Social Identity: What It is, How it Works, Limitations

What Is Social Identity?

Social identity is an organization or company's image as derived from its relationships with its customers, suppliers, shareholders, and other stakeholders. An organization's social identity thus comes from the groups that the organization belongs to or is affiliated with, the way it is structured, the industry it belongs to, and other social factors. A company's social identity will impact how it is perceived by consumers, so social identity affects a company's bottom line and should be closely managed.

Understanding Social Identity

A company's social identity derives from its relations, connections, and perceptions embedded in the minds of its stakeholders and observers. This takes place through branding & marketing efforts as well as through public relations departments, social media channels, and the company's own products and services.

For instance, some companies pride themselves on being environmentally conscious, or "green," and so they either produce eco-friendly products or use green technologies in their production processes.

Environment Social Governance (ESG) investing criteria are used by socially conscious investors to ensure that they put their money behind companies with environmentally-friendly social images.

A company's brand image is also part of its social identity and is increasingly managed in part on the Internet through social media channels, such as X (formerly Twitter) and Instagram, as well as through traditional forms of media and public relations channels.

Components of Social Identity

Making strategic alliances or joining professional associations or platforms can be an important signal for social identity. For example, whether a public company becomes listed to trade its shares on the Nasdaq or the New York Stock Exchange (NYSE), could be considered part of that company's social identity that signals legitimacy, which attracts investors.

Being added to an important equity index such as the S&P 500 adds further cachet. Social identity can also refer specifically to a company's image as portrayed through social networking websites such as X, Facebook, and LinkedIn.

The social media accounts of companies provide company updates, news, and promotions to their followers. Some companies' X feeds have built a social identity around wry humor, such as Wendy's Inc., which often responds cleverly to online posts. This endears customers and brings a personality to the company.

One of the most famous examples of social identity is that of Apple (AAPL) in the 80s and 90s. Apple portrayed its social identity in contrast to the larger and more successful Microsoft (MSFT). The identity that Apple created for itself was that of being the underdog, the revolutionary, and much "cooler."

Company CEOs or other important figures may also take to social media under their own name but in service of the corporations that they run. When someone falsely impersonates an individual or company online, it is considered social identity theft.

Companies can also damage their social reputation online by consistently making unfavorable posts.

How Companies Improve Their Social Identity

There are some softer elements to communication that companies can take to improve their social identity. It's important to realize that every social platform has its own nuisances; therefore, companies must be mindful of delicate differences that may implicitly define its identity on its own.

• Clarify Company Values. Companies can set a strong social identity by establishing a clear and strong set of values. This helps create the foundation of what a company stands for and wants to be known for. It is also important to ensure that these values align with the company's actions and behaviors, especially how the company may act in relation to what is posted on its social channels.
• Engage With Stakeholders. Companies can engage with stakeholders, such as customers, employees, investors, and community members, to understand their needs, concerns, and expectations. This can help the company develop a better understanding of its impact on society and perceptions of the public. This can be done via business transactions or marketing endeavors.
• Practice Transparency. Companies can improve their social identity by being transparent about their operations, policies, corporate governance, and impact on society. This includes being open about their environmental practices, labor policies, and social impact. Though there may be backlash, being transparent is an identity in itself, and a company may need to face harsh truths from the public when molding how it is perceived.
• Be Authentic. Companies should strive to be authentic in their communications and actions. This means being true to their values, avoiding greenwashing or other forms of inauthentic messaging, and taking concrete actions to back up their social identity. Again, even if this rubs the public wrong, the company will be able to receive authentic feedback it can use to further develop its true social identity.
  

Social Identity and Financial Performance

When a company has a positive social identity, it translates to its bottom line. With the world becoming more and more socially conscious, investors and the general population seek out companies that play a positive role in society. Individuals prefer to do business with companies that are seeking to do good.

Conversely, companies that have a poor social identity are criticized, ostracized, and often see a thinning of their customer base, resulting in lower sales. Though oil companies are financially robust and powerful and can weather many storms, they often come under heat when there is an oil spill or when they've been seen to pollute the environment.

Not only are they held liable for millions or billions of dollars in cleanup efforts, but often witness their social identity damaged and, therefore, their business. This is becoming more of a concern for oil companies now that clean energy is becoming a viable option for many individuals.

For example, after the BP oil spill, in the second quarter of 2010, the company recorded a loss of $17 billion. The company's CEO resigned that year and that year's dividend payments were stopped. Furthermore, BP petrol station owners reported declining sails after the oil spill.

Limitations of Social Identity

Though positive social identity may enhance a company in many ways, there are many hurdles and complications in devising a successful identity strategy. As a company becomes more engrained in the public eye, companies may be held to higher standards and face increased scrutiny from stakeholders, customers, investors, and activists.

Companies that engage in social and environmental initiatives solely for the purpose of enhancing their social identity can be accused of greenwashing. Even if these types of activities or endeavors were meant to be positive, this can damage the company's reputation and erode trust with stakeholders

Developing and maintaining a strong social identity can require significant resources, including time, money, and personnel. Companies may struggle to balance their social and environmental initiatives with their core business operations and financial goals. In addition, social elements of running a business may detract from improving actual business operations including innovation, manufacturing, and distribution.

Last, it can be difficult for companies to measure the impact of their social initiatives. Therefore, it may be challenging for a company to justify committing resources to building its brand and identity when the benefits are not quantifiable. When committing to building a social identity, there is often uncertainty and no guarantee in how the resources committed will benefit the company in the long-term.

The Bottom Line

Social identity refers to how a company portrays itself to shareholders, investors, and other members of the public. It is the way that a company or brand defines itself in relation to society and may be shaped by its values, mission, culture, and the social and environmental initiatives it undertakes.