A Full Service Global Management Consulting and Executive Training Firm
(Morgan O'Rourke, Risk Management, April 1, 2004)
One of the most valuable assets that any company has is its reputation. In many competitive industries, the differences between the products or services that companies provide can be difficult to distinguish for the average consumer. With all things seemingly equal to a consumer that is unaware of the subtleties of a given operation, choices are often made based on arbitrary criteria that may have less to do with performance or quality and more to do with general perceptions. This is where reputation can be the all-important deciding factor as to whether or not a company gets and retains business.
A good reputation can convince the undecided to choose a certain product or service and dissuade existing customers from moving to a competitor. But a damaged reputation can be irreparable and, in extreme cases, lead to a company's downfall. One need look no further than the demise of Arthur Andersen in the aftermath of the Enron scandal to see an example of the perils of a damaged reputation. While Enron was merely one client, the auditor's sins were deemed so unforgivable that they were unable to sustain a client base and continue operations. In the financial services industry, with many other organizations offering similar services, potential clients saw no need to tolerate a disgraced company and the potential wrongdoing its recent history suggested.
But while corporate scandals have led to an increased focus on reputational risk management, this is not the only area where reputation is threatened. "No organization is immune to reputational risk," says Catherine Bennett, president of Cost Control Concepts, Inc. Companies that promote trust and cater to the safety and well-being of their customers and their families may be especially vulnerable when an incident violates that trust and tarnishes their reputation, but any organization is susceptible.
The transportation company with a reckless driver and the amusement park with a malfunctioning ride will face, along with other liabilities, reputational damage should injuries occur. A manufacturer of children's products whose spokesperson is arrested on child molestation charges needs to be concerned about their image just as a drug company facing a tampering scandal and a restaurant dealing with a disease outbreak also need to factor the effect on reputation into their management of these events.
According to Janice Ochenkowski, senior vice president at Jones Lang LaSalle, senior management's sense of fiduciary responsibility to protect the interests of their shareholders and employees is at the heart of managing their reputation. Fiduciary responsibility means that in its quest to be profitable, an organization must consider the balance between the duty of obedience and the duty of care, or put more simply, the balance between legal obligations and ethical practices. Sometimes what may be legal may not be ethical, putting the reputation of the organization at risk.
For the amusement park, safety regulations may dictate a minimum level of protective equipment for a certain ride, but an ethical organization might choose to provide greater assurances to protect their customers even if it means incurring an additional cost. The park's reputation as a safe place will likely be much more valuable than saving a few dollars on safety equipment. "Companies need to weigh the letter of the law versus the spirit of the law," says Ochenkowski. In other words, effectively managing reputation risk may require imposing higher standards than simple legal compliance.
With the right corporate culture in place, it is important to know what to do to manage events should an incident occur. Reputation should become another part of an organization's crisis management plan. "What risk managers should really be thinking about is where they are most vulnerable to reputational risk," says Bennett. "They should be assessing that risk the same way they do when they are evaluating their property exposures."
This means that including reputation in an exposure assessment is really no different than any other steps in crisis management planning. "It is the risk management process at its most basic," says Ochenkowski. "Think about what might happen, think about what you're going to do about it, review it from time to time, and if you are unfortunate enough to have an incident, look back and see what needs to be changed. You can even use what happens to others as a measure against your plan to see what works and what doesn't in order to revise your own plan."
The most important component of a plan to protect reputation is a good communication strategy. More than anything, reputation is spread by word of mouth, so it is important to have some control over what that word will be. "The communication plan should address the community--the employees, the customers, the suppliers and the stockholders, as well as the media," says Bennett. By keeping everyone that comes into contact with the company informed, it will prevent the spread of damaging rumors that may or may not be true. Once the media picks up the story, the news will spread quickly. "In times of crisis, stories and rumors begin flying," she says. "While there may have been wrongdoing on the part of the company, the company needs to control how that message gets out there because there is a lot of confusion and misinformation."
In order to develop the public relations skills necessary to become media savvy, risk managers should work closely with their marketing and communications departments. This alliance will maximize the risk manager's ability to protect reputation assets and minimize any damage from an incident. But a company should not rely solely on public relations either. "There is a tendency by companies to think that reputation can be managed in a public relations or public affairs department and it can't," says Judy Larkin of the London-based reputation management consulting firm, Regester Larkin and the author of Strategic Reputation Risk Management. "It has to be managed at the top and across the organization."
An important aspect of communication with the media in a crisis is determining the proper spokesperson. If the chief communications officer or public relations executive is the spokesperson, an organization may benefit from their high level of communications and media-handling skills, but this person may also be perceived as trying to spin the incident in favor of the company. In contrast, the chief counsel is an appropriate choice if a lawsuit is the primary concern and will send a message that the organization is protecting its legal rights and trying to avoid further litigation.
Usually the CEO is the ideal spokesperson. "Communication strategy needs to be led from the top as an expectation of the chief executive," says Larkin. "The chief executive should be the leading communicator or the leading face of the organization and should be the ultimate reputation manager." CEOs minimize reputational damage because their presence can convey a message of personal involvement, compassion and honesty. It shows that even the top executive is willing to stand behind the company as it tries to resolve the issue.
After establishing a spokesperson, a communications strategy needs to be determined. How quickly will the organization respond and what will the message be? This will depend on the organization and the incident. In some cases, outright dismissal of the incident as a fluke might be the appropriate response. But other situations may call for organizations to resolve the crisis quickly and by taking responsibility for it and/or maintaining constant communication with customers, shareholders and the media. Cases involving Tylenol tampering and recalled Odwalla juices, for example, were not permanently damaging because the companies had such a plan and executed it successfully before a negative impression could take over. Such was the case in 1993, when Pepsi faced a nationwide scare that hypodermic needles were turning tip in their soda cans. In a nine-day media blitz, Pepsi opened its canning lines--and its CEO--to the public--show that their tears were misplaced. Ultimately, the scare turned out to be an elaborate hoax that landed its perpetrators in jail. Pepsi, on the other hand, not only preserved its reputation, but it won a prestigious national public relations award for its handling of the crisis. The entire incident cost Pepsi some $ 35 million--$ 25 million in advertising and publicity and another $ 10 million in coupons to woo back customers--but it worked. The company paid dearly for a problem it did not create, but to have done otherwise would have turned a reputation crisis into a near-fatal corporate disaster.
Many organizations recognize the importance of their reputation and, by extension, their brand and work aggressively to protect themselves from anything that might be damaging to their image. Copyright and patent infringements are strictly guarded against because the misuse of a brand name might give consumers the wrong idea about the company that was infringed upon. But that protection must not stray too far and turn into corporate bullying. In such a case, efforts to protect are the very things that cause harm.
In a recent example, a 17-year-old Canadian student named Mike Rowe created a cleverly worded Web site, www.mikerowesoft.com. This caught line attention of software giant Microsoft, who threatened legal action for what it saw as a trademark infringement. After negative publicity began to generate from Microsoft's actions, the company admitted that they may have handled the case a little too seriously and settled with Rowe, giving him an Xbox video game console and other gifts for the rights to the site. Although the case was resolved quickly, Microsoft's aggressive stance showed that there is a limit to how far a company can go to protect its reputation. "Corporations have to look comprehensively at what the impact of their actions is going to be," says Bennett. "They may or may not be wrong in terms of their aggressiveness but it is going to have an impact on the public's perception." Once again, communication and interaction with public relations departments will be integral to helping a risk manager gauge how efforts will be perceived by the public and just how far is too far.
Developing a plan to protect reputation is an integral step for any company but there is no definitive way to go about doing this. Each company will handle the process differently. For some it may take a change in corporate culture in order to recognize the value of reputation while others may simply be able to make it part of their existing crisis management plan. Undoubtedly, the corporate reputation is an asset that needs to be preserved.
"Companies spend hundreds of thousands of dollars to create an image, brand name or marketplace reputation, and that takes years to establish," says Bennett. "It only lakes that one incident to significantly impair the public's perception of that image and really damage a brand name."
Thus, the risk manager needs to assess the risk and plan for it before an incident occurs. According to Ochenkowski, "Risk management is not complete if it does not include reputational risk."