Corporate Reputation: Importance, Components, and Benefits

What exactly is a corporate reputation? How important is it? What is it worth? Isn’t it only an intangible, ‘feel-good’ concept? The answer: A good corporate reputation is a vital asset with significant impact on an organization’s bottom line. It is even more important internally and externally during the COVID-19 pandemic.

Corporate reputation defined

After reviewing 5,885 articles on reputation, Veh, Gobel & Vogel (2018) note “there is no agreement on one definition” of corporate reputation. However, the most popular definition is “corporate reputation is the overall estimation in which an organization is held by its internal and external stakeholders based on its past actions and probability of its future behavior,” according to leading international expert Charles Fombrun, former research professor of management at the Stern School of Business, New York University, and founder of the Reputation Institute, now known as RepTrak.

Using a slightly different perspective, UK PR Professor Tom Watson emphasizes predictability of actions, and brings communication into his definition: “Corporate reputation is the sum of predictable behaviors, relationships and two-way communication undertaken by an organization, as judged by its stakeholders over time.”

Reputation indices and single scores

Reputation indices and single scores for an organization relate to an aggregate perception by all stakeholders, but as Kent Walker pointed out in a 2010 paper, different stakeholder groups may have different perceptions of a corporate reputation for different aspects of specific issues. This makes it extremely important for organizations dealing with specific issues to start by identifying which stakeholders are relevant for which issues, and then to analyze reputation data most applicable to each situation. An example is a company like Wal-Mart: shareholders and the financial markets are impressed by the company’s profit record, but other stakeholders may be highly critical of its treatment of employees or its diversity policy, etc.

In a similar way, risk management expert Peter Sandman believes reputation consists of two variables, not one: “How loved you are is virtually unrelated to how hated you are.” As in the above Wal-Mart example, many companies are both loved and hated at the same time (and prominent individuals as well, like Elon Musk – refer the HuffPost image below. Imagine the wild ride as a Tesla investor!). Therefore, reputation management should take both broad aspects into account.

Source: HuffPost, 2 May 2020

Components of a corporate reputation

The two main sources of a corporate reputation are experience and information – a person’s past dealings with the organization (and potential future dealings) as well as the extent and nature of their direct and indirect communication with it. “A favorable reputation requires more than just an effective communication effort; it requires an admirable identity that can be molded through consistent performance, usually over many years,” stated Jennifer Moyer in a 2011 article for the Institute for Public Relations.

When I was corporate affairs manager of a power utility, a senior manager proposed that a KPI for my team should be based on the utility’s reputation score each year, but I didn’t agree to this because my unit was only accountable for communication, and I had no control over the behavior of field employees in the call center or involved with power line installation, maintenance, repair and removal. How could my area be responsible for the actions of linesmen who may have been rude to customers in the field, or who may have taken long lunch times and coffee breaks while waiting for equipment to arrive, etc, or for other poor behavior apparent to all kinds of customers?

Fombrun notes that:

…a reputation develops from a company’s uniqueness and from identity-shaping practices, maintained over time, that lead stakeholders to perceive the company as credible, reliable, responsible and trustworthy…Best regarded companies achieve their reputations by systematically practicing mundane management. They adhere rigorously to practices that consistently and reliably produce decisions that the rest of us approve of and respect. By increasing our faith and confidence in the company’s actions, credibility and reliability create economic value.

Fombrun’s view has stood the test of time since he wrote these comments in his book, Reputation: Realizing value from the corporate image, in the Harvard Business School Press, 1996.

According to a report by AMO Strategic Advisors in 2019, the most valuable elements of reputation are driven by impressions of:

1. A [public] company’s value as a long-term investment
2. Its quality of management
3. Its financial soundness.

These 3 core elements are the foundation of a strong reputation – they are commonsense, really. They are based on data from Bloomberg and Morningstar on 1,073 of the world’s largest companies in 15 ‘leading national indices.’ The factors shown in the image below are in a different order because they are based on different data obtained from an online survey of 1,700 participants in 19 markets a different data collection process.

Image: Weber Shandwick report 2019 – “The State of Corporate Reputation in 2020”. Executive Summary.

Quality of products or services and quality of employees top the Weber Shandwick list – 63% of global executives rate these drivers 8–10 – but the items that follow trail by very few percentage points. All 23 drivers are rated highly by at least half of the global executives in the study. This lack of distinction suggests that companies can no longer solely focus on and prioritize just a few key drivers of reputation. Everything matters to reputation today was the broad finding from the Weber Shandwick report: “Reputation’s day of judgement has certainly arrived in full force.”

CEO reputation key to good organizational reputation

An earlier global survey by US PR firm Weber Shandwick in 2015 found “Global executives in our survey agree: on average, they attribute nearly half (45%) of their company’s reputation to the reputation of the CEO…CEO reputation matters to the bottom line, too. Executives estimate that 44% of their company’s market value is attributable to the reputation of their CEO… According to Weber Shandwick’s past research, the general public is quite aware of company wrongdoing, and their opinions of companies are often swayed by what CEOs and other executives say and do.”

Image: Value of CEO reputation across the world, Weber Shandwick survey, 2016.

What’s more – the CEO especially, and other senior executives, can’t afford to be perceived as a distant figure internally, either. The CEO needs to be seen as accessible to employees by using relevant face-to-face communication channels such as town halls, roadshows, informal ‘get-togethers,’ conference calls, knowledge-sharing, eg ‘lunch-and-learn’ and ‘brown bag’ sessions, employee forums, ‘management-by-walking-around.’ Plus emailed and printed newsletters and emails, text messaging, video segments, internal social media, intranet, internal blog, organizational website.

Benefits of a good corporate reputation

Historical data compiled by Fombrun and Van Riel (2003) found that companies with a good reputation outperformed companies with poor reputations on every financial measure over a five-year period. Many more factors influence corporate reputation in recent years than in the past, and therefore organizations need to focus more widely on possible reputation disruptors, and to actively seek to address these in their strategic planning.

Weber Shandwick’s 2019 online international survey in 19 countries of 1,700 C-suite executives, excluding CEOs – “The State of Corporate Reputation in 2020” – found the main advantages to companies that do make a priority of strengthening their reputations are:

1. Customer or client loyalty, even when other companies’ products and services are available at a similar cost and quality
2. Competitive advantage
3. Better relationships with suppliers and partners
4. Attraction of high-quality talent
5. Employee retention
6. New market opportunities
7. Higher share price
8. Crisis resilience and risk minimization
9. Greater support from policymakers and regulators
10. Ability to charge premium prices / tied with More favorable media coverage
11. Less shareholder activism.

A good reputation brings many advantages

Although reputation is an intangible concept, research universally shows a good reputation demonstrably increases corporate worth and provides sustained competitive advantage. A business can achieve its objectives more easily if it has a good reputation among its stakeholders, especially key stakeholders such as its largest customers, opinion leaders in the business community, suppliers, and current and potential employees.

If your organization is well regarded by your main customers, they will prefer to deal with you ahead of others. And these people will influence other potential customers by word of mouth. Suppliers will be more inclined to trust in your organization’s ability to pay and to provide fair trading terms. If any problems occur in their trading relationship with you, your suppliers will be more inclined to give you the benefit of the doubt when you have a reputation for fair dealing.

Likewise, government regulators will trust you more if you have a good reputation, and they will be less inclined to punish you if you trip up along the way. And clearly, a potential employee will be more likely to join if you have a good reputation for your treatment of staff compared with an employer who may have a lesser reputation.

Also, corporations are being judged more on their net contributions to society now, with the expectation that they make a higher priority of their social impact in society. The proliferation of media technologies and social media channels has given individuals and organizations new tools they use to generate greater and faster scrutiny on companies’ social license to operate. Therefore, corporations need to allocate sufficient attention and resources to strengthening their reputation.

Public companies and institutions

Even though the figures in the following two reports measure different variables, they underline the fact that corporate reputation is a very significant contributor to the market capitalization of public companies. You can read further information in my article about a corporate reputation even being a company’s biggest financial asset.

AMO Strategic Advisors analysis

A 2019 AMO Strategic Advisors report stated that in their analysis for the 12 months to 31 March 2019, “corporate reputations accounted for 35.3% of total capitalization of the world’s top 15 stock market indices, representing $16.77 trillion in shareholder value. Almost eight in 10 companies surveyed saw their stock value shored up by a positive corporate reputation.” Over the same period, the value associated with corporate reputation for the 1,611 corporations that comprise the top 15 global indices rose by 2.1%, even as the indices’ total gross market capitalization fell 0.4%.

The poor reputation of 21% of public companies meant this was actively destroying their market capitalization [reflected in their share price]. Corporate reputation can be a major contributor to shareholder value but only when it’s performing well. The AMO report stated that “reputation value analysis is founded on the understanding that no single method of valuing companies can fully explain market capitalization with any consistency.”

Weber Shandwick online survey

Executives participating in the ‘2020’ Weber Shandwick online survey in 22 international markets, on average attributed 63% of their company’s market value to their company’s overall reputation. Contribution to the overall market value varies by country. Executives in all the countries, except in the UK (47%) and Hong Kong (47%), estimated that their company reputations contributed to more than half of their market value. One-third of executives (33%) reported that more than three-quarters of their market value – 76% or more – was attributable to their company’s reputation. [Despite the reference to ‘2020’ in the title of the ensuing report, no date was given to the survey in the report. The survey was actually conducted in July-August 2019, and therefore ‘2020’ in the report title could be considered deliberately misleading so the report would have a longer lifetime.]

Reputation factors stem from sources such as:

• A company’s public statements in formal documents like reports to the stock exchange, annual reports and quarterly financial statements
• Stakeholders’ public views such as large investors’ comments, financial analyst recommendations
• Social performance (eg CSR and sustainability)
• The type, extent and tone of coverage in digital, print and broadcast media sources
• Public perceptions in social media platforms, online forums and blogs.

The intangible asset of reputation is valued in financial markets by analysts, in share prices, in ratings by credit agencies and for private lender programs. Reputation has particular value in IPOs (initial public offerings of shares in a new company), mergers, acquisitions, and partnerships. Not the least are employees’ expressed opinions of their employer in social media and word-of-mouth situations. In addition, there are semi-public institutions such as universities and professional services firms.

Image: Chart from Weber Shandwick global online survey report 2019, “The State of Corporate Reputation in 2020.”

Small to medium entities

The reputations of privately owned small-to-medium companies and firms, NGOs, plus government bodies, government trading enterprises and institutes of higher learning can’t be measured as easily because they don’t have a daily share price to monitor. But their reputations can still be measured by the publicly expressed views of customers and other relevant stakeholders, including employees; the tone of any media coverage; and public perceptions about those entities and their owners, managers or employee opinions or actions discussed in social media platforms, online forums and blogs.

‘Bad is stronger than good’

“Bad is stronger than good as a general principle across a broad range of psychological phenomena,” is the reasoning in a ground-breaking academic paper by Baumeister et al. in 2001. Among other things, the paper has been the basis of an article in the Harvard Business Review in 2010 and in the New York Times in 2012. Why is this relevant to reputation analysis? Because, from the article by Baumeister et al.:

The greater power of bad events over good ones is found in everyday events, major life events (e.g., trauma), close relationship outcomes, social network patterns, interpersonal interactions, and learning processes. Bad impressions and bad stereotypes are quicker to form and are more resistant to contradiction than good ones. Hardly any exceptions (indicating greater power of good) can be found (p. 323)…there are likely to be few principles that are even more broad and general. (p. 325)

Among journalists and communication scientists, it is considered common knowledge that bad events are more newsworthy and attract more reader attention. Periodic calls for the news to focus more on positive, uplifting stories get nowhere, not because journalists are sadists or misanthropes, but because bad news sells more papers. (p. 343)

…bad reputations are easy to acquire but difficult to lose, whereas good reputations are difficult to acquire but easy to lose. (p. 344)

When people first learn about one another, bad information has a significantly stronger impact on the total impression than any comparable good information. Bad feedback has stronger effects than good feedback. (p. 355).  [Italics are my emphasis.]

No wonder we find people take more notice of bad-news stories and negative commentary in the media, of criticisms in social media by influencers and members of Facebook groups, unpleasant Twitter comments, irresponsible corporate social responsibility actions, adverse views by financial analysts and politicians etc.

From his experience on behalf of clients, Peter Sandman believes that acting to increase your positive reputation in a controversy usually means increasing your support – which helps you win battles. However, “Diminishing your negative reputation usually means diminishing your opposition – which helps you end battles. It’s almost always better to end battles than to win them.”

Hazards of corporate reputation in public companies

The value of corporate reputation can be measured, especially when a good reputation turns bad for a public company – because the impact can be seen in the plunge in share price and therefore market value. Great examples include:

• The Boeing Company’s share price plunged almost 40% in the 5 months to April 2020 due to the damage to its global reputation, commercial business and financial rating after a total of 346 passengers and crew were killed in two crashes of its Boeing 737 MAX aircraft in 2018 and 2019. Earlier in 2018, Boeing had been ranked 19th on the list of the “World’s Most Admired Companies.” Not any more.

Image: Chart of Boeing Company share price on the New York Stock Exchange from 2015 to 2020.

• The Wells Fargo bank share price dropped by 20% from 2014 to 2016 when the bank was caught up in a prolonged scandal after admitting to creating several million fake customer accounts that led to employees receiving unearned incentive commissions, and 5,300 hourly (casual) employees losing their jobs.
• The share price of the Carnival shipping line dropped by 18% after one of its cruise ships sank when it hit underwater rocks off Tuscany in 2012, with the loss of 33 lives.
• BP’s share price crashed by 53% after the Deepwater Horizon oil production platform caught fire in the Gulf of Mexico in 2010, causing the largest accidental oil spill in history and the loss of 11 lives.
• Volkswagen group’s overall revenue dropped 5% in the first half of 2016, the group’s share price tumbled around 40% from May 2015 to October 2016, its share of the European auto market fell, and it laid off 30,000 employees in the wake of its diesel emissions scandal, which continued to hit the group after the scandal started in September 2015.
• A bad reputation also affects staff recruitment, which is a major cost to every business. Around 84% of employees would consider quitting their current employer to join a company with a great reputation. On the other hand, research reported in the Harvard Business Review in 2016 found that a company with 10,000 employees could be spending $7.6 million in additional wages to counter a bad reputation. That’s around $4,723 per hire. The research showed that such companies would need to offer a minimum 10% pay increase to convince a candidate to accept a job there.

Organizations would have a slightly different reputation with each stakeholder according to their experiences in dealing with the organization or in what they have heard about it from others.

Varied reputations in other types of organizations

It is all very well for the reputations of large public companies to be measured by share value, but what about NGOs, charities and other smaller organizations? The case of international aid charity Oxfam is a good example. Oxfam had developed an impressive reputation over many years and good deeds, but in 2018 a scandal erupted in which some Oxfam staff in Haiti were accused of sexual misconduct, bullying and harassment. For a non-profit organization depending on donations backed by goodwill, the bad press hit hard. A poll at the time found that more than 60% of people were less likely to donate to Oxfam, who also experienced a 4% drop in regular, long-term donors canceling subscriptions. The previous retention rate had been 99.6%. But as well as funds, Oxfam also lost volunteers – in its shops, on the streets and in the disaster zones where it operates. This was an unpaid workforce vital to its mission. The fact that individuals’ demonstrated such a lack of desire to associate themselves with the charity will have ongoing reputational repercussions.

Small businesses can suffer significant financial downfalls from negative social media and online commentary. According to research by Apex Global Learning, every additional star in an internet review leads to a 5-9% increase in revenue; there is an 18% difference in revenue between three-star reviewed businesses and those rated five-star. Happy customers count.

As noted above, many organizations consider their greatest asset to be their good name or reputation. This is especially true in knowledge-based organizations such as professional services firms in the consulting, legal, medical, and financial sectors and in universities. They work actively to build their good reputation, to build the ‘bank of goodwill’ towards them.

The importance and relevance of reputation are even more vital in this era of technological advances. People form their views from many different sources now, especially from social media and the web.The proliferation of media technologies and social media outlets has given individuals and organizations new tools they use to subject companies to greater and faster scrutiny.

Measuring reputation

Reputation is a difficult concept to measure. It is based largely on what people’s past dealings with your organization and stakeholder perceptions of your organization. Overall, it is a ‘woolly’ concept. But perceptions can actually be converted accurately into data.

alva Group

Image: from alva website.

For instance, the alva Group calculates a reputation score using specialist technology to rank business reputation. More than 2,000 companies in 100 sectors are assessed and classified by their reputation score. Data is drawn from more than 80,000 news sources, including digital, print and broadcast media, 100 social media platforms, and three million online forums and blogs to give a score giving a real-time, numerically precise understanding of where a company’s reputation sits within its sector and the broader business community.

Alva’s reputation intelligence process analyzes millions of pieces of content in real time every day. Drawing data from more than 200 countries in over 90 languages, it is able to measure sentiment among stakeholders and influencers on every topic affecting a business. Alva’s sentiment algorithm identifies the varying and competing shades  of positive, neutral and negative language relating to a company, and calculates a score on a -100 to +100 score range. It accounts for different types of sentiment, based on specific metrics relating to the scenario in which the client companies are mentioned, and how they are positioned and described in the marketplace. Their weighting process ranks content in terms of reliability, size of audience, and reader recall. Scores automatically account for the influence of a given source, prominence of the company in the content, and whether they are the sole organization focused on within the content. These are all factors that research shows are key drivers of likely reader recall.

To gain actionable insight, companies need to understand the concept of multiple reputations. For each set of stakeholders, the reputation of a particular organization will be specific. For example, shareholders might have a different view about supporting charitable causes ahead of consumers or NGOs. Beneath a single reputation ranking lies the ability to understand which stakeholders have a good opinion of a company, and which need some further focus. By identifying precisely where they stand with their various stakeholders, against their competitors, and among their peers, companies are able to evaluate the reputational risks and opportunities facing them in the immediate future and in the longer term.

RepTrak

RepTrak, formerly the Reputation Institute, conducts an annual reputation survey of global companies. The firm’s 2020 survey found the “Top 10 most reputable global companies” were (1) Lego, (2) The Walt Disney Company, (3) Rolex, (4) Ferrari, (5) Microsoft, (6) Levi’s, (7) Netflix, (8) Adidas, (9) Bosch, (10) Intel. Those companies would be very pleased with their ranking, but to qualify for the study, companies needed to operate globally, have annual revenue greater than $2 billion, and their name needed to be ‘familiar’ to more than 20% of the general public in at least 15 markets. RepTrak also compiled a list of the top 100 companies, but only 153 companies qualified for the above selection criteria in total (!).

According to RepTrak, the top drivers of corporate reputation have held remarkably stable in the past 10 years:

1. 20.1% Products and services
2. 14.8% Corporate governance
3. 14.4% Citizenship
4. 13.2% Financial performance
5. 13.1% Innovation
6. 12.9% Executive leadership
7. 11.5% Workplace quality

Ipsos

Some firms like Ipsos believe trust is a simpler approach to reputation (2019) – “if you are building trust, then you are building reputation” – and they develop trust scores rather than indices of corporate reputation. And, of course, we have the Edelman’s Trust Barometer global survey, which has been conducted annually since 2000, of which the latest, in 2021, is here.

Confronting reputational risk

Reputation risk is the potential for any event, controllable or otherwise, to damage your organization’s reputation. It is the risk to the institution from stakeholder perceptions of your profitability, brand value, authenticity, or ability to perform your corporate function.

“Reputation risk is the top strategic business risk,” was a key finding of a 2014 Deloitte global survey of 300 high-level respondents from companies in the Americas, Europe and Asia Pacific with annual revenues higher than US$1 billion. Around 87% of the executives surveyed rated reputation risk as more important or much more important than any other risks their companies were facing. Respondents also reported that their top 3 drivers of reputation risk were (1.) Ethics/integrity – fraud, bribery or corruption 55%, (2.) Security – physical and/or cyber 45%, and (3.) Products/services – product safety or services issue; health/environmental; controversial products 43%).

According to the Alva group in 2020, reputational risk falls outside the scope of traditional risk management, even though it is fundamental to the success of an organization – largely because it is hard to neatly package and measure: “It is not an operational risk – it could better be described as a strategic risk.” A framework for managing reputational risk is summarized in this image below from an article by Eccles et al. in the Harvard Business Review, 2007:

Image: from the article, “Reputation and Its Risks,” in the Harvard Business Review, February 2007.

What increases exposure of an organization to greater reputational risk?

The major components of reputation risk include perceptions of an organization’s ethics compared with the reality of its corporate behavior – the reputation-reality gap. An extensive review of international business data, conducted by Boldt Partners in 2020, found that “business ethics is now the most significant reputation risk facing corporate UK.”

Boldt used the SASB (Sustainable Accounting Standards Board) definition of business ethics as “the company’s approach to managing risks and opportunities surrounding ethical conduct of business, including fraud, corruption, bribery and facilitation payments, fiduciary responsibilities, and other behaviour that may have an ethical component.”

In 2020, the researchers found more than 1.5 million articles, comments and conversations about the FTSE350 companies that fell into this category.

Graph: Boldt Partners UK ESG Reputation Risk Report 2021.

In reviewing environmental, social and governance (ESG) factors, the researchers concluded that the three largest reputation risks the UK faced in 2020-2021 were: business ethics, labor practices, and product safety and quality. “ESG factors have continued to grow in prominence over the 10 years 2011-2021 as a reputational – and corporate performance – consideration for large, listed businesses. The shift towards stakeholder rather than shareholder capitalism is now mainstream…”

Bar chart: Boldt Partners UK ESG Reputation Risk Report 2021.

The above bar chart shows volume and sentiment. Bars below the horizontal are net negative sentiment, while bar width indicates volume, ie the widest bars have the biggest impact, and conversely, tall narrow bars to the right have limited impact despite being ‘positive’ issues. Environmental factors (light blue) have very much taken a back seat compared with Social (yellow) and Governance (dark blue) factors. Issues around Business Ethics have taken the most space, followed by Labour Practices.

Three things determine the extent to which a company is exposed to higher reputational risk, according to Eccles et al. in the Harvard Business Review, 2007:

1. Reputation-reality gap
   

Effectively managing reputational risk begins with recognizing that reputation is a matter of perception. A company’s overall reputation is a function of its reputation among its various stakeholders (investors, customers, suppliers, employees, regulators, politicians, non-governmental organizations, and the communities in which the firm operates) in specific categories (product quality, corporate governance, employee relations, customer service, intellectual capital, financial performance, handling of environmental and social issues). A strong positive reputation among stakeholders across several categories will result in a strong positive reputation for the company overall.

To bridge reputation-reality gaps, a company must either improve its ability to meet expectations or reduce expectations by promising less. For an example of the problem, a 2018 survey conducted by Weber Shandwick and KRC Research, discussed in a Harvard Business Review article, found that only 19% of the nearly 2,000 global employees surveyed felt strongly that the work experience their employer promotes publicly was matched by reality. This finding is consistent with other data showing that almost one-third of new hires leave voluntarily within their first 6 months. Beyond the cost to replace staff, which is estimated at 50%–75% of the new hire’s annual salary, this type of attrition damages coworker morale, disrupts customer relationships, and, in the age of employer review sites like Glassdoor, inhibits companies’ ability to attract new talent, and damages companies’ reputation.

The problem is, management may resort to short-term manipulations. For example, reputation-reality gaps concerning financial performance can result in accounting fraud and (ultimately) restatements of results as well as other bad behaviors stemming from poor business ethics. Some of the well-known companies that have fallen into this reputation trap are Wells Fargo bank, Sears, Uber, Johnson & Johnson, and Volkswagen.

When the reputation of a company is more positive than its underlying reality, this gap poses a substantial risk. Eventually, the failure of a firm to live up to its self-promotion will be revealed, and its reputation will decline until it more closely matches the reality. A good example of this is BP’s “Beyond Petroleum” campaign a few years ago. Many people were critical of that advertising campaign, as well as a BP refinery explosion and fire in Texas in 2005 plus the major crisis caused by BP’s Deepwater Horizon fire and massive oil spill in the Gulf of Mexico in 2010.

2. How much external beliefs and expectations change, which can widen or (less likely) narrow this gap.

The changing beliefs and expectations of stakeholders over time are another major determinant of reputational risk. When expectations are shifting and the company’s character stays the same, the reputation-reality gap widens and risks increase. There are numerous examples of once-acceptable practices that stakeholders no longer consider to be satisfactory, ethical or even safe. In the US, once-acceptable practices now considered improper include:

• Brokerage firms using their research functions to sell investment-banking deals
• Insurance underwriters’ incentive payments to brokers, which caused brokers to price and structure coverage to serve underwriters’ interests rather than customers’
• The appointment of CEOs’ friends to boards as ‘independent directors’
• Earnings guidance statements ahead of financial reports being released, which are intended to reflect well on the company. For example, a comparatively small change in the estimates for uncollectible accounts can have a significant effect on net income. Also, a company using last-in, first-out accounting for inventories can increase net income in times of rising prices by delaying purchases to future periods.
• Artificially inflating the outlook in short-term earnings reports to keep share prices high. For instance, management may invest in fashionable technologies or in glamorous acquisitions to encourage markets to believe the investment will potentially create more value, even if they know those investments will ultimately fall short. By doing this, managers can postpone the day of reckoning until they have left the company and can escape the consequences.

Sometimes community standards evolve over time, as did the now widespread expectation in most developed countries that companies should pollute minimally (if at all). Organizations sometimes underestimate how much attitudes can vary by region or country. For instance, in the months following Bayer’s June 2018 acquisition of Monsanto, its stock lost 46% of its value because of investor apprehension concerning thousands of lawsuits filed against Monsanto due to major health concerns that had developed about Monsanto’s glyphosate-based herbicide, Roundup, as well as lawsuits in other countries about the product.

3. The quality of internal coordination, which also can affect the gap.

Poor coordination of the decisions made by different business units and functions are another major source of reputational risk. If one group creates expectations that another group fails to meet, the company’s reputation can suffer. A classic example is the marketing department of a software company that launches a large advertising campaign for a new product before developers have identified and ironed out all the bugs: The company is forced to choose between selling a flawed product and introducing it later than promised.

Poor internal coordination also reduces a company’s ability to identify changing beliefs and expectations. Even in well-run organizations, individual business units may tread over the interests of other areas. For instance:

• Investor Relations department (with varying degrees of input from the CFO and the CEO) attempts to find out and influence the expectations of analysts and investors
• Marketing surveys customers
• Advertising buys ads that shape expectations
• HR surveys employees
• Corporate Communications monitors and engages with the news media and stakeholders in conveying two-way communication
• Legal branch monitors new and pending laws and regulations.

All of these actions are important to understanding and managing reputational risks. But more often than not, these groups are poor at sharing information or coordinating their plans with other areas of the organization.

Key elements that shape a response to reputation risk

According to Deloitte, reputation risk is created when performance does not match expectations. Ultimately, how a company manages the expectations and performance related to its reputation determines whether value is created or destroyed.

1. Setting expectations. Stakeholder expectations are established based on:
Company history
– Backward-looking
– Company track record and performance
Company strategy
– Forward-looking
– Established by the company
– Communicated to the public
2. Measuring performance. Perceived performance is driven by:
Actual performance – Reputation is mostly (but not entirely) determined by what a company does, not what it says.
Communication – Effective communication with stakeholders and the media can help shape opinions and reputations.
3. Reputation impact. An event’s effect on reputation can be positive or negative:
Reputation opportunity – The company exceeds expectations and its reputation is enhanced.
Reputation risk – The company falls short of expectations and its reputation is damaged.

Who should be responsible for reputation?

A reputation can’t literally be managed – because reputation depends entirely on the attitudes of internal and external stakeholders towards it, whose opinions can’t be controlled by the organization. However, an organization can take steps known to increase favorable stakeholder attitudes.

Ultimately, the organization’s board of directors, or equivalent, is responsible for the good reputation of the organization as part of its role in overseeing the development, implementation and assessment of risk reduction strategies relating to a range of broad risks, in addition to monitoring and assessing changes to specific risks.

Responsibility delegated

The board usually delegates the responsibility for reputation management to the CEO, who lays down the broad parameters of the desired reputation. The CEO could even conduct a workshop with relevant executives and other staff to decide the desired reputation policy and framework, which are essential to integrate into the organizational vision, mission, values, and culture. Then the head of each business unit should be responsible for developing a risk and reputation management strategy for their functional area.

Internal and external communication plays a vital role in an organization’s reputation strategy and risk reduction, and so your head of corporate affairs (Chief Communications Officer [CCO]), or equivalent, is central to these aspects. The CCO needs to plan and implement communication activities to support the strategic plan, the code of conduct, assorted campaigns, or diversity and inclusion initiatives in many formats for internal and external audiences. And in time of crisis, the CCO will also play a central role before, during and after the event.

Higher reputation risk now

Experts note that we are now functioning in an ‘era of elevated reputation risk,’ involving global trade tensions, environmental concerns, changes in human values and desires for enhanced connectivity as contributing factors. Plus, more recently, applications of artificial intelligence (AI), web-based issues such as cyber risks, and social media issues. In this age of stakeholder and shareholder activism, many people go to an organization’s website to assess its approach to corporate and social responsibility (CSR) and environmental, social and governance (ESG), and relationships in the public environment such as news and social media. Online reputation needs to be monitored and managed through keeping aware of search engine results, online customer service and customer reviews.

In applying expertise to support organizational cybersecurity, your head of IT and IT staff can have a positive impact on reputation management.

How HR is relevant to reputation management

Your employees have the potential to be among your strongest supporters, and so HR practices play an important role in reputation management through all stages of the employee experience – from orientation and onboarding, policy development and enforcement, to retention.

The head of the corporate affairs function or Chief Communication Officer (CCO) is also often considered the Chief Reputation Officer:

“The Chief Communications Officer is the person managing our reputation, including PR, external affairs, and social media,” says C. David Minifie, Chief Experience Officer and Executive Vice President of Corporate Strategy at Centene Corporation.

A significant financial improvement from increasing a reputation score

Thoughtful and effective communication about a company’s positive efforts reinforces a positive reputation and drives financial performance. In fact, data shows that a one-point increase in reputation score yields a 2.6% increase in market capitalization. For a typical corporation, that can translate into $1 billion per reputation point. [Market capitalization is the number of company shares multiplied by the share price, which gives an indication of what a company is worth on the open market, as well as the market’s perception of its future prospects, because it reflects what investors are willing to pay for those shares.]

Role of the Chief Communication Officer/Chief Reputation Officer

Additionally, a strong organizational reputation differentiates your organization from the competition, supports talent acquisition and retention, and boosts crisis management and post-crisis recovery. Accordingly, the CCO often is the one leading the measurement of reputation, harnessing the data, and championing action that will affect key reputation drivers.

The corporate affairs or public relations role (CCO) closely monitors and often represents the view of stakeholders. When they sit at meetings of the executive committee or with other managers the CCO brings to the role the benefits of focusing on broad societal issues and relevant internal/external stakeholder relationships. The ability to manage reputation is therefore critical to the communications professional since perceptions gained by stakeholders of the organization through a variety of relationships and exchanges, or from emotions that stakeholders feel toward the firm, or from collective beliefs that exist in the organizational field about a firm’s ‘identity and prominence’ (Moyer, 2011).

Why don’t some organizations pay serious attention to measuring their corporate reputation?

A segment of global executives in the Weber Shandwick 2019 survey reported that their company experiences a very positive financial result from strong reputation. One-third of global executives (33%) overall reported that more than three-quarters of their organization’s market value – 76% or more – is attributed to their company’s reputation. This group represents the companies that are leveraging reputations for maximum financial returns. If corporate reputation can be leveraged so well, why don’t more organizations make a priority of measuring and strengthening their reputation? Possible reasons include:

• Reputation is an intangible and complex concept, which takes time to change.
• The dollar value of improvements to a growing reputation is difficult to quantify.
• Senior managers are obliged to deal with more immediate and demanding operational priorities – reputation is a long-term concept.
• Corporate reputation is a ‘soft’ concept. Many organizations put the importance of a good reputation to the back of their minds while they attend to more hard-edged, day-to-day urgencies.
• Reputation ranges over such a broad area of the organization’s activities that it is difficult to allocate specific responsibility for work on enhancing the corporate reputation to individual functional areas.
• Cost – the typical cost of applying a conceptual model to consumers, individual investors and community leaders in one major US city is about US$150,000. However, a study of companies in one industry might cost as little as $50,000, depending on the size of the industry.

One thing is certain, there is a high cost to pay for losing a good reputation, your good standing with stakeholders. A badly handled crisis can strip big chunks off a company’s share price, and therefore its market value. And a smaller organization could be devastated by loss of reputation. Conversely, the skillful handling of a major issue or crisis can maintain a good reputation and cushion the organization’s share price against a drop in market share.