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Posted: February 21, 2012
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Article SummaryThis overview of reputation management focuses on corporate reputation as an economic asset – and how to protect the asset.

Not Cleaning up Your Act Can Be Costly

Originally published in Treasury & Risk Management, September 2004

After Enron, companies are awakening to the intrinsic value of maintaining a good name

Once a year at the Memphis corporate headquarters of FedEx Corp., executives representing each of the company’s corporate-level departments and operating units sit down together and assess the different risks the company faces.

“We’ll consider plane crashes, computer outages, disruption at one of our transport hubs, the loss of a package of national importance – we have numerous issues that we evaluate and rank based on our vulnerability assessments,” says Bill Margaritis, corporate vice president of worldwide communications and investor relations with FedEx.

Meetings like these are fairly common across the corporate landscape, but at FedEx there is a significant twist on business as usual. Besides considering the financial impact of each event, the provisions for business continuity and the effect on customer service as other companies do, FedEx executives also ask what would happen to the company’s reputation if any of these potential disasters occur. “Reputation is a strategic asset that needs to be managed in a highly disciplined and focused manner on a sustained basis,” says Margaritis. “We believe that a strong reputation can act as a life preserver in a crisis and as a tailwind when the company is on the offensive.” Academics agree and have been arguing for years that reputation has a value and should be managed like any other asset. But with a few exceptions, companies have tended to pay little attention – that is, until now.

Today, discussions within Corporate America about how to protect reputation are becoming, if not commonplace, then at least not extraordinary. And the explanation for this new imperative should be self-evident: Major companies have been collapsing under the weight of reputations damaged by the actions of their top managements – or worse, because of the behavior of top managements at other companies in their industry.

Peter Sandman, a risk communication consultant based in Princeton, N.J., points to the impact that Enron’s collapse had on the energy sector. After the energy giant suddenly sank in a sea of debt, the rest of the industry was caught in the undertow – including some of Sandman’s own clients. “The assumption was that they were doing the same things as Enron,” Sandman explains. “They had trouble with their bondholders, their regulators and the investing public – all of it attributable directly to Enron.”

To Sandman, the market’s loss of confidence in the energy sector was a self-fulfilling prophecy. Investors turned tail and fled, and lenders pulled in the credit lines, resulting in a downward spiral of ratings downgrades and liquidity problems. Sandman suggests that, had one of these companies tried at the beginning of the scandal to distinguish itself from Enron, it may have been saved. “But none took that strategy,” he says.

Nonetheless, the lessons of the millennial corporate governance scandals are still fresh in the memory. The problem now is how one defines reputation and then goes about protecting it.

Charles Fombrun, executive director of the Reputation Institute and a former professor at New York University’s Stern School of Business, defines reputation as “the perception that stakeholders have of a company as a whole. Different stakeholders have different expectations,” he says. “If a company hits those expectations, then their reputation improves. If it disappoints, the reputation suffers.”

It’s a simple definition, but using it as the basis for a management response isn’t easy. The central problem: There can be a reputational dimension to almost any action in which a company is involved – whether it’s a missed earnings target, an offshoring decision, a product recall or the escape of a pollutant from a company facility. “Reputation touches every function in an organization at every level. It also requires you to think about all of the different stakeholder groups,” says Mark Bain, head of corporate communications for Alticor Inc., the group that owns direct-selling companies Amway and Quixtar. “Often, you’ll find companies doing things here and there to manage reputation, but very few do it holistically.”

Putting a Number on it

The stakes are high. The Reputation Institute’s Fombrun puts the consensus estimate for the portion of a company’s value made up by its reputation at 20%, but claims some studies have suggested it could be as high as 90%. This has prompted considerable work by academics and accountants to provide a quantitative framework for evaluating intangible assets like reputation, innovation and management expertise, which could allow companies to attempt some risk transfer solution.

One group that stands to benefit from a more quantitative approach to reputation is the insurance industry. Insurers have made numerous attempts to develop cover specifically for reputational events, calling in specialists in the field to help them measure the risks involved. For instance, Sandman worked with a European insurer on its reputational product initiative. For a while, he says, the insurer was “very interested” in adjusting its pricing policy to take reputational management into account. “It wasn’t reputational risk cover per se,” he explains, “but they knew that existing insurance was sensitive to the way that reputational events were managed. When people are outraged, claims go up, so they were considering reducing premiums for companies who could demonstrate that they knew how to handle reputational issues.”

So far, however, the search for the quantitative analysis that would allow real coverage has been largely fruitless – and Deborah Pretty, the New York-based principal with consulting firm Oxford Metrica, believes that “ultimately, reputation cannot be hedged, covered or transferred away.”

No Way Back from Here

Pretty should be in a position to judge, having previously advised one large U.S. insurer on its attempt to create reputational cover. “Even if the insured client could be restored to exactly the same financial position as before the loss – the principle of indemnity – such cover is likely to be prohibitively expensive,” she says.

In the absence of readily available insurance solutions, says Pretty, reputational risk “remains on the CEO’s desk as a strategic asset that requires active management and cannot be delegated to the treasury or insurance department.”

So then the question becomes how to manage this unhedged risk. There’s no single corporate function to take responsibility for oversight. Some companies see it as an issue for communications, others as a problem of brand management. Ethics officers and compliance officers are also in the mix, as is investor relations.

At Alticor the communications function is actively involved in day-to-day programs to build reputation, but representatives from all of the main functions also sit on a “global reputation team,” which is charged with developing and monitoring worldwide plans to protect and enhance reputation. The company is also willing to put its money where its mouth is. Executives at Alticor know that the amount of money they take home at the end of the year rests in part on their ability to meet their reputational targets, says Bain. “If you just reward people by sales or profits, you may find that the actions of your employees are at odds with the company’s reputational interests,” he notes.

A Yardstick for Reputation

Such a system has to be based on some kind of metric, of course, and both Alticor and FedEx have developed formal processes to measure their reputation. The principal tool is a regular survey of different stakeholder groups.

On a quarterly basis, FedEx conducts a survey to find out how it is perceived by external stakeholders, says Margaritis. It conducts another survey of its own employees annually. Each of the surveys asks about a consistent series of six attributes that the company believes are the key drivers of corporate reputation, including quality of products, workplace practices and social responsibility. “We track the results to see where we’re improving, whether our actions are improving our scorecard – and that gives us a clear roadmap to take action when we need to enhance our reputation,” he says.

The company has tried to establish a direct link between reputation and shareholder value by studying the ways in which different elements of reputation affect the behaviour of customers and investors. “There are correlations between changes in the reputational data and changes in the ‘likely-to-buy’ or ‘likely-to-invest’ results,” says Margaritis.

Alticor conducts a survey of the general public on an annual basis, and does supplementary surveys of employees and salespeople every two years on average. As with FedEx, the company explores more or less the same issues in all of its surveys to enable comparisons across different stakeholder groups, says Bain.

According to Sandman, however, monitoring and measuring reputation is only half the battle – companies also need to understand how reputation can be managed. As things stand, he says, “company management is more aware of reputational issues than they used to be, but their awareness of good reputation management is as bad as ever.”

FedEx tries to improve its ability to manage reputation by regularly running simulations in which cross-functional teams are given a scenario and asked to react as though it was real. “A call will come in, saying that a plane has gone down with hazardous materials on board, or that anthrax has been found in a transport hub – and you’ve got to mobilize, got to move, got to manage,” says Margaritis.

As with the annual risk assessment meetings, reputation is a key consideration in the FedEx simulations – and they will sometimes incorporate elements designed specifically to test the team’s readiness to cope with a specific reputational problem. “We’ll have them react to a damaging issue that goes public and attracts the attention of [nongovernmental organizations] and pressure groups, or ask them how to respond to a mocking CNN interview, or criticism from politicians,” he says. The team’s behavior is evaluated throughout the simulation by a team of observers using a variety of techniques.

It may seem like a lot of unnecessary hassle, but Margaritis believes that pretending to cope with imagined disasters will not only help reduce the reputational risks the company faces, but will also enable FedEx to cope if something does go wrong. “If more people understood the risk issues connected to reputation,” he says, “a lot of the corporate malfeasance we’ve been through could have been avoided.”

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