No: 1 Risk Among All Risks
Today 75% of an average corporation’s value is intangible – or in other words, its brand and its reputation are a business’ most valuable asset1 and according to a survey by Deloitte 87% of executives rate reputation risk as more important than other strategic risks.2 However, despite knowing the impact of reputational damage, indicators point to the fact that most organizations still invest in managing reputational crises rather than in preventing it. In other words: reaction instead of action and damage limitation instead of proactive improvement.
Impact Across Various Sectors
The impact of reputational damage is evident in most sectors. It is there not only for transnational corporations but also for universities, B2B companies, charities, investors and CEOs. One of the major reasons why, for instance, the banking sector has been behind when it comes to implementing the best practice in reputation management is because the way they define reputation is incomplete and inaccurate. Despite the banks’ efforts put in managing reputation during the post-recession period it began falling again in 2018 after five years.3 In 2019 the series of reputational crises among the Scandinavian banks (Danske Bank, Swedbank and Nordia) reinforced the damage even further. Shares of these banks began falling continuously while negative media coverage about them grew exponentially and internationally.
The lasting impact of reputational damage is observed in the investment world as well. Research from FTI Consulting found that investors give far more importance to reputational factors than financial considerations when responding to corporate crises.4 In the area of non-profit organizations reputational risk is the biggest perceived threat to charities too. Charities need to take a longer-term view of risk or face “increasing threats” to their prosperity and security, according to a new report by a specialist insurer Ecclesiastical Insurance.5 The damage that came from the Oxfam scandal spilled over to the perception of the rest of the sector too. Reputational risks are there for universities just as they are there for businesses. “A scandal covered in a long-form magazine article resulted in about a 10% drop in the number of applications a school received or roughly the same impact on applications as a 10-ranking drop in the influential U.S. News and World Report College Rankings.”6
In the sphere of tech giants the impact of reputational damage on Facebook stands out the most. Its shares at the end of 2018 reached lowest closing share price in nearly 2 years.7 During the beginning of this reputational storm the company lost about $150 billion in market capitalization in less than two hours.8 Between 2018 and 2019 Facebook was among those who saw the biggest drop in brand reputation rating from 94 down to 43.9
In today’s day and age there is growing radical transparency in value chains as the world witnessed with such global cases as Volkswagen’s emission crisis or Hermes’ Birkin Bag scandal. It only takes using a smartphone by someone from PETA and record a short video of cruel practices at a crocodile slaughter farm, which was in the value chain for production of the famous handbags by Hermes. The rest of it unfolded so rapidly increasing the damage in the multifaceted way. It is much quicker and easier for an empowered consumer, informed stakeholder or a disgruntled employee to do great damage today or expose a firm than anytime before in history.
CASE STUDY: Boeing
In the aviation industry the world’s largest commercial aircraft manufacturer has been undergoing a multifaceted public relations nightmare. Two Boeing aircrafts of the same make and model fatally crashed killing almost 350 passengers within few months. As the investigations by the Department of Justice continued, in total more than 60 countries and airlines have suspended flights with this particular plane model.
One thing is clear: repairing the software or any other internal technicality of the plane won’t be enough to restore the trust in the aviation brand. Boeing will need to invest considerable amount of time, effort, attention and capital into repairing its reputation too. Not only will it be costly but it will also take long time for the brand to repair its reputation. According to experts, it is estimated that overall (loss of market share, stock fall, loss of brand value) it will cost them almost $40 billion.
The brand faced the reputational consequences that came from:
- the butterfly effect
- the domino effect
- the bandwagon effect
The butterfly effect is when a small change in the software caused large typhoons of crisis and disaster.
The domino effect, like a negative spiral, is when a communications problem became a technical problem that became a communications problem again which then became a societal problem and when the societal problem became an economic problem and when the economic problem became a fundamentally holistic problem etc.
The bandwagon effect is when different stakeholders began follow in each other’s footsteps in regard to decision making on the ongoing issue. Although not necessarily in this sequence everywhere but it went from airlines to regulators, from regulators to governments, from governments to other stakeholders as customers, online flight-ticket platforms, investors, shareholders, employees etc. For instance, the online flight-searching platform Kayak announced that, in the wake of the crisis from the fatal crashes, they’ll enable fliers to filter out the plane model they do not want to fly.10
Even though there isn’t much competition for the aircraft brand it still isn’t the only good choice out there either. As the airlines are likely to reconsider their options and postpone purchases with Boeing, a bigger slice of the market will likely go to Airbus to which Boeing has already been losing market share.
Read part two of “Preventive Reputability”, to be published on 12 August 2019, to learn how to minimize your risks.
Learn how we can help you proactively improve your reputation.
- Linssen, Alexander F. Brigham Stefan. “Your Brand Reputational Value Is Irreplaceable. Protect It!” Forbes, Forbes Magazine, 19 June 2013, www.forbes.com/2010/02/01/brand-reputation-value-leadership-managing-ethisphere.html#5c0f008b3790.
- “[email protected] | Deloitte | Survey, Global, Reputation, Risk.” Deloitte, 30 Oct. 2018, www2.deloitte.com/global/en/pages/governance-risk-and-compliance/articles/reputation-at-risk.html.
- Garver, Rob. “Bank Reputations Fall for First Time in Five Years: 2018 Survey.” American Banker, 28 June 2018, www.americanbanker.com/news/bank-reputation-survey.
- January 21, 2019 by John Harrington. “Investor Response to Crises ‘Led by Reputation More than Numbers’.” PR Week, www.prweek.com/article/1523418/investor-response-crises-led-reputation-numbers.
- “Reputational Risk ‘Biggest’ Perceived Threat to Charities, Report Reveals.” Charity Update, 25 June 2019, www.charityupdate.co.uk/news/community/reputational-risk-biggest-perceived-threat-to-charities-report-reveals/.
- Kingkade, Tyler. “How Media Coverage Of Campus Scandals Impacts College Applications.” HuffPost, HuffPost, 8 July 2016, www.huffpost.com/entry/college-scandals-applications_n_577e6ac1e4b0344d514e1bf9.
- Rodriguez, Salvador. “Here Are the Scandals and Other Incidents That Have Sent Facebook’s Share Price Tanking in 2018.” CNBC, CNBC, 21 Nov. 2018, www.cnbc.com/2018/11/20/facebooks-scandals-in-2018-effect-on-stock.html.
- “Facebook Lost Approximately US$150 Billion in Two Hours.” Stuff, www.stuff.co.nz/business/world/105770399/facebook-lost-approximately-us150-billion-in-two-hours.
- Feldman, Sarah, and Felix Richter. “Infographic: Brand Reputations That Took a Hit in 2019.” Statista Infographics, www.statista.com/chart/17269/drop-in-brand-reputation/.
- Isidore, Chris. “Kayak Will Allow Flyers to Filter by Plane Model, Including the 737 Max Jet.” CNN, Cable News Network, 13 Mar. 2019, edition.cnn.com/2019/03/13/tech/kayak-737-max-filter/index.html.