A Weber Shandwick and KRC Research study found that executives attribute 63% of their company’s value to its reputation. Reputation risk also ranks high in the list of strategic risks for a company. Usually, all the functions and resources parked for addressing threats to a company’s reputation or brand image are isolated. However, to implement effective governance strategies, companies need to enforce a high level of connectedness among the various parts of the business.
Reputational risk events usually arrive with little to no warning, and they force companies to react swiftly and in real-time. To have a stronger footing in times of crisis and to combat this uncertainty, companies must design comprehensive risk control matrices that evaluate the brand’s threats in real-time. An organization’s brand equity traditionally includes customer loyalty, public perception, positive brand association, and recognition. Even though these elements are intangible, they can directly affect a company’s bottom line.
Risks to the reputation and the brand are ofttimes tied to the emotions and trust of the market’s sell-side. This means that the risk to a company’s value is high — as coronavirus-induced Black Monday showed. If companies don’t rush to address the reputational threats, they run the risk of seeing a containable event become something worse. If there is a gap between a company’s reputation and its reality, companies must either bridge that gap or promise less and meet reality — the second one isn’t likely at all. Unaddressed gap, inevitably, leads to some type of discrepancies in the company as Enron, Computer Associates, and Rite Aid can testify.
On the flip side, if managed well, organizations can come out, influencing their target audience’s perceptions and having created positive value for themselves. It becomes a great opportunity for companies to showcase their beliefs and values. Companies can leverage these risk management practices to prove that their core values go beyond the description on the website and are implemented from the grassroots. The way Johnson & Johnson reacted to the Tylenol crisis is proof of that statement.
Before any other constructive action can occur — whether it’s serving customers or managing internal communications — the morale of the stakeholders must be rebuilt.
More than the employees, this show of values affects the customers because customers are the most important stakeholders for a company measuring the risk to its reputation. When General Electric committed twice its R&D investment to developing cleaner technologies, and when GlaxoSmithKline spearheaded the effort to develop retroviral drugs for AIDS, it improved the stakeholders’ confidence in the way these businesses were operating.
Companies may think that they have a good reputation, when, in fact, they might not have any reputation at all in the market. Deloitte quotes Reto J Kohler, the managing director and head of Strategy for investment banking at Barclays as saying, “Who decides what your reputation is?” The question is important because reputation risk is not like any other risk. In a legal environment, companies know the law, and they know their boundaries.
But, in case of reputation risk, what to do is not defined at all. What one company chooses to do might not be the same as what another might choose to do. Because of the inherent complexities, it is hard to identify or foresee what’s going to happen. If the Maruti HR fire incident is anything to go by, it is not always just choice — it is also about the perceived damage by the management
One more reason for this complexity is because reputation is omni-driven. Several studies have shown that reputation goes beyond a single factor. Companies can no longer afford to rely on just a few metrics for managing — or identifying — their reputation. Spotlight can be unforgiving because customers will shun companies they lose their trust in.
A company’s reputation could get tarnished because
- They ignored the signs that there is a shift in the shareholders’ beliefs and expectations from the company
- They chose to ignore the shift and believe that it wasn’t valid or that it was a temporary phase, because why change something that isn’t broken.
In this article:
Mitigating the Risk to Reputation
Who Is In Charge of Overseeing Reputation Activities
Reputation is Omni-Driven
Reputation is Influenced by Communication
Reputation has a Sizeable Impact on Market Value
Mitigating the Risk to Reputation
As discussed above, reputation is a company’s most valuable asset. It goes beyond the balance sheet, the services, its CSR, and other communication activities. To balance the enormous responsibility, companies must ensure that they include processes for the reputational crisis in their crisis management plans.
When a company does something right, sceptics ask what is in it for the company. It takes significant efforts and transparent communication to prove that the company is genuinely doing something and solidify its reputation as a sustainable business.
“It takes many good deeds to build a good reputation, and only one bad one to lose it.”
Benjamin Franklin
The Committee of Sponsoring Organizations of Treadway Commission (COSO), an association of US accountants and financial executives, in 2004, released a 135-page framework for ERM, documenting almost every type of risk but risks to public perception and reputation. Nor do Basel II norms which specifically exclude strategic and reputational risk. One reason Basel II did not record risks to the reputation was because of the difficulty in factoring then into capital-adequacy requirements. Basically, reputation is generally the consequence of other tier-one risks.
So, how to manage reputation risks? While there isn’t a set formula, some standard methods are used in fixing a reputational crisis.
- Identify specific risks and quantify their impact on the reputation
- Create a baseline to use in measurement and evaluation
- Establish a framework that constantly monitors and manages issues that can have a potential risk on the reputation
- Provide for processes that can protect and improve organizational reputation in line with the company’s culture and resources.
- Identify processes that can deal with the escalation of issues that can explode into a crisis.
But how is reputation measured? A study by Weber Shandwick identified 10 factors that companies can use for measuring reputation.
- Employee engagement/satisfaction
- Financial performance
- Surveys — both online and offline
- Awards and ranks
- Online customer ratings
- Media coverage
- Personal judgment
- Social media activities
- Number of website visitors
- Government support, funding, and grants
Who Is In Charge of Overseeing Reputation Management Activities
Economic Intelligence Unit, in 2005, had commissioned a study titled Reputation: Risk of Risks. Among other things, the study discussed the appropriation of responsibility for managing reputation. Out of the 270 interviewed executives, 84% answered that the CEO is responsible for managing reputational risk. True, the CEO is responsible for managing a company’s reputation because a CEO is in charge of everything in the organization. But, asking the CEO to coordinate all efforts for managing reputational risk is a waste of resources.
That study highlighted a critical control failure — no one was in charge of overseeing the coordination processes for managing risks to the reputation. Lack of dedicated resources means internal coordination can suffer. The expectations set by one sect of the organization should fall within the contemporary capabilities of all other related sects in the organization — something that American Airlines can attest.
Not allotting a specific person the responsibility for identifying shifts in stakeholder perceptions means the functional groups in the organization are effectively working in silos, something that can have detrimental effects for the organization.
Reputation is Omni-Driven
Organizations can no longer afford to focus on isolated elements for managing their reputation. The number of drivers that affect public perception is too numerous to count. The reputation of a company is generally relative to the reputation of the overall industry. This means having context is important before identifying whether a specific news story or event is positive or negative.
A company should not only land in the favourable gazes of the public but must manage to stay there. To do this, a company must stay relevant through a continual stream of stories and reportings in the media — either print, digital, or social media. The general thumb rule is that at least 70% of the stories about the company should be neutral to keep the public perception above what the HBR calls “awareness threshold”.
Reputation is Influenced by Communication
The nature of media coverage is important for the reputation of a company. Companies must strive to stay above the awareness threshold and make sure that the coverage is comprehensive. If the media coverage for any issue focuses on select aspects, a company’s reputation can take a hit with negative events outside those select aspects. So, even if a company maintains a good reputation with the investors, failure to make the coverage comprehensive can pose a high reputational risk.
Having a fair ‘share of voice’ is important too. A share of voice is that part of media coverage where data from the company is cited, employees from the company are quoted, or interviews of the executives of a company given. Organizations must work on upping the share of voice to keep the negative opinions at a minimum in times of crisis.
Reputation has a Sizeable Impact on Market Value
Reputation measurement will always benefit from being contextual, objective, and highly quantified. Managers can tend to either overestimate their company’s reputation or cite a reputation where there’s none. Tools like Extensible Business Reporting Language (XBRL) can help in financial tagging and analysis. When a company’s performance and character exceeds its reputation, it needs to develop better investor relations and more effective communications programmes.
Regular surveys of employees and customers is a good way to assess public perception and market reputation. If conducting surveys is one side of a coin, assessing whether those surveys indicate a gap between reputation and performance is the other.
The board should also appoint one dedicate resource to take care of all the elements that pose a reputational risk. When choosing such resources, there must not be an apparent conflict, such as those that marketing or communications executives have with the stakeholders. These resources should report to the board identifying reputation risks and what they are doing to plug those gaps.
Giving one person unambiguous responsibility of managing reputation makes for better performance and greater accountability.
Conclusion
Senior executives in an organization generally tend to absorb praise and discount criticism. But, choosing to ignore the negative side just means they aren’t willing to consider what their organization isn’t doing right. Being open, transparent, and gritted is a good way to build and maintain a reputation with all the stakeholders.