The Reputation Stumble Rate Stumbles

Weber Shandwick’s annual calculation of reputation loss – the “stumble rate” – finds the lowest rate of reputation leadership loss since we began tracking this rate in 2010. During 2013, fewer than four in 10 of the world’s largest companies lost their esteemed status as their industries’ #1 most admired company during 2013. This is good news.

Each year Weber Shandwick measures the rate at which companies lose their #1 most admired position in their respective industries on the Fortune World’s Most Admired Companies survey. We call this the stumble rate. Between 2013 and 2014, 35% of the world’s largest companies experienced a stumble, down from last year’s 46%. For those companies that fell from their perches, there is likely extensive introspection and remedial action plans being discussed as I write this post.

The good news is the non-stumble rate of 65%. This means that about two-thirds of the industries in the Most Admired survey boast companies with durable reputations.

 

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In addition to calculating the stumble rate, we also dig through the data, including the nine drivers of reputation, to glean some interesting insights about stumblers and non-stumblers. A stumbler is an industry whose top company last year is no longer the top company this year. What is interesting this year?

  • 19 industries (out of nearly 60, give or take depending on the year) have never had a stumbler since we started monitoring the stumble rate in 2010. The most admired companies in these industries have been stalwarts of reputation: Automotive Retailing, Building, Materials-Glass, Computer Peripherals, Consumer Food Products, Electric & Gas Utilities, Electronics, Entertainment, Household & Personal Products, Property & Casualty Insurance, Internet Services & Retailing, Metal Products, Mining, Crude Oil Production, Oil & Gas Equipment Services, Pipelines, Newspapers & Magazines Publishing, Railroads, Semiconductors, Diversified Retailers, Food & Grocery Wholesalers.
  • Two industries stumbled for the first time during 2013: Information Technology Services  and Office Equipment & Electronics Wholesalers. This must hurt.
  • The Energy industry is a chronic stumbler. No Energy company has been able to hold the #1 spot for consecutive years.  In the course of six years, there have been five different Energy leaders.
  • Five industries have stumbled four times since 2010. The most volatile industries are: Airlines, Life & Health Insurance, Medical Equipment, Motor Vehicle Parts and Health Care Wholesalers.
  • Six industries have a first-ever number one: Diversified Outsourcing Services, Food Production Information Technology Services, Medical Equipment, Mega Banks and Electronics and Office Equipment. Interestingly, the new leader in Medical Equipment is also new to the industry, having ranked #3 last year in Pharmaceuticals. This probably has to do with a change in their business mix.
  • For most of the stumblers, the People Management driver declined. The biggest drops in People Management (one of the nine drivers) were in Mega Banks (-3 ranking positions) and in Soaps and Cosmetics (also -3 spots).  In 2013, the Mega Banks stumbler experienced a crisis-riddled year that pointed to lack of leadership oversight of personnel.
    • The Soaps and Cosmetics stumbler decline might not be reflection of its own management troubles, but rather strides made by the competitors.  In one case, a well-respected CEO came out of retirement to replace his successor on an interim basis. One of his top priorities is to prepare a lineup of executives who will eventually replace him.
    • The other competitor announced – shortly before the Fortune survey was distributed to respondents – it was rolling out a supply chain collaboration platform to make its manufacturing more responsive to shifting customer tastes. This agile manufacturing process is expected to help add 1 billion new customers.

 

 

 

 

 

 

Obama's small step repair strategy

Leadership is very messy. I was asked the other night at dinner why President Obama was not coming out slinging on the repair of the healthcare website. Why was he not saying anything? And why were his advisors not telling him to speak up and put a stop to the constant naysaying? Well, for one, I think the reason is that there is nothing to say until it is fixed.  He apologized and put a bookend on the mess for now. That was the right strategy. Now he should say nothing until it has been resolved. Why keep it in the headlines by saying something? No one wants another BP oil spill where the headlines went on for weeks regarding how much oil was spilling into the Gulf. I read the New York Times columnist Bill Keller's to-do list for President Obama on how tosalvage his reputation now that it has stalled. Keller basically says that now is not the time for "grand new initiatives."  True. He goes on to say, " It’s not that I want the president to think small; by all means, address the threat of climate catastrophe and push ahead on early childhood education. But he needs to get a few wins on the scoreboard."  Absolutely. Now is not the time for the big speeches, big sweeping initiatives, big words. Now is the time for small, incremental steps that change the conversation and get him back on track. I also found it interesting that Michelle Obama chose this time to release news that she is going to focus on higher education for low-income students. Clearly, a great policy decision but the timing is not coincidental. The White House needs some positive news to overshadow the constant barrage of negative sentiment surrounding the White House. Everyone loves Michelle and who can argue with her for coming to the rescue. Wonder if we will be seeing more of the kids now.

However, this too shall pass. Maybe we should spend more time focusing on the devastation in the Phillipines and what we can do.

Reputation forgery

Case-Studies-Dealing-With-Handwriting-Forgery Fake commentary. This weekend I received constant fake commentary to my blog -- every minute. I deleted over 1000 or more in the end. I just could not believe that anyone cares enough to assault my blog like that but apparently wordpress has been having these robo-attacks which affects its users. Very annoying.

On the subject of fakery and forging online reviews, this morning I read about the proliferation of fake reviews online. It is estimated that by 2014, nearly  10 to 15% of social media reviews will be fake. The problem with this is obvious to all -- reputations are won and lost by such phony reviews. How many times have you turned away from a product because a review was scathing or negative? And how often has that bad review made you think less of the company behind the brand or anything else that company sells? This causes reputation doubt.

Some of our research at Weber Shandwick has found that online reviews were becoming nearly as important as professional reviews. For example,by more than a margin, consumers pay attention to consumer reviews over professional reviews for consumer electronics products (77% to 23%). They read 11 online reviews on average before purchasing products. Online reviews surely affect the bottom line. New York's Attorney General Eric Schneiderman, who is leading a crackdown on companies in the business of creating false online reviews, gives good reasons as to why this is more than an annoyance:  "Harvard Business School found that increasing a restaurant's review score by one star on Yelp.com could boost business up to 8 percent. Cornell researchers found an extra star on Travelocity or TripAdvisor could translate into an 11 percent increase in a room rate." So there you go. Fake reviews destroy reputations and profitabilty.

Many of these firms hire people in other countries who get paid $1 up to $10 to write one negative review. Luckily, our attorney general in New York is trying to get rid of them and is giving out large fines to keep them from continuing this bad behavior.  Reputations deserve better than this.

 

 

Rolling Reputations

imagesCADV729OI could tell that it must have been the one year anniversary of the Costa Concordia because I started hearing about the shipliner crash in the past few days.  Reputations keep rolling along throughout the year but especially hit home one year later. Whereas they might be fleeting memories at first, they all come together on the year one anniversary to make us take notice. Today I started hearing more about the memorial service for survivors and families of those who lost their 32 dear ones in Giglio, Italy and it started to stick more than two days ago. There were 846,000 mentions on Google when I searched for Costa Concordia anniversary today. For reputation, one year anniversaries are part of the reputation process.  It is almost like it fits into the five stages of grief. The one year anniversay is a day of reflection and return to the reputation demise that caused the loss in the first place. All the pictures of the cruise ship on its side off the shores of the little Tuscan city are back in view. Debates over raising the ship and removing it are back in the news. Anniversaries are important because they remind us that reputations should not restored overnight. The bigger the loss (especially when lives are lost),  the longer reputation takes to repair. That should be law.

I especially remember the Costa Concordia because we were launching our survey on how corporate and brand reputations have become nearly indivisible. The parent company of the cruise liner pushed media requests over to the Costa Concordia CEO -- the brand leader -- in an effort to disentangle the corporate reputation from the brand reputation. Due to the ease of information flow and the Internet's reach, much of the media coverage mentioned the parent company in the coverage which only proved that corporate and brand reputations have definitely converged. Because the entire incident happened just as we launched the survey, it is forever lodged in my mind.

Talking about reputation, tomorrow's Oprah Winfrey interview with cyclist Lance Armstrong will be another one for the record books.  I am not sure how Lance's confession that he used drugs to help him win the Tour de France several times will go over. My sense is that an apology might not curb his rapid reputation decline and Lance's reputation might not just keep rolling along but might face a hard stop for awhile. No telling where it will be, however, in three or four years.  I will be interested to tune in and watch.

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!

Reputation Loss as Punishment

These few sentences were chilling. They refer to the sentencing of Rajat Gupta  who was sentenced to two years in prison on Wednesday for leaking boardroom secrets to the former hedge fund manager Raj Rajaratam.

Legal counsel..." tried to keep his client out of prison by arguing, unsuccessfully, that Mr. Gupta was a proud man for whom the loss of his reputation was a punishment far worse than incarceration. This is a fall from grace of Greek tragedy proportions."

Baffled by Reputation Lately

I have been trying to figure out why Jamie Dimon has not received as much reputation mud as you'd expect considering the fiasco over the trading loss JPMorganChase recently revealed. I am also trying to figure out how Ina Drew, the chief investment officer who resigned over the debacle, managed to keep such a low profile. I don't recall her ever having made it to the Fortune's Most Powerful List and yet she certainly had a big job. These two enigmas baffle me. On the one count re Dimon, I think that his immediate response to the crisis saved him. He immediately owned the problem, publicly agreed that it was outrageous and took the blame personally. His response was in keeping with our public understanding of what kind of person he is -- blunt, decisive and unequivocal. But I have to admit that he has managed to do what few others have managed in a crisis......evoke sympathy. There was an article I read last week about how he could not sleep, how he told his wife he had screwed up big and how he felt terrible having to let Ina Drew go (something like she was practically a sister). I actually felt bad for him. The other reason I think that he has managed to have his reputation stained but not decimated is that there are no customer stories where individuals are shown having lost their entire retirement savings or otherwise. When we watched those stories about what people lost with Bernie Madoff or people who lost their lives with the BP oil spill at Deep Horizon, it was crushingly real. I guess that's the advantage of the CIO loss, it's the bank's money!

As for Ina Drew, in 2011, there were 21 mentions of her when I searched on Google. Just in the first five months of 2012, there are 7,570. Quite the uptick! She managed to keep such a low profile for such a powerful woman. And when I looked closer at those 21 mentions, only one had to do with her and that was about her compensation. Otherwise the mentions had to do with Ina's or Drew's or the Immigration and Nationality Act (INA).  So basically, she had NO profile which is hard to believe. How did she do that? Not either a best dressed executive headline! (Did you see yesterday's Best Dressed CEOs?)

I have no doubt that Dimon's and JPMorganChase's reputation have been hurt. But now is the time for them to "recover." I hope they read my book. The first step after the spotlight somewhat ebbs is to focus internally and reassure employees that the future is ahead.