Reputation is a powerful and valuable commodity. In a 2012 study, the World Economic Forum concluded that more than 25 per cent of the average company’s market value is directly attributable to its reputation. For a dollar value, the 2017 UK Reputation Dividend Report estimates that the combined reputational value of FTSE 350 companies stands at £986 billion (A$1721b); 39 per cent of all shareholder value.
We now live in a reputation economy of collaborative consumption — businesses like Uber are built on reputation capital — yet organisations have never been more vulnerable to reputational risk.
Rules of the game
Reputation is how customers, employees, the media or regulators see us. We have no direct control over our reputations. A good reputation, says Younger, is comprised of three mechanisms: behaviour, networks and narrative.
“Behaviour is what you do, the product or service you provide. Your networks are your channel and an important social asset, without which no-one will know what it is that you do. Narrative is how organisations and individuals create legitimacy, it is how they talk about themselves and the key there is authenticity.
“They all interact with each other. One might mask faults in another, but this creates reputational risk. Take Bernie Madoff, former investment advisor and financier. He committed the largest financial fraud in US history while his networks upheld an inauthentic narrative and masked his bad behaviour until he was eventually found out.”
Directors in the firing line
“It is rare directors gain a reputation from the success of the company they govern, but they are often first in the reputational firing line when things go badly. That’s the job. Being a director is a complicated task, made more complicated by the intense public scrutiny that comes with new media.”
Younger believes the management of reputation risk is still stuck in the Dark Ages because companies are mostly reactive. However, some boards are beginning to develop separate systems, like specific reputation risk registers, while others have created reputation committees.
He suggests boards should characterise all current and potential problems as capability or character issues — to first gauge the source of the issue, then its potential impact.
Contrast Toyota in 2009 and Volkswagen in 2015. Toyota sales plummeted due to an accelerator pedal recall (a significant capability issue). Volkswagen experienced a temporary drop in sales following the exhaust emissions scandal (a character issue). It was then hit by intense scrutiny from governments, regulators and the media for a breach in public trust and later forced to pay billions of dollars in penalties.
“Capability issues are best managed by focusing on the customer and making the product better, whereas character issues can be tackled through improved transparency, greater communication and management change. During a crisis, it’s often difficult to know what to focus on, but the capability/character framework is an effective starting point.”
Accentuate the positive
”Reputation has this untapped potential that is a huge asset to business and it shouldn’t be solely looked at as a downside risk. This is something directors should embrace. So many organisations rely too much on the reputation they have built in the past. They should be engaging with their future one.”
Five tips on managing reputation from the boardroom
- Identify future reputation risks — Reputational issues can be categorised into capability issues (affecting your customer/product) or character issues (sparking scrutiny by stakeholders).
- Ensure diversity — The boardroom is the perfect example of a “closed network”. It’s highly productive, but risks becoming an echo chamber. Board diversity will assist in identifying a wide range of risks.
- Make time for reputation — Allocating a specific agenda item to reputation is beneficial. Organisations that better understand potential reputational risks and their impacts are better prepared for the downside.
- Manage governance structure — Each organisation’s governance structure should be fit-for-purpose. Consider the transparency of your current systems, which issues get escalated and how.
- Review your risk register — Ensure that reputation is accounted for or consider creating a separate reputation risk register by business division.