Tackling excess profits Article icon

Tackling

Every decade or so, two words are joined together to strike fear into the hearts of public relations advisers at British companies.

The term is 'excess profits' and over the years it has been thrown variously at Britain's biggest gas supplier, railway infrastructure and high street banks.

Now it's the turn of the UK's big six energy companies, courtesy of an unusual political axis between Labour leader Ed Miliband and former Conservative Prime Minister Sir John Major.

Miliband started it at last year's Labour Party Conference, promising to impose a 20-month energy price freeze if he is elected in 2015.

And Sir John weighed in last October, saying there's a case for an 'excess profits tax' on the big six, following the power bill increases announced ahead of the most expensive time of the year for heating homes and offices.

Suddenly, 'excess profits' are back on the agenda and a mismatch between what the public and the business community understand by this term causes a particular problem for corporate communicators.

To the public, 'excess profits' means fat cats, poorer customers and injustice. Business meanwhile believes the phrase to be an oxymoron, with companies surely existing to make as large a profit as possible for their shareholders.

'It's an entirely mistaken argument because it's merely based on envy,' says Anthony Cardew, founder and chairman of strategic communications company Cardew Group, of the 'excess profits' charge.

'There's a lot of work to be done on refocusing peoples' attention because it's very destructive. Stable and growing profits enable companies to continue employing people. Governments also want companies to make profits so they can tax them.'

WHAT IS EXCESSIVE?

Neil Bennett, chief executive of financial and corporate communications consultancy Maitland, agrees. 'Any definition of excess profits is entirely subjective,' he states. 'Profit is an entirely arbitrary concept. The only reason profits were invented was to try to create a number government could tax. Profits very rarely have anything to do with actual cash flow.

'It also depends on the reputation of the organisation. You can think of enormous organisations that manage their communications well and make enormous amounts of money but these are not considered to be excessive because they're seen to be delivering value.

'It shouldn't be seen in isolation. Companies that are attacked for excess profits tend to be failing to communicate the value they add both to their customers and to the wider community and that's the task.'

The trouble is that this is not how the matter is viewed by Britain's public. Companies that are deemed to make 'excess profits' generate explosive headlines guaranteed to attract readers to newspapers, regardless of whether the concept makes any sense to business executives and their advisers.

So how should corporate communicators respond? And what are the lessons of how companies tagged with making 'excess profits' in the past dealt with the charge?

LESSONS FROM THE PAST

Railtrack may seem an odd business to provide such a lesson, given that the company was renationalised in 2002 after essentially running out of cash to service its liabilities.

However, after being privatised in 1996, the group was accused of making too much money and paying 'fat cat controller' salaries at the expense of travellers who had to use its crowded platforms and run-down stations.

Philip Dewhurst, now a senior partner at financial PR agency College Group, was corporate affairs director at Railtrack from 1994 to 1999.

'We certainly had this 'excess profits' issue at that time,' he recalls. 'What we found was that people were just not interested when we said what we were going to do over the next 20 years with the profits we were making in terms of renewing Britain's railway infrastructure.

'They just couldn't connect to it so what we decided to do instead was tell people what we had actually already done. We ran a campaign that included running small adverts every week in a national newspaper to publicise all the things we had done to make stations better.

'It was amazing how that turned things around. I particularly remember an advert drawing attention to work we had done refurbishing the toilets at Leeds station. The headline was What a relief. It got a laugh and certainly helped get our message across.'

Similarly, most of Britain's beleaguered banks are currently not making enough money to be accused of excess profits but high street banks have been a favourite target in the past.

Anthony Frost, head of communications at Santander UK, worked as a banker for NatWest in the mid-1990s when it routinely hit the front pages for allegedly making too much money.

'I was there when NatWest Bank was the first UK bank to make £1 billion in profits and it was definitely an issue,' he says. 'Banks have come across this in the past for different reasons and they will need to be able to deal with it again when profits come back.

REMEMBER CONSUMERS

'The key thing is that you have to be able to demonstrate value for consumers. You've got to come up with a purpose that's driven by a consumer-focused agenda.

'If you're a bank on the high street, you have to be seen to be giving value in a simple and easy-to-understand way. That's a big culture change to where banks were before but it's what they all have to do now and it's certainly what we're committed to at Santander UK.'

In retailing, Angus Maitland, chairman at the eponymous PR agency, recalls advising Tesco when it was about to announce its first £1 billion profit in the middle of the last decade.

At the time, some of the supermarket group's suppliers were complaining about being squeezed, while farmers were demonstrating outside stores about the prices that they were being paid.

Maitland recalls that Tesco decided to respond by publishing a breakdown of its sales, group margins and tax, leaving a dividend yield for shareholders that was fairly average at the time. That helped defuse the issue, he says.

He also advised British Gas in 1995 when executive pay protesters vented their wrath at the pay of the company's chief executive Cedric Brown by bringing a 20 stone pig called Cedric to its annual meeting.

'The problem was that the pay issue was never clearly explained,' he recalls. 'It was explained to one journalist by the chairman but that got lost in a frenzy by all the other newspapers about executive greed.

'The first lesson from that is that when an issue like that comes along, you have to explain very simply and clearly and deal with it as quickly as you can.

'The problem for the energy companies is that it is very easy to look at the profits they are making in absolute terms when you need to look at the capital being invested into the business for the benefit of consumers.

'The second lesson is that when things do go wrong with an accusation like 'excess profits', it is very difficult to retrieve it. I think energy companies need to get a lot better at using social media to make sure they are getting the message across in a sensible way.'

EXPLAINING THE BUSINESS MODEL

Cardew agrees, adding: 'Companies need to be very clear about their use of capital, because it's very easy to write a shock horror headline screaming 'fat cat profits'.

'The so-called fat cats should be turning around and saying Yes, we've made millions and we're going to apply it in the following ways.

'They don't currently communicate that properly. It's all about communicating the use of capital. Companies make profits for a reason. If they make them only to pay fat cat salaries, that's something that should be subject to criticism.

'But there's nothing wrong with companies making money per se and there certainly is something wrong with not making any. It's a case of getting that message across.'

Bennett sees the issue being part of the 'licences to operate' that companies are effectively granted by governments and people in return for being seen to be good corporate citizens who benefit the world around them.

'The debate about 'excess profits' is not actually about profits,' he says. 'It's about the values that every organisation delivers and the values they espouse.

'It's also about where the profits go. Nobody complains that the John Lewis Partnership is making very healthy profits. Because they go to the partners, it's seen to be a good thing.' It is highly doubtful that the handy soundbite of 'excess profits' will be retired anytime soon. 'Excess profits' will therefore remain a daunting subject for companies and their advisers to tackle.

'It's about transparency and bravery and hats off to the first company that wants to put its head above the parapet on a massively sticky issue,' agrees Rhodri Harries, managing director of independent public relations and digital communications agency Kaizo.

'Who wants to be brave and transparent and see their share price drop?' That's the challenge for corporate communicators. Answers on a postcard please to Ed Miliband and Sir John Major.