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The CEO Must be the Chief Reputation Officer
by Daniel Diermeier

 
   
 
   

CEOs and board members routinely list reputation as one the company’s most valuable assets. (1)  Yet, every month a new reputational disaster makes the headlines destroying shareholder value and trust with customers and other stakeholders.  During the last year leading companies ranging from Toyota over Goldman Sachs to BP battled severe crisis. While the sources of the crisis may vary from case to case and from industry to industry in all cases financial markets punished the companies leading to a severe and sustained erosion of their the market values. 

In every single case observers have pointed out specific mistakes by senior management and offered advice on how to avoid similar disasters. However, the frequency and severity of these incidents warrants a broader explanation. We suspect that the increase in reputational crises points to mismatch between risks and corporate capabilities. In other words, while reputational risks had risen significantly, reputation management capabilities have not kept up. But an increase in risk without a matching improvement in prevention and preparation capabilities will lead to more and more severe incidents.

The consequence is a sustained and significant erosion of trust. The PR firm Edelman’s 2011Trustbarometer shows that trust in business in the U.S.  is now approaching levels found in Russia. The data in the rest of Europe are not much better.  Only some of the other BRIC counties (China and Brazil) show slightly increased trust. Moreover, NGOs are now trusted more than companies in almost every country, even China.  Business leaders and corporate boards are starting to take notice but are unsure what to do. 

This trend may simply be a consequence of an annus horribilis for business. The year 2010 saw some of the world’s most recognized companies, all leaders in their industry, battling reputational crises.  And now the world is looking in horror at the Fukushima disaster, which in the words of late night talk show host Jay Leno, may make us look back at the Deepwater Horizon oil spill as the good old days.   

But the root causes go deeper. Trust in business has been eroding at a steady pace over the last decade and CEOs are now among the least trusted professions.  Four main factors are responsible for the increase in reputational risk.

First, media coverage, whether traditional or social, has dramatically increased globally. This increased scrutiny has made it virtually impossible for companies to hide. Transparency is expected, while companies have less control over their messages; once an issue is on the Web, it will likely stay there forever.

The second factor is an unexpected consequence of globalization. The globalization of activist organizations has matched the global reach of companies. NGOs have increasingly succeeded in forcing private regulation: the “voluntary” adoption of rules and standards that constrain certain forms of company conduct without the involvement of public agents. In many cases, the mechanism driving change is the creation of reputational crises for globally operating companies that, when effective, leave the companies with no choice but to change their business practices.

Third is a shift in expectations about corporate conduct, especially among younger population segments. Evidence for these trends can be found in the explosive growth of areas such as corporate social responsibility, sustainability, and socially responsible investing. Some critics have dismissed these trends as passing fads that lack impact, but reputational crisis are increasingly arising driven by moral outrage, whether over environmental concerns or executive perks.

The final factor is the rise of business models based on trust. To develop unique customer experiences and solutions, companies need to get closer to customers’ unarticulated—perhaps even unconscious—desires and needs. This requires trust.  While this shift has undoubtedly created new opportunities for value creation, even the mere perception of broken trust will lead to feeling betrayed, a strong emotion indeed.

How have companies responded to these trends?  Poorly.  Most companies still view stewardship of the company’s reputation as a narrow issue best left to the PR department.  For the most part, the result is in underfunded initiative greeted by nervous questions from the board. Underdeveloped capabilities in the presence of growing reputational risks will lead to an increase in reputational crises. That mismatch is untenable.

Most companies still believe that building a strong reputation is easy and only requires common sense; it is merely a natural consequence of doing right by customers, employees and business partners.  This approach is flawed. Good business practices are important, even necessary, but they are not sufficient for successful reputation management. A company’s reputation needs to be actively managed by the business leaders, led by the CEO as the steward of the corporate reputation. While experts such as public relations specialists may play an important they should not own the process. The reason is that challenges to a company’s reputation typically arise out of a specific business decision, but reputational risk awareness is not part of the decision process.

Successful reputation management is difficult. It requires a high level of strategic sophistication and mental agility that sometimes runs counter to day-to-day business decisions. A company’s reputation is shaped not just by its direct business partners, customers, and suppliers, but also by external constituencies. Frequently, constituencies that have lain dormant for many years can suddenly spring into action, particularly in the case of reputational crises. Companies need to have process to identify such risks.

A company’s reputation consists of what others are saying about the company, and not just its business partners and customers. It is essentially public. This necessitates the ability to assume external actors’ perspectives and viewpoints, especially when they are critical or even hostile towards the company.  This requires a strategic rather than defensive approach by business leaders.  Anger or self-pity are not helpful.

A strategic approach requires the emotional fortitude to treat reputational difficulties as understandable and even predictable challenges that one should expect in today’s business environment. As a result, companies should handle reputational crises like any other major business challenge: based on principled leadership and supported by sophisticated processes and capabilities that are integrated with the company’s business strategy and culture.

(1) As examples consider:

“Concerns About Risks Confronting Boards: First Annual Board of Directors Survey,” Eisner LLP, May 2010. http://www.eisnerllp.com/Nep/PressReleases.aspx?id=5045.  (accessed October 23, 2010);

The Economist. Risk Reputation Report. (Economist Intelligence Unit, December 2005). http://www.acelimited.com/NR/rdonlyres/2B964DD5-F93E-47C3-BA44-999A0BAEAD40/0/RISK_REPUTATION_REPORT.pdf. (accessed November 29, 2010).


Here is a video of Daniel Diermeier speaking about transparency and convergence within a company: http://www.youtube.com/watch?v=ThDG89I1Jn4 (ed.)


     
   
     
   

The Author

Reputation Rules

 

Daniel Diermeier, Ph.D., (Evanston, IL), author of Reputation Rules, is the IBM Professor of Regulation and Competitive Practice and Director of the Ford Motor Company Center for Global Citizenship at the Kellogg School of Management, Northwestern University. He has served as an advisor to leading companies, including Accenture, Cargill, HSBC, Johnson & Johnson, Kraft, and McDonald's. In 2007, Diermeier won the Faculty Pioneer Award from the Aspen Institute, named the "Oscar of Business Schools" by the Financial Times.

Visit Reputation Rules for additional information.

     
   
     
   
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