Social media is causing reputation crises to hit twice as hard
The rise of social media and online commentary avenues like blogs and websites mean that bad news travels a long way quickly. Such bad news is often inaccurate or sensationalized.
Companies worldwide consider reputation damage as their top risk management concern, according to Aon’s Global Risk Management Survey in 2017. Reputation risk leads to share price insecurity, and so companies need to ensure their reputations are protected in the face of crises.
Social media greatly increase the risks of reputation damage as well as creating much faster impact. A recent study published by Pentland Analytics and Aon examined 125 reputational crises over the past decade and their impact on shareholder value over the following year. Deborah Pretty, founding director of Pentland Analytics, said:
Technological developments have heightened reputation risk by making it easier, cheaper and faster for people to spread news.”
Good reputation adds major value
The value of reputation is significant. Due to the complexity of the concept, it is extremely difficult to measure reputation value for organizations other than public companies, whose financial results are publicly available.
According to calculations in 2018 by Simon Cole of Reputation Dividend, reputation comprised more than 50% of the total market value of 6 top public companies in the FTSE 100 index. Reputation was worth £65 billion for Unilever, which had the most added value as a proportion of increased value from corporate reputation. The top 10 companies were Unilever, Shell, Diageo, GSK, Berkeley, BP, Rio Tinto, BHP Billiton, AstraZeneca and RELZ Group. Corporate reputations reflect how professional observers and investors see the business as an operating entity.
To clarify the difference between a brand and a reputation, these definitions have been developed:
- Brand is defined as the sum of all expressions by which an entity (person, organization, company, business unit, city, nation, etc.) intends to be recognized.
- Reputation is defined as the emotional connections that observers feel about an entity, according to the Reputation Institute.
In the simplest terms, brand is what you say about yourself; reputation is what others say about you.
The 2018 UK Dividend Reputation Report showed the main components of corporate reputation value as:
- 15% Quality of management
- 14% Financial soundness
- 13% Use of corporate assets
- 12% Quality of goods and services
- 12% Value as a long-term investment
- 11% Ability to attract and retain talent
- 8% Quality of marketing
- 7% Capacity to innovate
- 6% Community and environmental responsibility
After a reputational crisis such as a major cyber attack or product recall, the typical company loses around 5% of shareholder value in the year after the event.
The Pentland study shows that companies tend to fall into two distinct groups after a reputational crisis: winners and losers. Winners usually outperform investors’ pre-crisis expectation and actually gain shareholder value in the year after a reputational crisis, while losers experience a value decline that exceeds the average.
Pentland’s analysis further shows the impact of social media on reputation risk. In 2018, with the use of social media at its most prevalent, companies that emerged successfully from a reputational crisis – the winners – tended to gain about 20% in value. This compares with a 10% jump in 2000, when social media barely existed. Meanwhile, in 2018, losers lost nearly 30% in value, nearly double the 15% loss of companies analyzed in 2000.
Images from AON’s The One Brief magazine.
Pentland’s Dr Pretty said:
Other factors certainly will be at play, but it is striking that, for both winners and losers, the post-crisis value impact in a social media world is double that of the pre-social media portfolio. What separates the winners from losers is how the company responds to the crisis. This gives investors an opportunity to assess the company’s managerial capabilities and its prospects for generating future cash flow.”
What winners look like
Companies that “win” in terms of shareholder value following a reputational crisis typically respond in the ways outlined below. In examining 125 reputational crises, Pretty shares the key actions of companies that not only overcame the crisis but thrived afterward:
- Respond immediately – A delayed response is almost always costly. Delays can lead markets and the public to question the company’s ability to respond adequately and whether the information provided to the public could be trusted. Delays also provide more time for social media users to dictate the narrative around the crisis, rather than letting the company control its crisis response message. Deep commitment to risk preparedness helps to reduce delays when crisis strikes.
- Know the facts – Move quickly to gather accurate and complete details about the crisis and its potential impact on the company and the public. Having to issue corrections as the response proceeds will undercut confidence in the company’s crisis efforts.
- Be decisive – Companies are typically rewarded for responding decisively to a reputational crisis. For example, a winner might move quickly to protect consumers following a data breach or to shut down production of a flawed product and quickly announce recall plans. Strong, visible leadership from the CEO is pivotal to a value-creating response.
- Be open – Winners move quickly to inform the public of the crisis and provide detailed information about the event, the steps they’re taking to contain it and what they’re doing to protect the public. They’ll also keep the public aware of the progress of their response and any changes to the response plan, should they occur.
- Respond globally – The impact of the reputational crisis is best managed by addressing the crisis globally, whether it’s in terms of the information the company shares with markets and the public or the remedies it provides, instead of responding in a piecemeal fashion.
- Make amends – Among the cultural shifts affecting the current reputation risk climate is an increasing expectation that companies should not only acknowledge, but also make up for their mistakes. Winners make amends with the public for the impact of the crisis through actions like future product features, consumer protections or restitution, customer data monitoring after a data breach, or engaging in environmental protection activities.
Valuing reputation, protecting value
The impact of a reputational crisis on shareholder value underlines the need for reputation risk management. Pretty says:
Strong visible leadership from the CEO, swift and effective action to address the crisis, accurate and thorough communications, and understanding the scale of the task and the need to rebuild trust are critical to successfully navigating a reputation-threatening event.”