Interesting Reputation Sidebars

Just a few bullets that caught my eye over the past few weeks on the topic of reputation.

  • In a wickedly well-written and snarky article in The Economist on CEOs living in glass houses (no kidding), especially in this new social world, a few things stood out. First, a mention about research among Wharton researchers that found that the most emailed articles among 7,000 articles from The New York Times over a three month period had to do with topics that evoked fear, anger and anxiety. As the author said, perfect click bait for “evil CEOs.”
  • From that same article mentioned above, a fascinating stat which I am saving for my folder on Why Crises Are Bad News? is this one: “The stock market is more sensitive to reputational disasters than ever before. In the two weeks after the 1989 Exxon Valdez oil spill in Prince William Sound, in Alaska, Exxon’s shares dropped 3.9% but quickly rebounded. In the two months after the Gulf of Mexico spill in 2010 BP’s shares fell by half (and have still to recover fully).”
  • The Hay Group, who conducts the World’s Most Admired Companies (WMAC) Survey for Fortune every year, reports that internal and external reputation management is the most significant factor in consistently enabling the WMACs to outperform their peers. And to add in another good proof point, 75% of these most admired companies worldwide regularly communicate the importance of their company’s reputation to their workforce.  
  • Also from the Hay Group article, a statement which surprised me. They say that the world’s most admired companies now have “much greater control over their reputations” compared to five years ago. I think that this is a perception that could be easily debated and I’ve be in several of them lately.  On one hand, companies might feel that they have less reputation-control due to the rise of the Internet, NGOs and the never ending media-frenzy but you could also say that with disintermediation, companies now have more tools in their arsenal to bypass the media to get their messages out and to listen early on to stakeholders before the conversation turns viral and damaging. A great topic for a debate. I might save it for a panel discussion.

Hope to add more to my collection of interesting reputation nuggets in due time.

 

Risky business for CEOs

Risk-Management  

A new McKinsey survey among board members reports that members acknowledge knowing little about risk. Nearly three in ten (29%) say their boards have limited or no understanding of the risks their companies face. Even more compelling, members say their boards spend just 12% of their time on risk management, an even smaller share of time than two years ago. Not sure about you, but I'd say that the business environment has become more complex and risky, not less complex and risk-free.

This is not good news for executive teams. When it comes to risk management, reputation is high on the list of vulnerabilities that can damage a company's good name. This has me thinking that if board members are not focusing enough on risk, executive teams are going to be held even more responsible for any misdoings and misdeeds. They had better been attuned to crises and risks that are lurking around the corner. CEOs and their direct reports should make reputational issues an A-1 priority on their management agendas.

I received an email about two weeks ago asking if I had information on whose most to blame when crisis strikes. Years ago, I asked that question of executives and if I recall right, CEOs received most of the blame, regardless of whether they knew about the problem or not. The McKinsey research is hinting at the same blame chain. The CEO takes all the credit when things go right and all the blame when things go wrong. The board is looking in all the wrong places. CEOs, beware.

Crisis Type Impacts Investors...

What spooks markets the most? If you closely follow crises, you probably think about how many different types of crises there are. For example, how do the markets react to a crisis that is due to the questionable behavior of the company or employees? What about product recalls? Or litigation? What about loss of customer data? All good questions to ask about reputational damage. International law firm Freshfields Bruckhaus Deringer decided to investigate how the markets react to different crises and how long the crisis lingers. This chart below is from their study:

 

 

 

 

 

Behavioral crises (company or employees acting questionably or illegally) have the greatest short-term impact on shares and the only type where the companies have the possibility of regaining their market share after six months. However, they spook the markets the most and can cause shares to crash by 50% or more on  the day they become public, according to the researchers. Investors, however, forgive these types of crises more quickly than others.

Operational crises (when the company's functioning is halted due to a major product recall or environmental disaster) have a modest impact in the first two days of the crisis breaking but the greatest long-term effect on share price...down almost 15% after six months. One quarter are still down one year later. These type of crises strike fear in companies and reputations are hit for the longest period of time.

Corporate crises (companies where the financial wellbeing is affected such as liquidity issues or material litigation) made up more than one quarter of companies experiencing a share drop on day one. Most often, these companies recovered quickly.

Informational crises (when companies IT such as system failures or hacking) were of moderate concern to the markets. They did not fall more than 3% on day one. According to the research, none saw shares fall more than 30% within a year of when the crisis struck. Possibly, investors figure these can be resolved and its everywhere today, not necessarily at the core of the company's business.

As the research states, "Our research shows that directors typically benefit from a window of 24 to 48 hours, during which financial market reaction to news of a major reputational crisis will be relatively constrained."  In the public relations world, we often refer to the first hour after a crisis breaks as the "golden hour." According to Freshfields, it sounds like there is an even longer" golden window."

The natural question to raise is why does operational crises do the worst? Freshfields answers appropriately, "Crises that strike at a business’ core have a greater long-term impact on share price as markets are more likely to lose faith in a management team that cannot resolve a crisis that is intrinsic to its operations." As Oxford Metrica's research in 2012 for AON showed, management response is showcased for all to see when crisis strikes. The kind of  CEO or executive response can make or break reputations and create reputation loss of great magnitude if done poorly. To prevent such reputation loss, prepare!

Countering Rumors that Harm Reputation

In an article today on the academic dream team that consulted with President Obama's team, a few lessons are shared that should be helpful for the public sector and CEOs or other executives. The group of behavioral scientists who were unpaid advised that voters focus on two characteristics in choosing a president or leader -- competence and warmth. This is especially good advice for new CEOs coming into office to hear. The article states that Romney had the competence factor working for him but less so the emotional warmth factor, particularly with all the negative advertising that many people saw. Clearly, CEOs have to project both factors to gain support from their followers. Another lesson to be learned that was shared in the article is useful for companies facing crises (who isn't?). The social scientists that made up the dream team advised the Democrats running the Obama campaign that when it comes to neutralizing rumors, it is best not to deny the charge but to affirm a competing one. The example given was how the rumors about President Obama being a Muslim stuck over the long term but their advice (and probably well taken) was to counteract that rumor by asserting that Obama is a Christian. I do recall hearing that. Good advice that can apply to corporate leaders faced with hearsay and wanting to deflect innuendos.

Self-inflicted reputational damage...

I don’t even have to do the math to figure this out. The increase in mentions about Jamie Dimon’s reputation is astronomical. Last year on May 14, there were nine mentions of Jamie Dimon with the word reputation.  Fast forward one year and there are 3,160 mentions just today. The articles all have a similar ring to them… no surprise considering that the bank he leads lost over $2 billion on a trading error. Pretty soon, I expect they will be calling for his head. “The reputation that Jamie Dimon honed for decades on Wall Street has been severely damaged in a matter of days.”

“…tainted the reputation of the bank's high profile chief executive Jamie Dimon.”

"We made a terrible, egregious mistake," said bank CEO Jamie Dimon, who had a reputation as a master of risk management.”

“So here you are Jamie Dimon. You have a sterling reputation. Why? Because people say he knows how to manage risk better than anybody.”

“A black mark for a survivor of the financial crisis.”

The one thing I can safely conclude is that the word reputation is firmly embedded in our lexicon. I used to notice the mention of reputation once in a while but in the past year "reputation" shows up everywhere. It has become ubiquitous. This is not because crises and scandals are skyrocketing which is how it feels every day but is not the case. We had as many scandals and crises just two or three years ago when the economy tanked. It is just clear to me that "reputation" is such an economic competitive asset, that it is its own form of currency today.  Hence, it falls into the same rubric as dollars and cents.  Reputation is definitely playing a larger role in what drives our economy. There is no doubt about it.

Self-Inflicted Reputational Disasters

I recently had a discussion with someone about self-inflicted and non-self-inflicted reputational disasters. Most of the reputation crises I have worked on and written about were self-inflicted because the early warning signs were there in the first place and leadership had an opportunity to change course. Unfortunately, the early warning signs were ignored or deemed inconsequential. An article in strategy + business, the Booz & Company journal, discusses the concept of self-inflicted black swans (a surprise occurrence that causes a major impact) and provides excellent food for thought.  Essentially, the author points out that there are ways to detect if the culture is ripe for these kinds of disasters and ways to protect against their occurrence. And it all gets down to the organizational culture or DNA. There are some very good suggestions such as clarifying who is really in charge of identifying risk exposure, aligning incentives so that people are rewarded for anticipating and disclosing risk and third, creating unfiltered pathways so that those at the top hear the "ground truth" and not just what they want to hear. The bonus for me after reading the article was learning about some stats that the authors uncovered. Since I am always looking for good stats to illustrate the downside of reputational disasters, self-inflicted or not, I want to share here:

The unintended consequences associated with a self-inflicted black swan can be devastating. They include negative publicity; huge, sudden costs; lost revenues; lawsuits and criminal judgments; and regulatory penalties. Analysis of the stock prices of companies that suffered such events in 2009 and 2010 in the oil, automobile, aircraft manufacturing, and financial-services industries shows that within two months after a visible self-inflicted crisis, an average of 18 percent of shareholder value was lost, relative to the S&P 500. Moreover, stock price performance continued to diminish over time: On average, shareholder value came down 33 percent within a year.

A loss of shareholder value of 33 percent over a year's time is catastrophic in my book.  It is worth learning how to prevent these unexpected surprises from occurring and figuring out how to turn these black swans into white ones.

Getting the GC and CCO to the Same Table/Same Page

  Lawyers and communications specialists seem at times to inhabit entirely different worlds.  This is something that I've often thought about but has received little attention in the public relations and legal counsels' worlds. So it's time to think about this new trend in reputation managment that can help companies managing crises and issues better. Consider this example I was told that has to do with the comments of one anxious general counsel reviewing his company's first few Tweets.  "Looks good but you have a typo at the end," the in-house counsel warned the communications officer.  The more socially-savvy communications person quickly replied that the so-called typo -- a colon and closed parenthesis -- was none other than that now nearly universal icon ... the smiley face :).

Of course, not all general counsels are so unfamiliar with standard and new social media customs and practices.  However, companies can no longer afford a disconnect between legal and communications.  In times of crisis, particularly, the general counsel  (GC) and chief communications officer (CCO) represent two departments often at odds with one another.  Lawyers typically urge minimal or even no public comment out of fear that admissions might damage a company’s case in a court of law, while communications professionals typically demand prompt public comment, even a CEO apology, to avoid further damage to a company’s reputation in the court of public opinion.

As the “information age” produces one corporate crisis after another and social media zingers multiply at alarming speed, everyone is responsible for keeping a watchful eye on defending company reputation as well as protecting against slander, libel and other legal  difficulties. Despite decidedly different approaches, GCs and CCOs are now both finding themselves participating in the same “reputation management” strategy meetings and conference calls.  They now have no choice but to trust and understand each other.

Here are three ways that these corporate officers can get on the same page:

  1. Socialize.   Instead of dealing with problems incident by incident, start strengthening the relationship between GC and CCO by getting them to the table to jointly craft the company’s social media policy and guidelines.  Only about one-third of companies have such policies which leaves plenty of seats left for the two departments to fill. Agreeing to and understanding the needs of the other and providing for thoughtful compromise ahead of time can only help protect against trade secret violations, adverse publicity, confidential leaks and inadvertent disclosures about employee departures and misbehavior. Companies with employees who know  what’s allowable and not allowable on Facebook, Twitter, LinkedIn and blogs because the GC and CCO have cooperated will save their companies sudden embarrassment and reinforce continued cooperation between the departments.
  2. Scenario Plan.  The time to build mutual respect is before reputation risk knocks at the door. Best practice requires getting  GCs and CCOs together with CEOs, HR, IT officers and others to rehearse various best and worst case scenarios, online and offline.  After a few sessions of rapid response simulations (we have an online simulation crisis drill called Firebell to do exactly this),  GCs and CCOs will have the opportunity to work out obstacles and craft prepared statements to hypothetical crises that will give them a head start should real crises occur.
  3. Value Set.  Anchor both communications and legal concerns to the company's core values. The values by which a company operates serves as the grease that reduces the natural friction between legal and communications best practices.  Both departments need to consistently call up company values – for example, integrity, good governance and customer always comes first – as the standard by which any legal or communications decision is judged.  Once the primacy of company values is accepted as the ground rule, cooperation between GCs and CCOs can be more easily facilitated.