Sure, inclusion on some “Best Companies to Work For” list can bag some nice headlines for a business. Nowadays, however, a sterling reputation brings far more than good publicity: It adds a tremendous boost to shareholder value, and even to a company’s bottom line.
According to a 1998 study by The Conference Board, for example, companies with reputable brands experienced an average annual stock price increase of 20.1 percent, while companies that ranked lowest suffered an average annual decline of 1.9 percent. Research commissioned by United Technologies last year attributed 27 percent of the company’s market capitalization to intangibles like reputation.
But reputation doesn’t just affect stock prices; it’s also a way to inoculate a company against bad news that might someday strike. “Reputation is inseparable from everything you do,” says Rosemary Kenney, director of corporate governance at Pfizer. “People will forgive a misstep if your reputation precedes you, and your reputation is good.”
Companies seem to be taking notice, as reputation risk becomes a more pressing topic in the boardroom. “Board members take a company’s reputation very seriously,” says Lydia Beebe, corporate secretary and chief governance officer at Chevron. “After all, once you sign onto a board, your reputation is entwined with that of the company.”
Tonello
Matteo Tonello, senior research associate at The Conference Board, cites another telling sign that boards pay more attention to their company’s appearance: Since 2000, the number of publications containing the phrases “corporate reputation” and “reputation risk” in their titles or abstracts has doubled.
Reputation Defined
In general, Tonello says, most companies take a reactive approach to reputation risk, handling problems after the fact. That may be because “people have a hard time really grappling with what reputation is, measuring it, and understanding it—and sometimes reputation is in the eye of the beholder,” says John Farrell, head of the enterprise risk management practice for KPMG. “Everyone knows when reputation is severely damaged, but it’s hard to see minor degrees of change.”
Low
BP is a case in point. To reinvent itself as more eco-friendly, the company dropped its old name “British Petroleum” to the pithy “BP”—and promptly played up the new name as evidence it had moved “beyond petroleum.” Jonathan Low, partner at New York City-based Perceptiv Corp., contends that BP “got credit for being greener than its competitors,” a perception not necessarily backed by the facts.
Low points out that Exxon, which is notorious for fighting environmental initiatives, actually has “an exemplary remediation record.” But Exxon doesn’t consider its strength in this area as central to its identity, he says; instead, the company views it as a way to remove costs from the system.
Dumont
“Reputation is not just a beauty contest; reputation is understanding the extent to which stakeholders believe you’re meeting their expectations,” says Bryan Dumont, senior vice president at APCO Worldwide, a public-affairs consulting firm.
And as more companies shine a spotlight on enterprise risks as a whole, reputation risk is increasingly getting its due. But many executives struggle with finding the best way to categorize this risk. Farrell has witnessed a 50-50 split among companies that view reputation as its own unique risk category and those that consider it simply the outcome of other risks.
Tonello has seen the same schism. He is convinced that dealing with reputation risks within the larger context of an enterprise risk management program is the wiser approach. To treat reputation risks as their own category (separate from the other risks that lead to publicity problems) can lead to duplicated efforts and wasted resources, he says. Tonello also maintains that the business unit manager who owns a specific risk is best positioned to prevent it from going wrong in the first place, rather than have the company wage a communications campaign to alter public perceptions after the fact.
Farrell
Frequently, Farrell says, the most serious reputation risks are “linked to your value proposition as a company.” In the case of Martha Stewart Living Omnimedia, for example, its celebrity founder was central to the company’s success; the 1999 prospectus even warned that the business might be “adversely affected if Stewart’s public image or reputation were to be tarnished.” And when Stewart was later indicted and jailed in a highly publicized insider-trading lawsuit, the stock tanked.
Getting a Grip
Directors rarely play a strong role in shaping a company’s reputation. Their responsibility instead is to ask management the right questions about how reputation risk is handled. Some companies have begun to establish specific risk committees at the board level to oversee risk management. Others, like MetLife, have assigned responsibility to a combination of the audit and governance committees, according to Conference Board research.
PROTECT YOUR REP
Below is an excerpt from a Conference Board paper in 2007 examining how companies should handle risks to reputation.
To protect and enhance their reputation
capital, organizations must be able to rely on an
enterprise-wide process that:
Maintains an asset inventory where the
relationships constituting reputation capital
are classified according to: their nature
(i.e., enabling, customer, normative, peer,
and special interest relations); the criticality,
rationality, and urgency of stakeholders’
claims; their influence on and control of
key business resources; and their proneness
to support corporate deliberations.
Quantifies their intrinsic value, determines
their propensity to be strategically deployed,
assesses their impact on risk appetite (i.e.,
how much risk the business is capable of
undertaking in the pursuit of its strategic
vision), and evaluates their actual contribution
to long-term business growth.
Develops a set of extra-financial measures
of performance appropriate to assess whether
reputation-capital stakeholder relations are
being adequately developed and deployed
in the pursuit of the business strategy.
Clearly communicates such information to
the market.
If adequately implemented, an enterprise-wide process
of this sort ensures that business potentials of material
stakeholder relations are unlocked and the company is
set to meet its long-term objectives.
Source
The Conference Board (2007).
Regardless of how the effort is structured, directors should know how management identifies stakeholders—from investors and activists to employees, customers, policymakers, and members of the community at large—and how those stakeholder groups are prioritized. Tonello advises boards to understand the urgency of each stakeholder group’s claims, as well as the likelihood that a given group will retaliate if displeased with the company’s actions. Dumont recommends that some senior executive—preferably one who directly reports to the CEO—spearhead this effort.
Next, directors should see that management is taking the proper steps to measure reputation risk. Perceptiv’s Low notes that the impact of various communications methods can be measured, such as by tracking mentions in press releases and articles in terms of reach, frequency, and tone. That data can be compared to financial outcomes, offering companies a sense of what themes work.
Firestein
That being said, Peter Firestein, president of Global Strategic Communications and author of the forthcoming The CEO’s Guide to Reputation Leadership, warns against simplistic metrics, which may prove deceptive. He urges management “to be open in terms of the conversations it’s having internally and with the community of its influencers.”
Firestein adds: “How do smart companies end up doing dumb things? They sit around talking to each other in a conference room, and day by day convince each other it’s OK to do this stuff.” Opening up what he calls the “fortress company” to the voices of shareholders and other stakeholders with diverse views is an excellent way to stave off costly mistakes.
Kenney also endorses doing what Pfizer’s board did last year—meet face-to-face with shareholder groups. While that format may not work for every company, opportunities exist for directors to engage with shareholders by speaking at conferences and seminars where institutional investors are present, she says.
Keeping at It
Although companies can benefit from a savvy PR makeover in the short run, good reputations are earned over time. For Tonello, the BP example highlights the fallacy of trying to burnish one’s image when serious problems exist.
Tonello argues that BP’s efforts to bolster its reputation belied operational problems that came to light with its large oil spill in Alaska in 2006 and a refinery explosion in Texas that killed 15. “The communications strategy that BP had invested in so heavily did more damage to them than good,” he contends. “It revealed that underneath they hadn’t worked on strategic and operational problems.”
“At the end of the day, you should make sure your operations are being conducted in a sound manner,” Tonello says. “If you do that and offer a good product and a safe work environment for employees, and if you meet environmental standards, eventually you’re not going to have a reputation problem.”
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