Starbucks’ public relations crisis management in response to the British ‘tax scandal’

(Source: Daily Mail, 2012). In 2012, Starbucks, amongst a number of other large corporations including Amazing and Apple were catapulted on to the front page of newspapers and their respective websites in light of a ‘tax scandal’. Reports discussed how Starbucks only paid £8.6m corporation tax in 14 years. Starbucks counter-argument to these reports was that they only had one profitable year in the UK (in 2006) and paid the taxes they were legally obliged to pay (BBC, 2012). Additional reports cite company accounts showing consecutive annual losses while Starbucks CFO Alstead had reportedly told investors the UK was ‘profitable’. Culver, President of Starbucks International division and CEO Schultz were also quoted referring to the UK’s performance in a positive light – all of which stood contradictory to published accounts (Reuters 2012). Considering the obvious contradictions brought to light and Starbucks’ firm values of corporate social responsibility (CSR), ethical and the moral business positioning they had achieved, a public outcry was the result. The wider impact on this saw Costa Coffee’s sales increase 7%. Nero Coffee was also flagged in reports up for profiting £40m and not paying taxes in the UK, however this story gained very little momentum and very few people are aware of this (Daily Mail, 2012). This assignment will look at the different factors that played in to the scandal, how they were used and how they impacted Starbucks response.

Corporate Social Responsibility: As a result of recent financial crisis’s that damaged various world economies, CSR has become a wider issue in the mind of consumers, publics and stakeholders. During the economic downturn, many consumers were more observant and reactive of selfish corporate behavior. (Hiller, J 2012; Tench, R. 2009). Although CSR is still a fairly new concept to public relations and the wider business function, Regina, V. and Ugne, D. concluded a definition based on varying interpretations: “Early CSR definitions focused on corporate activities that were not implied by economic or legal requirements” (2011). British Telecommunication’s (BT) 1996/7 annual review talked about why they are helping the community and that business cannot consider themselves separate to the community and environment they exist in. The report also links CSR to BT’s bottom line and how a decision to purchase with one company or brand over their competitors is ‘not a decision about price alone’; suggesting that gestures of good will and ethical business practises will not go unnoticed and can positively impact on an organisations profit. Image 1 (Source: Peach, L. 1987). 1: Pay taxes, observe the law and deal fairly 2: Minimise negative impact and act in the spirit of the law (for e.g. pay living wage when it is not a legal requirement. Offer flexible hours to staff not legally entitled to it). 3: Responsibility for a healthy society and help remove / alleviate society’s problems (e.g. donating 1% of pre-tax profits to children in need). Before the Starbucks tax crisis, the Starbucks brand would have fallen in to all three categories with their fair trade coffee beans meeting the criteria for Peach’s second and third point. Not only did Starbucks meet the criteria for fair trade by paying farmers more, they went one-step further and paid farmers living. (Starbucks Coffee Co. 2012. Starbucks Ethical Coffee Sourcing and Farmer Support). While many organisations were beginning to introduce fair trade schemes,

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Starbucks were one of the first to engage with CSR ‘best practices’ to the extent that they did. It is worth pointing out that in relation to Starbucks’ FT work, no independent verification as to the legitimacy or scale of work has been found, highlighting a potential bias in the copy presented on the Starbucks website in this specific reference. Reputation & Image: CSR can have a substantial impact on corporate reputation and image. (Sugar, P. and A, Singla (2004). Organisational reputation is formed in the mind of a public or stakeholder and each experience with, or exposure to that company forms an image in the publics mind. Over time the

more experience or exposure to the organisation, the more images, positives and negatives are conjured up. (Löwensberg, D. (2009). Especially considering some of the recent responsibility issues (global warming, poverty, fair trade, war, famine), actions taken within the CSR spectrum are increasingly important to businesses and the images it sends to consumers. (Image source: BBC 2013 via Getty Images). Starbucks reputation and image was greatly affected by the tax crisis. Many stakeholders, consumers and members of the public took to the streets in 2012 to protest and boycott Starbucks in light of their ‘creative accounting’. Interestingly, protestors used creative word play to indicate Starbucks’ own name against them. It is also one of the banners that recognises the predicament that Starbucks has not broken any laws, but used legal loopholes to avoid paying tax and as a result, protestors have framed their campaign around this. In contrast to the boycotts, news reports and public opinion mentioned thus far, there were a number of consumers who could understand the need to be profitable, even if it meant not helping the wider community as much as they had previously. However, these views never reached front-page news. When looking at corporate reputation and image, it is also important to consider the iceberg concept. This looks at corporate image and splits it in two sections using icebergs as the analogy that has a visible body above the surface of the water and hidden elements beneath the surface. The visible parts of corporate image that is more obvious and clear elements of image. The less obvious parts of a companies reputation may be the mythical elements, or rumours (Löwensberg, D. 2009). This can include image to internal stakeholders such as staff, management and external perceptions. A good example of this would be after a company merger whereby organisation A were taken over by organisation B, staff from A felt nostalgic feelings towards their previous

working environment. Additionally, they also felt a loss of autonomy as an individual after, as there was not an equal split in power between the organisations. This is relevant to the case of Starbucks in their attempts to recover their damaged reputation when reports came out that Starbucks were cutting paid lunch breaks, sick leave and maternity benefits (The Guardian, 2012). Although it could be argued that the issues were known and therefore not hidden issues beneath the reputations surface, it is conceivable that unknown issues could amount as a result of the loss of benefits; cognitive dissonance from employees with the company could lead to decreased standards of service impacting external reputation, or negative word-of-mouth from employees. Additionally, as this story made the news and gained some momentum, external stakeholders and publics perceptions could be altered by this but might not be top-of-mind, but rather subliminal for some. Crisis Management: As discussed by Langford, M. (2009), pre-emptive crisis management happens in three stages: issue management, risk assessment and crisis planning. Part of crisis management is accepting that they are often unavoidable and that rumours will circulate quicker than facts. Also, rather than ignoring them, seeking to control and limit damage to corporate reputation and image as silence will only be filled with more rumour. Preparing crisis management plans costs a PR department, but carrying them out can cost in terms of: management distraction, employee concern, political backlash, legal action, consumer reaction and market and share price confidence. A crisis can fall in to two different sets of categories with the first one using a snake analogy: 1. The cobra, a crisis that hits with no, or very limited warning that requires an immediate response by the crisis team to assemble senior management, the board and a team (i.e. The BP Gulf of Mexico oil spill that happened with no, or extremely limited, warning). 2. The python, a crisis whereby an issue continues to burn over time that has the potential to destroy reputation over time (for example; the NSA / GCHQ scandal, as well as the privacy issue as a whole that reappears for government) (Seymour, M. and S, Moore. 2000). The second set of categories contains 8 different options for a crisis to fall under crisis management (Lerbinger, O. 1997):

1. Natural 2. Technological 3. Confrontational 4. Malevolence 5. Skewed management 6. Deception 7. Management misconduct 8. Business and economic

In terms of Starbucks, it could be argued they were somewhat prepared based on that the assumption they knew they were using ‘legal loopholes’ and not paying proportionate tax. The financial public relations (FPR) should have been aware of the companies’ financial status and

health when reporting to stakeholders and most importantly shareholders. Whether or not a red flag was raised or innocently overlooked is a question for the FPR team at Starbucks. Within FPR, annual reports include many of the CSR initiatives an organisation is engaged in as a requirement of stakeholders and meeting their expectations, but also legal and regulatory requirements, amongst the usual financial results of the organisation with the aim of encouraging investor confidence from the profit or loss reports for the period of time in question. Financial reports also serve to update stockholders and shareholders with projections (Bowd, R. 2009). It is argued that actions seen by companies such as Starbucks, Apple and Google have been legal while others argue that while their actions were legal, they had exploited loopholes in tax systems. The loophole allows companies to complete a British sale, in Ireland, where the tax rate is half the British rate (The Globe and Mail, 2012). Thus, an argument between Starbucks being a smart and robust business vs. ethical trading and ‘doing what is right’ emerged. Internet Crisis Management Crisis’s does not always happen ‘over night’ as is seen by the estimates by The Gartner Group that $600bn was spent globally to prepare for a possible Y2K crisis (Year 2000 and the transition to the new millennium). Though the majority of crisis’s will be unexpected and come as a surprise to organisations. Academic theory identifies 3 pre-crisis actions, 10 during-crisis actions and 1 post-crisis action, detailed as follows: Before: 1) Conduct a crisis audit. 2) Prepare crisis manual. 3) Conduct regular crisis simulation training. During: 1) Define the real problem. 2) Centralise or at least control information flow. 3) Isolate a crisis team from daily business concerns. 4) Assume a worst-case planning position. 5) Do not fully depend on one indiviual. 6) Always resist the combative instinct. 7) Understand why the media are there. 8) Remember all constituents, stakeholder and publics. 9) Contain the problem. 10) Recognise the vlaue of short-term sacrifice. After: 1) Post-crisis review. (Langford, M. 2009). The tax scandal involving Starbucks turned to an internet crisis for them when they sponsored a TV screen outside the Natural History Museum which displayed messages sent out on Twitter with the hash tag #spreadthecheer included in it. The crisis emerged when their content moderation filter broke, allowing tweets with bad language to be displayed on the TV screen. As seen in the image above, Twitter users had tax avoidance occupying ‘top of mind’ when thinking about Starbucks.

Starbucks response was largely defensive for the immediate aftermath, though in light of the boycott, twitter incident and mass of public opinion they altered the communications approach to a two-way symmetrical model outlined by Grunig and Hunt’s 4-way model of public relations (1984). The message shifted from trying to defend their legal practises, to hearing what stakeholders were thinking, saying and doing and responding to that by paying roughly £20m tax over two years. (Grunig, J. & Hunt, T. 1984). Conclusion: In conclusion, it is conceivable that corporate social responsibility, reputation, image and crisis management are important to Starbucks public relations and communications strategy. Based on the tax crisis in 2012, Starbucks have moved from a respected and admired corporate reputation to having a considerable amount of reputation and image rebuilding ahead of them. Taking this in to consideration for future possible crises and being increasingly diligent and prepared is now even more vital for Starbucks given the company’s more fragile condition. Although Starbucks agreed to pay £20m to HMRC, its publics perceived this as a good-will gesture and not entirely in line with Starbucks ethical and CSR structure. Some of the lessons that other organisation can take away from this, are that if an organisation is going to make public a set of figures, facts or information in general, it should be prepared and expect for them to be scrutinised – whether that be by government, the press, publics or their competitors. In an ideal scenario, the organisation would ensure that there is nothing within that information that could be used against them (for example; not using ‘creative accounting’ and legal loopholes in the first place), though businesses and organisations are still driven by bottom line results without seeing the advantages initiatives such as CSR will have on an organisations bottom line - thus will still attempt these approaches to doing business. A fully prepared crisis management structure should be in place to deal with any consequences if an organisation chooses not to follow CSR examples to combat negative connotations that may arise from them.

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