As governments respond to the financial crisis and its reverberations in the real economy, a company’s reputation has begun to matter more now than it has in decades. Companies and industries with reputation problems are more likely to incur the wrath of legislators, regulators, and the public. What’s more, the credibility of the private sector will influence its ability to weigh in on contentious issues, such as protectionism, that have serious implications for the global economy’s future.
Senior executives are acutely aware of how serious today’s reputational challenge is. Most recognize the perception that some companies in certain sectors (particularly financial services) have violated their social contract with consumers, shareholders, regulators, and taxpayers. They also know that this perception seems to have spilled over to business more broadly. In a March 2009 McKinsey Quarterly survey of senior executives around the world, 85 and 72 percent of them, respectively, said that public trust in business and commitment to free markets had deteriorated.1 According to the 2009 Edelman Trust Barometer, those executives are reading the public mind correctly: 62 percent of respondents, across 20 countries, say that they “trust corporations less now than they did a year ago.”
The breadth and depth of today’s reputational challenge is a consequence not just of the speed, severity, and unexpectedness of recent economic events but also of underlying shifts in the reputation environment that have been under way for some time. Those changes include the growing importance of Web-based participatory media, the increasing significance of nongovernmental organizations (NGOs) and other third parties, and declining trust in advertising. Together, these forces are promoting wider, faster scrutiny of companies and rendering traditional public-relations tools less effective in addressing reputational challenges.
Now more than ever, it will be action—not spin—that builds strong reputations. Organizations need to enhance their listening skills so that they are sufficiently aware of emerging issues; to reinvigorate their understanding of, and relationships with, critical stakeholders; and to go beyond traditional PR by activating a network of supporters who can influence key constituencies. Doing so effectively means stepping up both the sophistication and the internal coordination of reputation efforts. Some companies, for example, not only use cutting-edge attitudinal-segmentation techniques to better understand the concerns of stakeholders but also mobilize cross-functional teams to gather intelligence and respond quickly to far-flung reputational threats.
One key to cutting through organizational barriers that might impede such efforts is committed senior leadership, including leadership from CEOs, who have an opportunity in today’s charged environment to differentiate their companies by demonstrating real statesmanship. The stakes demand it; an energized public will expect nothing else. At a moment when capitalism seems flat on its back, CEOs have an obligation to bolster the reputations of their companies and of free markets.
A rapidly evolving reputation environment
The financial crisis has underscored just how ill-equipped companies can be to deal with two important changes in the reputation environment. First, the influence of indirect stakeholders—such as NGOs, community activists, and online networks—has grown enormously. The number of NGOs accredited by the United Nations, for instance, has grown to more than 4,000, from less than 1,000 in the early 1980s. These proliferating indirect stakeholders have tasked business with a broader set of expectations, such as making globalization more humane and combating climate change, obesity, human-rights abuses, or HIV.
Second, the proliferation of media technologies and outlets, along with the emergence of new Web-based platforms, has given individuals and organizations new tools they use to subject companies to greater and faster scrutiny. This communications revolution also means that certain issues (such as poor labor conditions) that might be acceptable in one region can be picked up by “citizen journalists” or bloggers and generate outrage in another.
As a result, what formerly were operational risks resulting from failed or inadequate processes, people, or systems now often manifest themselves as reputational risks whose costs far exceed those of the original missteps. In banking, for example, data privacy has become a reputational issue. In pharmaceutical clinical trials, Merck’s experience with Vioxx showed that anything less than full transparency can lead to disaster. And as risk-management problems in the financial sector have generated astronomical losses that taxpayers are helping bear, it’s little wonder that the reputational fallout has been enormous.
An outmoded approach to reputation management
In this dispersed and multifaceted environment, companies must collect information about reputational threats across the organization, analyze that information in sophisticated ways, and address problems by taking action to mitigate them. That can involve developing alliances with new kinds of partners and coordinating responses from a number of parties, including governments, civil-society groups, and consumers. All this requires significant coordination and an ability to act quickly.
Many companies, though, rely primarily on small, central corporate-affairs departments that can’t monitor or examine diverse reputational threats with sufficient sophistication. Moreover, traditional PR spin can’t deal with many NGO concerns, which must often be addressed by changing business operations and conducting two-way conversations. Managers of business units have a better position for spotting potential challenges but often fail to recognize their reputational significance. Internal communication about them may be inhibited by the absence of consistent methodologies for tracking and quantifying reputational risk. Accountability for managing problems is often blurred.
As a result, responses to reputational issues can be short term, ad hoc, and defensive—a poor combination today given the intensity of public concern. And therein lies a problem that companies must solve quickly: even as reputational challenges boost the importance of good PR, companies will struggle if they rely on PR alone, with little insight into the root causes of or the facts behind their reputational problems.
A better, more integrated response
A logical starting point for companies seeking to raise their game is to put in place an effective early-warning system to make executives aware of reputational problems quickly. In our experience, most companies are quite good at tracking press mentions, and many are beginning to monitor the multitude of Web-based voices and NGOs, whose power is beginning to rival the mainstream media’s. However, doing these things effectively, while an important prerequisite for stepping up engagement with stakeholders, isn’t the toughest task facing organizations.
Far more of a challenge is preparing to meet serious reputational threats, whose potential frequency and cost have risen dramatically given the greater likelihood that stakeholders—including regulators and legislators—will lash out in an atmosphere that’s become less hospitable to business. These threats might take a variety of forms: issues related to a company’s business performance, like those that financial companies have recently experienced (see sidebar, “Assuming responsibility”); unexpected shocks along the lines of Johnson & Johnson’s Tylenol scare, more than two decades ago; opposition to business moves, such as expanding operations; or long-standing, sector-specific issues, for instance climate change (industrials and oil and gas), obesity (the food and beverage industry), hidden fees (telecom providers), “e-waste” (high tech), and worker safety (mining).
