Crisis management

I feel like I have read this article before. The title in USA Today yesterday was "CEOs stumble over ethics violations, mismanagement." Is it 2002 over again when Enron, WorldCom and Adelphia made headlines over ethical transgressions and wrongdoing? I agree that there seems to be a rush of these events recently but I am not sure it is vastly different than it has always been. The Internet has certainly added to the scrutiny of corporate executives but the spotlights were just as glaring and intense as they were years ago. In fact, I tend to think that wrongdoing on the part of CEOs stayed in the news for a longer period of time than they do now. I am waiting for headlines about JPMorganChase CEO Jamie Dimon to be replaced soon.  Not sure what will substitute for him in the days ahead but I can bet $5 that something will surface in the next week to knock Dimon off the front pages (so to speak). And whistleblowers have been around for a long time.  It is not the first time I have heard about a note being sent to a board member about an executive transgression. The real difference is that there is zero tolerance for these missteps and for a simple reason -- "reputation." It was interesting to me that the word "reputation" did not appear once in the USA Today article. Boards are making split-second decisions about CEO tenures because they know the downside of having their reputations tarnished, trashed, torn and tattered. Not only are their own personal reputations at risk but that of the companies on whose boards they sit (and that impacts their compensation which is often in stock).  As Lucian Bebchuk, director of corporate governance at Harvard Law School said in the article, "Boards do seem to move faster to deal with scandals and public failings that attract shareholder and media attention."  Being in the headlines and chatted about online about reputation failure is the new scarlet letter. I hope that next time an article appears, the reputation damage that brings down share prices, dampens employee morale, attracts headlines and invites investor activists gets mentioned. The cost of reputation failings are higher than ever and the stain can be very deep. In fact, it takes years to wash out.

I have to say that the headline in today’s WSJ re the $2 billion trading loss at JPMorganChase strongly resonated with me. The title is “J.P. Morgan Trades in Its Crown.”  In our research on safeguarding reputation, we start out by summing up reputation failures among the world’s most admired this way:

 

“The last decade has seen many of the world’s most admired companies descend from their once lofty positions. They were in a class by themselves — corporate reputation royalty whose invincibility was universally accepted by business executives around the globe. No one could have predicted that these companies would ever part with their crowns. How the world has changed!”

 

It looks like we now have another major kingpin to add to our Weber Shandwick “stumble rate” analysis that we calculate every year. You can find more about it in an earlier post.  But…between 2011 and 2012, 49% of the world’s largest companies experienced a reputational stumble, up from last year’s 43% but exactly the same as 2010’s rate.  There seems to be no more untouchables among the Fortune 500 with this recent news.

 

I was also intrigued by Jamie Dimon’s remarks about what he could have done differently to have caught this $2 billion blunder earlier. Dimon’s deadpan answer was paying more attention to the “newspapers” among other things. He was referring to earlier reports in the papers about the trading problem. Have to hand it to him for taking the blame and being brutally honest in his response. He’s been true to his reputation on that count.

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.”

Another side note of interest is that this reputation crisis did not start in social media. It has certainly taken off online but as far as we know now, there's been no social media assault that instigated this crisis. No online cloak and dagger here.

Will be interesting to see how this pans out reputation-wise. Will this tarnish the bank’s reputation for the long-term or just be a stain? No doubt it will be headline news for a while. Dimon is eminently quotable --the WSJ has his most notable quotes already listed. I hate to have to say it but another one hits the dust.

Just read an article in The Economist (which I love) that questions the business of reputation management. The columnist attended a recent meeting in London held by the Reputation Institute (RI) on their new RepTrak results for British companies. The writer rightfully acknowledges that we are living in a "reputation economy" where institutions and individuals literally trade on the currency of reputation and this type of exchange makes "intuitive sense" in a society where Facebook is worth more than many Fortune 100 companies. Reputation Economy is the term used by RI and its professionals, led by Charles Fombrun, and continue to provide valuable, far-reaching insights to companies around the world. The writer, however, raises several interesting objections to the effectiveness of the reputation management industry as it stands today. First, he/she (have no clue) objects to the idea that many different factors as disparate as product quality and corporate citizenship are all rolled up into one understanding of what reputation means. That may be true, but I am not sure why that is bad in such a complex and fragmented world where every individual becomes an interest group. For us reputologists (I just made that up), the factors contributing to corporate reputation vary depending on the company’s history, industry and situation they are facing. For example, in the financial industry, unlike say the automotive industry, it is often difficult to distinguish one company from another by focusing only on their products and services. Their reputations are far more likely to be built on sheer trust in the perceived integrity of their leadership and governance.   The columnist’s second objection to reputation management today is the assumption that companies with positive reputations will find it easier to attract customers and withstand crises.  As evidence of the supposed weakness of this assumption, the columnist cites many companies with strong bottom lines despite terrible reputations: e.g., tobacco companies (harmful product), Ryanair (poor service) and Daily Mail (mean spirit). Yes, there are always companies that will make gobs of money despite wrong-doing and poor service. Nevertheless, these companies have and will continue to have a hard time attracting and retaining the best talent. But in this online world where advocates and fans matter more than ever, it will be harder to keep that bottom line as stable as it once was. But the greatest objection to the reputation industry, according to the columnist, is and I quote… "its central conceit: that the way to deal with potential threats to your reputation is to work harder at managing your reputation.” He/she continues with… “The opposite is more likely: the best strategy may be to think less about managing your reputation and concentrate more on producing the best products and services you can."  Here I agree at least in part with the columnist’s thinking.  The best way to build reputation is to “have a customer” as Peter Drucker always said. Without customers, there is no business to have a reputation worth building. The reputation industry, however, does not urge industries to ignore producing the best products and services in favor of managing reputation.  To the contrary, building the best products and services is part and parcel of a good reputation.   Also, however, today’s society is much more complicated and often it behooves a corporation to do more than just having great products and services. Apple, for example, may have the best products but if it does not give a damn about how it treats employees or contributes to society, it will face problems that if allowed to accumulate may well threaten its bottom line. We see that now with regard to questions about their handling of factories in China. I think that the columnist should rename the article to Why companies should worry MORE about their reputations or else.

Job descriptions for leaders today have to begin including public relations expertise. Just looking at this week's headlines convinced me that CEOs have to be PR crisis experts to be qualified for the job. I was thinking about this when I read the oped in The New York Times from an investment bank's employee and hearing the news about the Afghan killings by a U.S. military person. I also just read an indictment by a former Google employee about the oversized focus on advertising since Larry Page took the reins at the search giant.  Whereas we used to enumerate the operational excellence of CEOs-to-be, today we should seriously consider whether they are crisis-seasoned enough. Bank CEOs, presidents and Internet champion CEOs have little time to respond when their organizations or countries are making breaking news. I hold my breath waiting for them to respond. Every word is dissected and critiqued. Not easy. Years ago, I worked on a research project about how pr-savvy board members were. We looked at how many board members  in the Fortune 500 had "any" communications experience. Sad to say, there were few. I used to wonder how these board discussions went when no one in the room knew how to deal with detractors. Now I realize that not only do boards need some practiced PR professionals among their board members but CEOs too need to also be PR- tested. Of course, corporate communications officers are there to work alongside CEOs experiencing a crisis but CEOs themselves need to be good at communicating their positions and steadying the troops (so to speak). Tone is sometimes everything. Here are remarks from the highest offices of the US government in response to the Afghan rampage. Wonder what you think?

"And obviously what happened this weekend was absolutely tragic and heartbreaking. But when you look at what hundreds of thousands of our military personnel have achieved under enormous strain, you can't help but be proud generally." -- President Obama "This terrible incident does not change our steadfast dedication to protecting the Afghan people and to doing everything we can to build a strong and stable Afghanistan." -- Secretary of State Hillary Clinton   "Our thoughts and prayers are with the families and their entire community." -- Deputy American ambassador to Afghanistan, James Cunningham.

       

An interesting study appeared this week from Willis Group Holdings on reputation risk. They examined 600 publicly-held companies.  Here are some of the more interesting details:

• 95% (a lot) of major companies have suffered at least one reputational crisis in the past 20 years
• Major companies suffer a "significant" reversal of fortune every seven years
• One out of two (50%) of these reputational failures were tied to having the wrong business strategy or model; 15% from lawsuits; 10% from merger and acquisition issues. Interestingly, the CEO of Willis Global Solutions Consulting Group said that none of the crises were related to natural disasters until 2011. That is hard to believe since there have been plenty of natural catastrophes over the past 20 years that should have impacted companies such as floods, hurricanes, droughts, food shortages, cyclones, earthquakes, SARS, etc.

Also wanted to mention a recent analysis that came from the 2012 Harris Interactive Reputation Quotient (RQ) and was reported in PRWeek. Harris Interactive reported that advertising has less of an impact on company reputation than social media or new stories. Research continues to show that word of mouth from news stories with negative information about companies drives perceptions more than we realize. We learned that in our Company Behind the Brand: In Reputation We Trust. Consumers are talking about more about company wrong doing than right doing and advertising may not be as able as it used to be in rehabilitating brand reputations. Enjoy the Oscars if you are watching tomorrow!    

Beautiful morning here in New York. I even hear the birds chirping, almost like Spring. However, for me, it is a sit-down day. I am working on an article which I will tell you more about later but I am looking at many hours in front of my laptop as I draft away. I already started my list of what I want to do when it gets done in a few short weeks. When I wrote my books and other articles, I started a similar list that contains all the things I want to do on an ordinary Saturday or Sunday like see a movie, go out for dinner or lazily walk in the park.  Anyhow, back to my blog post. I have my own reputation and risk to manage with this article looming before me. I kept an advertising insert from a few weeks ago because it had a few good stats on reputation. It was on Risk Management, a favorite of mine because reputation often comes up.  It was written by Joe Mullich. I am unable to find the link, apologies. A few interesting facts:

1. Accenture found that 44 percent of companies do not gauge reputational risk
2. The Federational of European Risk Management Associations (FERMA) along with the Institute of Risk Management (IRM) found that reputation risk from social media is cited as a "material risk" by nearly 50 percent of European companies, making it one of the greatest threats that companies face.
3. Corporate responsibility or CSR is having a large impact on consumers' buying habits.
4. Reputation is seriously affected by missteps. Mullich's section cites a 2010 study of the world's largest 1000 companies and found that 80 percent of those firms have a major "reputational" event every five years that causes them to lose one fifth of their value.

I particularly liked #3 above because we found a similar trend in our recent study on the importance of the corporate brand behind the product brand. And this quote intrigued me...."The higher the cost of the purchase and the more that translates into a long term relationship, the important reputation becomes." I think that is exactly right. When consumers are buying big ticket items or even medium sized ticket ones, the relationship is deeper and the consumer wants to get it right. They want to invest their dollars with a nod to doing right and supporting companies that treat employees right. The big shift however is that consumers feel this way about the company behind the brand for smaller, everyday purchases. The article also mentions how insurance companies are introducing reputational risk or crisis management insurance policies (something we know about) and interestingly, that there is a new data terminal that incorporates a reputational risk indicator "which allows investors to identify the severity of criticism and negative press coverage directed toward individual companies and market sectors." That's new to me and quite interesting. Perhaps it is one of those predictive systems that advise companies on emerging threats that we have seen as more clients are being proactive vs. reactive.

Just was forwarded an interesting study out of Northwestern's Kellogg school. It found that the share price of a company that is being boycotted drops nearly one percent for EACH day of national print media coverage. Ever wondered what happens when those protesters zero in on your company and tell people not to buy your products? Often I will hear the response, "The boycott is not affecting our sales so let's not worry too much about this."  However, the research uncovered that perhaps your sales are not being affected, but watch out for your reputation and stock price. Assistant Professor Brayden King found that Day One may not be as much a problem (decline of one half of one percent in share price) but there is an average decline in share price of 0.7 percent for EACH day afterwards that the company remains in the national print media spotlight.  After looking at 177 firms who were boycotted over several years (1990 to 2005), King concludes that there is a clear link between reputation and media coverage. And when you think of today with the Internet, whoah. I liked this fact -- about 25% of those companies generated a concession from the targeted company.  What does that say about the other 75%? Perhaps there are some behind the scenes negotiations that we are not privy to. And clearly companies stuck to their position if they felt they were right. Also liked this fact. King used the Fortune Most Admired Companies ranking (one of my favorites) and found that boycotted firms with a high reputation ranking generated 4.4 times the coverage generated by boycotted firms that were unranked, three times the coverage of those in the lower quartile and six times those in the middle ranking group. Essentially, the bigger you are and the more admired, the greater the coverage when boycotts land on your door. Like I often say, when you make it to the top of your industry in the Most Admired, you might as well paint a bulls eye on your back (or logo).

In a piece I wrote for The HuffingtonPost for 2012, I forecasted that reputation blackmail would show its hand this year. Lo and behold, a front page article in yesterday's paper headlined "Hackers-For-Hire Are Easy to Find."  The article had to do with two feuding brothers from Kuwaiti who were suing one another over business they held. One of the billionaire brothers found someone to hack into his brother's account and post online all his brother's personal emails including finances, legal affairs, pharmacy bills and everything else that you can imagine gets sent and received from one's personal account. The cost: $400. Hackers to hire are that cheap and apparently easy to find. One of the reasons there has not been much on this topic where reputations can be easily lost is that people do not want to report this type of reputation blackmail and generate even more attention. In this instance, the one brother hired Invisible Hacking Group located in China and here is how it works:

"It requested the target person's email address, the names of friends or colleagues, and examples of topics that interest them. The hackers would then send an email to the target that sounded as if it came from an acquaintance, but which actually installed malicious software on the target's computer. The software would let the hackers capture the target's email password."

You get the picture. Reputation blackmail presents a very scary scenario. Not only is privacy damaged but reputations which take a long time to rebuild get decimated.  Reputation protection can only go so far. Risk management and reputation warfare gets more complicated by the day.

A few interesting things crossed my mind and desk this week that I thought I would share. All reputation-related of course. 1. The World Economic Forum released its report on the top risks facing the world in 2012. Social unrest and income inequity were at the top. Natural disasters such as the earthquake in Japan were also high on the risk list. And as pointed out, one risk affects another creating a domino effect. "The Internet, meanwhile, can magnify and spread the effects of a disaster in other ways. Rumors, even if incorrect, spread quickly on social networking sites — sometimes more rapidly than emergency services can communicate accurate information. As word of disasters like the terror attacks of Sept. 11 or the earthquake in Japan spreads globally, consumers hunker down in front of their computer screens or televisions, rather than going about their daily lives. This increases the economic effects of a crisis, even in areas far removed from the source."  Disasters such as the horrific earthquake, tragic 9-11, death-defying financial crisis, massive oil spills and nasty ash clouds coming from Iceland all heighten other risks in some way. And risk spells reputation damage depending on how a company or country responds and solves the problem. 2. The report from WEF also mentioned that risks are on the horizon as leadership transitions are in full force this year. It is not just the U.S. presidential election that poses risk and stirs up emotional angst. There are leadership transitions underway this year in France, Russia and China as well. Add to that the sudden transitions in the Arab world this past year and we see upheaval and uncertainty. When CEO transitions are underway, the first few months can be risky so as we see world leaders change, tighten your seatbelts. The public will be more socially active than ever. We've already seen that in Russia. 3. I've written here about rankings and so-called "worst of" lists where companies, CEOs and environmental records are put on notice that they are not making the grade. In most Januarys, TripAdvisor.com comes out with its "dirtiest hotels" in the world.  No more. The CEO Stephen Kaufer says, "We want to stay more on the positive side, so we'll continue to feature the best destinations, the top hotels.  We're slicing and dicing the 'best of' in different ways this year, more than focusing on the negative."  Although the article where I learned about this says there were potential legal considerations and competitive reasons for abandoning the January list, it also mentioned that the original "worst of" list was done for PR reasons and that TripAdvisor is less interested in that now.  Perhaps there is a reputation-reason afoot here. There is so much negativity online on some of these sites and it is so easy to find what you are looking for that a list of the 10 worst may be hardly worth alienating visitors to your site. Everyone worries about the detractors and the praisers. Maybe it is time to just worry about the average site visitor who does not want snarky comments and lists, but just the plain old straight forward facts to plan a plain old relaxing get-away.