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No: 1 Risk Among All Risks

Read part one of “Preventive Reputability” to learn about the risk and impact of reputability issues.

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.

Benjamin Polak, a British professor of economics and management at Yale University, said that the next time there is a Nobel Prize in game theory, it would be for the idea of reputation.11 Rory Sutherland, Vice-chairman of Ogilvy One, wrote: “Reputation acts as a kind of cashless deposit in human dealings. As any mafioso or game theorist knows, you can only trust people who have something to lose.”12 In the definition of Cambridge Dictionary, reputation is the opinion that people in general have about someone or something, or how much respect or admiration someone or something receives, based on past behaviour or character.13 This means ‘reputation’ is more about what other people are saying unlike ‘brand’, which is what the organization is saying about itself. But the key question is who are other people? Contrary to common belief other people here doesn’t mean anything that is being said by anyone is of equal importance, let alone impact. Not all opinions and perception are of equal impact. Thus the other people in relation to reputation can be segmented using the approach of multi-stakeholder thinking. However, in order to truly apprehend what reputation is, it is necessary to know what it is not too. Reputation is not the level of popularity, buying audience, being all over mass media, green washing, loud signaling, fast communication etc.

What can be done to minimize the reputational risks?

Signs indicate that organizations across various industries and countries will continue facing the reputational threats that can come from:

Firstly, it is necessary for organizations to be truly aware that the risks of reputational damage exist in a world of increasing complexity and accelerating speed for exposure. Secondly, it is critical that organizations start seeing reputational risk as the number one risk among all other kinds of strategic risks there are.

For not being aware, for example Bayer had to learn the hard way in 2019. The smart organization learns from its own failures and mistakes while the wise organization learns from others’ failures and mistakes. Those organizations that think education, learning, becoming aware or training is expensive end up learning the hard way that is much more costly, which is why Preventive Reputability (PR) requires continuous learning and measurement of ongoing reputation-related operations.

In order to avoid suffering from reputational damage, it is necessary implement Preventative Reputability (PR). Preventive Reputability (PR) is the key to analyze and minimize reputational risks. It is about thorough constructivist consideration beforehand (pro-active, preparation, prevention etc.) and being considerate about others (respect, relationships, manners etc.). It is not incidental that the etymological root of the word reputation – from Latin ‘reputatio’ - is translated as consideration.14

The priority needs to be in being pro-active rather than reactive. The amateurs never do their homework and in turbulent times tend to react, if not overreact to almost every other thing while responsible professionals prepare and, when the time is right, respond. Preparedness has proven to mitigate risks. Handling a brand’s reputation requires thinking ahead and planning. As the enlightened polymath Benjamin Franklin said: “By failing to prepare, you are preparing to fail.”

Action steps

  1. Developing awareness, consciousness and sensibility about reputational risk entails monitoring both of internal processes/systems across the value chain and external developments. This way if something goes out of order, it is spotted on time. Since reputation, by definition, is what others are saying about the organization it is necessary to identify and map who the key stakeholders are. Consequently, this involves such criteria as social proof, the Net Promoters Score (NPS), employee satisfaction, network effect, key influencers, press relations, social responsibility and so forth. Is there enough continuous content development for your website or social media channels to make your voice present and reputation visible? Have you contacted the satisfied stakeholders for them to write a review on i.e. Google about your service/product?
  2. Using scenario training to test reputation management systems is a sine qua non. It is almost analogical to emergency procedures in a fire drill. It leads to simple steps as double-checking, for instance, the direct contact info of an HR director that is in the manufacturing factory in i.e. Bangalore in case a tourist-like person filmed an underage worker that was not in the Headquarters’ knowledge. At the same time if it wasn’t clear whether supervising this is among the responsibilities of the HR director, clarifying the responsibilities is another step.
  3. Integrity starts from within and then it spills over. It’s inside out. Discovering, identifying, articulating, aligning and communicating the underlying drivers of values, culture and ultimately Purpose enable socially responsible practices and processes internally and across the entire value chain. How on-brand is your day-to-day decision-making or communications? Is the daily internal behavior in accordance with the brand purpose? Are the values lived inside the organization or are they just filling your website’s vision/mission page?

Learn how we can help you in proactively improve your reputation.

 

References:

  1. “ECON 159: Game Theory.” CLCV 205 - Lecture 2 - The Dark Ages | Open Yale Courses, oyc.yale.edu/economics/econ-159/lecture-16.
  2. “The Price of a Good Reputation.” The Spectator, The Spectator, 6 Oct. 2012, www.spectator.co.uk/2012/07/the-wiki-man-the-price-of-a-good-reputation/.
  3. 13.“REPUTATION | Meaning in the Cambridge English Dictionary.” Cambridge Dictionary, dictionary.cambridge.org/dictionary/english/reputation.
  4. “Reputation.” Merriam-Webster, Merriam-Webster, www.merriam-webster.com/dictionary/reputation.

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 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.

 

References:

  1. 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.
  2. [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.
  3. 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.
  4. 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.
  5. “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/.
  6. 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.
  7. 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.
  8. “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.
  9. 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/.
  10. 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.
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