The reputational risk of seeking a bailout

Brands need to be aware of how consumers might perceive highly valuable companies looking for government assistance.

During a time of economic hardship brought on by crises like the coronavirus – coming off a month in which Canadian stocks had their biggest one-day drop in 80 years while nearly a million Canadians filed for employment insurance – the potential of multi-billion dollar brands seeking economic reprieve of any kind could be polarizing.

Parliament passed its $107-billion pandemic relief bill last Wednesday to assist Canadian workers and businesses struggling during the pandemic, including a wage subsidy for employers that has been increased to 75% from the original 10%, as well as a Business Credit Availability Program to provide $65-billion of additional support through the Business Development Bank of Canada and Export Development Canada.

But on top of what is being offered by the government, businesses in several industries in Canada and globally have also asked for their own bailouts due to the extra stress the pandemic has placed on their businesses, such as the travel and airline industry. For brands, the reputational risk in publicly requesting a bailout during a crisis varies, especially when many people are dealing with their own job losses.

For example, Airlines for America, an industry trade organization representing U.S. airlines, requested $50 billion in assistance from the U.S. federal government on March 16, claiming the COVID-19 crisis may pose an existential threat to the industry. However, there was backlash when analysts pointed out that 96% of free cash flow over the last ten years has been spent on stock buybacks to enrich the company’s bottom line, rather than save for a crisis like the one the industry is in now or rewarding employees. Several individuals online also pointed out the extra costs and fees often associated with air travel that could have been used to save for this situation, as well as the rate of pay for each of the airlines’ CEOs. There are also historical examples, like the blowback faced by U.S. banks when executives were given bonuses after having received a government bailout following the 2008 financial crisis.

Alan Middleton, professor of marketing at York University’s Schulich School of Business, says the risk to reputation “depends on the brand,” and differs depending on if it is selling services or products. But what it ultimately comes down to is how that money is used and if ends up going to its employees.

For service brands, there’s a reputational risk “because so much of the service is people,” Middleton describes.

“You’re instantly raising the whole issue of how you’re looking after your people or staff, who then look after the customer. That’s why it’s more front and centre in the mind,” he says. “When you’re dealing with a product brand like Nescafe, yes, you’ll want to know a little bit about how Nestle is performing. But am I going to think twice about buying Nescafe based on [what] I’ve read about how it’s treating its people?”

Middleton adds that even though consumers don’t have the same direct interaction with staff from product brands, the reputational risk comes when a company does something that puts that employee in the consumer’s mind.

“As more and more stories come out about how different organizations handle it, if someone were to find out that the factory that makes toothpaste, for example, has been found to not be putting in suitable health conditions, then all of sudden that explodes and that will have an impact on the brand. But it will still be at a much lower level than the main service brands.”

Those conditions also apply to pay, and how front-line workers are being compensated compared to top executives. Several major CPG companies have implemented wage increases for employees similar to those seen at Canadian grocery and retail chains in recent weeks, including Mondelez Canada, PepsiCo and Maple Leaf.

Middleton notes that size of the company plays a factor in the public’s response to seeking assistance, or even something like laying off staff. “What people do want to understand, which reduces the reputational risk for the brand, is that whatever money is given gets to the individual employees,” he says. “The bigger the organization, the more the other part of reputational risk kicks in. People starting thinking, well, they are already rich, shouldn’t they be looking after the staff themselves?”

While executive salaries are often not enough to cover some of the hardships a company might face on their own, some companies have begun to look at their highest earners as a source of cost savings – either to avoid laying off staff or the blowback that would come if staff need to be let go anyway while a CEO continues to bring in millions. Several major U.S. airline CEOs and executives have pledged to take reduced salaries – or no salary at all – alongside its request for government assistance, but it has also come to other categories, including companies such as Columbia Sportswear, Ford, Marriot and Buzzfeed.