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The Reputation Risk Handbook
Surviving and Thriving in the Age of Hyper-Transparency
By Andrea Bonime-Blanc Do Sustainability
Copyright © 2014 Andrea Bonime-Blanc
All rights reserved.
ISBN: 978-1-910174-32-6
CHAPTER 1
Reputation Risk in the Age of Hyper-transparency
I lost my reputation but, then again, I didn't need it.
MAE WEST, AMERICAN FILM ACTRESS, 1930S
Mae West and the age of hyper-transparency
MAE WEST, the lusty and irrepressible American movie actress of the early twentieth century was responsible for the above quote and this one: 'When I'm good I'm very good, but when I'm bad I'm even better.' For her, being bad was good for business. That was her reputation – to be bad. Losing her reputation wasn't the problem – but losing her reputation for 'being bad' was her greatest reputation risk and would have been a blow to her livelihood.
Can we apply this approach to today's business and organizational context?
Most organizations want to build and retain a 'good reputation' for whatever it is that they do or offer. It isn't necessarily about being good or bad but about consistently and predictably doing what you do best: creating products, providing services, creating some form of value.
However, behaving 'badly' in the new age of hyper-transparency can be hazardous to an organization's health. The damage can be instant, very public and, in some cases, irreversible. It's no longer just about making products, delivering services or creating value anymore; it's about doing these things under the extreme spotlight of a hyper-transparent world.
Extrapolating to organizational life, Mae West got it right, but only half right. Maintaining and improving your reputation – for whatever that might be – is different from being 'good' or 'bad'. While these words are simplistic, charged and relative, the point is this: in today's hyper-transparent world, organizations need to do both things – build and defend their reputations and be (or be perceived to be) 'good' in the eyes of most stakeholders. The recent annals of reputations lost and never recovered are littered with examples of companies that did neither: Enron, Lehman Brothers, Barings and WorldCom come to mind.
There's a reason why we have seen so many more of these cases since the turn of the century – the age of hyper-transparency has changed the very nature of 'reputation' from something somewhat amorphous and superficial to something more material and impactful. Indeed it may very well be that the age of hyper-transparency is the handmaiden of the relatively new and still misunderstood concept of 'reputation risk'.
'Reputation' across the ages
It's not that reputational matters are new – indeed reputation is an age-old concept. We can go back to the fourth century BC to find Socrates' wisdom on the subject:
Regard your good name as the richest jewel you can possibly be possessed of – for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way to a good reputation is to endeavor to be what you desire to appear.
A little later, in the first century BC, Publilius Syrus said:
A good reputation is more valuable than money.
In the nineteenth century Abraham Lincoln stated:
Character is like a tree and reputation like a shadow. The shadow is what we think of it; the tree is the real thing.
And, then of course, everyone knows the famous words of present-day business titan, Warren Buffet:
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
Buffet is also quoted as saying:
We can afford to lose money – even a lot of money. We cannot afford to lose reputation – even a shred of reputation.
Many wise sayings and much time traversed and yet the essence of the meaning of 'reputation' remains pretty much the same: 'Reputation' is about the perception by others (stakeholders) of the state of something (an entity, product or service) or someone (a leader or other person) and the danger (of loss) or opportunity (of gain) that such perception provides to such entity, thing or person.
Twenty-first-century reputation risk hit parade
Reputation hits can affect the largest entities in the world – including the most powerful governments and global corporations. America's reputation, for example, has suffered a variety of blows over the past decade and a half. First, unpopular wars – Iraq and Afghanistan – and then National Security Agency (NSA) high-tech spying revelations on US citizens and friendly governments. Specific reputational damage has resulted not only to the US government but also, by association, to its citizens and even its technology sector which may now be less trusted by non-US stakeholders (customers) than before.
The BP Deepwater Horizon oil spill disaster of 2010 was the biggest of its kind ever in terms of sheer magnitude and resulting attention, fines, settlements, civil and criminal investigations, and reputational damage. BP's then CEO, Tony Hayward, made things worse when he publicly complained about not having enough time off, seemingly putting his personal comfort ahead of a terrible crisis that had just caused 11 deaths and unprecedented environmental and financial damage.
Reputation hits can affect entire sectors, globally. The reputational hit parade of the past decade in the global financial sector has been non-stop and unparalleled, involving almost every big bank name – JP Morgan, RBS, HSBC, Standard Chartered, Goldman, Citibank, Barclays, UBS, Deutsche Bank, BNP Paribas, Credit Suisse and more. The banking industry seems to think of reputation risk, ethics and compliance, amorphously at best or as a 'cost of doing business'. It's not surprising that this sector places last consistently over time in industry sector trust surveys, like the Edelman Trust Barometer which has been gauging stakeholder trust in industry and government for over a decade. However, the tide may be turning as recent mega-fines, regulatory overdrive and stock under-performance may be starting to put a dent in what previously seemed to be a sector that didn't seem to notice the importance of reputational risk.
And then there is the slow-motion, long-term, reputational unraveling. After surviving a major existential threat, going bankrupt and being saved by a massive government bailout, GM seems to have done it again. In January 2014, an investigation revealed that thirteen GM car accident deaths (and many more injuries) occurring over the past decade appeared to be the result of a defective ignition switch that could have been fixed for $1 per car. Apparently for cost-saving reasons (traced back to deep-seated cultural dysfunction), the correction was never made, the problem wasn't disclosed and a cover-up ensued. The full magnitude of this reputational hit is yet to unfold but is unlikely to be modest or short-lived.
Reputational hits and consequences
Does a reputational hit today mean long-term reputational damage? Or are these mostly momentary blips that affect certain stakeholders (investors, customers) temporarily but, depending on the response of the organization, won't lead to long-term negative consequences?
Measuring reputational risk is a challenging and as yet unconquered art or science but attempts are being made. For example, the impact of a specific event on a company's publicly traded stock can be a useful metric though obviously useless for privately held businesses and other organizational forms like NGOs or government agencies.
It is helpful, however, to look at stock metrics, as there are lessons to be learned. Wal-Mart stock declined by almost 5% (or US$10 billion) the trading day after the New York Times published its in-depth investigative report on Wal-Mart's alleged corruption and bribery of Mexican officials on 20 April 2012. Similarly, observers charted a decline of US$7 billion over four days of trading in NewsCorp stock when allegations of widespread phone-hacking by News of the World journalists were first reported in July 2011.
However, in both cases, there have been other longer-term quantitative and qualitative hits: over 1000 employees of News of the World lost their jobs when the paper closed within a year of the revelations; high level executives and even members of the board from each company have been either terminated, investigated and/or prosecuted; hundreds of millions of dollars (and multiple thousands of hours of employee time) are still being spent annually by each company because of ongoing investigations, legal cases and internal compliance reforms.
There are essentially three possible types of outcome from a reputational hit depending on how prepared and effective an organization and its leaders are. There is the 'Deadly Blow' where the consequences of a serious reputational risk gone wrong are devastating to people, products, profits and/or performance. There is no recovering – witness Enron, Arthur Andersen, WorldCom, Lehman Brothers (see Table 1). There is the 'Recoverable Hit' where recovery and even regeneration are possible as in the case of the German corporate giant Siemens, which overcame its costly (US$2 billion+) enterprise-wide corruption scandal of the early 2000s and adopted what is considered the gold standard for global corporate anti-corruption programs. And then, though rare, there are reputation 'Enhancement Events' such as the case of Johnson & Johnson (J&J) in the mid-1980s and its masterful handling of a potentially disastrous event – the criminal tampering of Tylenol containers outside of the company's control resulting in several deaths. The company's quick, responsible and systematic action not only prevented further deaths but truly enhanced their reputation for responsibility towards stakeholders (especially customers).
However, unlike J&J, most entities consider reputation risk in one of two ways – after the fact, as a result of a reputational hit, or grudgingly, in response to other serious unrelenting pressures. In the first instance, risk and crisis management don't really exist and the only possible response to a reputational hit is to scramble and gamble, with all the chaos and mismanagement that entails. Or, because of regulatory pressures or other stakeholder 'demands', some entities create an often under-resourced or superficial risk, compliance or ethics program, or a marketing-oriented corporate social responsibility (CSR) program that's supposed to demonstrate 'good' corporate citizenship (and 'good' reputation).
These efforts are skin-deep – a 'Potemkin Village' approach to reputation management generally with a pretty veneer but no substance from a risk or reputation risk management standpoint. Both of these responses are reactive and inadequate and are neither sustainable nor responsible, certainly not in the age of hyper-transparency.
Until the very recent past, executives and boards haven't considered reputation risk management at all or as important as focusing on more 'important' strategic business and financial risks. But this is changing and fairly dramatically as boards and executives suddenly realize that reputation risk is pervasive: in the last year, major surveys of global CEOs, executives and boards, singled out reputation risk as either one of the top or the number one strategic risk. What happened?
The age of hyper-transparency
Transparency + data + velocity = hyper-transparency
(Big & small data traveling & impacting at the speed of light)
The age of hyper-transparency is what happened. The age of Wiki-Leaks and Edward Snowden's NSA revelations is what happened. The age of Apple iCloud hacked celebrity nude photos is what happened.
The age of hyper-transparency is best characterized by the words: 'Nowhere to run, nowhere to hide.' In the corporate world, this adage is well illustrated by the constantly evolving and complex GlaxoSmithKline (GSK) corruption scandal which began in China in 2013 with a government investigation into what first appeared to be corruption issues, and has since morphed and expanded into a multifaceted set of issues involving sex, privacy, lies and videotape. Because of the hyper-transparent age we live in, multiple governments, prosecutors, investigators, the media and others have jumped on the GSK investigatory bandwagon and are looking under every possible rock, including in such unlikely and unrelated places like Iraq and Syria.
There are four factors that explain why reputation risk is suddenly considered important and even strategic:
• Scholarly and practitioner work on the real value of intangible things.
• The proliferation and visibility of high impact scandals since the turn of the century.
• Growing awareness and impact of non-financial considerations: namely, environmental, social and governance (ESG).
• Greater transparency, availability, velocity and volume of information through technology.
Finally, this age of hyper-transparency also includes the proliferation of a multitude of players equipped or claiming to be equipped to be reputation experts. Let's take a quick look at a few of these experts.
Reputation educators
Educational institutions and think tanks are offering more courses on reputation management, though catering mostly to the public relations and communications field. Increasingly, however, there are scholarly inquiries into the nature of reputation and reputation risk, with think-tanks that study, analyze and publish important contributions to the scholarly and practical dialogue. Corporate Excellence: The Centre for Reputation Leadership headquartered in Spain, for example, has recently published a major contribution to this topic.
Reputation analysts
There are a few reputation measuring services and analysts; for example, the consultancy the Reputation Institute has a longstanding 'Global RepTrak' which rates and tracks the reputation of a variety of entities. One of the few and more interesting entries in this field, focused exclusively on reputation risk analytics, is Swiss-based RepRisk ESG Business Intelligence. They deploy big data analytics and algorithms to dynamically analyze and quantify reputational risk and assign a RepRisk Index (RRI) to companies, sectors, countries, issues and themes based on extra-financial, ESG risks. The RRI 'is a risk measure that captures criticism and quantifies exposure to controversial ESG issues, such as environmental degradation, human rights abuses, corruption and more. It does not measure a company or project's overall reputation, but rather is an indicator of their reputational risk.' See Figure 1 for an example of the RRI showing a snapshot of most exposed companies from August 2012 through August 2014.
Reputation consultants
Reputation consultants, traditional and non-traditional, are proliferating, ranging from large global firms (including, recently, accounting 'Big Four' and traditional management consultancies) to specialized boutiques. Most of these firms come from the communications and public relations field but increasingly are looking at reputation risk as well and beefing up their capabilities with multi-disciplinary teams.
Reputation insurers
Reputation risk insurance has also developed recently, from large companies like AIG and Zurich to specialized outfits like Steel City Re. Dr Nir Kossovsky, a pioneer in the reputation risk and reputation risk insurance space and CEO of Steel City Re, has written extensively on this subject and explains reputation risk insurance as follows:
Reputation insurance coverage ... belong(s) to the same class of value-added service coverages as kidnap and ransom insurance ... where the actuarial value of the covered losses (premium/burden vs frequency/severity) is secondary. More important are the expert risk mitigation and risk management services embedded in the policy-based solutions. These services prevent issues rather than just compensate for the costs of problems after the fact. These policies can provide risk mitigation before, during and after an incident through controls and preparedness, including crisis communications and messaging support and media training to help retain stakeholder loyalty and protect enterprise value.
Reputation 'protectors'
A number of services – most of them online and virtual – have sprung up in this age of hyper-transparency to cater to the needs, desires and, yes, narcissism of the modern age. The need to scrub one's online identity has become de rigueur for those in the limelight, those falsely (or accurately) accused of improprieties or worse, the very wealthy or famous who want to be virtually 'absent' and corporations and other organizations seeking to control their image and brand (reputation.com is an example of this kind of service).
(Continues...)
Excerpted from The Reputation Risk Handbook by Andrea Bonime-Blanc. Copyright © 2014 Andrea Bonime-Blanc. Excerpted by permission of Do Sustainability.
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