Introduction
There is no doubt that no companies can
legally hide or withhold information that might potentially damage their
reputation, particularly from customers.
A company's reputation is one of its
biggest and most important assets. When people hear and say great things about
an organization and its good standing is reported in the media, it may receive
more customer inquiries, see increased profit margins and be able to expand
its operations. After a public relations disaster, the reputation a firm
has worked diligently to build can easily be destroyed - and may be nearly
impossible to rebuild. That's why it's essential for businesses to continually
assess their reputational risks to avoid worst-case scenarios as much as
possible.
1.
Ethical Lapses
Strong ethics initiatives are essential at any company, and particularly for firms that want to avoid staining their reputations. Limited ethics practices can lead employees, no matter what their position, to slip up and make serious judgment errors. Theft, accounting fraud, and other illegal activities may be the result of a single employee's behavior, but they can have a significant impact on a business as a whole.
Strong ethics initiatives are essential at any company, and particularly for firms that want to avoid staining their reputations. Limited ethics practices can lead employees, no matter what their position, to slip up and make serious judgment errors. Theft, accounting fraud, and other illegal activities may be the result of a single employee's behavior, but they can have a significant impact on a business as a whole.
Instances of illegal business activity,
especially among large corporations, are highly publicized and make their way
across media outlets quickly. Even a minor ethical issue can spiral out of
control once the word hits news channels and can cause serious harm to a
company's reputation in just hours. Clients may be unwilling to continue
working with a company that is quickly becoming known for a fraud or insider
trading investigation, which could cause profits to plummet as long-time
customers seek new partners.
To deter the risk of
reputational damage from ethical issues, it's critical for businesses to have
in place strong mechanisms that deter employees from breaking the law. Setting
high standards and significant repercussions for noncompliance with these
expectations can help prevent such occurrences and potentially serve to bolster
a company's reputation in the long run.
2.
No Corporate Social Responsibility Policies
With more consumers and investors concerned about environmental sustainability, waste, pollution, and the impact companies have on the areas in which they do business, corporate social responsibility is a growing trend. More organizations are implementing processes that allow them to lower pollution and resource use, increase recycling activities, and give back to the communities in which they do business.
With more consumers and investors concerned about environmental sustainability, waste, pollution, and the impact companies have on the areas in which they do business, corporate social responsibility is a growing trend. More organizations are implementing processes that allow them to lower pollution and resource use, increase recycling activities, and give back to the communities in which they do business.
On the other hand, those companies'
competitors could be at risk for a plummeting reputation if they have
failed to implement corporate social responsibility policies their consumer and
investor base expects. With social media use so common and information
instantly accessible via the Internet, it's easy for potential customers to see
what their favorite companies are doing to better the planet. Individuals who
discover brands have no current initiatives and believe they are being
contradictory may spread the word via popular networking websites, which can anger
millions of potential customers and prove damaging to a company's standing.
While there's always a risk consumers
will unearth a company's limited corporate social responsibility plans and
raise awareness, the possibility of a disaster and the fallout of such an event
are even more damaging. Several American apparel retailers learned this lesson
the hard way when a factory fire in Bangladesh killed more than 100
workers in November 2012, and a facility collapse just a few months later left
more than 1,100 workers dead. The factories were found to have various safety
violations the retailers failed to address. If the companies had kept a close
watch on their overseas clothing suppliers, they may have avoided these
public relations disasters. Those who had quick responses to the disasters
- and had contingencies built into their supply chain to make changes - fared
better in the public eye.
3.
Customer Service Failures
If consumers are treated poorly, a corporation risks significant damage to its reputation. It will lose key references who will not recommend the company to friends, family members, and business associates.
If consumers are treated poorly, a corporation risks significant damage to its reputation. It will lose key references who will not recommend the company to friends, family members, and business associates.
Because companies want current clients
to act as brand ambassadors and extol the advantages of their services, they
need to work hard to consistently improve the customer experience and ensure
all consumers are well-served. Employees who are short with clients, are
unwilling to provide solutions to fit their needs, or who fail to follow up on
requests may send the wrong message to consumers and tell them a company
doesn't actually care about their needs. Those who have a poor experience may
complain to potential customers and prevent them from working with a company or
even take their issues to social media sites. This can cause a client's bad
experience to go viral and hinder an organization's attempts to improve its
reputation.
Some businesses may need to
launch training initiatives that teach newer employees how to
interact with clients and give them the best experience possible, while reminding
more experienced professionals of how they can go out of their way to improve a
customer's experience. Identifying key problems within a company's
consumer management strategy and developing a plan to eliminate those
issues are ways for an organization that wants to keep a firm handle on
client relations and prevent its reputation - and sales - from going downhill.
4.
Low Employee Satisfaction
Ensuring employees are happy isn't just a way to build up a brand's internal culture, it's also a way to improve a company's reputation with the public. Satisfied teams are more likely to feel positively about their jobs and have a stronger sense of attachment to their employers. This makes it easier for them to encourage others to try a brand's products or services and promote the company even when they aren't on the job.
Ensuring employees are happy isn't just a way to build up a brand's internal culture, it's also a way to improve a company's reputation with the public. Satisfied teams are more likely to feel positively about their jobs and have a stronger sense of attachment to their employers. This makes it easier for them to encourage others to try a brand's products or services and promote the company even when they aren't on the job.
Content employees are also more likely
to go out of their way to provide better client experiences and ensure
customers are better served. Customer service training initiatives are
essential, but they may not work as well if employees are dissatisfied with
their positions. Brands with good reputations, such as Google, Whole Foods
Market and Facebook, are often known for being some of the happiest places to
work.
5.
Data Breaches
Businesses rely on technology more than ever, and while this may make some processes easier, it carries with it a reputational risk. Data breaches have become more common in recent years, as hackers look to gain access to corporate secrets, financial data, and customer information. As such, it has become imperative for companies to employ stronger systems to protect digital files.
Businesses rely on technology more than ever, and while this may make some processes easier, it carries with it a reputational risk. Data breaches have become more common in recent years, as hackers look to gain access to corporate secrets, financial data, and customer information. As such, it has become imperative for companies to employ stronger systems to protect digital files.
Firms that do experience a data breach
need to own up to the mishap, which can cost them valuable standing with
customers. Some consumers may feel a business didn't sufficiently prepare for a
cyber-attack and didn't take risks seriously, which can make a firm appear
ill-prepared to handle other important tasks. Others may blame a company for
losing their personal information, which can also have a damaging impact for a
brand looking to grow and gain a following. Customers may feel uncomfortable
giving personal or payment data to a company that has had trouble with breaches
in the past and instead look to work with firms that have an unstained reputation
in regard to client information security.
Reputation and Its Risks
Executives know the importance of their
companies’ reputations. Firms with strong positive reputations attract better
people. They are perceived as providing more value, which often allows them to
charge a premium. Their customers are more loyal and buy broader ranges of
products and services. Because the market believes that such companies will
deliver sustained earnings and future growth, they have higher price-earnings
multiples and market values and lower costs of capital. Moreover, in an economy
where 70% to 80% of market value comes from hard-to-assess intangible assets
such as brand equity, intellectual capital, and goodwill, organizations are
especially vulnerable to anything that damages their reputations.
Most companies, however, do an
inadequate job of managing their reputations in general and the risks to their
reputations in particular. They tend to focus their energies on handling the
threats to their reputations that have already surfaced. This is not risk
management; it is crisis management—a reactive approach whose purpose is to
limit the damage. This article provides a framework for proactively managing
reputational risks. It explains the factors that affect the level of such risks
and then explores how a company can sufficiently quantify and control them.
Such a process will help managers do a better job of assessing existing and
potential threats to their companies’ reputations and deciding whether to
accept a given risk or to take actions to avoid or mitigate it.
The Current State of Affairs
Regulators, industry groups,
consultants, and individual companies have developed elaborate guidelines over
the years for assessing and managing risks in a wide range of areas, from
commodity prices to control systems to supply chains to political instability
to natural disasters. However, in the absence of agreement on how to define and
measure reputational risk, it has been ignored.
“It takes many good deeds to build a good
reputation, and only one bad one to lose it.”- Benjamin Franklin
Consider the 135-page framework for
enterprise risk management (ERM) proposed in 2004 by the Committee of
Sponsoring Organizations of the Tread way Commission (COSO), a group of
professional associations of U.S accountants and financial executives that
issues guidelines for internal controls. Although the framework mentions
virtually every other imaginable risk, it does not contain a single reference
to reputational risk.
Nor does the Basel II international
accord for regulating capital requirements for large international banks. In
defining operational risk as “the risk of loss resulting from inadequate or
failed internal processes, people and systems or from external events,” the
Basel II framework, issued in 2004 and updated in 2005, specifically excludes
strategic and reputational risks. That’s mainly because of the difficulty of
factoring them into capital-adequacy requirements, most banking-risk
professionals would say.
Given this lack of common standards,
even sophisticated companies have only a fuzzy idea of how to manage
reputational risk. A large U.S. pharmaceutical company reflects the current
state of practice among well-run organizations. It has an ERM system for
managing operational and financial risks, as well as hazards from external
events such as natural disasters that is loosely based on the COSO framework.
The firm’s vice president of risk management oversees the system. However, the
company manages reputational risks only informally—and unevenly—at the local
and product levels. Its leaders consider reputational risk only when they make
major decisions such as those involving acquisitions. (The company’s
due-diligence process includes the evaluation of problems that could affect
reputation, including pending lawsuits, weak product-testing procedures,
product-liability concerns, and poor control systems for detecting management
fraud.) The risk management VP says that reputational risk is not included in
the long list of risks for which he is responsible. Then who is responsible?
The CEO, the vice president surmises, since that is who oversees the firm’s
elaborate crisis-response system and is ultimately responsible for dealing with
any events that could damage the company’s reputation. This pharmaceutical firm
is not alone. Contingency plans for crisis management are as close as most
large and midsize companies come to reputational-risk management. While such
plans are important, it is a mistake to confuse them with a capability for
managing reputational risk. Knowing first aid is not the same as protecting
your health.
Determinants of Reputational Risk
Three things determine the extent to
which a company is exposed to reputational risk. The first is whether its
reputation exceeds its true character. The second is how much external beliefs
and expectations change, which can widen or (less likely) narrow this gap. The
third is the quality of internal coordination, which also can affect the gap.
Reputation-reality gap.
Effectively managing reputational risk
begins with recognizing that reputation is a matter of perception. A company’s
overall reputation is a function of its reputation among its various
stakeholders (investors, customers, suppliers, employees, regulators,
politicians, nongovernmental organizations, the communities in which the firm
operates) in specific categories (product quality, corporate governance,
employee relations, customer service, intellectual capital, financial
performance, handling of environmental and social issues). A strong positive
reputation among stakeholders across multiple categories will result in a
strong positive reputation for the company overall.
Reputation is distinct from the actual
character or behavior of the company and may be better or worse. When the
reputation of a company is more positive than its underlying reality, this gap
poses a substantial risk. Eventually, the failure of a firm to live up to its
billing will be revealed, and its reputation will decline until it more closely
matches the reality. BP appears to be learning this the hard way. The energy
giant has striven to portray itself as a responsible corporation that cares
about the environment. Its efforts have included its extensive “Beyond
Petroleum” advertising campaign and a multibillion-dollar initiative to expand
its alternative-energy business. But several major events in the past two years
are now causing the public to question whether BP is truly so exceptional. One
was the explosion and fire at its Texas City refinery in March 2005 that killed
15 people and injured scores of others. Another was the leak in a corroded
pipeline at its Prudhoe Bay oil field in Alaska that occurred a year later and
forced the company to slash production in August 2006. BP has blamed the
refinery disaster on lax operating practices, but federal investigators have
alleged that cost cutting contributed as well. Employee allegations and company
reports suggest that the root cause of the Prudhoe Bay problem may have been
inadequate maintenance and inspection practices and management’s failure to
heed warnings of potential corrosion problems. As media coverage reflects,
these events and others have damaged BP’s reputation.
BP’s Sinking Image.
To bridge reputation-reality gaps, a
company must either improve its ability to meet expectations or reduce
expectations by promising less. The problem is, managers may resort to
short-term manipulations. For example, reputation-reality gaps concerning financial
performance often result in accounting fraud and (ultimately) restatements of
results. Computer Associates, Enron, Rite Aid, Tyco, WorldCom, and Xerox are
some of the well-known companies that have fallen into this trap in recent
years.
“Character is like a tree and reputation
like its shadow. The shadow is what we think of it; the tree is the real
thing.”- Abraham Lincoln
Of course, organizations that actually
meet the expectations of their various stakeholders may not get full credit for
doing so. This often occurs when a company’s reputation has been significantly
damaged by unfair attacks from special interest groups or inaccurate reporting
by the media. It also can happen when a company has made genuine strides in
addressing a problem that has hurt its reputation but can’t convince
stakeholders that its progress is real. For example, Chrysler, Ford, and
General Motors improved their cars so much that the quality gap between them
and the vehicles made by Japanese companies had largely closed by 2001. Yet,
much to the frustration of the Big Three, consumers remain skeptical.
Undeserved poor or mediocre reputations
can be maddening. The temptation is to respond to them with resignation and
conclude: “No matter what we do, people won’t like us, so why bother?” The
reason executives should bother—through redoubled efforts to improve reporting
and communications—is that their fiduciary obligation to close such
reputation-reality gaps is as great as their obligation to improve real
performance. Both things drive value creation for shareholders.
Changing beliefs and expectations.
The changing beliefs and expectations of
stakeholders are another major determinant of reputational risk. When
expectations are shifting and the company’s character stays the same, the
reputation-reality gap widens and risks increase.
There are numerous examples of
once-acceptable practices that stakeholders no longer consider to be
satisfactory or ethical. Until the 1990s, hostile takeovers in Japan were
almost unheard of—but that was partly due to the cross-holding of shares among
the elite groups of companies known as keiretsu, a practice that undermined the
power of other shareholders. With the weakening of the keiretsu structure
during the past ten to 15 years, shareholder rights and takeovers have been on
the rise. In the United States, once-acceptable practices now considered
improper include brokerage firms using their research functions to sell
investment-banking deals; insurance underwriters’ incentive payments to brokers,
which caused brokers to price and structure coverage to serve underwriters’
interests rather than customers’; the appointment of CEOs’ friends to boards as
“independent directors”; earnings guidance; and smoothing of earnings.
Sometimes norms evolve over time, as did
the now widespread expectation in most developed countries that companies
should pollute minimally (if at all). A change in the behavior or policies of a
leading company can cause stakeholders’ expectations to shift quite rapidly,
which can imperil the reputations of firms that adhere to old standards. For
example, the “ecomagination” initiative launched by General Electric in 2005
has the potential to raise the bar for other companies. It committed GE to
doubling its R&D investment in developing cleaner technologies, doubling
the revenue from products and services that have significant and measurable
environmental benefits, and reducing GE’s own greenhouse emissions.
Of course, different stakeholders’
expectations can diverge dramatically, which makes the task of determining
acceptable norms especially difficult. When GlaxoSmithKline pioneered the
development of anti-retroviral drugs to combat AIDS, its reputation for
conducting cutting-edge research and product development was reinforced and shareholders
were pleased. They were initially on board when GSK led a group of
pharmaceutical companies in suing the South African government after it passed
legislation in 1997 allowing the country to import less expensive, generic
versions of AIDS drugs covered by GSK patents. But in 2001, GSK shareholders
did an about-face in reaction to an intensifying campaign waged by NGOs and to
the trial proceedings, which made GSK and the other drug companies look greedy
and immoral. With its reputation plunging, GSK relented and granted a South
African company a free license to manufacture generic versions of its AIDS
drugs—but the damage was already done.
Sometimes, particular events can cause
latent concerns to burst to the surface. One example would be all the questions
about whether Merck had fully disclosed the potential of its painkiller Vioxx
to cause heart attacks and strokes. Merck is embroiled in thousands of lawsuits
over the arthritis drug, which it pulled from the market in 2004. The
controversy has raised patients’ and doctors’ expectations that drug companies
should disclose more detailed results and analyses of clinical trials, as well
as experience in the market after drugs have received regulatory approval.
When such crises strike, companies
complain that they have been found guilty (in the courts or in the press)
because the rules have changed. But all too often, it’s their own fault: They either
ignored signs that stakeholders’ beliefs and expectations were changing or
denied their validity.
In addition, organizations sometimes
underestimate how much attitudes can vary by region or country. For example,
Monsanto, a developer of genetically modified plants, was badly burned by its
failure to anticipate Europeans’ deep concerns about genetically modified
foods.
Weak internal coordination.
Another major source of reputational
risk is poor coordination of the decisions made by different business units and
functions. If one group creates expectations that another group fails to meet,
the company’s reputation can suffer. A classic example is the marketing
department of a software company that launches a large advertising campaign for
a new product before developers have identified and ironed out all the bugs:
The Company is forced to choose between selling a flawed product and
introducing it later than promised.
The timing of unrelated decisions also
can put a company’s reputation at risk, especially if it causes a stakeholder
group to jump to a negative conclusion. This happened to American Airlines in
2003, when it was trying to stave off bankruptcy. At the same time that it was
negotiating a major reduction in wages with its unions, its board approved
retention bonuses for senior managers and a big payment to a trust fund
designed to protect executive pensions in the event of bankruptcy. However, the
company didn’t tell the unions. Furious when they found out, the unions
revisited the concessions package they had approved. The controversy cost CEO
Donald J. Carty his job.
Poor internal coordination also inhibits
a company’s ability to identify changing beliefs and expectations. In virtually
all well-run organizations, individual functional groups not only have their
fingers on the pulses of various stakeholders but are also actively trying to
manage their expectations. Investor Relations (with varying degrees of input
from the CFO and the CEO) attempts to ascertain and influence the expectations
of analysts and investors; Marketing surveys customers; Advertising buys ads
that shape expectations; HR surveys employees; Corporate Communications monitors
the media and conveys the company’s messages; Corporate Social Responsibility
engages with NGOs; and Corporate Affairs monitors new and pending laws and
regulations. All of these actions are important to understanding and managing
reputational risks. But more often than not, these groups do a bad job of
sharing information or coordinating their plans.
Coordination is often poor because the
CEO has not assigned this responsibility to a specific person. When 269
executives were asked in 2005 by the Economist Intelligence Unit who at their
companies had “major responsibility” for managing reputational risk, 84%
responded, “The CEO.” This means that nobody is really overseeing the
coordination process. Yes, the CEO is the person ultimately responsible for
reputational risk, since he or she is ultimately responsible for everything.
But the fact of the matter is, the CEO does not have the time to manage the
ongoing process of coordinating all the activities that affect reputational
risk.
Managing Reputational Risk
Effectively managing reputational risk
involves five steps: assessing your company’s reputation among stakeholders,
evaluating your company’s real character, closing reputation-reality gaps,
monitoring changing beliefs and expectations, and putting a senior executive
below the CEO in charge.
Assess reputation.
Since reputation is perception, it is
perception that must be measured. This argues for the assessment of reputation
in multiple areas, in ways that are contextual, objective, and, if possible,
quantitative. Three questions need to be addressed: What is the company’s
reputation in each area (product quality, financial performance, and so on)?
Why? How do these reputations compare with those of the firm’s peers?
Various techniques exist for evaluating
a company’s reputation. They include media analysis, surveys of stakeholders
(customers, employees, investors, NGOs) and industry executives, focus groups,
and public opinion polls. Although all are useful, a detailed and structured
analysis of what the media are saying is especially important because the media
shape the perceptions and expectations of all stakeholders.
Today, many companies hire clipping
services to gather stories about them. Text- and speech-recognition
technologies enable these services to scan a wide range of outlets, including
newspapers, magazines, TV, radio, and blogs. They can provide information on
such things as the total number of stories, the number per topic, and the
source and author of each story. While useful in offering a real-time sample of
media coverage, these services are not always accurate in assessing whether a
story about a company is positive, negative, or neutral, because of the limits
of the computer algorithms that they employ. They also tend to miss stories
that cite a company but do not mention it in the headline or first few
sentences.
Therefore, the old tool of clipping
services needs to be supplemented with strategic media intelligence. This new
tool not only analyzes every line in a story but also places the coverage of a
company within the context of all the stories in the leading media
(those that set the tone for the coverage of topics, companies, and people in
individual countries). Since the reputation of a company is a function of others’
reputations in its industry and the relative reputation of the industry
overall, having the complete context is essential for assessing volume and
prominence of coverage, topics of interest, and whether the view is positive or
negative.
Establishing a positive reputation
through the media depends on several factors or practices, according to
research by the Media Tenor Institute for Media Analysis (founded by coauthor
Roland Schatz) in Lugano, Switzerland.
First, the company has to land and
remain on the public’s radar screen, which involves staying above what we call
the “awareness threshold”: a minimum number of stories mentioning or featuring
the company in the leading media. This volume, which must be continual, varies
somewhat from company to company, depending on industry and country but not on
company size.
Second, a positive reputation requires
that at least 20% of the stories in the leading media be positive, no more than
10% negative, and the rest neutral. When coverage is above the awareness threshold
and is positive overall, the company’s reputation benefits from individual
positive stories and is less susceptible to being damaged when negative stories
appear. If coverage is above the awareness threshold but the majority of
stories are negative, a company will not benefit from individual positive
stories, and bad news will reinforce its negative reputation. All
companies—large or small—should care about staying above their awareness
threshold. Even if a small company has a very strong reputation among a small
group of core investors or customers, it runs a high risk of suffering
considerable damage to its reputation if its media coverage is below the
awareness threshold when a crisis hits.
A company’s reputation is also
vulnerable if the media are focused on just a few topics, such as earnings and
the personality of the CEO. Even if the coverage of these topics is extremely
favorable, a negative event outside these areas will have a much larger
negative impact than it would have if the firm had enjoyed broader positive
coverage.
Third, managers can influence the mix of
positive, negative, and neutral stories by striving to optimize the company’s
“share of voice”: the percentage of leading-media stories mentioning the firm
that quote someone from the organization or cite data it has provided. Media
Tenor’s research suggests that a company needs to have at least a 35% share of
voice in order to keep the proportion of negative stories to a minimum in
normal times. Strong relationships and credibility with the press are crucial
to attaining a large share of voice and are especially important during a
crisis, when a company really needs to communicate its point of view. In such
times, management’s share of voice needs to be at least 50% to ensure that critics
of the company don’t prevail. Merck’s travails after the problems with Vioxx
illustrate the consequences of a company inadequately managing its position in
the media. (See the exhibit “Merck: The Perils of a Low Profile.”)
Evaluate reality.
Next, the company must objectively
evaluate its ability to meet the performance expectations of stakeholders.
Gauging the organization’s true character is difficult for three reasons:
First, managers-business unit and functional heads as well as corporate executives- have
a natural tendency to overestimate their organizations’ and their own
capabilities. Second, executives tend to believe that their company has a good
reputation if there is no indication that it is bad, when in fact the company
has no reputation in that area. Finally, expectations get managed: Sometimes
they are set low in order to ensure that performance objectives will be
achieved, and other times they are set optimistically high in an attempt to
impress superiors or the market.
As is the case in assessing reputation,
the more contextual, objective, and quantitative the approach to evaluating
character, the better. Just as the reputation of a company must be assessed
relative to competitors, so must its reality. For example,
performance-improvement targets based only on a company’s results for the
previous year are meaningless if competitors are performing at a much higher
level. The importance of bench-marking financial and stock performance and
processes against peers’ and those of companies regarded as “best in class” is
hardly a revelation. However, the degree of sophistication and detail as well
as the accuracy or reliability of bench marking data can vary enormously. The
reasons include transcription errors (a big problem when a large amount of data
in paper documents has to be manually entered into electronic spreadsheets),
for instance, and the inability to determine whether the way competitors report
information in an area is consistent. One company might include customers’
purchases of extended warranties in its revenues, while another might not.
Some new tools should help address these
issues. One of the most noteworthy is Extensible Business Reporting Language
(XBRL). A version of the Internet standards technology Extensible Markup
Language (XML), XBRL allows each piece of information in a financial statement
to be electronically tagged so that it can be quickly and cheaply pulled into
analytical software. These tags are contained in dictionaries, or “taxonomies,”
based on sets of standards such as the U.S. generally accepted accounting
principles. XBRL-formatted financial statements are already available from
companies such as EDGAR Online, but these early offerings have limitations.
Taxonomies for specific industries must be developed; software for downloading
and analyzing XBRL data is still at an early stage; and EDGAR Online’s offering
includes European companies only if their shares are listed on a U.S. exchange
(although an XBRL taxonomy does exist for international financial reporting
standards, used by all members of the European Union and a number of other
countries). Christopher Cox, the chairman of the Securities and Exchange
Commission, is determined to address such limitations and accelerate the
widespread adoption of XBRL. Toward that end, he announced in September 2006
that the SEC will invest $54 million in an interactive data system based on
XBRL, which “will represent a quantum leap over existing disclosure
technologies.”
Another valuable new tool for managing
reputational risk is visualization software, which uses colors, shapes, and
diagrams to communicate the key points in financial and operating data. These
displays are a big improvement over the spreadsheets now widely used, which
often make it difficult for even the most financially sophisticated executives
to spot important anomalies and trends. Because it takes so much time to make
sense of spreadsheets, executives tend to focus on the largest business units
even though the greatest risks to reputation may reside in smaller ones—such as
a struggling foreign subsidiary that has begun to employ questionable means to
meet budget targets. (See the exhibit “One Drug Company’s Dashboard for
Spotting Potential Risks” for an example of a simple but effective use of
visualization software to highlight whether business units and products are on
track to meet year-end goals.)
Close gaps
When a company’s character exceeds its
reputation, the gap can be closed with a more effective investor relations and
corporate communications program that employs the principles of strategic media
intelligence discussed above. If a reputation is unjustifiably positive, the
company must either improve its capabilities, behavior, and performance or
moderate stakeholders’ perceptions. Of course, few companies would choose the
latter if there were any way to accomplish the former. If, however, the gap is
large, the time required to close it is long, and the damage if stakeholders
recognize the reality is likely to be great, then management should seriously
consider lowering expectations—although this obviously needs to be done in
careful, measured ways.
Monitor changing beliefs and
expectations.
Understanding exactly how beliefs and
expectations are evolving is not easy, but there are ways to develop a picture
over time. For instance, regular surveys of employees, customers, and other
stakeholders can reveal whether their priorities are changing. While most
well-run companies conduct such surveys, few take the additional step of
considering whether the data suggest that a gap between reputation and reality
is materializing or widening. Similarly, periodic surveys of experts in
different fields can identify political, demographic, and social trends that
could affect the reputation-reality gap. “Open response” questions can be used
to elicit new issues of importance—and thus new expectations—that other
questions might miss. It is generally useful to supplement these surveys with
focus groups and in-depth interviews to develop a deeper understanding of the
causes and possible consequences of trends.
Influential NGOs that could make the
company a target are one group of stakeholders that should be monitored. These
include environmental activists; groups concerned about wages, working
conditions, and labor practices; consumers’ rights groups; globalization foes;
and animals’ rights groups. Many executives are skeptical about whether such
organizations are genuinely interested in working collaboratively with
companies to achieve change for the public good. But NGOs are a fact of life
and must be engaged. Interviews with them can also be a good way of identifying
issues that may not yet have appeared on the company’s radar screen.
Finally, companies need to understand
how the media shape the public’s beliefs and expectations. Dramatic changes in
the amount of coverage influence how fast and to what extent beliefs and
expectations change. The large volume and prominent display of stories on the
backdating of stock options in recent months is one example of how the media
can help set the agenda. The sharp drop in stories about insurance brokers’
getting incentive payments from underwriters illustrates how the media can help
relegate a hot topic to the back burner.
Put one person in charge.
Assessing reputation, evaluating
reality, identifying and closing gaps, and monitoring changing beliefs and
expectations will not happen automatically. The CEO has to give one person
responsibility for making these things happen. Obvious candidates are the COO,
the CFO, and the heads of risk management, strategic planning, and internal audit.
They have the credibility and control some of the resources necessary to do the
job. In general, those whose existing responsibilities pose potential conflicts
probably shouldn’t be chosen. People holding top “spin” jobs, such as the heads
of marketing and corporate communications, fall into this category. So does the
general counsel, whose job of defending the company means his relationship with
stakeholders is often adversarial and whose typical response to media inquiries
is “no comment.”
The chosen executive should periodically
report to top management and the board on what the key reputational risks are
and how they are being managed. It is up to the CEO or the board to decide
whether the risks are acceptable and, if not, what actions should be taken. In
addition, top management and the board should periodically review the
risk-management process and make suggestions for improving it.
Managing reputational risk isn’t an
extraordinarily expensive undertaking that will require years to implement. At
most well-managed companies, many of the elements are already in place in
disparate parts of the organization. The additional costs of installing and
using the new tools described above to identify risks and design responses are
in the low to high six figures, depending on the size and complexity of the
company. This is a modest expense compared with the value at stake for many
companies.
A Framework for Managing Reputational
Risk Understanding the factors that determine reputational risk enables a company
to take actions to address them.
So the primary challenge is focus:
recognizing that reputational risk is a distinct category of risk and giving
one person unambiguous responsibility for managing it. This person can then
identify all the parts of the organization whose activities can affect or pose
risks to its overall reputation and enhance the coordination among its
functions and units. The improvements in decision making will undoubtedly
result in a better-run company overall.
Senior executives tend to be optimists
and cheerleaders. Their natural inclination is to believe the praise heaped on
their companies and to discount the criticism. But looking at the world and
one’s organization through rose-tinted glasses is an abdication of responsibility.
Being tough-minded about both will enable a company to build a strong
reputation that it deserves.
Why is having a good reputation important?
Reputation is important in business because it isn’t just one aspect of your
business. It is made up of all of the aspects of your business. It doesn’t
affect one area of your business, it permeates and influences all aspects of
your business. Your business reputation is an interconnected system that fuels
itself. As a result, a good reputation is a must for businesses that want to
continue to grow.
The Importance of a Business Reputation
People need information in order to form
opinions about a business, and they need opinions in order to decide how to
relate and interact with it. Having no reputation is just as bad as having a
bad reputation. After all, at least businesses with a bad reputation still have
a presence. Your business needs a reputation because it puts your business on
the map, helps it to stand
apart from the competition, and gives people a starting point
for engaging with it.
The Value of a Good Business Reputation
You know that your business needs a
reputation, and you know that you want a good reputation, but do
you know why you want a good reputation? Of
course every business owner wants people to like their business, but feeling
good shouldn’t be your only reason for pursuing a positive image. Here are 8
reasons why having a good reputation is important to your small business.
A Good Business Reputation Facilitates
Engagement
Your business reputation helps people to
determine how to engage with your business, but a good business reputation
determines whether people engage with it in the first place. If you have a bad
reputation—even if that bad reputation is skewed or misconstrued—you are at an
automatic disadvantage with all of your marketing campaigns. It is going to
take more effort to get people to trust you, let alone even warm up to you.
Your Business Reputation Is Not 100% in
Your Control
While your products, services, and brand
are in your complete control, your business reputation is not. Yes, you
can do things that build your reputation and influence how people feel about
your business, but ultimately you have no control over the minds of outsiders.
A good business reputation is important because even if it gives you little
influence over the minds of your target audience, it gives you the most
influence you will ever have, and you’ll take what you can get.
Your Reputation Amplifies Itself
Your business reputation is not only
what current and potential customers use to form an opinion about your
business; these opinions are that which influence other peoples’ and future
customers’ opinions as well. Your business reputation amplifies itself, so
having a good one is crucial.
Word of Mouth Marketing is real
With all of the social
media applications, online customer review
sites and content platforms available today, people
have more encouragement, ability, and convenience than ever before to voice
their opinion about a business. Furthermore, people trust the opinions of other
people, even if they are total strangers. Having a good business reputation is
important because it’s not just you that spreads the word about your business,
it is everyone. Plus, with a good business reputation, customers will feel more
confident referring you to others.
A Good Reputation Mitigates the Impact
of Bad Reviews
Unfortunately, people are typically
quicker to share negative experiences than positive ones. Even worse, one
negative review can hold as much weight as ten positive
ones. Online reviews are powerful, and negative reviews can cause serious
damage, but a good business reputation can help mitigate that damage. When your
business does encounter
difficult customers or unlucky experiences, the
negative reviews that result will have less clout. Far fewer people will adopt
or be influenced by that unhappy customer’s opinion if they already have a good
opinion of you to start with.
Reputation is More Than Just among Your
Target Audience
Your business reputation impacts all of
your relationships—not just those with your customers, niche
markets, or target audience. Your reputation also applies
to the people who work for you, invest in you, welcome you into their
community, partner with, and provide services for you. A good business
reputation is important because it will facilitate growth in your most valuable
relationships and will have a ripple effect throughout your entire network.
Why You Need to Keep a Good Reputation
Good Begets Good
As mentioned in the previous point, a
good reputation leads to better relationships in your network. The more people
you know, and the more people who like you, the more opportunities you will
have to spread
the word about your business, which in turn
increases the number of people who know and like you. If you do not have a
positive image in the eyes of people in your community, it is going to be
harder to plan events and carry out the very campaigns that you need in order
to build your reputation.
A Good Business Reputation Gives You a
Competitive Advantage
Having an online
presence and good products and services is great for
getting customers. However, what about getting customers to choose you
over your
competitors? A good business reputation is
important because it can help distinguish you from competitors, and even be the
deciding factor in whether someone chooses you over them.
Benefits of a Good Business Reputation
If you want to get more customers, you
need more customers to want your business. Having a good reputation is crucial
to getting people to pursue, trust, and engage with your business. While people
have the last say in what they do and think, your business reputation is a
major factor in their decision making. A good reputation benefits a business
because it:
- Distinguishes it from competitors
- Attracts supporters
- Builds resiliency with respect to non-supporters
- Creates opportunities for growth.
Conclusion
Reputation isn’t just about making your
business look good. It’s about ensuring that your business survives in the
larger business ecosystem and continues to grow. So take your reputation
seriously, and make having a good reputation your priority.
