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 market values. Often the loss of public trust is only the beginning of a company’s troubles. Lawsuits, public hearings, and investigations soon follow. In some cases pubic officials may sense an opportunity to pursue policy agendas or occupy the role of heroes taking on corporate villains. In other cases, regulators and politicians may feel the pressure of the public to take decisive action changing competitive environments. (Daniel Diermeier, The Need For Reputation Management Capabilities, The European Business Review 2012)
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; and 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 sustained impact, but reputational crises are increasingly being 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 a feeling of betrayal, a strong emotion indeed, a phenomenon recently experienced by Netflix who alienated its passionately loyal customers first with an ill-advised price hike, followed by a confused communication strategy. (Daniel Diermeier, The Need For Reputation Management Capabilities, The European Business Review 2012)
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. Successful reputation management therefore requires the ability to assume external actors’ perspectives and viewpoints. . . . Effective reputation management will always be challenging and, like any business skill, will require innovation and adaptation. However, appropriate capabilities can dramatically reduce the complexity of reputational challenges, help spot problems early, and assist in the development of effective strategies that are deeply integrated with the rest of the business. (Daniel Diermeier, The Need For Reputation Management Capabilities, The European Business Review 2012).
Companies must therefore recognize the reputational impact of any business decision before it is made whether they are related quality control (Toyota and Johnson & Johnson), safety (BP), product design and disclosure (Goldman Sachs), compensation (AIG), or executive conduct (HP). In all these cases, managers in departments ranging from HR to Engineering made decisions that had massive reputational consequences. . . . It emphasizes the fact that a company’s environment during a reputational crisis will look very different from its environment in normal times. In the case of AIG’s retention agreements, for example, a confidential contract between two parties faced sudden scrutiny in the glaring spotlight of 24-hour news coverage, simplified for a mass audience, with an emphasis on emotional impact and moral outrage. Advocacy groups that typically lie dormant or unorganized may jump on the stage, followed by politicians, regulators, and other officials. . . . he key to successful reputation management is that all decision makers in the organization view themselves as stewards of the company’s reputation. Proactive reputation management needs to anticipate the possibility of such developments and incorporate them into decision making. It requires a mindset that reflects an awareness that through our business decision today, we are creating the facts that will be the basis for our story tomorrow. (Daniel Diermeier, The Need For Reputation Management Capabilities, The European Business Review 2012).
One of the CEO’s main tasks is to integrate reputation management into the operational processes of the business. One approach to accomplishing this task has been to create a separate corporate function: a chief reputation officer (CRO) or chief reputational risk officer (CRRO). . . . An alternative is the creation of a corporate reputation council (CRC). This is a cross-functional unit composed of senior executives with actual decision-making authority. . . . Good governance and decision-making structures are necessary for effective reputation management, but even these alone are not sufficient.(Daniel Diermeier, The Need For Reputation Management Capabilities, The European Business Review 2012).
But there is a risk here as well. business reputation is critically important. But the maximization of enterprise value production (however that is calculated) is even more so. Where risk management becomes central to the operations of an enterprise, where risk management becomes the core basis on which performance is assessed, the potential value maximizing utility of the enterprise itself may be put at risk. The trend toward managerialism in all aspects of organized life has been strong in recent decades. It represents in a way both a desire to contain risk and evidence that as societries become richer they become more risk averse (e.g.Democracy Part XXV: Law as Command or Surveillance as Law in an Era of of the Mass Production of Political Organization). The result is a better managed enterprise, but also one that is less willing to take risks and therefore more unlikely to achieve higher rewards. The balance between risk and safety is a hard one, and also a moving target. it is as likely a product of cultural premises as it is of the governance architectures put in place by governments and enterprises themselves. This society appears to be moving decisively, though, to an era where risk taking is more dangerous and the management of the downside more central to operations than the attainment of the high reward at high risk.