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Your Reputation Statement is Not Far Off
August 26, 2014
THE CENTRAL COLUMN CONSORTIUM PRESENTS NEW TRUST NETWORKS
What’s your reputation worth?
A good reputation is priceless, but the question is how to protect a vulnerable asset whose value resides not just in the performance or quality of the product but in how the business is perceived by its many and varied stakeholders. Commitment on the part of top management is essential in maintaining a good reputation, because if they don’t see it as having strategic value, it won’t be given the necessary priority. Furthermore, the behavior of senior management has a significant impact on the public perception of the company.
What’s in a name? More and more, it would appear. As social responsibility is one market value that seems certain to go on rising, a good reputation is a priceless, if unquantifiable, asset. Having a good name is one thing, keeping it in an age of ever greater scrutiny is another. And however well you manage your business, a reputation can be seriously damaged by forces beyond your control because, while corporate reputation is built from the inside, it is sustained in the perception of outside interest groups. When your good name hangs in the balance, for whatever reason, how you manage the crisis is crucial and you may even emerge with your reputation enhanced. The value of reputation goes beyond purely economic variables. It lies, according to Jordi Canals, the dean of IESE, in businesses understanding that it is “necessary and essential that they cease being merely commercial institutions” and remember that they are also social institutions. Reputation is the sum of many intangible parts, among them a good public image, a reputation for honesty, quality products and services, good management and social responsibility. Although corporate social responsibility is a component of reputation, it is only a part of it: CSR is in the company’s hands, while reputation is a matter of public opinion. Public opinion can prove difficult to shift since it is based as much on subjective factors as on concrete experiences. Mobile phone companies, for example, are regularly ranked among the worst businesses in opinion polls. Regardless of whether they deserve their bad reputation, the fact remains that telephone companies – along with certain airlines – are among the businesses that the public simply loves to hate. On the other hand, it is fashionable to sneer at Ikea but, according to the New York-based Reputation Institute’s rankings, it is the second most reputable company in the world, after the Italian chocolate maker Ferrero.
Hard to build, easily destroyed Losing a bad reputation is difficult, losing a good one all too easy. As Warren Buffet, the third richest man in the world, remarked: “It takes 20 years to build a reputation and five minutes to ruin it.” Some events are outside your control, but the way in which you respond to them is not, and a well-managed response can save a threatened reputation. Take the example of Perrier. In 1990, traces of benzene were found in bottles of Perrier water at a North Carolina plant. It is not clear how the benzene got there nor how much of a health risk it posed. What is clear is that the company’s response was confused. It issued a variety of conflicting explanations and, while dismissing it as an isolated incident, at the same time recalled 160 million bottles. In the process, Perrier lost the public’s trust and has never recovered its market position.
From laughing stock to top model On the other hand, the Czech carmaker Skoda has shown how to turn a reputation around. Dumping cheap, unreliable cars on the European – and especially the U.K. – market during the 1980s made it a byword for poor quality and the butt of jokes (Why does a Skoda have a heated rear window? To keep your hands warm when you push it.). Then VW took it over in 1991 and within a few years the company was synonymous with reliability. In a Top Gear magazine poll in 2005, in which readers were asked to rank 159 cars, Skoda models were the only three European cars in the top 10 – the rest were Japanese. This may be about to change as Toyota, hitherto one of the most reputable companies in the world, has seen its name seriously damaged over its handling of a recall of thousands of vehicles with faulty brake and accelerator pedals. “Toyota was considered an example of best practice and was the originator of the continuous improvement concept, just in time and lean production philosophy,” says IESE’s Philip Moscoso. “These concepts have been influential way beyond the car industry. Now they have problems they weren’t supposed to have. They had focused on reliability – not on building sexy cars – but recently they decided to go for growth in a bid to become the world’s biggest carmaker.” He says that in order to keep pace with this rapid growth, they had to increasingly sub-contract, which affected their famed culture of quality control. The company’s reputation has been damaged not so much by the technical problem – recalls are not uncommon in the car industry – but in Toyota’s apparent foot-dragging in response to it. “The problem, I believe, is a cultural one, the Japanese fear of losing face,” says Moscoso. “People who knew something was wrong perhaps didn’t tell their boss so that he wouldn’t lose face, and that made them slow – too slow – to react.” He thinks it will probably hurt them more in the U.S. than Europe, but in the short term Toyota has, in effect, lost its reputation through fear of losing it.
Reputation starts at the top Commitment on the part of top management is essential in maintaining a good reputation, because if they don’t see it as a strategic value, it won’t be given the necessary priority. Furthermore, the behavior of senior management has a significant impact on the public perception of the company. However, when it comes to convincing a skeptical director, “the biggest obstacle continues to be the difficulty of translating the value of intangibles into financial terms”, says Juan Manuel Mora, vice-president of communications at the University of Navarra. If you can’t manage what you can’t measure, how can you quantify the value of something as intangible as reputation? According to the Reputation Institute, it can be measured and has a direct impact on results, because a good reputation means lower costs (doing things well costs less in the long run) and because it has a positive impact on stakeholders. In what is known as the virtuous circle, a good reputation produces favorable behaviors among consumers, such as high consumption, recommendations and a desire to work for the company. It also helps attract talent, all of which have a direct or indirect effect on financial results. According to the RI’s scale, if a company’s reputation rises by 5 points, recommendations on the part of clients will go up by 6.5 percent. Good leadership in terms of reputation will ensure that managers and staff will make decisions in keeping with the image the company wishes to promote. With luck it will also avoid the situation Starbucks found itself in when exhausted rescue workers at the site of the September 11 attacks in New York asked for water and a Starbucks employee charged them $130 for 72 bottles of water which they had to pay for out of their own pockets. This is the sort of story that starts whizzing around the Internet before you can say click. The company quickly issued an apology and reimbursed the $130. Transparency and the Internet Thanks to the Internet and social networking, purveyors of urban myths and conspiracy theories can now reach beyond their traditional bar-stool audience and have their stories circulating among millions of people within a matter of hours. In the late 1990s, for example, a story started going around that fashion designer Tommy Hilfiger made racist remarks on the Oprah Winfrey show and that as a result, she kicked him off the program. Hilfiger counter-attacked, as did Winfrey, pointing out that he had never appeared on the show in the first place, and yet two years later the story was still circulating. The revenge of the guitar hero Then there was the case of Dave Carroll’s broken guitar. Last year, the singer accused United Airlines baggage handlers of damaging his $3,500 guitar. The company didn’t deny it, but they were not forthcoming with compensation either. After nine months without any satisfaction, Carroll warned them that he would write a song about the incident, which he did. The song “United Breaks Guitars” was viewed by eight million people on YouTube. United’s somewhat lame response, in which they offered to donate $3,000 to a charity of Carroll’s choice, got 85,000 hits. Some have been slow off the mark, but companies are waking up to the power of social media. Carolina Albero, head of external relations of Repsol, says the oil and gas company employs an agency “to listen to everything that is being said online about the company and find out what various interest groups are saying.” “The main change that has come with the Internet is that companies are losing the power to influence individuals,” says IESE marketing specialist Julián Villanueva. “They are more vulnerable than before, and they have to take this into account. It is not clear whether they can manipulate opinion on line. ...and the main challenge is figuring out how to play by the new rules.” Studies show that what customers want is for companies to listen to them via social networking sites and blogs, but they don’t want to be offered any unsolicited information such as advertising. It is clear how easily and rapidly a reputation can be damaged via new media, but it has its advantages. Villanueva says: “The main advantage is for medium-sized businesses that couldn’t afford to advertise or get attention from journalists under the old model. They were out of the game. Today they have a huge platform from which to spread by word-of-mouth and a better chance to build a reputation.” A model response to an endangered reputation If perhaps a good reputation is difficult to measure, a bad one soon gets around. “Bad news makes good headlines,” says Joan Fontrodona, academic director of IESE’s Center for Business in Society. On the other hand, a well-handled crisis can actually enhance a reputation. The classic example of this was Johnson & Johnson’s handling of the Tylenol affair. In 1982 a malevolent person contaminated capsules of the analgesic with cyanide and seven people died as a result. The company’s market value fell by $1 billion. In 1986 it happened again, and this time the company recalled all the Tylenol and didn’t put it back on the market until it had designed a tamper-proof package. The enormous cost of the recall was offset by the PR benefits of being open and putting the customer’s interests first, even though the origin of the problem had been completely beyond their control. Within a few months the repackaged drug had regained 70 percent of its market share and Johnson & Johnson improved its reputation. According to Mora “a real reputation is acquired through actions, when promises become realities. This implies a change in the institutional communication paradigm but also perhaps in the management paradigm, which needs to become more transparent, connected, participatory and responsible.” Reputation is a function of doing business well – it is not an add-on.
Be careful how you choose your friends Reputation is capital and needs to be wisely spent. In this respect, you need to be careful the company you keep, especially when it comes to sponsorship. The Santander Group has enhanced its name by sponsoring first the McClaren and now the Ferrari Formula 1 teams, but PepsiCo must regret putting its reputation in the hands of Michael Jackson. First, in 1984, they faced embarrassment when the singer was rushed to hospital after his hair caught fire while filming a Pepsi commercial, then in 1992 they broke off with the singer after allegations of child abuse surfaced, even though they were unproven. A hole in one or a shot to the bunker More recently, revelations of Tiger Woods’ “off course” activities sent his sponsors running for cover. The golfer was earning $100 million from endorsements but the consulting firm Accenture, AT&T and Gatorade (owned by PepsiCo) have all dropped him, while others such as Gillette and Nike are so far staying the course. They may well be rewarded for keeping their nerve. Having promised to mend his ways, Woods announced that he was returning to professional golf. Despite what Scott Fitzgerald said about there being no second acts in American lives, everyone loves a comeback. Sean McManus, president of CBS News and Sport, predicted that Woods’ return would be “the biggest media event other than the Obama inauguration in the past ten years.”