This Chapter Covers
Reputational crises have a significant impact on a company’s valuation.
They can be triggered by any business activity and do not necessarily reflect lapses in a company’s ethics or integrity.
Both the frequency and the magnitude of such events is increasing.
The underlying factors that drive these developments are likely to increase in importance.
Since reputational risk cannot be hedged or “outsourced,” companies need to develop effective reputation management capabilities.
Such capabilities consist of an integrated reputation management system and its core components: (1) mindset, (2) processes, and (3) values and culture.
A reputation management process consists of a decision-making system and an intelligence system.
CEOs and board members routinely list reputation as one the company’s most valuable assets. 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 such as Toyota, Goldman Sachs, BP, Johnson & Johnson, and HP battled severe reputational crises. In all cases, financial markets punished the companies, leading to a severe and sustained erosion of their market values. In many cases, reputational damage is followed by lawsuits, public hearings, investigations, and regulatory actions.
In contrast to the scandals related to Enron, WorldCom, and Arthur Andersen a decade earlier, these crises are not limited to a specific domain (accounting practices and standards, especially with “new economy” firms) or caused by a dramatic increase in blatantly unethical or illegal activities. Rather, the involved companies were all category leaders, some with iconic status in their respective industries, and the issues involved ranged from quality and safety to disclosure and (alleged) executive misconduct.
The increase in the frequency and impact of reputational issues suggests that more fundamental shifts are occurring in the business environment and that companies are unprepared for dealing with them. What companies lack is an effective reputation management capability in the presence of increasing reputational risk. Too often, reputation management is considered a (sub)function of corporate communication and isolated from business decisions. Rather, companies need to adopt a strategic approach that treats reputational challenges as understandable and even predictable. As a result, companies should manage their reputation 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.
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