Does Reputation Really Matter?

by Andrew Leigh, Featured Contributor

IS THIS A will o’ the wisp? Quite simply, is reputation so intangible as to be irrelevant?

These are no idle questions, as we watch the shredding of the reputations of such diverse organisations as the Bank of England, the BBC, most banks, the Catholic Church, several major pharma companies and and more than a handful of hospitals around the country.

Reputation lies at the core of ethical leadership. The job comes down to three basic responsibilities: building, sustaining and restoring reputation.

Too many leaders though, are stuck with spending precious time and resources seeking ways to restore their organisations’ battered standing, rather than building and sustaining it.

Take BP for example. It spent more than $90m on PR in the first three months of the Gulf spill. A further $13bn (£7.9bn) went on the clean-up with $500m committed to funding scientific studies on the impact of the spill, and more than $280m to projects including wildlife rescue and the restoration of habitats.  The bill has since risen still higher.

Not nearly enough say its critics, and while the company may point to its work on sustainability, its long-term reputation remains permanently sullied by its environment destruction record.

Reputation has a value even if it cannot be expressed financially. The possibility of this value being reduced represents a business risk. Most organisations do not know enough about the drivers of their reputation to identify or protect against this risk from devaluation”  CIMA report on corporate reputation

Despite the damage done though, BP continues apace—its return on equity was 18.14% in 2013. Research into reputation shows BP beginning to repair the past damage and many would say, like one of the oil tankers used to carry its output, it ploughs on regardless.

So perhaps ethical leaders are wasting their time on reputation restoration projects? Maybe they would be better off simply allowing the dust to settle and await natural inertia to exert itself? Possibly it makes not a lot of real difference, particularly to large enterprises, that their reputations take a nose dive.

Many companies and institutions indeed seem either too big, important or convenient to bother much with reputation or customer service. Though they will of course pay lip service to them.

For years Ryanair was a bi-word for being anti-customer. Yet this did not stop it becoming a leading contender in its market. Only when a competitor began making inroads into its cosy niche did the company realise reputation for service might be important after all.

In 2009 and 2014 Eurostar failed its passengers with major breakdowns. Thousands were stranded, some for up to nine hours. Others were left in pitch darkness with no fresh air or flushing toilets and barred from leaving the trains.

Yet the company celebrated having 10 million passengers a while back and doubled its 2012 profits to £53m and its profit margin outperforms British domestic operators at 6.5%.

Or will the Catholic Church cease to exist, or even fail to flourish because of the evil tales of sexual abuse that have surfaced in recent years? Endless apologies and mea culpas seem the main response and most “customers”—sorry, “believers”,  appear willing to stick with the brand.

Explaining apparent imperviousness to reputation damage seems to come down to a mixture of size, lack of tough competition and arrogance. For many organisations the pragmatic response is “why bother?

So far, the evidence suggests reputational damage may not affect the ability to produce new products or preserve market share. But share price and market capitalisation may indeed be adversely affected.

The long term impact of “do whatever it takes managers” is always negative.”
Louisa Wah, The Either/or Question, Management Review Nov 1998,

To make more sense of this reputation puzzle we must break down what the term means, and how we can properly evaluate its true potential to hurt a company.

Meaning

The Harris Reputation Quotient, dissects the issue into various parts. These includes social responsibility, emotional appeal, financial performance, vision and leadership and so on:

Source: See 2015 Harris Poll, RQ Summary Report

The overall rating systems produces a top 10 list of companies for reputation, which include: Amazon, Samsung, Cosco, Kraft, Johnson and Johnson, Apple and Google. While the report asserts reputation does indeed matter, it also admits, perhaps somewhat, reluctantly:

“Companies continue to struggle to be viewed as a good member of the community.”

In the last five years according to this latest US report, eight companies have taken serious reputation hits with major challenges for their leaders to demonstrate their ethical credentials: Monsanto, BP, McDonalds, Sears, Walmart, Toyota, Coca-Cola, and Pepsi.

The names would probably be different in the UK, and might include: BAE, GSK, Serco, GS4, Talk Talk, and N.Power.

Impact

In July 2011, as the phone hacking scandal in the UK unfolded, News Corporation saw approximately $8 billion wiped off its shareholder value. What followed was a reputational nightmare and included

1. The News of the World was permanently closed.
2. Executives and hired consultants who worked for paper were arrested under charges of bribery.
3. Members of the Murdoch family were summoned before a parliamentary enquiry.
4. Lawsuits for breaches of privacy were initiated and continued for years.
5. The BSkyB bid was permanently derailed.

These were the reality. But there is something of a gap though between reality and perceptions.  Companies with a strong positive reputation attract better people, with lower costs of recruitment. They are perceived as providing more value, which often allows them to charge a premium. Their customers are thought to be more loyal and buy broader ranges of products and services. Reputation is therefore essentially a matter of perception.

For example, because the market believes higher reputation companies deliver sustained earnings and future growth, they tend to have higher price-earnings multiples and market values and lower costs of capital.

However, when 70% to 80% of a company’s market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages reputation.

Undeserved poor or mediocre reputations can be infuriating though, and there’s a
temptation to respond to them with resignation: “No matter what we do, people won’t like us, so why bother?”

The answer to such complacency is that while certain practices were once thought unlikely to dent reputation, now there’s a long list of unacceptable ones that do. Looking greedy or immoral may not matter to some leaders. But to major corporations this can prove highly damaging. That happened with GSK in 2001 for example. Faced with a major campaign waged by NGOs, the company was virtually force to grant a free licence to South Africa to make a generic version of its AIDS drug.

Yet analysis of the actual adverse longer term impact from a damaged reputation continues to suggest it may be less than at first sight. For example, the percentage of the general public who decide not to do business with a company because of its adverse reputation is relatively small—36%, against 64% who are not affected.

Don’t wait for the impact

A positive company reputation is said to require at least one in five stories appearing in the media to be positive and no more than one in ten negative, with the rest neutral.

That’s a useful ethical leadership rule of thumb, but nowadays there’s also a whole array of tools for a more accurate measurement of perception. These are both sophisticated and expensive.

The  main one to emerge in recent years is professional risk management. This is when a company invests serious effort at anticipating potential reputation damage.

Ethically-mined leaders are realising it pays to put a single senior person in charge of the entire risk assessment and handling process.  These people have a tough job. In most cases they’re dealing with imaginary scenarios, rather than actual ones. This executive is usually supported by an internal risk committee helping the CEO and the board make sense of the corporate risks.

No Hiding Places

If reputation could once be cosily confined to the PR department, that time has long since gone. To blame the rise of social media for this would be grossly unfair, but few would deny it’s having a significant effect on how companies build, sustain and restore their reputation.

Also, there is the continuing shift towards greater corporate accountability and transparency. Consequently organisations must understand and report on all issues with a significant bearing on their future prospects and risk profiles. Reputation is certainly one such key issue.