CEOs and board members routinely list reputation as one of the company’s most valuable assets. EisnerAmper’s Annual Board of Directors Survey 2013, for example, lists reputational risk as the number one nonfinancial risk to companies. These developments are particularly pressing in the global food sector, where maintaining consumer trust is essential for continued business success. The challenges to companies are many, including food safety, as illustrated in the recent Chipotle crisis, concerns over ingredients such as genetically modified organisms in addition to concerns over animal welfare, sustainable agriculture, working conditions at global suppliers and, more recently, fears about terrorist attacks on the food supply chain.
Yet, every month, a new reputational disaster makes the headlines, destroying shareholder value and trust with customers and other stakeholders. While the sources of the crisis may vary from case to case and from industry to industry, in all cases, financial markets punished the companies, leading to a severe and sustained erosion of their respective market values. Often, the loss of public trust is only the beginning of a company’s troubles. Lawsuits, public hearings and investigations soon follow. In some cases, public officials may sense an opportunity to pursue policy agendas or occupy the role of heroes taking on corporate villains. In other cases, regulators and politicians may feel public pressure to take decisive action, changing competitive environments.
In every single case, observers have pointed out specific mistakes by senior management and offered advice on how to avoid similar disasters. But it would be a mistake to focus just on the specific tactical mistakes in any given case and miss the broader trends that manifest themselves in ever more frequent and severe corporate crises. Business globally faces a trust crisis. The 2013 Edelman Trust Barometer shows that fewer than one in five respondents believe a CEO would tell them the truth in a tough situation. Even fewer trust governments. Business can no longer rely on a trust reservoir.
Why Risk Is Increasing
At root, these developments are driven by a mismatch between a dramatic increase in corporate reputational risk and the existing capabilities to manage it. In short, reputation management capabilities have not kept up. The increase in reputational risk is due to three main factors. The first is the global news environment, turbocharged by the growth in social media. Social media are not only an avenue for sharing information and opinion quickly and permanently, but they can also help diverse constituencies better organize. Companies have less and less control over their messages, shifting the balance of power from companies to customers and other stakeholders.
The second factor is a consequence of rapid globalization and outsourcing. Ever more complex supply chains have increased the scale and scope of reputational risks. Companies are less able to monitor business practices or anticipate emerging issues. Once a crisis occurs, whether on safety, data security or labor conditions, it is the large, visible company that tends to get blamed, even if the ultimate cause was further up the supply chain. Reputational risk transcends the legal limits of the company.
As a third factor, expectations about business responsibility are increasing. Customers no longer simply expect companies to keep their brand promise; they also expect flawless business processes across the board, whether in data security, privacy or customer support. Moreover, both customers and other stakeholders increasingly expect companies to align their business practices with social and moral standards that exceed legal or regulatory requirements.
Reputation Building and Management
While executive committees and boards have started to pay attention, most companies still believe that building a strong reputation is easy and only requires common sense; it is merely a natural consequence of doing right by customers, employees and business partners. This approach is flawed. Good business practices are important, even necessary, but they are not sufficient for successful reputation management. A company’s reputation needs to be actively managed like any other core business asset. Successful reputation management is difficult. It requires a high level of strategic sophistication and mental agility that sometimes runs counter to day-to-day business decisions. A company’s reputation consists of what others are saying about the company, and not just its business partners and customers. It is essentially public. This necessitates the ability to assume external actors’ perspectives and viewpoints, especially when they are critical or even hostile toward the company. Frequently, constituencies that have lain dormant for many years can suddenly spring into action, particularly in the case of reputational crises. Companies need to have a process to identify such risks.
Building a reputation management capability requires the commitment to treat reputational difficulties as understandable—and even predictable—challenges that one should expect in today’s business environment. As a result, companies should handle reputational crises like any other major business challenge: based on principled leadership and supported by sophisticated processes and capabilities that are integrated into the company’s business strategy and culture.
Many executives mistakenly assume that a good reputation simply follows from having good business practices and doing right by customers, employees and suppliers. According to this view, a high level of business integrity is believed to be both necessary and sufficient for building and maintaining a stellar reputation, whereas concrete reputational threats can be delegated to public affairs, legal or outside advisers. This common approach has two unfortunate consequences. First, general managers do not view themselves as responsible for protecting and enhancing the company’s reputation. Designing a supply chain, for instance, is often largely driven by cost and reliability concerns but does not incorporate the potential negative reputational impact of appalling supplier labor conditions for a major brand, as many major retailers experienced after the 2013 collapse of the Rana Plaza garment factory in Bangladesh. Second, in most companies, communications professionals do not participate in major business decisions but are brought in when the decision has already been made, often tasked with containing the fallout of an ill-conceived business decision.
Steps to Building Trust
At the root of the problem is a misconception of the source of reputational challenges. Most reputational crises do not happen because of some external event or misfortune; rather, they are the direct consequence of company actions or inaction. Decisions are made without consideration for their reputational impact. Decision makers fail to act as the stewards of the company’s reputation.
While communication plays an important role in the process, active reputation management should be tightly integrated into strategy decisions and coordinated with activities across the enterprise. The value of this approach is clear. Once executives are aware of the reputational risk of an issue, they can take proactive measures. Specifically, the effective mitigation of reputational risk has two critical components: Prevention and Preparation.
Prevention consists of steps to reduce or eliminate a particular risk. In general, prevention strategies aim to reduce the likelihood that an adverse event will occur, ideally to zero. In a quality management context, it may consist in additional quality controls. In a marketing context, it may consist in the elimination of an advertising strategy that may cause outrage. In a mergers-and-acquisition context, it may mean that a company walks away from an acquisition as questionable business practices come to light during the due-diligence process.
But not all risks can be prevented. This is where Preparation strategies come into play. They are intended to mitigate the impact should an adverse event materialize. For example, prudent reputational risk management will be aware that during a reputational crisis, it may lose control over customer perception. Customers may believe the media or third parties more than they believe the company. A preparation strategy will establish relationships with trusted third parties that can be called upon when necessary. Building such relationships takes time and effort. They are difficult to establish during a crisis; there often is no time to identify the relevant third parties, and outside experts may not want to associate with a company that has lost public trust.
Generally, today’s business decisions limit or expand a company’s room to maneuver in a future reputational crisis, whether the company is aware of this impact or not. Today’s decision to cut data security expenses will haunt the company if it becomes the victim of a hacking attack. To avoid this, proactive reputation management must anticipate the possibility of such developments and incorporate them into decision making. A proactive mindset means that leaders are aware that through their business decisions today they are creating the facts that will be the basis for the company’s story tomorrow.
What is needed is not another corporate function but the development of a reputation management capability. As with any capability, it requires the proper mindset and processes, and the values and culture to support them.
Navigating the Process
Effective reputation management begins with the right mindset. A company’s reputation is essentially public. Successful reputation management therefore requires the ability to assume external actors’ perspectives and viewpoints. Many of these actors (although certainly not all of them) are motivated by moral or ideological concerns that the company or its managers do not share; indeed, they may be openly hostile toward the company’s business practices. This often leads to a defensive, reactive posture on the part of business leaders. The executives’ gut reaction to a reputational crisis may be emotional, or based on anger or self-pity.
Instead of following their (often flawed) gut reaction, business leaders need to think strategically. A strategic approach requires the emotional fortitude to treat reputational difficulties as understandable and even predictable challenges that one should expect in today’s business environment. This implies viewing reputational decisions not solely as PR issues but also as decisions that are tightly connected to the company’s strategy, its core competencies and values, and its distinctive position in the marketplace.
A strategic mindset requires situational awareness, being aware of one’s surroundings and identifying potential problem issues. Reputational challenges frequently are created by activists, interest groups and public actors with the goal of forcing changes in business practices through corporate campaigns. Understanding and anticipating the motivations and capabilities of these external actors—people who are not specialists but still may have strong opinions and influence—are essential for situational awareness. Activists are competitors for the company’s reputation. They need to be treated as seriously as competitors in the marketplace.
A strategic mindset also necessitates avoiding the expert trap. Acquiring and using expertise in a coordinated fashion are, of course, tremendously valuable and at the root of any efficient organization. But in the context of reputational challenges, they can lead astray even the most well-meaning companies, as they unduly restrict attention to only familiar, technical aspects of an issue. In a food safety scare, a food scientist will point to his company’s industry-leading safety standards and may be bewildered when the media focus on one specific victim. The difficulty lies in the public nature of reputational challenges, where company actions are evaluated by nonexperts through the filter of the media. This requires decision makers to temporarily set aside their expertise and consider the situation from the point of view of the public.
To do this effectively, companies need to build effective decision processes based on the following principles:
• Reputation consists of the perception of customers and other constituencies.
• In many cases, these perceptions are not derived from actual experience with the company or a deep knowledge of any given issue, but from an ever-changing mixture of opinion and information driven by traditional and social media, and various influencers ranging from experts to advocacy groups.
• Proactive reputation management requires companies to identify issues early, connect them with the business strategy, develop prevention and preparation strategies and implement possible changes to the business practices in advance of an issue’s gaining momentum.
This sequence can break down at various points. Executives may not realize the importance of reputation management for business success, governance structures may be lacking or incentive structures may reward short-term vision. But companies may also fail to adopt effective strategies because they are simply unaware of the imminent risk. In other words, even perfectly designed governance and decision-making structures will be ineffective if they lack critical intelligence. This is the rationale for anticipatory issues management (AIM) processes.
Building the Right Team
Anticipatory issues management processes have three essential components:
1. Issue Identification
2. Issue Evaluation
3. Issue Monitoring
The purpose of the issue identification function is to create awareness. The goal is simply to list all issues that may affect a company’s reputation or other related risks. Although issue identification may sound like an easy task, it is not. The main threat is the presence of “unknown unknowns” or “black swans,” that is, issues that the company is unaware of.
Unawareness is different from uncertainty. In the case of uncertain events, we may not know whether an event will occur, but we can assess its likelihood and take proactive measures such as prevention or preparation. This is the domain of risk management. But if a company is unaware of an issue, none of these strategies are available; the company is blindsided. Thus, simply reducing unawareness provides tremendous value. Once issues are identified, they can be evaluated and monitored.
In practice, companies are well advised to have in-house AIM teams. They fulfill the same function as intelligence agencies in the area of national security using a combination of human and open-source intelligence. It is here that technology solutions such as web-scraping or issue-identification software can be most helpful. Yet, such technology-driven insights need to be evaluated and assessed by well-trained specialists. Effective AIM teams provide a first evaluation of issues and present actionable strategic options to senior management. At a later stage, they can also evaluate whether a chosen course of action had the desired effect. If an in-house capability is beyond a company’s means, managers should consider procuring such services from an outside vendor.
But intelligence is worthless if it is not integrated into the operational processes of the business. Creating a separate corporate function is one common approach: a chief reputation officer (CRO) or chief reputational risk officer (CRRO). This approach works only if the position is well resourced and participates in important business decisions at the enterprise level. An additional pitfall in this approach is that other executives may consider reputation the exclusive responsibility of the CRRO, one that can safely be delegated without integrating it into day-to-day business operations. Unless carefully designed, the establishment of a CRRO thus can create additional barriers to integrating reputation management and business strategy and actually hurt the process rather than help it.
Alternatively, companies should consider creating a corporate reputation council (CRC), a cross-functional unit of senior executives with actual decision-making authority. It is critical that the CRC mirrors the actual operating structure of the business. In some businesses, it makes sense to extend the jurisdiction of the CRC to include regulatory and political developments as well as macroeconomic ones. In that case, it effectively becomes the corporate relations council. The governance structure should be closely connected with the intelligence function. This means that the CRC provides strategic direction to the intelligence function and receives actionable intelligence that is directly connected to the corporate strategy. Figure 1 summarizes an effective issues and reputation management system.
In sum, an anticipatory issues management process is a crucial component of any reputation management capability. But issues management capabilities need to be tightly integrated into the business processes. Only then can the process support executives in their roles as stewards of the company’s reputation.
Daniel Diermeier, Ph.D., is provost and Emmett Dedmon Professor at the University of Chicago’s Harris School of Public Policy. A highly decorated teacher, Diermeier is a fellow of the American Academy of Arts and Sciences and the Guggenheim Foundation and has served as an adviser to industry leaders such as Accenture, BP, Shell and McDonald’s. This article is in part based on his book Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset (New York: McGraw-Hill, 2011).