changes to external expectations and beliefs that change the gap between reputation and actual character. The final source is coordination in the organization’s internal mechanics (Wrench, 2013, 42). Managing reputation risk efficiently starts when the organization recognizes that reputation is all about the perception among the different stakeholders who include the public, government, regulators, customers, workers, partners, competitors, and so on. This is based on the awareness that reputation is distinctive from actual behavior or character. Instead, it is about perception. When the perception exceeds reality, then there is a gap that presents a reputation risk. The organization’s inability to bridge that gap will eventually cause a decline in its reputation until the gap is eliminated (Coombs, 2014, 41).
An example of this can be seen in the case of BP. The oil giant was previously viewed as an environmentally conscious energy company that conducted its oil mining activities in a manner that protected the environment and even invested in renewable energy research. The oil spill the threatened the Gulf of Mexico exposed the gap between the company’s reputation and reality. It showed that despite the group having a good reputation, its mining activities did not actively reduce environmental threats. Although the company has tried to salvage its reputation by blaming the incident on lax operating practices, most stakeholders are of the opinion that the incident was resultant of unjustified cost-cutting measures. The subsequent media coverage only worsened the situation by focusing on the negative aspects of the company thus influencing the public opinion to further hurt the company’s reputation. It is acknowledged that this incident efficiently damaged the company’s reputation.
To bridge the gap between reality and reputation, an organization must either promise less to reduce expectations or meet the existing status. Understandably, there is no guarantee that a lost reputation can be recovered even when the organization meets its stakeholder’s expectation and the gap between reality and reputation is bridged. That is because there is no guarantee that stakeholders will be convinced about the organization’s right intentions despite taking active steps to address the problem that had a negative effect on its reputation. This can also be exasperated by inaccurate media reporting and undue attention from special interest groups and lobbyists. In essence, gaining undeservedly mediocre or poor reputation can be frustrating and can lead to resignation that there is no need to bother with reversing negative reputation. This is the wrong mindset. Instead, the organization should redouble its efforts since it has a fiduciary obligation to bridge the gap between reality and reputation. In fact, the fiduciary obligation is at the same level with the organization’s obligation to the stakeholders to improve actual performance (Berard & Teyssier, 2017, 73-74).
Measuring corporate reputation
Owing to its nature that targets all stakeholders in a range of business issues, the notion of measuring reputation risk is very broad. In fact, corporate reputation is specific to the predictive factor and stakeholder group. As such, measuring reputation risk should decide on a specific predictive factor for which the reputation is to be assessed, then decide on the stakeholder group. This approach accounts for the incompatibilities among different stakeholders and predictive factors and is typically referred to as the events method (Feldman, Bahamonde & Bellido, 2014, 59). For instance, the government and customers are two distinct customer groups that would attach different importance to environmental and financial impact assessments as business factors. Dowling, 2016 (207) adds to this awareness by noting that measuring a reputation must account for each stakeholder’s truism. This means that the measurement must be planned with sufficient breadth to accommodate each stakeholder’s truism. In this respect, corporate reputation is measured by identifying a specific stakeholder group and assessing how it values the selected predictive factor.
Other than the events method, corporate reputation can be measured through four other strategies. Firstly, tracking market demographics and brand equity as content within the primary financial markets as a measure of corporate reputation. This approach looks at how the company responds within the market, particularly its leadership and trust aspects as reflected in customer feedbacks. Also, it evaluates content by source, prominence, and relevance. Secondly, quantifying the reputation of all materials that contribute to the company products even as they travel along the supply chain. This approach understands that every step of the supply chain can be potentially damaging since dissatisfaction with any point can affect the overall reputation. Thirdly, identifying and evaluating events that could have an adverse effect on reputation. For instance, a possible change in legislation that could have a negative effect on the company reputation should be anticipated, response plan devised, and mitigation measures applied. Finally, tracking the competitions’ reputation since they affect the company as part of the industry (Dowling, 2016, 210-214). Applying the five strategies as discussed facilitates corporate reputation measurement.

Berard, C. & Teyssier, C., 2017. Risk Management: Lever for SME development and stakeholder value creation. Hoboken, NJ: John Wiley & Sons.
Burke, R., Martin, G. & Cooper, C. 2016. Corporate Reputation: Managing opportunities and threats. New York, NY: Gower Publishing.
Carroll, C. 2015. The Handbook of Communication and Corporate Reputation. Malden, MA: John Wiley & Sons.
Coombs, T., 2014. Ongoing Crisis Communication: Planning, managing, and responding, 4th ed., Thousand Oaks, CA: SAGE Publications.
Dowling, G. 2016. Defining and Measuring Corporate Reputations. European Management Review, 13(3), 207-223.
Feldman, P., Bahamonde, R. & Bellido, I. 2014. A New Approach for Measuring Corporate Reputation. Revista de Administração de Empresas, 54(1), 53-66.
Frandsen, F. & Johansen, W., 2017. Organizational Crisis Communication: A Multivocal Approach. Los Angeles, CA: SAGE Publications.
Wrench, J., 2013. Workplace Communication for the 21st Century: Tools and strategies that impact the bottom line. Santa Barbara, CA: PRAEGER.

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