Today’s guest post is by Thomas Walek, President, WALEKpeppercomm

_Wall_St_bull_fallenWhile not as final as the punishment meted out by Chinese courts against this investment criminal (“Chinese Woman Sentenced to Death in $200 Million Fraud“) the US Securities and Exchange Commission’s new focus on “guilty” can mean a death sentence for errant Wall Street firms.   Given this new threat, brand and reputation management demands a higher priority among financial and public firms of all stripes.

Under new leadership, the SEC is much less willing to accept settlements allowing defendants to walk away from crimes  “without admitting or denying guilt” and paying token financial penalties.  Friday’s admission of guilt by the founder of hedge fund SAC Capital, similar admissions by other executives at that firm, and the recent guilty plea by the founder of another hedge fund, Harbinger Capital, effectively terminate these businesses.

And it’s not just historically secretive hedge funds who can no longer whistle past the hanging judge. JP Morgan was forced by the Commodity Futures Trading Commission to admit to questionable conduct related to the bank’s London Whale fiasco.  Worse may be coming for that bank, with profound implications for its business.

This tougher regulatory stance is gaining momentum.  Just last week, the head of the Federal Reserve Bank of New York talked about “tough enforcement and high penalties” and pointed to “deep-seated cultural and ethical failures at many large financial institutions.”  The era of the get-out-of-jail-free card is over.

Legal issues aside, companies need to take the offensive in understanding, directing, and managing brand and reputation and do so long before potentially fatal legal problems arise.  A higher level of transparency is a good place to start.  SAC and Harbinger’s closed and adversarial relationship with the media and regulators was both antiquated and shortsighted.

But even the most transparent financial firms will occasionally fall on the wrong side of a lawsuit, and it’s not necessarily “justice” on the part of regulators to destroy an otherwise healthy and productive company. One way that companies can help offset this risk is by engaging in Corporate Social Responsibility (CSR). All of the biggest banks, including Citigroup (Citi Bike) and Goldman Sachs (10,000 Women Initiative), are known for something other than making money — surely an important distinction when nearly all SEC lawsuits have to do with a financial firm trying to bend the rules to make even more money.

Clients and customers will want nothing to do with a company that spends more time in court than in the community. Of course, CSR is but one small part of a firm’s overall reputation management package. Ethics guidelines, improved relationships with the media, appropriate use of social media, improved regulatory relationships, community involvement, mentoring programs, charity outreach, and mock crisis training must be considered and, more often than not, put in place.

Drinks with a reporter or sponsoring a table at a fund-raiser won’t, of course, solve all the business problems created by the criminal actions of employees.   Recent lessons such as those above clearly suggest the threat of a “death penalty” or other severe punishment is just what’s needed.  But as the admission of guilt becomes a more likely outcome of financial malfeasance, brand and reputation can no longer be considered soft issues.  They need to be the ground upon which businesses are built and from which they can be rebuilt, if need be — they demand all the weight, priority and commitment that’s required to safeguard the future of the business.


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