The Vulnerability of Corporate Reputation

Leadership for Sustainable Long-Term Value

Peter Verhezen

• Publisher: Palgrave Pivot
• Year: 2016
• ISBN:
  9781137547378
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

The Vulnerability of Corporate Reputation explores the role that reputation plays in the success and failures of companies. This book focuses on the traditional topic of reputation risk management, the process of reputation, reputational excellence and examines leaders whose reputation and foresight could benefit the organization they steer.

Part I

The Complexity of Governing Reputational Risks

Verhezen, Peter. The Vulnerability of Corporate Reputation: Leadership for Sustainable Long-Term Value. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137547378.0003.

Concerns among boards about their reputation and the risks to reputation have increased dramatically in the past decade. Globally, reputation risk has become one of the top risk concerns of any CEO or board, next to retaining managerial talent and sustaining creative innovation. Owing to the amorphous and ambiguous nature of reputation, senior executives and board members find this “risk of risks”¹ harder to manage compared to any other risk. Not only is it difficult to measure reputation risk, but hardly 60 percent of most (global) companies have prepared a plan in place to manage reputation risk.² Responsibilities to manage and reduce reputational risks are often fragmented and therefore poorly coordinated, which in itself can increase the reputation risk. Obviously, reputation risk will not fade away by itself.

Never has trust in business been lower, yet never has it been more important in business exchanges and building relationships. CEOs are among the least trusted professions, just barely ahead of used-car dealers and politicians.³ Business has been profoundly affected by a decline in trust following the wake of corporate scandals and a turbulent economy, by the disillusionment over excessive executive pay despite the crisis.

Digitized social media have empowered a wide range of stakeholders. It goes without saying that the globalization of companies and the digitization of information and knowledge have greatly contributed to a continuous scrutiny of corporate motivations and corporate behavior. The amalgam of different opinions and expectations and beliefs and values constitute corporate reputation. Bad fate can suddenly strike. However, irresponsible corporate behavior may be less forgivable, possibly causing a corporate reputational crisis. How to govern those possible or immanent reputational risks? The first part of the book will attempt to address how to reduce the causes of reputation risks to potentially increase the trustworthiness, reliability and credibility of a firm.

Notes

1 Tonello 2007.

2 See the FERMA Survey 2012; Schreiber 2011.

3 Gallup News 2008; Edelman Trust Barometer 2014–2015.

1

Winning the “Hearts and Minds” of Stakeholders

Abstract: Managing corporate reputation requires boards and top management to assume different perspectives, and to focus on a number of objectives that are well beyond mere profit maximization. Internal drivers of values, beliefs, purpose and organizational culture are an effective counterforce to behavior that only seeks short-term profitability at all costs. Reputation risk management aims at increasing the odds of good outcomes and reducing the odds of bad outcomes. Good reputation management relies not only on vigilance and staying informed, but also on a readiness to respond quickly and effectively to challenges or perceived problems as and when they arise.

Verhezen, Peter. The Vulnerability of Corporate Reputation: Leadership for Sustainable Long-Term Value. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137547378.0004.

Over the past decade, most corporations have undergone a change from providing products and services to a focus of selling experiences or a solution. Starbucks does not merely sell coffee; it sells an experience. Xerox does not just sell photocopy machines; it leases them out because it provides solutions to universities, design companies and publishers. Both rely heavily on building and maintaining relationships with their primary customers. Such relationships are based on trust. Cognitive and affective trust in organizations is gained over a period of time potentially resulting in a good reputation. A firm’s reputation consists of what others are publicly saying about the firm. The more business models are being built on experiences and solutions, the higher the stakes have become. If you live by the brand and its reputation, you also can die by the brand.¹

1.1Potential causes of reputational risks

Managing corporate reputation requires boards and top management to assume different perspectives, and to focus on a number of objectives that are well beyond mere profit maximization. Obviously, those different perspectives occasionally clash or demand a certain trade-off. Nonetheless, developing “good corporate reputation” will need “wise” leadership, supported by appropriate processes, procedures and capabilities and aligned with an integrated strategic perspective. Concretely, management and boards need to maintain or strengthen the relationships of trust in the company.

Corporate scandals like Exxon’s Valdez oil spill incident in Alaska in 1989 or the BP’s Deepwater Horizon oil leak in 2010, to name just two out of a long list, are reputation killers for these companies and for their managers and board members. The opposite is also true. The Tylenol crisis in 1982 at Johnson & Johnson, for instance, has been an example where the company has developed an inspiring reputational narrative underwriting the values and belief system of the company, as mandated in its Credo. The consequence is a stellar corporate reputation groomed over the years, despite some hick-ups lately. These examples indicate that enhancing trust is among the most important tasks for management, especially in times of crises. Kellogg’s professor Daniel Diermeier developed a “trust radar” to analyze reputational risks. He focuses on four crucial factors in building trust in organizations – transparency, expertise, commitment and empathy – during or before a crisis.² By narrowing management focus on expertise only, and largely ignoring empathy, leaders and their organizations usually aggravate the crisis situation. During moments of crisis we view corporations less as impersonal purveyors of goods and services and more as members of our community. And if those corporate citizens, members of the community, are perceived not to care about us, they look out of touch or even “monstrous” to us.

Nonetheless, reputation means different things to different people, but it should be clear that reputational risks extend beyond the legal boundaries of the firm and are often related to moral disgust or emotional fear. Reputational crises are almost always about trust! The most difficult crises are those in which the organization believes that it does not bear any wrongdoing, but everyone else thinks it does. A crisis about trust always needs strong pragmatic leadership and a strategic and mindful sophisticated understanding to move beyond mere emotional reactions. And that will require leadership that replaces the management monologue approach with genuine dialogues, focusing on values and collaboration to regain or strengthen trust. Switching from a mere legalistic to a trust-based approach will definitely help. A trustworthy leadership will need to embrace cognitive, emotional as well as moral dimensions in dealing with a reputational crisis. It will need to balance analytical expert reasoning with intuitive and empathetic feelings for its concerned stakeholders, occasionally willing to take bold but intelligent risks to address a reputational crisis.

1.2What is corporate reputation?

Reputation is a reflection of how well or how badly different groups of interested people – stakeholders – view an organization or perceive an individual. Reputation consists of perceptions – whether “true” or “false” – held by others about that organization or individual. In this definition reputation is (1) based on perceptions that imply that it is somewhat out of control of the particular firm or individual and (2) is an aggregate perception of all stakeholders that highlights its social and collective character. Indeed, reputations are socially shared impressions that are based on “collectives.”³

Others argue that corporate reputation refers to the “observers’ collective judgments of a corporation based on assessments of the financial, social, and environmental impacts attributed to the corporation over time.”⁴ Corporate reputation can therefore be defined as “a relatively stable, issue specific aggregate perceptual representation of a company’s past actions and future prospects compared against some standard,”⁵ or compared with other leading rivals.⁶

Corporate reputation embraces both (1) a cognitive component as in the valuation of the company’s attributes and (2) affective reactions of customers, investors, employees and the public at large. This combination of affective and cognitive components allows us to define reputation as an attitudinal construct, denoting subjective emotional and cognitive-based mindsets.⁷ Despite some remaining disagreements among scholars because of the elusive and “intangible” nature of reputation, progress has been made in defining and understanding corporate reputation.

Reputation can be perceived as a judgment or actual perception of the firm by stakeholders or observers⁸ and is a function of certain events exposing a corporate identity feature, be it a business practice, a behavioral incident or a characteristic of the products sold. Corporate reputation can be positive or negative; for example, stakeholders perceive the firm as being environmentally responsible, or stakeholders view the corporation as being harmful to the environment. Reputation Capital is obviously a valuable economic asset and can be defined as the perception of the firm by those stakeholders⁹ whose relationship with the firm is directly instrumental to the pursuit of long-term growth and shareholder value.

A (corporate) brand, by contrast, tends to relate to what the corporation wants to be and how it tends to differentiate itself from competitors, rather than what it actually is.¹⁰ Many scholars and practitioners alike have focused on developing tools to measure the intangible brand equity, but there is less clarity around what drives corporate reputation.

And despite the fact that many still use “identity,” “image” and “reputation” interchangeably, a clear conceptual distinction should be made. “Identity” is the true essence of the corporation and its defining attributes are its mission, strategy, core ethical values, organizational culture and business practices. Identity is that which is most central, enduring and distinctive about an organization.¹¹ A corporate identity is primarily a function of the perception and knowledge of the organization by insiders.

“Image,” however, is how the corporation represents itself to the public. As such, corporate image is a function of mandatory disclosure, public relations, marketing (branding and advertising) efforts and other organizational initiatives that attempt to shape the impression people have of the firm. Organizational image is viewed as a desired image and therefore it can be described as an internal picture projected to an external audience. And an image can be manipulated.

One could argue that corporate identity refers to the collection of symbols that somehow refers to the underlying core or character of the firm whereas the corporate image can be defined as the impressions stakeholders have about the firm. The transition from identity to image is usually the result of smart public relations and marketing management that shapes the impression that people have of the firm. Image can possibly be shaped but not fully controlled by the management of the firm. Turning image into reputation will not succeed without some deliberate efforts.

Reputation, nonetheless, remains a relative or relational concept and depends on everything the organization does as an entity. Companies can and do have multiple reputations for different things with different people¹² as individuals usually have different identities.¹³ It is rather difficult to have an aggregate measurement for reputation without suffering a loss in analytical rigor. For customers, value may be a fair price or quality. For employees, it may be a good job, good pay and good working conditions. For prospective talent, it may be a good place to work; for the community, it might be a company that is a good corporate citizen. For instance, Goldman Sachs¹⁴ or JP Morgan may have a very strong reputation for being a top destination for finance MBAs, but it currently has a very poor reputation with international regulators or other no...

Table of contents

• Cover
• Title
• Introductory Remarks: The Traps of Maximizing Shareholder Value
• Part I  The Complexity of Governing Reputational Risks
• Part II  The Quest for Reputational Excellence
• Concluding Remarks: The Vulnerability of Corporate Reputation
• References
• Index