More Enterprises Investing in Protecting Their Reputations

By Vivian Tse

Corporate leadership teams are the guardians of an organization’s stability and financial well being. The growth of profits and protection of assets are always prominent concerns. While factors posing a potential risk to a company are routinely evaluated and addressed, one critical threat is frequently overlooked: reputation.

Unless the key elements of reputation risk are identified, prioritized and monitored, an enterprise is not fully protected against the impact of potential negative events and issues, which may result in reputation distress. A growing number of major global companies are investing substantial resources to manage their reputation risk and have increased their efforts to do so over the last four years, according to a report from the Conference Board in March.

“Safeguarding reputation is even more critical today because companies have developed successful ways to make reputation risk management part of their overall risk management,” says Ellen Hexter, director of enterprise risk management at the Conference Board and co-author of a report with Bayer Consulting President Daniel Sandy Bayer.

“In addition, different stakeholder groups are becoming more sophisticated in how they drive corporate reputations. Critics on the Internet can now transmit their opinions and complaints around the world with ease. Most importantly, consumers have high expectations that companies will not only produce quality products and services, but also will act ethically in their creation and distribution,” she added.

How to Manage Reputation

Reputation is defined as how a company is perceived by each of its stakeholder groups and reputation risk as the risk that an event will negatively influence stakeholder perceptions. Many reputation risks are the secondary result of other more traditionally recognized risks. For example, if a manufacturer produces an unsafe product, it may lose customers and will likely suffer financial setbacks due to a product recall, both of which impact reputation. Reputations may be damaged for a number of reasons, including that stakeholders perceive a company to be unethical.

“Although reputation is the quintessential intangible asset, a strong corporate reputation yields concrete benefits - higher market value, stronger sales, and an increased ability to hire the best and the brightest,” said Bayer.

Reputation risk should be managed throughout the organization. Although communication is of critical importance in responding to a risk event, a company’s reputation should be considered during the preparation and execution of strategy and new projects, which hasn’t been the case in most companies.

However, reputation risk is not often incorporated into risk management. Only 49 percent of executives surveyed in the Conference Board study said that the management of reputation risk was highly integrated with their enterprise risk management function or another risk oversight program.

Assessing Reputation Risks

Assessing reputation risks is a top challenge. Fifty-nine percent in the survey indicated that assessing the perceptions and concerns of stakeholders was an extremely or very significant issue, making it the highest-ranked challenge.

Media monitoring has become more sophisticated. There are now tools to assess whether coverage is positive, neutral or negative, the credibility of publications and the prominence of coverage, while efforts are being made to quantify the value of reputation. A select group of companies is making progress in this area by working with specialist consulting firms to quantify the impact of reputation on share price.

“Boards of directors, senior management, and operating management should demonstrate an active commitment to strong reputation management,” said Hexter and Bayer. “While crises are sometimes inevitable, a company’s reputation when it is most vulnerable and how the organization responds can have an enduring impact on how it is perceived for years to come.”

Getting Reputation Right: Wal-Mart vs. Costco

The principal tenet of building a reputation is that it cannot be created through advertising or public relations. It is established through ongoing interaction between a company and key shareholder groups whose values match. As Professor Stephen A. Greyser of Harvard Business School put it, “Actual corporate behavior far outweighs corporate communications about behavior — especially promised behavior.”

An example of a successful company that continues to suffer from a perceived negative reputation is Wal-Mart. The world’s largest retailer, second on the Fortune 500 list and largest private employer in the U.S. has a reputation risk problem. In a 2002 survey of senior executives at companies in retail, Wal-Mart ranked below its peers on an important element of reputation: ethics.

“The company is in the bottom half of being trustworthy, adhering to ethical business practices and being open and honest with the public. This low score may reflect competitors’ negative response to the cost advantage that Wal-Mart achieves through its considerable leverage over vendors,” said Rating Research.

However, Wal-Mart ranked at the top in six of the eight reputation dimensions identified in retail: market responsiveness, financial stability, strategic investment, differentiation, customer loyalty and workforce diversity. Investing in PR is not enough. The company attempted to salvage its reputation by injecting millions of dollars into a corporate image campaign that backfired when community newspapers refused to provide free PR given that Wal-Mart does little print advertising.

Unlike Wal-Mart, Costco doesn’t have a PR department and doesn’t spend on advertising. “There’s a real business advantage to treating employees well,” as co-founder and CEO James Sinegal put it.

Costco, the third-largest retailer in the U.S., has the lowest employee turnover rate in the retailing industry, five times below Wal-Mart’s. As ABC News reported, “What Sinegal has proven is that a company doesn’t have to be ruthless. Being humane and ethical can also make you money.”

The reputation audit is essential to “getting reputation right.” The audit lays the foundation for a final tracking and monitoring phase ensuring that reputation remains solid. Reputation measurement and diagnostics should be treated as an investment with an expected return on investment, not an expense.

 

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